UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September~~June 30, ~~2021~~2022


☐			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,

20706

(Address of Principal Executive Offices)

(Zip Code)

(301) 892-4350

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

TWOU

The Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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. ☐

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

As of ~~November 5, 2021,~~July 25, 2022, there were ~~75,372,101~~77,485,216 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

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PART I. FINANCIAL INFORMATION		4

Item 1.	Financial Statements	4

Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 (unaudited) and December 31, ~~2020~~2021		4

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021		5

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021		6

Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021		8

Notes to Condensed Consolidated Financial Statements (unaudited)		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2739

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4156

Item 4.	Controls and Procedures	4257

PART II. OTHER INFORMATION		4358

Item 1.	Legal Proceedings	4358

Item 1A.	Risk Factors	4358

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4558

Item 3.	Defaults Upon Senior Securities	4559

Item 4.	Mine Safety Disclosures	4559

Item 5.	Other Information	4559

Item 6.	Exhibits	4660

Signatures		4761

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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, 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. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:

•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 impact of competition on our industry and innovations by competitors;

•our ability to comply with evolving regulations and legal obligations related to data privacy, data protection and information security;

•our expectations about the potential benefits of our cloud-based software-as-a-service technology and technology-enabled services to university clients and students;

•our dependence on third parties to provide certain technological services or components used in our platform;

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

•our ability to meet the anticipated launch dates of our degree programs, ~~short courses~~executive education offerings and boot camps;

•our ability to acquire new university clients and expand our degree programs, ~~short courses~~executive education offerings and boot camps with existing university clients;

•~~our ability to consummate the edX Acquisition (as defined below) and realize the anticipated benefits of the edX Acquisition;~~

•our ability to successfully integrate the operations of our acquisitions, including the ~~pending~~ edX Acquisition, to achieve the expected benefits of our acquisitions and manage, expand and grow the combined company;

•our ability to refinance our indebtedness on attractive terms, if at all, to better align with our focus on profitability;

•our ability to service our substantial indebtedness and comply with the covenants and conversion obligations contained in the Indenture (as defined below) governing our Notes (as defined below) and the Term Loan Agreement (as defined below) governing our Term Loan Facilities (as defined below);

•our ability to generate sufficient future operating cash flows from recent acquisitions to ensure related goodwill is not impaired;

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

•our ability to continue to recruit prospective students for our offerings;

•our ability to maintain or increase student retention rates in our degree programs;

•our ability to attract, hire and retain qualified employees;

•our expectations about the scalability of our cloud-based platform;

•potential changes in regulations applicable to us or our university clients;

•our expectations regarding the amount of time our cash balances and other available financial resources will be sufficient to fund our operations;

•the impact and cost of stockholder activism;

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•the impact of the significant decline in the market price of our common stock, including the impairment of goodwill and ~~cost~~indefinite-lived intangible assets;

•the timing, structure and expected impact of ~~stockholder activism;~~our 2022 Strategic Realignment Plan and the estimated savings and amounts expected to be incurred in connection therewith;

•the impact of any natural disasters or public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic;

•our expectations regarding the effect of the capped call transactions and regarding actions of the option counterparties and/or their respective affiliates; and

•other factors beyond our control.

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, ~~2020,~~2021, as amended and supplemented by Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q, 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 time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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. In this Quarterly Report on Form 10-Q, the terms “2U,” “our company,” “we,” “us,” and “our” refer to 2U, Inc. and its subsidiaries, unless the context indicates otherwise.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

2U, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

September 30,
2021 December 31,
2020
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 934,348 $ 500,629
Restricted cash 16,976 18,237
Accounts receivable, net 95,390 46,663
Prepaid expenses and other assets 68,388 39,353
Total current assets 1,115,102 604,882
Property and equipment, net 48,006 52,734
Right-of-use assets 77,940 60,785
Goodwill 414,004 415,830
Amortizable intangible assets, net 291,427 312,770
Other assets, non-current 87,003 97,263
Total assets $ 2,033,482 $ 1,544,264
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued expenses $ 155,116 $ 130,674
Deferred revenue 96,984 75,493
Lease liability 11,243 10,024
Other current liabilities 37,033 21,178
Total current liabilities 300,376 237,369
Long-term debt 742,769 273,173
Deferred tax liabilities, net 1,295 2,810
Lease liability, non-current 103,024 83,228
Other liabilities, non-current 6,553 6,694
Total liabilities 1,154,017 603,274
Commitments and contingencies (Note 5) 0 0
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued — —
Common stock, $0.001 par value, 200,000,000 shares authorized, 74,749,601 shares issued and outstanding as of September 30, 2021; 72,451,521 shares issued and outstanding as of December 31, 2020 75 72
Additional paid-in capital 1,714,647 1,646,574
Accumulated deficit (823,377) (695,872)
Accumulated other comprehensive loss (11,880) (9,784)
Total stockholders’ equity 879,465 940,990
Total liabilities and stockholders’ equity $ 2,033,482 $ 1,544,264


	June 30, 2022		December 31, 2021
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	220,807	$	232,932
Restricted cash	16,978		16,977
Accounts receivable, net	69,844		67,287
Other receivables, net	30,938		29,439
Prepaid expenses and other assets	80,400		47,217
Total current assets	418,967		393,852
Other receivables, net, non-current	21,284		21,568
Property and equipment, net	50,731		48,650
Right-of-use assets	71,282		76,841
Goodwill	788,021		834,539
Intangible assets, net	611,886		665,523
Other assets, non-current	71,063		68,033
Total assets	$	2,033,234	$	2,109,006
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued expenses	$	150,081	$	164,723
Deferred revenue	132,472		91,926
Lease liability	11,934		13,985
Accrued restructuring liability	16,385		1,735
Other current liabilities	93,089		61,138
Total current liabilities	403,961		333,507
Long-term debt	927,746		845,316
Deferred tax liabilities, net	1,142		1,726
Lease liability, non-current	94,094		98,666
Other liabilities, non-current	641		636
Total liabilities	1,427,584		1,279,851
Commitments and contingencies (Note 6)	0		0
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued	—		—
Common stock, $0.001 par value, 200,000,000 shares authorized, 77,219,835 shares issued and outstanding as of June 30, 2022; 75,754,663 shares issued and outstanding as of December 31, 2021	77		76
Additional paid-in capital	1,668,282		1,735,628
Accumulated deficit	(1,046,453)		(890,638)
Accumulated other comprehensive loss	(16,256)		(15,911)
Total stockholders’ equity	605,650		829,155
Total liabilities and stockholders’ equity	$	2,033,234	$	2,109,006

See accompanying notes to condensed consolidated financial statements.

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2U, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Revenue	Revenue	$	232,376	$	201,073	$	702,058	$	559,239	Revenue	$	241,464	$	237,209	$	494,793	$	469,682
Costs and expenses	Costs and expenses									Costs and expenses
Curriculum and teaching	Curriculum and teaching	30,869		30,153		98,805		76,887		Curriculum and teaching	32,145		34,788		65,375		67,936
Servicing and support	Servicing and support	33,898		32,536		101,947		93,363		Servicing and support	37,061		34,865		76,685		68,049
Technology and content development	Technology and content development	43,106		40,223		128,539		113,040		Technology and content development	45,616		42,509		96,673		85,433
Marketing and sales	Marketing and sales	118,300		100,068		346,181		297,624		Marketing and sales	116,350		114,644		247,332		227,881
General and administrative	General and administrative	49,736		44,000		144,342		127,207		General and administrative	41,523		46,160		91,758		92,787
Restructuring charges										Restructuring charges	16,753		1,334		17,540		1,819
Impairment charges										Impairment charges	—		—		58,782		—
Total costs and expenses	Total costs and expenses	275,909		246,980		819,814		708,121		Total costs and expenses	289,448		274,300		654,145		543,905
Loss from operations	Loss from operations	(43,533)		(45,907)		(117,756)		(148,882)		Loss from operations	(47,984)		(37,091)		(159,352)		(74,223)
Interest income	Interest income	474		713		1,188		1,380		Interest income	241		352		498		714
Interest expense	Interest expense	(16,945)		(7,564)		(33,014)		(19,575)		Interest expense	(13,906)		(8,188)		(27,796)		(16,069)
Loss on debt extinguishment	Loss on debt extinguishment	—		—		(1,101)		(11,671)		Loss on debt extinguishment	—		(1,101)		—		(1,101)
Other income (expense), net	Other income (expense), net	(425)		42		22,730		(1,659)		Other income (expense), net	(1,367)		24,070		(2,397)		23,155
Loss before income taxes	Loss before income taxes	(60,429)		(52,716)		(127,953)		(180,407)		Loss before income taxes	(63,016)		(21,958)		(189,047)		(67,524)
Income tax benefit	Income tax benefit	319		162		448		1,580		Income tax benefit	164		127		415		129
Net loss	Net loss	$	(60,110)	$	(52,554)	$	(127,505)	$	(178,827)	Net loss	$	(62,852)	$	(21,831)	$	(188,632)	$	(67,395)
Net loss per share, basic and diluted	Net loss per share, basic and diluted	$	(0.80)	$	(0.77)	$	(1.72)	$	(2.69)	Net loss per share, basic and diluted	$	(0.82)	$	(0.29)	$	(2.46)	$	(0.91)
Weighted-average shares of common stock outstanding, basic and diluted	Weighted-average shares of common stock outstanding, basic and diluted	74,691,521		68,580,439		74,266,999		66,368,686		Weighted-average shares of common stock outstanding, basic and diluted	77,059,157		74,421,911		76,667,681		74,051,220
Other comprehensive income (loss)	Other comprehensive income (loss)									Other comprehensive income (loss)
Foreign currency translation adjustments, net of tax of $0 for all periods presented	Foreign currency translation adjustments, net of tax of $0 for all periods presented	(4,268)		1,667		(2,096)		(13,044)		Foreign currency translation adjustments, net of tax of $0 for all periods presented	(7,674)		2,977		(345)		2,172
Comprehensive loss	Comprehensive loss	$	(64,378)	$	(50,887)	$	(129,601)	$	(191,871)	Comprehensive loss	$	(70,526)	$	(18,854)	$	(188,977)	$	(65,223)

See accompanying notes to condensed consolidated financial statements.

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2U, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, in thousands, except share amounts)


		Common Stock			Additional Paid-In Capital				Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity				Common Stock					Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
		Shares	Amount								Shares								Amount
Balance, December 31, 2020		72,451,521	$	72			$	1,646,574						$	(695,872)			$	(9,784)		$	940,990
Balance, December 31, 2021																			Balance, December 31, 2021	75,754,663			$	76		$	1,735,628		$	(890,638)		$	(15,911)		$	829,155
Cumulative effect of adoption of ASU No. 2020-06, net of taxes																			Cumulative effect of adoption of ASU No. 2020-06, net of taxes	—			—		(114,551)			32,817			—			(81,734)
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	1,404,971	2		(12,615)				—			—				(12,613)			Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	577,416			1		(920)			—			—			(919)
Exercise of stock options	Exercise of stock options	181,716	—		3,533				—			—				3,533			Exercise of stock options	284,455			—		875			—			—			875
Stock-based compensation expense	Stock-based compensation expense	—	—		24,947				—			—				24,947			Stock-based compensation expense	—			—		24,424			—			—			24,424
Net loss	Net loss	—	—		—				(45,564)			—				(45,564)			Net loss	—			—		—			(125,780)			—			(125,780)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—				—			(805)				(805)			Foreign currency translation adjustment	—			—		—			—			7,329			7,329
Balance, March 31, 2021		74,038,208	$	74	$	1,662,439			$	(741,436)		$	(10,589)			$	910,488
Balance, March 31, 2022																			Balance, March 31, 2022	76,616,534			$	77	$	1,645,456		$	(983,601)		$	(8,582)		$	653,350
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	390,976	1		(1,502)				—			—				(1,501)			Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	464,984			—		(822)			—			—			(822)
Exercise of stock options	Exercise of stock options	28,263	—		737				—			—				737			Exercise of stock options	2,278			—		17			—			—			17
Issuance of common stock in connection with employee stock purchase plan	Issuance of common stock in connection with employee stock purchase plan	50,406	—		1,773				—			—				1,773			Issuance of common stock in connection with employee stock purchase plan	136,039			—		1,282			—			—			1,282
Stock-based compensation expense	Stock-based compensation expense	—	—		24,776				—			—				24,776			Stock-based compensation expense	—			—		22,349			—			—			22,349
Net loss	Net loss	—	—		—				(21,831)			—				(21,831)			Net loss	—			—		—			(62,852)			—			(62,852)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—				—			2,977				2,977			Foreign currency translation adjustment	—			—		—			—			(7,674)			(7,674)
Balance, June 30, 2021		74,507,853	$	75	$	1,688,223			$	(763,267)		$	(7,612)			$	917,419
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings		171,486	—		(429)				—			—				(429)
Exercise of stock options		70,262	—		1,831				—			—				1,831
Stock-based compensation expense		—	—		25,022				—			—				25,022
Net loss		—	—		—				(60,110)			—				(60,110)
Foreign currency translation adjustment		—	—		—				—			(4,268)				(4,268)
Balance, September 30, 2021		74,749,601	$	75	$	1,714,647			$	(823,377)		$	(11,880)			$	879,465
Balance, June 30, 2022																			Balance, June 30, 2022	77,219,835			$	77	$	1,668,282		$	(1,046,453)		$	(16,256)		$	605,650

See accompanying notes to condensed consolidated financial statements.

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2U, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity ~~(Continued)~~

(unaudited, in thousands, except share amounts)


		Common Stock			Additional Paid-In Capital				Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity				Common Stock					Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
		Shares	Amount								Shares								Amount
Balance, December 31, 2019		63,569,109	$	63			$	1,197,379						$	(479,388)			$	(6,804)		$	711,250
Balance, December 31, 2020																			Balance, December 31, 2020	72,451,521			$	72		$	1,646,574		$	(695,872)		$	(9,784)		$	940,990
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	96,683	1		(1)				—			—				—			Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	1,404,971			2		(12,615)			—			—			(12,613)
Exercise of stock options	Exercise of stock options	37,275	—		384				—			—				384			Exercise of stock options	181,716			—		3,533			—			—			3,533
Stock-based compensation expense	Stock-based compensation expense	—	—		20,870				—			—				20,870			Stock-based compensation expense	—			—		24,947			—			—			24,947
Net loss	Net loss	—	—		—				(60,106)			—				(60,106)			Net loss	—			—		—			(45,564)			—			(45,564)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—				—			(16,115)				(16,115)			Foreign currency translation adjustment	—			—		—			—			(805)			(805)
Balance, March 31, 2020		63,703,067	$	64	$	1,218,632			$	(539,494)		$	(22,919)			$	656,283
Balance, March 31, 2021																			Balance, March 31, 2021	74,038,208			$	74	$	1,662,439		$	(741,436)		$	(10,589)		$	910,488
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	355,506	—		(463)				—			—				(463)			Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	390,976			1		(1,502)			—			—			(1,501)
Exercise of stock options	Exercise of stock options	158,453	—		1,441				—			—				1,441			Exercise of stock options	28,263			—		737			—			—			737
Issuance of common stock in connection with employee stock purchase plan	Issuance of common stock in connection with employee stock purchase plan	83,573	—		1,771				—			—				1,771			Issuance of common stock in connection with employee stock purchase plan	50,406			—		1,773			—			—			1,773
Equity component of convertible senior notes, net of issuance costs		—	—		114,551				—			—				114,551
Purchases of capped calls in connection with convertible senior notes		—	—		(50,540)				—			—				(50,540)
Stock-based compensation expense	Stock-based compensation expense	—	—		21,091				—			—				21,091			Stock-based compensation expense	—			—		24,776			—			—			24,776
Net loss	Net loss	—	—		—				(66,167)			—				(66,167)			Net loss	—			—					(21,831)			—			(21,831)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—				—			1,404				1,404			Foreign currency translation adjustment	—			—		—			—			2,977			2,977
Balance, June 30, 2020		64,300,599	$	64	$	1,306,483			$	(605,661)		$	(21,515)			$	679,371
Issuance of common stock in connection with a public offering of common stock, net of offering costs		6,800,000	7		299,789				—			—				299,796
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings		112,460	—		(6)				—			—				(6)
Exercise of stock options		81,647	—		1,298				—			—				1,298
Stock-based compensation expense		—	—		22,001				—			—				22,001
Net loss		—	—		—				(52,554)			—				(52,554)
Foreign currency translation adjustment		—	—		—				—			1,667				1,667
Balance, September 30, 2020		71,294,706	$	71	$	1,629,565			$	(658,215)		$	(19,848)			$	951,573
Balance, June 30, 2021																			Balance, June 30, 2021	74,507,853			$	75	$	1,688,223		$	(763,267)		$	(7,612)		$	917,419

See accompanying notes to condensed consolidated financial statements.

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2U, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)


		Nine Months Ended September 30,					Six Months Ended June 30,
		2021		2020			2022		2021
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net loss	Net loss	$	(127,505)	$	(178,827)	Net loss	$	(188,632)	$	(67,395)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:						Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Non-cash interest expense	Non-cash interest expense	28,278		13,161		Non-cash interest expense	5,664		11,447
Depreciation and amortization expense	Depreciation and amortization expense	77,577		71,406		Depreciation and amortization expense	65,757		51,409
Stock-based compensation expense	Stock-based compensation expense	74,745		63,962		Stock-based compensation expense	46,773		49,723
Non-cash lease expense	Non-cash lease expense	13,518		11,181		Non-cash lease expense	11,405		8,644
Loss on sublease		4,845		—
Provision for credit losses	Provision for credit losses	5,712		2,703		Provision for credit losses	4,610		3,551
Loss on debt extinguishment	Loss on debt extinguishment	1,101		11,671		Loss on debt extinguishment	—		1,101
Gain on sale of investment	Gain on sale of investment	(27,762)		—		Gain on sale of investment	—		(27,875)
Impairment charges						Impairment charges	58,782		—
Other						Other	2,920		1,759
Changes in operating assets and liabilities, net of assets and liabilities acquired:	Changes in operating assets and liabilities, net of assets and liabilities acquired:					Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net	Accounts receivable, net	(54,689)		(65,095)		Accounts receivable, net	(6,632)		(58,847)
Other receivables, net						Other receivables, net	(2,790)		(14,738)
Prepaid expenses and other assets	Prepaid expenses and other assets	(31,237)		(14,982)		Prepaid expenses and other assets	2,585		(1,030)
Accounts payable and accrued expenses	Accounts payable and accrued expenses	24,249		38,018		Accounts payable and accrued expenses	3,484		15,888
Deferred revenue	Deferred revenue	21,960		43,138		Deferred revenue	45,549		34,697
Other liabilities, net	Other liabilities, net	(16,028)		(5,680)		Other liabilities, net	(20,831)		(10,528)
Other		2,100		2,486
Net cash used in operating activities		(3,136)		(6,858)
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	28,644		(2,194)
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Purchase of a business, net of cash acquired	Purchase of a business, net of cash acquired	—		(949)		Purchase of a business, net of cash acquired	5,010		—
Additions of amortizable intangible assets	Additions of amortizable intangible assets	(45,179)		(46,750)		Additions of amortizable intangible assets	(34,854)		(29,867)
Purchases of property and equipment	Purchases of property and equipment	(5,397)		(5,516)		Purchases of property and equipment	(5,218)		(2,452)
Purchase of investment	Purchase of investment	(1,000)		—		Purchase of investment	—		(1,000)
Proceeds from sale of investment	Proceeds from sale of investment	38,762		—		Proceeds from sale of investment	—		37,875
Advances made to university clients						Advances made to university clients	(310)		—
Advances repaid by university clients	Advances repaid by university clients	200		925		Advances repaid by university clients	200		200
Other	Other	56		—		Other	(7)		56
Net cash used in investing activities		(12,558)		(52,290)
Net cash (used in) provided by investing activities						Net cash (used in) provided by investing activities	(35,179)		4,812
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Proceeds from issuance of common stock, net of offering costs		—		299,796
Proceeds from debt	Proceeds from debt	469,595		371,681		Proceeds from debt	385		469,595
Payments on debt	Payments on debt	(2,203)		(250,479)		Payments on debt	(3,793)		(703)
Purchases of capped calls in connection with issuance of convertible senior notes		—		(50,540)
Prepayment premium on extinguishment of senior secured term loan facility		—		(2,528)
Payment of debt issuance costs	Payment of debt issuance costs	(10,259)		(3,419)		Payment of debt issuance costs	—		(10,258)
Tax withholding payments associated with settlement of restricted stock units	Tax withholding payments associated with settlement of restricted stock units	(14,543)		(470)		Tax withholding payments associated with settlement of restricted stock units	(1,741)		(14,114)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	6,101		3,123		Proceeds from exercise of stock options	892		4,270
Proceeds from employee stock purchase plan share purchases	Proceeds from employee stock purchase plan share purchases	1,773		1,771		Proceeds from employee stock purchase plan share purchases	1,282		1,773
Net cash provided by financing activities		450,464		368,935
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(2,975)		450,563
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(2,312)		(92)		Effect of exchange rate changes on cash	(2,614)		(713)
Net increase in cash, cash equivalents and restricted cash		432,458		309,695
Net (decrease) increase in cash, cash equivalents and restricted cash						Net (decrease) increase in cash, cash equivalents and restricted cash	(12,124)		452,468
Cash, cash equivalents and restricted cash, beginning of period	Cash, cash equivalents and restricted cash, beginning of period	518,866		189,869		Cash, cash equivalents and restricted cash, beginning of period	249,909		518,866
Cash, cash equivalents and restricted cash, end of period	Cash, cash equivalents and restricted cash, end of period	$	951,324	$	499,564	Cash, cash equivalents and restricted cash, end of period	$	237,785	$	971,334

See accompanying notes to condensed consolidated financial statements.

Table of Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Organization

2U, Inc. (together with its subsidiaries, the “Company”) is an online education platform company. The Company’s mission is to expand access to high-quality educational opportunities that unlock human potential.

On November 16, 2021, the Company completed the acquisition of edX (the “edX Acquisition”), including the edX brand, website, and marketplace. As a ~~leading~~result of the edX Acquisition, the Company expanded its digital ~~transformation partner~~education offerings to include open courses and micro-credential offerings at the undergraduate and graduate levels and added an education consumer marketplace, edx.org, with over 45 million registered learners. Refer to Note 3 for ~~nonprofit colleges and universities.~~ further information about the edX Acquisition.

The Company ~~builds, delivers, and supports~~serves more than ~~550 digital~~230 top-ranked global universities and ~~in-person educational~~other leading institutions, and offers more than 4,000 high-quality online learning opportunities, including open courses, executive education offerings, ~~including graduate degrees, undergraduate degrees,~~boot camps, micro-credentials, professional certificates ~~boot camps,~~as well as undergraduate and ~~short courses, across~~graduate degree programs. edX is the ~~Career Curriculum Continuum.~~primary brand for the Company’s products and services and edx.org operates as its global online learning marketplace.

The Company is positioned as one of the world’s most comprehensive free-to-degree online learning platforms. The Company believes its platform and robust consumer marketplace provide clients with the digital infrastructure to launch world-class online education offerings and allow students to easily access high-quality, job-relevant education offerings without the barriers of cost or location.

The Company has 2 reportable segments: the Degree Program Segment and the Alternative Credential Segment.

The Company’s Degree Program Segment provides the technology and services to nonprofit colleges and universities to enable the online delivery of degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate degree of the same quality they would receive on campus.

The Company’s Alternative Credential Segment provides ~~premium~~ online ~~short courses~~executive education programs and technical, skills-based boot camps through relationships with nonprofit colleges and universities. Students enrolled in these offerings are generally seeking to reskill or upskill through shorter duration, lower-priced offerings that are relevant to the needs of industry and society.

On June 28, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with edX Inc., a Massachusetts nonprofit corporation (“edX”) and Circuit Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of edX (“edX Sub”), pursuant to which the Company agreed to acquire edX Sub (the “edX Acquisition”).

Pursuant to the Purchase Agreement, edX will contribute substantially all of its assets to edX Sub effective immediately prior to the closing (the “Contribution”), and the Company will purchase from edX 100% of the outstanding membership interests of edX Sub (the “Membership Interests”). The purchase price for the Membership Interests will be $800 million, subject to customary adjustments based on, among other things, the amount of cash, debt, transaction expenses and working capital of edX and edX Sub at the closing date.

The Purchase Agreement contains customary representations, warranties and covenants by edX Sub, the Company, and edX. The completion of the transaction is subject to receipt of required regulatory and governmental approvals, including the expiration or termination of the waiting period applicable to the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), and certain other customary closing conditions. The applicable waiting period under the HSR Act expired on August 12, 2021 and the other required governmental approvals were obtained in early November 2021. The transaction does not require approval of the Company’s stockholders and is not subject to any financing contingency.

The Purchase Agreement may be terminated under certain circumstances, including by the Company or edX if the transaction has not been completed by June 28, 2022. The Company currently anticipates that the edX Acquisition will be completed before the end of 2021.

2. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements, which include the assets, liabilities, results of operations and cash flows of the Company have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (the “SEC”). As permitted under such rules, certain notes and other financial information normally required by U.S. GAAP have been condensed or omitted. The Company believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~2021. All significant intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet data as of December 31, 2021 was derived from the audited financial statements, but does not include all disclosures required by U.S. GAAP on an annual reporting basis.

Reclassifications

The Company has reclassified prior period amounts in the condensed consolidated statements of cash flows to conform to the current period’s presentation of other receivables. The Company reclassified $14.7 million from changes in prepaid

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~2. Significant Accounting Policies (Continued)~~

expenses and other assets to changes in other receivables. This reclassification had no impact on the previously reported operating cash flows. The Company has reclassified certain other prior period amounts in the consolidation statements of cash flows to conform to current period presentation. These reclassifications had no impact on previously reported operating, financing, or financing cash flows.

The Company has reclassified prior period amounts in the condensed consolidated balance sheet ~~data as~~and condensed consolidated statement of ~~December 31, 2020 was derived~~operations to conform to the current period’s presentation restructuring charges. The Company reclassified $1.7 million from accounts payable and accrued liabilities to accrued restructuring liability. In addition, the ~~audited financial statements, but does not include all disclosures required by U.S. GAAP on an annual reporting basis.~~Company reclassified $1.3 million and $1.8 million from general and administrative expense to restructuring charges for the three and six months ended June 30, 2021, respectively.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Significant items subject to such estimates include, but are not limited to, the measurement of provisions for credit losses, implied price concessions, acquired intangible assets, the recoverability of goodwill and indefinite-lived intangible assets, deferred tax assets, and the fair value of the convertible senior notes. Due to the inherent uncertainty involved in making estimates, particularly in light of the COVID-19 pandemic, 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.

~~Recent Accounting Pronouncements~~Fair Value Measurements

~~In October 2020,~~The carrying amounts of certain assets and liabilities, including cash and cash equivalents, receivables, advances to university clients, accounts payable and accrued expenses and other current liabilities, approximate their respective fair values due to their short-term nature.

Fair value is defined as the ~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-10,~~ ~~Codification Improvements. The amendments~~price that would be received to sell an asset or paid to transfer a liability in ~~this ASU affect a wide variety of topics~~an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in the ~~Accounting Standards Codification (“ASC”) by either clarifying~~absence of a principal, most advantageous, market for the ~~codification~~specific asset or ~~correcting unintended application of guidance. The amendments do not change~~ liability.

U.S. GAAP provides for a three-tier fair value hierarchy to classify and ~~therefore,~~disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. Generally, assets are ~~not expected to~~recorded at fair value on a non-recurring basis as a result ~~in a significant change in current accounting practice.~~of impairment charges. The Company ~~adopted this ASU~~remeasures non-financial assets such as goodwill, intangible assets and other long-lived assets at fair value when there is an indicator of impairment, and records them at fair value only when recognizing an impairment loss. The fair value hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. Refer to Note 4 for further discussion of assets measured at fair value on ~~January~~a nonrecurring basis. The three tiers are defined as follows:

•Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;

•Level 2—Observable inputs, other than quoted prices in active markets, that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

•Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

The Company has financial instruments, including cash deposits, receivables, accounts payable and debt. The carrying values for such financial instruments, other than than the Company’s convertible senior notes, each approximated their fair values as of June 30, 2022 and December 31, 2021. ~~Adoption~~Refer to Note 9for more information regarding the Company’s convertible senior notes.

Table of ~~this standard did not have a material impact~~Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Business Combinations

The purchase price of an acquisition is allocated to the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. Acquisition-related costs are expensed as incurred. The excess of the cost of an acquired entity, net of the amounts assigned to the assets acquired and liabilities assumed, is recognized as goodwill. The net assets and results of operations of an acquired entity are included on the Company’s condensed consolidated financial statements from the acquisition date.

Goodwill and Other Indefinite-lived Intangible Assets

The Company reviews goodwill and other indefinite-lived intangible assets for impairment annually, as of October 1, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or an indefinite-lived asset below its carrying value.

Goodwill

Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company’s goodwill balance relates to its acquisitions of GetSmarter in July 2017, Trilogy in May 2019 and edX in November 2021. The Company tests goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. The Company initially assesses qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment review. The Company reviews goodwill for impairment using a quantitative approach if it decides to bypass the qualitative assessment or determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on a qualitative assessment. Upon completion of a quantitative assessment, the Company may be required to recognize an impairment based on the difference between the carrying value and the fair value of the reporting unit.

The Company determines the fair value of a reporting unit by utilizing a weighted combination of the income-based and market-based approaches.

The income-based approach requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies, discount rates, terminal growth rates, and forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, the Company considers each reporting unit’s historical results and current operating trends, revenue, profitability, cash flow results and forecasts, and industry trends. These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, market capitalization, the continued efforts of competitors to gain market share and prospective student enrollment patterns.

In addition, the value of a reporting unit using the market-based approach is estimated by comparing the reporting unit to other publicly traded companies and/or to publicly-disclosed business mergers and acquisitions in similar lines of business. The value of a reporting unit is based on pricing multiples of certain financial parameters observed in the comparable companies. The Company also makes estimates and assumptions for market values to determine a reporting unit’s estimated fair value.

Other Indefinite-lived Intangible Assets

The Company’s indefinite-lived intangible asset was acquired in November 2021 and represents the established edX trade name.

Interim Impairment Assessment

During the first quarter of 2022, the Company experienced a significant decline in its market capitalization, which management deemed a triggering event related ~~disclosures.~~to goodwill and its indefinite-lived intangible asset. As a result, the Company performed an interim impairment assessment as of March 1, 2022 and determined the carrying value for one of the reporting units within the Company’s Alternative Credential Segment and the carrying value of an indefinite-lived intangible asset exceeded their respective estimated fair values. As a result, during the three months ended March 31, 2022, the Company recorded impairment charges of $28.8 million and $30.0 million to goodwill and the indefinite-lived intangible asset, respectively, both within the Company’s Alternative Credential Segment. These charges are included within operating expense on the Company’s condensed consolidated statements of operations. The estimated fair values of the remaining reporting units exceeded their respective carrying values by approximately 10% or more.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

The Company utilized a weighted combination of the income-based approach and market-based approach to determine the fair value of each reporting unit and the income-based approach to determine the fair value of its long-lived intangible asset. Key assumptions used in the income-based approach included forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements, terminal growth rates, and discount rates based upon each respective reporting unit’s or indefinite-lived intangible asset’s weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that were not observable to active markets, which would be deemed “Level 3” fair value measurements, as defined in the Fair Value Measurements section above. Key assumptions used in the market-based approach included the selection of appropriate peer group companies. Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value and the impairment test result.

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts indexed to and potentially settled in an entity’s own equity. The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. As a result, in more cases, convertible debt will be accounted for as a single instrument. The guidance also removes certain conditions for equity classification related to contracts in an entity’s own equity and requires the application of the if-converted method for calculating diluted earnings per share. This ASU is effective for fiscal years beginning after December 15, 2021. ~~Early adoption is permitted.~~

The Company ~~is evaluating the impact that~~adopted this ASU ~~will~~on a modified retrospective basis in the first quarter of 2022, effective as of January 1, 2022. As a result of the adoption, long-term debt increased $81.7 million, additional paid-in capital decreased $114.6 million, deferred tax liabilities decreased $22.1 million, and the Company recorded a cumulative-effect adjustment to opening accumulated deficit of $32.8 million. Adoption of this ASU requires the use of the if-converted method for all convertible notes in the diluted net income (loss) per share calculation and the inclusion of the effect of potential share settlement of the convertible notes, if the effective is more dilutive. There was no impact to the number of potentially dilutive shares as a result of the adoption. Adoption of this standard did not have a material impact on ~~its condensed consolidated financial statements and related disclosures.~~the Company’s liquidity or cash flows.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU is intended to provide optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, to ease the potential accounting and financial reporting burden associated with the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU may be applied as of the beginning of any interim period that includes its effective date (i.e., March 12, 2020) through December 31, 2022. The Company will adopt this standard when LIBOR is discontinued and does not expect the adoption of this standard to have a material impact on its ~~condensed~~ consolidated financial statements and related disclosures.

In ~~January 2020,~~November 2021, the FASB issued ASU No. ~~2020-01,~~2021-10, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815Disclosures by Business Entities about Government Assistance. This ASU ~~was issued~~requires entities to ~~clarify~~disclose information about certain government assistance they receive, including the ~~interaction~~nature of the transactions and the related accounting policy, the line items on the balance sheet and statement of operations that are affected and the amounts applicable to each financial statement line item, and significant terms and conditions of the transactions. The ASU is effective for ~~equity securities~~fiscal years beginning after December 15, 2021 and the disclosure requirements are for annual periods only. The guidance under ~~ASC 321~~this ASU will be effective for the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2022. The Company is currently evaluating the impact of this guidance on the disclosures in its consolidated financial statements.

In March 2022, the FASB issued ASU No 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and ~~investments~~Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted ASU 2016-13 and enhances the disclosure requirements for certain loan refinancings when borrowers are experiencing financial difficulty. In addition, the ASU requires the disclosure of current-period gross write-offs for financing receivables by year of origination in the vintage disclosures. This ASU is effective for fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3. Business Combination

On November 16, 2021, pursuant to the Membership Interest Purchase Agreement, dated June 28, 2021 (the “Purchase Agreement”), by and among the Company, edX Inc., a Massachusetts nonprofit corporation (“edX Inc.”) and edX LLC (f/k/a Circuit Sub LLC), a Delaware limited liability company and a wholly owned subsidiary of edX Inc. (“edX”), edX Inc. contributed substantially all of its assets to edX and the Company acquired 100% of the outstanding membership interests of edX (the “edX Acquisition”) including the edX brand, website, and marketplace.

The total preliminary purchase price was $773.0 million in cash consideration, of which $23.0 million was distributed to an escrow account to satisfy indemnification claims and purchase price adjustments, as applicable. During the six months ended June 30, 2022, the Company recorded working capital adjustments of $5.0 million, reducing the preliminary purchase price to $768.0 million. In addition, the Company adjusted its preliminary valuation of acquired assets and assumed liabilities based upon new information that was received pertaining to acquisition date fair values.

The transaction was accounted for under the ~~equity~~acquisition method of accounting ~~in ASC 323~~ and revenue. Under the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equityacquisition method of accounting, ~~when applying~~the total preliminary purchase price was allocated to edX’s net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of November 16, 2021. The allocation of the preliminary purchase price is pending the finalization of the fair value of acquired deferred revenue and other liabilities, deferred income tax assets and liabilities, and assumed non-income tax liabilities.

The following table summarizes the preliminary purchase price allocation based on the estimated fair value of the assets acquired and liabilities assumed and reflects the measurement ~~alternative in ASC 321, immediately before applying or discontinuing~~period adjustments recorded during the equity method of accounting. The Company adopted this ASU on January 1, 2021. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.six months ended June 30, 2022:


	Estimated Useful Life (in years)	Purchase Price Allocation
		(in thousands)
Cash and cash equivalents		$	11,901
Accounts receivable		6,608
Prepaid expenses and other assets		13,098
Property and equipment, net		529
Right-of-use assets		2,355
Other assets, non-current		572
Accounts payable and accrued expenses		(16,095)
Deferred revenue		(10,962)
Lease liability		(2,512)
Other liabilities		(33,235)
Intangible assets:
Developed technology	3	15,400
University client relationships	10	104,000
Enterprise client relationships	10	14,300
Trade names	indefinite	255,000
Goodwill		407,050
		$	768,009

1013

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~2. Significant Accounting Policies (Continued)~~

~~In December 2019,~~The Company’s unaudited pro forma combined financial information below is presented for illustrative purposes and does not purport to represent what the ~~FASB issued ASU No. 2019-12,~~ ~~Income Taxes (Topic 740): Simplifying~~results of operations would actually have been if the ~~Accounting for Income Taxes~~,business combination occurred as part of its initiative to reduce complexity in the accounting standards. The amendments in this ASU include removal of certain exceptions to the general principles in Topic 740 related to recognizing deferred taxes for investments, performing intraperiod tax allocation and calculating income taxes in an interim period. The ASU also clarifies and simplifies other aspects of the ~~accounting~~date indicated or what the results would be for ~~income taxes, including~~any future periods. The following table presents the ~~recognition~~Company’s unaudited pro forma combined revenue, pro forma combined net loss and pro forma combined net loss per share for the three and six months ended June 30, 2021, as if the acquisition of ~~deferred tax liabilities for outside basis differences. The Company adopted this ASU~~edX had occurred on January 1, ~~2021. Adoption~~2020.


	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
	(in thousands)
Pro forma revenue	$	247,175	$	492,994
Pro forma net loss	$	(49,729)	$	(123,991)
Pro forma net loss per share, basic and diluted	$	(0.67)	$	(1.67)

Table of ~~this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.~~Contents

2U, Inc.

3.Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. Goodwill and ~~Amortizable~~ Intangible Assets

The following table presents the changes in the carrying amount of goodwill by reportable segment on the Company’s condensed consolidated balance sheets for the periods indicated.

Degree
Program Segment
Alternative
Credential Segment Total
(in thousands)
Balance as of December 31, 2020 $ — $ 415,830 $ 415,830
Foreign currency translation adjustments — (1,826) (1,826)
Balance as of September 30, 2021 $ — $ 414,004 $ 414,004


		Balance as of December 31, 2021		Allocations		Adjustments		Impairment Charges		Foreign Currency Translation Adjustments		Balance as of June 30, 2022

	(in thousands)
Degree Program Segment
Gross goodwill		$	—	$	198,378	$	(5,519)	$	—	$	—	$	192,859
Accumulated impairments		—		—		—		—		—		—
Net goodwill		—		198,378		(5,519)		—		—		192,859

Alternative Credential Segment
Gross goodwill		$	481,366	$	225,174	$	(10,983)	$	—	$	(1,234)	$	694,323
Accumulated impairments		(70,379)		—		—		(28,782)		—		(99,161)
Net goodwill		410,987		225,174		(10,983)		(28,782)		(1,234)		595,162

Unallocated goodwill		$	423,552	$	(423,552)	$	—	$	—	$	—	$	—

Total
Gross goodwill		$	904,918	$	—	$	(16,502)	$	—	$	(1,234)	$	887,182
Accumulated impairments		(70,379)		—		—		(28,782)		—		(99,161)
Net goodwill		$	834,539	$	—	$	(16,502)	$	(28,782)	$	(1,234)	$	788,021

~~The carrying amount~~During the first quarter of 2022, the Company completed the allocation of the preliminary goodwill inbalance resulting from the ~~Alternative Credential Segment included accumulated impairment charges of $70.4 million as of both September 30, 2021 and December 31, 2020.~~

~~The following table presents the components of amortizable intangible assets, net on~~edX Acquisition to the Company’s ~~condensed consolidated balance sheets as of~~reporting units. The goodwill was assigned to the reporting units that are expected to drive synergies from the acquisition, which is each of the ~~dates indicated.~~

September 30, 2021 December 31, 2020
Estimated
Average Useful
Life (in years) Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Amount Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Amount
(in thousands)
Capitalized technology 3-5 $ 180,071 $ (103,163) $ 76,908 $ 165,254 $ (75,822) $ 89,432
Capitalized content development 4-5 235,268 (113,111) 122,157 208,170 (88,168) 120,002
University client relationships 9-10 108,816 (31,475) 77,341 109,498 (23,376) 86,122
Trade names and domain names 5-10 27,193 (12,172) 15,021 26,697 (9,483) 17,214
Total amortizable intangible assets, net $ 551,348 $ (259,921) $ 291,427 $ 509,619 $ (196,849) $ 312,770

~~The amounts presented in~~Company’s 4 reporting units. In addition, during the ~~table above include $44.5~~six months ended June 30, 2022, the Company recorded working capital adjustments of $5.0 million, adjustments to the preliminary valuation of acquired assets and assumed liabilities of edX of $11.5 million, and ~~$38.6 million~~a goodwill impairment charge of ~~in-process capitalized technology and content development as of September 30, 2021 and December 31, 2020, respectively.~~$28.8 million. Refer to Note 2for further information about the goodwill impairment charge.

The Company recorded amortization expense related to amortizable intangible assets of $23.2 million and $20.8 million for the three months ended September 30, 2021 and 2020, respectively. The Company recorded amortization expense related to amortizable intangible assets of $68.0 million and $61.8 million for the nine months ended September 30, 2021 and 2020, respectively.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~3. Goodwill~~

The following tables present the components of intangible assets, net on the Company’s condensed consolidated balance sheets as of each of the dates indicated.


		June 30, 2022						December 31, 2021
	Estimated Average Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount

	(in thousands)
Definite-lived intangible assets
Capitalized technology	3-5	$	209,976	$	(117,948)	$	92,028	$	199,766	$	(112,357)	$	87,409
Capitalized content development	4-5	258,285		(152,311)		105,974		243,687		(125,599)		118,088
University client relationships	9-10	211,171		(45,285)		165,886		211,680		(34,995)		176,685
Enterprise client relationships	10	14,300		(1,073)		13,227		14,300		(179)		14,121
Trade names and domain names	5-10	28,981		(19,210)		9,771		27,161		(12,941)		14,220
Total definite-lived intangible assets		$	722,713	$	(335,827)	$	386,886	$	696,594	$	(286,071)	$	410,523


		June 30, 2022						December 31, 2021
		Gross Carrying Amount		Accumulated Impairments*		Net Carrying Amount		Gross Carrying Amount		Accumulated Impairments		Net Carrying Amount

	(in thousands)
Indefinite-lived intangible assets
Trade names		$	255,000	$	(30,000)	$	225,000	$	255,000	$	—	$	255,000
Total indefinite-lived intangible assets		$	255,000	$	(30,000)	$	225,000	$	255,000	$	—	$	255,000



*						During the three months ended March 31, 2022, the Company recorded a $30.0 million impairment charge related to its indefinite-lived intangible asset. Refer to Note 2for further information about this impairment charge.

The amounts presented in the table above include $50.7 million and ~~Amortizable Intangible Assets~~$46.3 million of in-process capitalized technology and content development as of June 30, 2022 and December 31, 2021, respectively.

The Company recorded amortization expense related to amortizable intangible assets of $28.5 million and $23.2 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded amortization expense related to amortizable intangible assets of $59.9 million and $44.8 million for the six months ended June 30, 2022 and 2021, respectively.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

The following table presents the estimated future amortization expense of the Company’s amortizable intangible assets placed in service as of ~~September~~June 30, ~~2021.~~2022.


		Future Amortization Expense			Future Amortization Expense
		(in thousands)			(in thousands)
Remainder of 2021		$	22,758
2022		70,835
Remainder of 2022				Remainder of 2022	$	49,109
2023	2023	62,023		2023	79,764
2024	2024	37,193		2024	59,764
2025	2025	20,471		2025	41,022
2026				2026	28,016
Thereafter	Thereafter	32,913		Thereafter	78,575
Total	Total	$	246,193	Total	$	336,250

4.5. Other Balance Sheet Details

Prepaid expenses and other assets

As of June 30, 2022 and December 31, 2021, the Company had balances of $23.6 million and $23.0 million, respectively, of prepaid assets within prepaid expenses and other assets on the condensed consolidated balance sheets.

Other Assets, Non-current

As of June 30, 2022 and December 31, 2021, the Company had balances of $8.6 million and $7.0 million, respectively, of deferred expenses incurred to integrate the software associated with its cloud computing arrangements, within other assets, non-current on the condensed consolidated balance sheets. Such expenses are subject to amortization over the remaining contractual term of the associated cloud computing arrangement, with a useful life of between three to five years. The Company incurred $0.6 million and $0.6 million of such amortization for the three months ended June 30, 2022 and 2021, respectively. The Company incurred $1.3 million and $1.1 million of such amortization for the six months ended June 30, 2022 and 2021, respectively.

Accounts Payable and Accrued ~~and Deferred~~ Expenses

The following table presents the components of accounts payable and accrued expenses on the Company’s condensed consolidated balance sheets as of each of the dates indicated.


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(in thousands)					(in thousands)
Accrued university and instructional staff compensation	Accrued university and instructional staff compensation	$	25,123	$	27,371	Accrued university and instructional staff compensation	$	28,884	$	36,806
Accrued marketing expenses	Accrued marketing expenses	44,701		24,682		Accrued marketing expenses	33,430		26,469
Accrued transaction, integration and restructuring-related expenses		3,506		3,492
Accrued transaction and integration expenses						Accrued transaction and integration expenses	18,545		4,072
Accrued compensation and related benefits	Accrued compensation and related benefits	40,793		52,820		Accrued compensation and related benefits	40,549		49,143
Accounts payable and other accrued expenses	Accounts payable and other accrued expenses	40,993		22,309		Accounts payable and other accrued expenses	28,673		48,233
Total accounts payable and accrued expenses	Total accounts payable and accrued expenses	$	155,116	$	130,674	Total accounts payable and accrued expenses	$	150,081	$	164,723

For each of the three and ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020, expense~~expenses related to the Company’s marketing and advertising efforts of its own ~~brand~~brands were not material.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Other Current Liabilities

As of June 30, 2022 and December 31, 2021, the Company had balances of $19.3 million and $21.9 million, respectively, within other current liabilities on the condensed consolidated balance sheets, which represents proceeds received from students enrolled in certain of the Company’s alternative credential offerings that are payable to an associated university client.

In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses. Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted in the United States on March 27, 2020, the Company is allowed to defer payment of the employer’s share of Social Security taxes incurred from March 27, 2020 through December 31, 2020. In addition, the CARES Act provides eligible employers with an employee retention tax credit for employees whose services were impacted by COVID-19. ~~The~~As of June 30, 2022, the amount of payroll taxes subject to deferred payment, net of employee retention tax credits of $0.5 million, was approximately $5.0 million. The balance is ~~approximately $11.3 million. This total deferred amount is payable in equal installments, with 50% due by December 31, 2021 and the remainder due by December 31, 2022.~~

As of September 30, 2021 and December 31, 2020, the Company had balances of $6.5 million and $6.3 million, respectively, of deferred expenses incurred to integrate the software associated with its cloud computing arrangements,recorded within other ~~assets, non-current~~current liabilities on the condensed consolidated balance sheets. ~~Such expenses are subject to amortization over the remaining contractual term of the associated cloud computing arrangement, with a useful life of between~~ ~~three~~ to five years. The Company incurred $0.7 million and $0.3 million of such amortization for the three months ended September 30, 2021 and 2020, respectively. The Company incurred $1.8 million and $0.9 million of such amortization for the nine months ended September 30, 2021 and 2020, respectively.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5.6. Commitments and Contingencies

Legal Contingencies

The Company is involved in various claims and legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. While the Company does not expect that the ultimate resolution of any existing claims and proceedings (other than the specific matters described below, if decided adversely), individually or in the aggregate, will have a material adverse effect on its financial position, an unfavorable outcome in some or all of these proceedings could have a material adverse impact on the results of operations or cash flows for a particular period. This assessment is based on the Company’s current understanding of relevant facts and circumstances. With respect to current legal proceedings, the Company does not believe it is probable a material loss exceeding amounts already recognized has been incurred as of the date of the balance sheets presented herein. As such, the Company’s view of these matters is subject to inherent uncertainties and may change in the future.

In re 2U, Inc., Securities Class Action

On August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaints against the Company, Christopher J. Paucek, the Company’s CEO, and Catherine A. Graham, the Company’s former CFO, in the United States District Court for the Southern District of New York, alleging violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. The district court transferred the cases to the United States District Court for the District of Maryland, consolidated them under docket number 8:19-cv-3455 (D. Md.), and appointed Fiyyaz Pirani as the lead plaintiff in the consolidated action. On July 30, 2020, Mr. Pirani filed a consolidated class action complaint (“CAC”), adding Harsha Mokkarala, the Company’s former Chief Marketing Officer, as a defendant.The CAC also asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, against Mr. Paucek, Ms. Graham, members of the Company’s board of directors, and the Company’s underwriters, based on allegations related to the Company’s secondary stock offering on May 23, 2018. The proposed class consists of all persons who acquired the Company’s securities between February 26, 2018 and July 30, 2019. On October 27, 2020, defendants filed a motion to dismiss. On August 5, 2021, the court largely denied the defendants’ motion to ~~dismiss,~~dismiss. On February 18, 2022, the court stayed discovery until April 19, 2022, pending mediation. On April 28, 2022, the parties informed the court that they had reached a settlement in principle. On June 2, 2022, Plaintiffs filed a motion for preliminary approval of the class action settlement and accompanying documents. On June 23, 2022, the Court entered an order preliminarily approving the settlement. The settlement payment is being fully funded by the Company's insurers. The $37.0 million payable under the proposed settlement and the ~~remaining claims~~related insurance proceeds are ~~proceeding in discovery.~~

~~The Company believes that~~recorded within other current liabilities and prepaid expenses and other assets, respectively, on the claims are without merit, and it intends to vigorously defend against these claims. However, due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.condensed consolidated balance sheets.

Stockholder Derivative Suits

On April 30, 2020, Richard Theis filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, and the Company’s board of directors in the United States District Court for the Southern District of New York, with docket number 20-cv-3360. The complaint alleges claims for breaches of fiduciary duty, insider sales and misappropriation of information, unjust enrichment, and violations of Section 14(a) of the Exchange Act, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On July 22, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. On July 13, 2022, the Court granted the parties’ request to set a briefing schedule for defendants’ motion to dismiss. Defendants’ motion to dismiss is due on or before August 10, 2022. Plaintiff’s response is due on or before October 10, 2022. Defendants’ reply is due on or before November 9, 2022. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.

On August 21, 2020, Thomas Lucey filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, Harsha Mokkarala, the Company’s former Chief Marketing Officer and the Company’s board of directors in the United States District Court for the District of Maryland, with docket number 1:20-cv-02424-GLR. The complaint alleges claims for breaches of fiduciary duty, insider trading, and contribution for alleged violations of Sections 10(b) and 21D of the Exchange Act, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On September 3, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. On June 30, 2022, the Court granted the parties’ request to set a briefing schedule for defendants’ motion to dismiss. Defendants’ motion to dismiss is

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

due on or before August 10, 2022. Plaintiff’s response is due on or before October 10, 2022. Defendants’ reply is due on or before November 9, 2022. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.

On November 30, 2020, Leo Shumacher filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, Harsha Mokkarala, the Company’s former Chief Marketing Officer, and the Company’s board of directors in the Court of Chancery of

~~Table of Contents~~

~~2U, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(unaudited)~~

~~5. Commitments and Contingencies (Continued)~~

the State of Delaware, with docket number 2020-1019-AGB. The complaint alleges claims for breaches of fiduciary duty and unjust enrichment, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On January 6, 2021, the court entered a joint stipulation staying the case pending resolution of the securities class action. On July 13, 2022, the Court granted the parties’ request to set a briefing schedule for defendants’ motion to dismiss. Defendants’ motion to dismiss is due on or before August 10, 2022. Plaintiff’s response is due on or before October 10, 2022. Defendants’ reply is due on or before November 9, 2022. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.

Marketing and Sales Commitments

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

Future Minimum Payments to University Clients

Pursuant to certain of the Company’s contracts in the Degree Program Segment, the Company has made, or is obligated to make, payments to university clients in exchange for contract extensions and various marketing and other rights. As of ~~September~~June 30, ~~2021,~~2022, the future minimum payments due to university clients have not materially changed relative to the amounts provided in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~2021.

Contingent Payments

The Company has entered into agreements with certain of its university clients in the Degree Program Segment that require the Company to make future minimum payments in the event that certain program metrics are not achieved on an annual basis. The Company recognizes any estimated contingent payments under these agreements as contra revenue over the period to which they relate, and records a liability in other current liabilities on the condensed consolidated balance sheets.

In the first quarter of 2019, the Company entered into an agreement to make investments in an education technology company of up to $15.0 million, upon demand by the investee. During the second quarter of 2021, the Company sold its investment in this education technology company and was released from any further obligation to make additional investments.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Restructuring Charges

2022 Strategic Realignment Plan

During the second quarter of 2022, the Company began implementing a plan to accelerate its transition to a platform company (the “2022 Strategic Realignment Plan”). The plan is designed to reorient the company around a single platform allowing us to pursue a portfolio-based marketing strategy that drives traffic to the edX marketplace. As part of the plan, the Company expects to optimize marketing spend, simplify the current executive structure to reduce silos, reduce employee headcount, and rationalize its real estate footprint.

The Company anticipates the headcount reductions to be completed in the third quarter of 2022 while the remainder of the plan is expected to be completed by the end of 2022. The Company anticipates that we will incur restructuring charges associated with the 2022 Strategic Realignment Plan of approximately $35 million to $40 million. The Company recorded $15.8 million in restructuring charges related to the 2022 Strategic Realignment Plan for each of the three and six months ended June 30, 2022. The majority of the estimated remaining restructuring charges relate to planned office closures expected to be completed by December 31, 2022, and will be recognized as expense over the remaining lease terms ranging from 1 to 9 years.

The following table presents restructuring charges by reportable segment on the Company’s condensed consolidated statements of operations for the periods indicated.


	Three Months Ended June 30, 2022				Six Months Ended June 30, 2022
	Degree Program Segment		Alternative Credential Segment		Degree Program Segment		Alternative Credential Segment

2022 Strategic Realignment Plan
Severance and severance-related costs	$	8,772	$	6,431	$	8,772	$	6,431
Professional and other fees relating to restructuring activities	554		—		554		—
	9,326		6,431		9,326		6,431

Other restructuring charges*	926		70		1,615		168
Total restructuring charges	$	10,252	$	6,501	$	10,941	$	6,599



*						Includes severance and severance-related costs and costs associated with the exit of facilities

The Company recorded restructuring charges of $1.3 million and $1.8 million for the three and six months ended June 30, 2021, respectively.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Summary of Accrued Restructuring Liability

The following table presents the additions and adjustments to the accrued restructuring liability on the Company’s condensed consolidated balance sheets for the periods indicated.


		Balance as of December 31, 2021		Additional Costs		Cash Payments		Balance as of June 30, 2022

	(in thousands)
2022 Strategic Realignment Plan
Severance and severance-related costs		$	—	$	14,542	$	—	$	14,542
Professional and other fees relating to restructuring activities		—		554		—		554

Other severance and severance-related costs		1,735		728		(1,174)		1,289
Total restructuring		$	1,735	$	15,824	$	(1,174)	$	16,385

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

8. Leases

The Company leases facilities under non-cancellable operating leases primarily in the United States, South Africa, the United Kingdom and Canada. The Company’s operating leases have remaining lease terms of between less than one to 12 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. These options to extend the terms of the Company’s operating leases were not deemed to be reasonably certain of exercise as of lease commencement and are therefore not included in the determination of their respective non-cancellable lease terms. The future lease payments due under non-cancellable operating lease arrangements contain fixed rent increases over the term of the lease. ~~The~~

In October 2020, the Company ~~also leases office equipment under non-cancellable leases.~~

~~The following table presents the components of lease expense on the Company’s condensed consolidated statements of operations and comprehensive loss for each of the periods indicated.~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
(in thousands)
Operating lease expense $ 4,897 $ 3,848 $ 13,524 $ 11,189
Short-term lease expense 66 50 120 284
Variable lease expense 1,713 1,603 4,742 4,274
Sublease income (155) — (265) —
Total lease expense $ 6,521 $ 5,501 $ 18,121 $ 15,747

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~~2U, Inc.~~

~~Notes~~entered into an agreement with an unrelated party to ~~Condensed Consolidated Financial Statements (Continued)~~

~~(unaudited)~~

~~6. Leases (Continued)~~

As of September 30, 2021, for the Company’s operating leases, the weighted-average remaining lease term was 8.1 years and the weighted-average discount rate was 11.3%. For the nine months ended September 30, 2021 and 2020, cash paid for amounts included in the measurement of operating lease liabilities was $16.5 million and $12.7 million, respectively.

~~The following table presents the maturities~~sublease a portion of the Company’s ~~operating lease liabilities as of~~office space in the ~~date indicated, and excludes the impact of future sublease income totaling $4.4 million in aggregate.~~

September 30, 2021
(in thousands)
Remainder of 2021 $ 5,583
2022 21,869
2023 21,892
2024 21,732
2025 17,958
Thereafter 91,138
Total lease payments 180,172
Less: imputed interest (65,905)
Total lease liability $ 114,267

~~As of September 30,~~United States. In October 2021, the Company ~~had no~~entered into an agreement with the same party to sublease additional office space in the same facility. The agreements are coterminous. As of June 30, 2022, the subleases were classified as operating leases ~~that have not yet commenced.~~and each had a remaining term of 1.3 years, with scheduled annual rent increases and no option to extend or renew the sublease term. Sublease income is recognized on a straight-line basis over the term of the subleases as a reduction to expense incurred by the Company under the associated head lease.

In August 2021, the Company entered into an agreement with an unrelated party to sublease a portion of the Company’s office space in Denver, Colorado, as part of its overall real estate management strategy. As of ~~September~~June 30, ~~2021,~~2022, this sublease was classified as an operating lease and had a remaining term of ~~3.2~~2.4 years with scheduled annual rent increases and no option to extend or renew the sublease term. Sublease income is recognized on a straight-line basis over the sublease term as a reduction to expense incurred by the Company under the associated master lease. In connection with the execution of this agreement, the Company recognized a non-cash loss on sublease of $4.8 million in the third quarter of 2021.

The following table presents the components of lease expense on the Company’s condensed consolidated statements of operations and comprehensive loss for each of the periods indicated.


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021

	(in thousands)
Operating lease expense	$	5,611	$	4,345	$	11,372	$	8,627
Short-term lease expense	157		10		268		54
Variable lease expense	1,546		1,593		3,369		3,029
Sublease income	(228)		(56)		(456)		(110)
Total lease expense	$	7,086	$	5,892	$	14,553	$	11,600

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

As of June 30, 2022, for the Company’s operating leases, the weighted-average remaining lease term was 7.5 years and the weighted-average discount rate was 11.2%. For the six months ended June 30, 2022 and 2021, cash paid for amounts included in the measurement of operating lease liabilities was $13.1 million and $9.2 million, respectively. For each of the six months ended June 30, 2022 and 2021, lease liabilities arising from obtaining right-of use assets were $1.3 million and $11.3 million, respectively.

The following table presents the maturities of the Company’s operating lease liabilities as of the date indicated, and excludes the impact of future sublease income totaling $4.0 million in aggregate.


	June 30, 2022
	(in thousands)
Remainder of 2022	$	11,152
2023	21,960
2024	21,707
2025	17,890
2026	18,404
Thereafter	69,751
Total lease payments	160,864
Less: imputed interest	(54,836)
Total lease liability	$	106,028

As of June 30, 2022, the Company had additional operating leases for facilities that have not yet commenced with future minimum lease payments of approximately $17.5 million. Each of these operating leases will commence during the fiscal year ending 2022 and have lease terms of approximately 6 to 8 years.

9. Debt

The following table presents the components of outstanding long-term debt on the Company’s condensed consolidated balance sheets as of each of the dates indicated.


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(in thousands)					(in thousands)
Term loan facilities	Term loan facilities	$	473,813	$	—	Term loan facilities	$	569,498	$	572,374
Convertible senior notes	Convertible senior notes	380,000		380,000		Convertible senior notes	380,000		380,000
Deferred government grant obligations	Deferred government grant obligations	3,500		3,500		Deferred government grant obligations	3,500		3,500
Other borrowings	Other borrowings	3,254		1,343		Other borrowings	3,891		4,423
Less: unamortized debt discount and issuance costs	Less: unamortized debt discount and issuance costs	(111,689)		(111,043)		Less: unamortized debt discount and issuance costs	(21,864)		(107,777)
Total debt	Total debt	748,878		273,800		Total debt	935,025		852,520
Less: current portion of long-term debt	Less: current portion of long-term debt	(6,109)		(627)		Less: current portion of long-term debt	(7,279)		(7,204)
Total long-term debt	Total long-term debt	$	742,769	$	273,173	Total long-term debt	$	927,746	$	845,316

The Company believes the carrying value of its long-term debt approximates the fair value of the debt as the terms and interest rates approximate the market rates, other than the 2.25% convertible senior notes due 2025 (the “Notes”), which had an estimated fair value of ~~$528.7~~$322.7 million and ~~$616.6~~$403.3 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Each of the Company’s long-term debt instruments were classified as Level 2 within the fair value hierarchy.

Term Loan Credit and Guaranty Agreement

1524

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~7. Debt (Continued)~~

~~Term Loan Credit and Guaranty Agreement~~

The Company entered into a Term Loan Credit and Guaranty Agreement, dated June 28, 2021 (the “Term Loan Agreement”), among the Company, as borrower, the subsidiaries of the Company party thereto, as guarantors, the lenders party thereto, and Alter Domus (US) LLC as administrative agent and collateral agent. Pursuant to the Term Loan Agreement, the lenders thereunder made term loans to the Company on June 29, 2021 (the “Funding Date”) in the aggregate principal amount of $475 million (the “Term Loan Facilities”). The Term Loan Facilities have an initial maturity date of December 28, 2024 (the “Maturity Date”). Commencing on the Funding Date, loans under the Term Loan Facilities will bear interest at a per annum rate equal to a base rate or adjusted Eurodollar rate, as applicable, plus the applicable margin of 4.75% in the case of the base rate loans and 5.75% in the case of the Eurodollar loans. The Term Loan Agreement requires the Company to make quarterly principal repayments equal to 0.25% of the $475 million aggregate principal amount, beginning September 2021. If the loans under the Term Loan Facilities are prepaid prior to the second anniversary, subject to certain customary exceptions, the Company shall pay the Applicable Premium (as defined in the Term Loan Agreement) on the amount of the loans so prepaid.

On November 4, 2021, the Company entered into a First Amendment to Term Loan Credit and Guaranty Agreement and a Joinder Agreement, which amended the Term Loan Agreement (collectively, the “Amended Term Loan Facility”) primarily to provide for an incremental facility to the Company in an original principal amount of $100 million. The Company ~~can repay the~~is required to make quarterly principal repayments equal to 0.25% of this original principal amount beginning in December 2021. The proceeds of the ~~loans at par, plus accrued and unpaid interest, if the edX Acquisition does not close.~~ Amended Term Loan Facility may be used for general corporate purposes.

The associated effective interest rate of the Amended Term Loan ~~Facilities~~Facility for each of the ~~three-~~three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2021~~2022 was approximately ~~7.87% and 7.88%, respectively, and the~~8.00%. The associated interest expense was approximately ~~$9.0~~$11.1 million and ~~$9.3~~$22.2 million for the three and six months ended June 30, 2022, respectively.

The obligations under the Term Loan Agreement are guaranteed by certain of the Company’s subsidiaries (the Company and the guarantors, collectively, the “Credit Parties”). The obligations under the Term Loan Agreement are secured, subject to customary permitted liens and other agreed-upon exceptions, by a perfected security interest in all tangible and intangible assets of the Credit Parties, except for certain customary excluded assets.

The Term Loan Agreement contains customary affirmative covenants, including, among others, the provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters. The Term Loan Agreement contains customary negative covenants, including, among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchases of equity interests in the Company and entering into affiliate transactions and asset sales. The Term Loan Agreement contains a financial covenant that requires the Company to maintain minimum Recurring Revenues (as defined in the Term Loan Agreement) as of the last day of any period of four consecutive fiscal quarters of the Company commencing with fiscal quarter ending September 30, 2021 through the Maturity Date. The Term Loan Agreement also provides for customary events of default, including, among others: non-payment of obligations; bankruptcy or insolvency event; failure to comply with covenants; breach of representations or warranties; defaults on other material indebtedness; impairment of any lien on any material portion of the Collateral (as defined in the Term Loan Agreement); failure of any material provision of the Term Loan Agreement or any guaranty to remain in full force and effect; a change of control of the Company; and material judgment defaults. The occurrence of an event of default could result in the acceleration of obligations under the Term Loan Agreement.

If an event of default under the Term Loan Agreement occurs and is continuing, then, at the request (or with the consent) of the lenders holding a majority of the commitments and loans under the Term Loan Agreement, upon notice by the administrative agent to the borrowers, the obligations under the Term Loan Agreement shall become immediately due and payable. In addition, if the Credit Parties become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Term Loan Agreement will automatically become immediately due and payable.

Credit Agreement

On June 25, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and certain other lenders party thereto that provided for $50 million in revolving loans (the “Loans”). The Credit Agreement allowed for incremental borrowings from time to time in an aggregate amount for all such incremental amounts not to exceed (i) the lesser of (x) $50 million and (y) an amount such that the aggregate principal amount of the lenders’ commitments under the revolving credit facility does not exceed $100 million, plus

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

(ii) certain specified prepayments of indebtedness, plus (iii) an unlimited amount subject to satisfaction of a leverage ratio based compliance test.

The Loans bore interest, at the Company’s option, at variable rates based on (i) a customary base rate plus an applicable margin of 2.75% or (ii) an adjusted LIBOR rate (with a floor of 0.00%) for the interest period relevant to such borrowing plus an applicable margin of 3.75%. In connection with entering into the Term Loan Agreement in June 2021, the Company terminated ~~its $50 million credit agreement, dated June 25, 2020,~~the Credit Agreement and recognized a loss on debt extinguishment of $1.1 million in connection with the write-off of previously capitalized deferred financing costs and associated fees.

On November 4, 2021, the Company entered into a First Amendment to Term Loan Credit and Guaranty Agreement and a Joinder Agreement, which amended the Term Loan Agreement (collectively, the “Amended Term Loan Facility”) primarily to provide for an incremental facility to the Company in an original principal amount of $100 million. The Company is required to make quarterly principal repayments equal to 0.25% of this original principal amount beginning in December 2021. The proceeds of the Amended Term Loan Facility may be used for general corporate purposes.

~~Table of Contents~~

~~2U, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(unaudited)~~

~~7. Debt (Continued)~~

Convertible Senior Notes

In April 2020, the Company issued the Notes in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The net proceeds from the offering of the Notes were approximately $369.6 million after deducting the initial purchasers’ discounts, commissions and offering expenses payable by the Company.

The Notes are governed by an indenture (the “Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The Notes bear interest at a rate of 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Notes will mature on May 1, 2025, unless earlier repurchased, redeemed or converted. The interest expense related to the Notes for the three months ended September 30, 2021 and 2020, including amortization of the debt discount and debt issuance costs, was $7.8 million and $7.3 million, respectively. The interest expense related to the Notes for the nine months ended September 30, 2021 and 2020, including amortization of the debt discount and debt issuance costs, was $23.0 million and $12.3 million, respectively. The associated effective interest rate of the Notes for the three months ended September 30, 2021 and 2020 was approximately 10.9% and 11.2%, respectively. The associated effective interest rate of the Notes for the nine months ended September 30, 2021 and 2020 was approximately 11.1% and 10.8%, respectively.

The Notes are the senior, unsecured obligations of the Company and are equal in right of payment with the Company’s senior unsecured indebtedness, senior in right of payment to the Company’s indebtedness that is expressly subordinated to the Notes, effectively subordinated to the Company’s senior secured indebtedness (including indebtedness under the Term Loan Facilities), to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.

~~In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.~~ The net carrying amount of the liability component was calculated using a discount rate of 10.3%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amountNotes consists of the ~~equity component representing the conversion option, excluding debt issuance costs, was $117.8 million and was determined by deducting the fair value~~following as of each of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The Company allocated debt issuancedates indicated:


	June 30, 2022		December 31, 2021

	(in thousands)
Principal	$	380,000	$	380,000
Unamortized debt discount for conversion option	—		(83,609)
Unamortized issuance costs	(5,940)		(5,104)
Net carrying amount	$	374,060	$	291,287

Issuance costs of $7.2 million and $3.2 million to the debt and equity components, respectively. The excess of the principal amount of the liability component over its carrying amount, inclusive of debt issuance costs, represents the debt discount, which isare being amortized to interest expense ~~at an annual effective interest rate~~ over the contractual term of the Notes. AsSubsequent to the adoption of ~~September~~ASU 2020-06, the effective interest rate used to amortize the issuance costs was 2.9%. The interest expense related to the Notes for the three months ended June 30, 2022 and 2021 ~~and December 31, 2020, the unamortized debt discount~~ was ~~$94.5~~$2.7 million and ~~$111.0~~$7.6 million, respectively. The interest expense related to the Notes for the six months ended June 30, 2022 and 2021 was $5.3 million and $15.2 million, respectively.

Holders may convert their Notes at their option in the following circumstances:

•during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock, exceeds 130% of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;

•during the 5 consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

•upon the occurrence of certain corporate events or distributions on the Company’s common stock, as provided in the Indenture;

•if the Company calls such Notes for redemption; and

•at any time from, and including, November 1, 2024 until the close of business on the second scheduled trading day immediately before the maturity date.

~~Table of Contents~~

~~2U, Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Continued)~~

~~(unaudited)~~

~~7. Debt (Continued)~~

The initial conversion rate for the Notes is 35.3773 shares of the Company’s common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $28.27 per share of the Company’s common stock, and is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Upon conversion, the Company will pay or deliver, as applicable, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. In the event of the Company calling the Notes for redemption or the holders of the Notes electing to convert their Notes, the Company will determine whether to settle in cash, common stock or a combination thereof. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time. As of June 30, 2022, the if-converted value of the Notes did not exceed the principal amount.

In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.

The Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after May 5, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice, and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a “make-whole fundamental change” with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if such Note is converted after it is called for redemption. No sinking fund is provided for the Notes.

As of ~~September~~June 30, ~~2021,~~2022, the conditions allowing holders of the Notes to convert had not been met and the Company has the right under the Indenture to determine the method of settlement at the time of conversion. Therefore, the Notes are ~~not convertible between October 1, 2021 and December 31, 2021,~~classified as non-current on the ~~common stock sale price condition was not met.~~condensed consolidated balance sheets.

In connection with the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain counterparties. The Capped Call Transactions are generally expected to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions is initially $44.34 per share. The cost of the Capped Call Transactions was approximately $50.5 million.

In April 2020, the Company used a portion of the proceeds from the sale of the Notes to repay in full all amounts outstanding, and discharge all obligations in respect of, the $250 million senior secured term loan facility. The Company intends to use the remaining net proceeds from the sale of the Notes for working capital or other general corporate purposes, which may include capital expenditures, potential acquisitions and strategic transactions.

Deferred Government Grant Obligations

Government grants awarded to the Company in the form of forgivable loans are recorded within long-term debt on the Company’s condensed consolidated balance sheets until all contingencies are resolved and the grants are determined to be realized. The Company has a total of 2 outstanding conditional loan agreements with Prince George’s County, Maryland and the State of Maryland for an aggregate amount of $3.5 million, each bearing an interest rate of 3% per annum. These agreements are conditional loan obligations that may be forgiven, provided that the Company attains certain conditions related to employment levels at 2U’s Lanham, Maryland headquarters.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

In July 2020, the Company amended its conditional loan agreement with Prince George’s County to modify the terms of the employment level thresholds. The conditional loan with Prince George’s County has a maturity date of June 22, 2027.

In January 2021, the Company amended its conditional loan agreement with the State of Maryland to modify the terms of the employment level thresholds and extend the maturity date to June 30, 2028. The interest expense related to these loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 was immaterial. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company’s combined accrued interest balance associated with the deferred government grant obligations was $0.6 million and $0.5 million, respectively.

Letters of Credit

Certain of the Company’s operating lease agreements entered into require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of June 30, 2022, the Company has entered into standby letters of credit totaling $16.2 million as security deposits for the applicable leased facilities and ~~$0.4 million, respectively.~~in connection with the deferred government grant obligations.

The Company maintains restricted cash as collateral for standby letters of credit for the Company’s leased facilities and in connection with the deferred government grant obligations.

Future Principal Payments

Future principal payments under the Amended Term Loan Facility, the Notes, and the government grants, as of the date indicated are as follows:


	June 30, 2022
	(in thousands)
Remainder of 2022	$	2,876
2023	5,753
2024	560,869
2025	380,000
2026	—
Thereafter*	3,500
Total future principal payments	$	952,998



*						Amounts represent conditional loan obligations that may be forgiven, provided that the Company attains certain conditions related to employment levels at 2U’s Lanham, Maryland headquarters.

1828

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

8.10. Income Taxes

The Company’s income tax provisions for all periods consist of federal, state and foreign income taxes. The income tax provisions for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 were based on estimated full-year effective tax rates, including the mix of income for the period between higher-taxed and lower-taxed jurisdictions, after giving effect to significant items related specifically to the interim periods, and loss-making entities for which it is not more likely than not that a tax benefit will be realized.

The Company’s effective tax rate for each of the ~~three-~~three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 was less than 1%. The Company’s income tax benefit for the ~~nine~~three months ended ~~September~~June 30, 2022 and 2021 was $0.2 million and ~~2020~~$0.1 million, respectively. The Company’s income tax benefit for the six months ended June 30, 2022 and 2021 was $0.4 million and ~~$1.6~~$0.1 million, ~~respectively, and~~respectively. The income tax benefit is related to losses generated by operations and the amortization of acquired intangibles in the Alternative Credential Segment that are expected to be realized through future reversing taxable temporary differences. To date, the Company has not been required to pay U.S. federal income taxes because of current and accumulated net operating losses.

9.11. Stockholders’ Equity

Common Stock

As of ~~September~~June 30, ~~2021,~~2022, 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. As of ~~September~~June 30, ~~2021,~~2022, there were ~~74,749,601~~77,219,835 shares of common stock outstanding, and the Company had reserved a total of ~~24,918,492~~31,098,418 of its authorized shares of common stock for future issuance as follows:


			Shares Reserved for Future Issuance
Outstanding restricted stock units			~~2,681,579~~5,477,279
Outstanding performance restricted stock units			~~1,558,149~~2,515,924
Outstanding stock options			~~3,538,522~~5,964,973
Reserved for convertible senior notes			17,140,242
Total shares of common stock reserved for future issuance			~~24,918,492~~31,098,418

On August 6, 2020, the Company sold 6,800,000 shares of the Company’s common stock to the public. The Company received net proceeds of $299.8 million, which the Company ~~intends to use~~uses for working capital and other general corporate purposes, which may include capital expenditures, potential acquisitions, growth opportunities and strategic transactions.

Stock-Based Compensation

The Company maintains 2 stock-based compensation plans: the Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”) and the 2008 Stock Incentive Plan (the “2008 Plan” and together with the 2014 Plan, the “Stock Plans”). Upon the effective date of the 2014 Plan in January 2014, the Company ceased using the 2008 Plan to grant new equity awards. The shares available for future issuance under the 2014 Plan increased by ~~3,619,344~~3,782,719 and ~~3,175,011~~3,619,344 on January 1, ~~2021~~2022 and ~~2020,~~2021, respectively, pursuant to the automatic share reserve increase provision in the 2014 Plan.

The Company also has a 2017 Employee Stock Purchase Plan (the “ESPP”). During the nine months ended September 30, 2021, an aggregate of 50,406 shares of the Company’s common stock were purchased in accordance with the ESPP. Net proceeds from the issuance of these shares was $1.8 million. As of ~~September~~June 30, ~~2021, 615,988~~2022, 379,670 shares remained available for purchase under the ESPP.

The following table presents stock-based compensation expense related to the Stock Plans and the ESPP, contained on the following line items on the Company’s condensed consolidated statements of operations and comprehensive loss for each of the periods indicated.

1929

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~9. Stockholders’ Equity (Continued)~~


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(in thousands)									(in thousands)
Curriculum and teaching	Curriculum and teaching	$	18	$	21	$	51	$	212	Curriculum and teaching	$	49	$	17	$	96	$	33
Servicing and support	Servicing and support	3,856		3,409		11,669		10,979		Servicing and support	4,321		3,964		8,680		7,813
Technology and content development	Technology and content development	3,334		3,059		9,703		9,164		Technology and content development	2,635		3,095		6,497		6,369
Marketing and sales	Marketing and sales	1,811		1,618		4,984		6,704		Marketing and sales	1,722		1,672		3,848		3,173
General and administrative	General and administrative	16,003		13,894		48,338		36,903		General and administrative	13,622		16,028		27,652		32,335
Total stock-based compensation expense	Total stock-based compensation expense	$	25,022	$	22,001	$	74,745	$	63,962	Total stock-based compensation expense	$	22,349	$	24,776	$	46,773	$	49,723

Restricted Stock Units

The 2014 Plan provides for the issuance of restricted stock units (“RSUs”) to eligible participants. RSUs generally vest over a three- or four-year period. The following table presents a summary of the Company’s RSU activity for the period indicated.


		Number of Units	Weighted- Average Grant Date Fair Value per Share			Number of Units	Weighted- Average Grant Date Fair Value per Share

Outstanding balance as of December 31, 2020		3,010,019	$	29.41
Outstanding balance as of December 31, 2021					Outstanding balance as of December 31, 2021	2,613,063	$	32.29
Granted	Granted	1,104,174	40.35		Granted	4,176,272	10.63
Vested	Vested	(1,144,918)	33.24		Vested	(1,081,341)	28.17
Forfeited	Forfeited	(287,696)	30.40		Forfeited	(230,715)	22.68
Outstanding balance as of September 30, 2021		2,681,579	$	32.17
Outstanding balance as of June 30, 2022					Outstanding balance as of June 30, 2022	5,477,279	$	16.99

The total compensation expense related to the unvested RSUs not yet recognized as of ~~September~~June 30, ~~2021~~2022 was ~~$62.6~~$64.3 million, and will be recognized over a weighted-average period of approximately ~~1.5~~2.0 years.

Performance Restricted Stock Units

The 2014 Plan allows for the grant of performance restricted stock units (“PRSUs”) to eligible participants. The right to earn the PRSUs is subject to achievement of the defined performance metrics and continuous employment service. The performance metrics are defined and approved by the compensation committee of our board of directors. Earned PRSUs may be subject to additional time-based vesting.

During the first quarter of ~~2021,~~2022, the PRSU awards granted as part of the Company’s 2020 annual equity award cycle with a performance period that began on January 1, ~~2020~~2021 and ended on December 31, ~~2020, vested~~2021, which were subject to market-based vesting conditions, did not achieve the market-based targets for the second performance period, and 0% of the granted quantities vested. The PRSU awards granted as part of the Company’s 2021 annual equity award cycle with a performance period that began on January 1, 2021 and ended on December 31, 2021, which were subject to internal financial performance-based vesting targets, were earned at ~~200%~~112.7% of target.

The following tables present a summary of (i) the assumptions used for estimating the fair values of the PRSUs subject to market-based vesting conditions and (ii) the Company’s PRSU activity for the period indicated. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were ~~0.9~~1.3 million and ~~1.3~~1.0 million outstanding PRSUs for which the performance metrics had not been defined as of each respective date. Accordingly, such awards are not considered granted for accounting purposes as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, and have been excluded from the tables below. No PRSUs were granted during each of the three months ended June 30, 2022 and 2021.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~9. Stockholders’ Equity (Continued)~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Risk-free interest rate — — 0.10% – 0.26% 1.51%
Expected term (years) — — 1.00 – 3.00 1.00
Expected volatility — — 85% – 89% 75%
Dividend yield — — 0% 0%
Weighted-average grant date fair value per share — — $61.33 $22.45
Number of
Units Weighted-
Average Grant
Date Fair Value per Share
Outstanding balance as of December 31, 2020 1,355,296 $ 23.51
Granted 1,577,721 44.73
Vested (1,192,596) 22.47
Forfeited (182,272) 41.31
Outstanding balance as of September 30, 2021 1,558,149 $ 43.71


	Six Months Ended June 30,
	2022	2021

Risk-free interest rate	0.39% – 1.88%	0.10% – 0.26%
Expected term (years)	1.00 – 3.00	1.00 – 3.00
Expected volatility	49% – 97%	85% – 89%
Dividend yield	0%	0%
Weighted-average grant date fair value per share	$18.67	$61.33


	Number of Units	Weighted- Average Grant Date Fair Value per Share
Outstanding balance as of December 31, 2021	1,121,277	$	48.62
Granted	2,081,647	16.63
Vested	(3,106)	40.74
Forfeited	(683,894)	52.98
Outstanding balance as of June 30, 2022	2,515,924	$	21.46

The total compensation expense related to the unvested PRSUs not yet recognized as of ~~September~~June 30, ~~2021~~2022 was ~~$24.3~~$23.8 million, and will be recognized over a weighted-average period of approximately ~~0.9~~1.4 years.

Stock Options

The Stock Plans provide for the issuance of stock options to eligible participants. Stock options issued under the Stock Plans generally are exercisable for periods not to exceed 10 years and generally vest over ~~four years.~~a three- or four-year period.

The following table summarizes the assumptions used for estimating the fair value of the stock options granted for the period presented. No stock options were granted during the six months ended June 30, 2021.

Three Months Ended
September 30, Nine Months Ended
September 30,
2021 2020 2021 2020
Risk-free interest rate — — — 1.5%
Expected term (years) — — — 6.04
Expected volatility — — — 64%
Dividend yield — — — 0%
Weighted-average grant date fair value per share — — — $11.48

~~The following table presents a summary of the Company’s stock option activity for the period indicated.~~


	Three Months Ended June 30, 2022	Six Months Ended June 30, 2022

Risk-free interest rate	2.8% - 3.0%	1.9% - 3.0%
Expected term (years)	5.63 - 5.78	5.63 - 5.78
Expected volatility	75% - 77%	75% - 77%
Dividend yield	0%	0%
Weighted-average grant date fair value per share	$7.03	$6.99

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~9. Stockholders’ Equity (Continued)~~

Number of
Options Weighted-Average
Exercise Price per
Share Weighted-Average
Remaining
Contractual Term
(in years) Aggregate
Intrinsic
Value
(in thousands)
Outstanding balance as of December 31, 2020 3,916,867 $ 35.63 5.08 $ 59,906
Granted — 0
Exercised (280,241) 21.77 1.80
Forfeited (52,640) 54.10
Expired (45,464) 68.56
Outstanding balance as of September 30, 2021 3,538,522 36.03 4.30 41,267
Exercisable as of September 30, 2021 3,144,706 $ 31.68 3.94 $ 40,938
The following table presents a summary of the Company’s stock option activity for the period indicated.


	Number of Options	Weighted-Average Exercise Price per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)

Outstanding balance as of December 31, 2021	3,477,439	$	36.13	3.87	$	16,246
Granted	3,043,789	10.76		8.86
Exercised	(286,733)	3.12		0.02
Forfeited	(227,384)	14.89
Expired	(42,138)	60.02
Outstanding balance as of June 30, 2022	5,964,973	25.41		6.58	1,806
Exercisable as of June 30, 2022	3,187,768	$	34.69	3.93	$	1,802

The aggregate intrinsic value of options exercised during the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ was ~~$6.3~~$3.2 million and ~~$6.8~~$5.2 million, respectively.

The total compensation expense related to the unvested options not yet recognized as of ~~September~~June 30, ~~2021~~2022 was ~~$11.5~~$21.8 million, and will be recognized over a weighted-average period of approximately ~~1.9~~2.5 years.

~~10.~~12. 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 each of the periods indicated.


		Three and Nine Months Ended September 30,			Three and Six Months Ended June 30,
		2021	2020		2022	2021

Stock options	Stock options	3,538,522	4,023,741	Stock options	5,964,973	3,634,078
Restricted stock units	Restricted stock units	2,681,579	3,431,829	Restricted stock units	5,477,279	2,901,519
Performance restricted stock units	Performance restricted stock units	1,558,149	1,760,164	Performance restricted stock units	2,515,924	1,580,153
Shares related to convertible senior notes	Shares related to convertible senior notes	13,443,374	3,432,837	Shares related to convertible senior notes	13,443,374	13,443,374
Total antidilutive securities	Total antidilutive securities	21,221,624	12,648,571	Total antidilutive securities	27,401,550	21,559,124

The following table presents the calculation of the Company’s basic and diluted net loss per share for each of the periods indicated.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

Numerator (in thousands):	Numerator (in thousands):									Numerator (in thousands):
Net loss	Net loss	$	(60,110)	$	(52,554)	$	(127,505)	$	(178,827)	Net loss	$	(62,852)	$	(21,831)	$	(188,632)	$	(67,395)
Denominator:	Denominator:									Denominator:
Weighted-average shares of common stock outstanding, basic and diluted	Weighted-average shares of common stock outstanding, basic and diluted	74,691,521		68,580,439		74,266,999		66,368,686		Weighted-average shares of common stock outstanding, basic and diluted	77,059,157		74,421,911		76,667,681		74,051,220
Net loss per share, basic and diluted	Net loss per share, basic and diluted	$	(0.80)	$	(0.77)	$	(1.72)	$	(2.69)	Net loss per share, basic and diluted	$	(0.82)	$	(0.29)	$	(2.46)	$	(0.91)

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~11.~~13. Segment and Geographic Information

The Company has 2 reportable segments: the Degree Program Segment and the Alternative Credential Segment. The Company’s reportable segments are determined based on (i) financial information reviewed by the chief operating decision maker, the Chief Executive Officer (“CEO”), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions. The Company’s Degree Program Segment includes the technology and services provided to nonprofit colleges and universities to enable the online delivery of degree programs. The Company’s Alternative Credential Segment includes the premium online ~~short courses~~executive education programs and technical skills-based boot camps provided through relationships with nonprofit colleges and universities.

Significant Customers

For the three and six months ended ~~September~~June 30, 2022 and June 30, 2021, no university clients accounted for 10% or more of the Company’s consolidated revenue. For the three months ended September 30, 2020, one university client in the Degree Program Segment accounted for 10% or more of the Company’s consolidated revenue, contributing $19.3 million, or approximately 10% of the Company’s consolidated revenue.

For the nine months ended September 30, 2021, no university clients accounted for 10% or more of the Company’s consolidated revenue. For the nine months ended September 30, 2020, one university client in the Degree Program Segment accounted for 10% or more of the Company’s consolidated revenue, contributing $55.5 million, or approximately 10% of the Company’s consolidated revenue.

As of ~~September~~June 30, ~~2021,~~2022, one university client in the Degree Program Segment accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, with ~~$14.9~~$6.9 million, or approximately ~~16%~~10% of the Company’s consolidated accounts receivable, net balance. As of December 31, ~~2020,~~2021, two university clients in the Degree Program Segment each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, with ~~$5.8~~$9.8 million and ~~$5.2~~$8.8 million, or approximately ~~12%~~14% and ~~11%~~13% of the Company’s consolidated accounts receivable, net balance, respectively.

Segment Performance

The following table presents financial information regarding each of the Company’s reportable segment’s results of operations for each of the periods indicated.


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,						Six Months Ended June 30,
		2021			2020			2021			2020				2022			2021			2022			2021

		(dollars in thousands)													(dollars in thousands)
Revenue by segment*	Revenue by segment*													Revenue by segment*
Degree Program Segment	Degree Program Segment	$	147,795		$	122,036		$	439,884		$	356,178		Degree Program Segment	$	143,090		$	146,214		$	297,257		$	292,089
Alternative Credential Segment	Alternative Credential Segment	84,581			79,037			262,174			203,061			Alternative Credential Segment	98,374			90,995			197,536			177,593
Total revenue	Total revenue	$	232,376		$	201,073		$	702,058		$	559,239		Total revenue	$	241,464		$	237,209		$	494,793		$	469,682

Segment profitability**	Segment profitability**													Segment profitability**
Degree Program Segment	Degree Program Segment	$	32,925		$	9,713		$	86,786		$	20,876		Degree Program Segment	$	39,539		$	27,973		$	75,357		$	53,861
Alternative Credential Segment	Alternative Credential Segment	(18,185)			(6,001)			(41,186)			(23,555)			Alternative Credential Segment	(17,637)			(10,861)			(41,175)			(23,001)
Total segment profitability	Total segment profitability	$	14,740		$	3,712		$	45,600		$	(2,679)		Total segment profitability	$	21,902		$	17,112		$	34,182		$	30,860

Segment profitability margin***	Segment profitability margin***													Segment profitability margin***
Degree Program Segment	Degree Program Segment	22.3		%	8.0		%	19.7		%	5.9		%	Degree Program Segment	27.6		%	19.1		%	25.4		%	18.4		%
Alternative Credential Segment	Alternative Credential Segment	(21.5)			(7.6)			(15.7)			(11.6)			Alternative Credential Segment	(17.9)			(11.9)			(20.8)			(13.0)
Total segment profitability margin	Total segment profitability margin	6.4		%	1.8		%	6.5		%	(0.5)		%	Total segment profitability margin	9.1		%	7.2		%	6.9		%	6.6		%

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~11. Segment and Geographic Information (Continued)~~



*						The Company has excluded immaterial amounts of intersegment revenues from each of the ~~three-~~three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.
**						The Company defines segment profitability as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some or all of these items may not be applicable in any given reporting period.
***						The Company defines segment profitability margin as segment profitability as a percentage of the respective segment’s revenue.

The following table presents a reconciliation of the Company’s total segment profitability to net loss for each of the periods indicated.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(in thousands)									(in thousands)				(in thousands)
Net loss	Net loss	$	(60,110)	$	(52,554)	$	(127,505)	$	(178,827)	Net loss	$	(62,852)	$	(21,831)	$	(188,632)	$	(67,395)
Adjustments:	Adjustments:									Adjustments:
Stock-based compensation expense	Stock-based compensation expense	25,022		22,001		74,745		63,962		Stock-based compensation expense	22,349		24,776		46,773		49,723
Other (income) expense, net	Other (income) expense, net	425		(42)		(22,730)		1,659		Other (income) expense, net	1,367		(24,070)		2,397		(23,155)
Net interest expense	Net interest expense	16,471		6,851		31,826		18,195		Net interest expense	13,665		7,836		27,298		15,355
Income tax benefit	Income tax benefit	(319)		(162)		(448)		(1,580)		Income tax benefit	(164)		(127)		(415)		(129)
Depreciation and amortization expense	Depreciation and amortization expense	26,168		23,936		77,577		71,406		Depreciation and amortization expense	31,342		26,422		65,757		51,409
Impairment charges										Impairment charges	—		—		58,782		—
Loss on debt extinguishment	Loss on debt extinguishment	—		—		1,101		11,671		Loss on debt extinguishment	—		1,101		—		1,101
Restructuring charges										Restructuring charges	16,753		1,334		17,540		1,819
Other*	Other*	7,083		3,682		11,034		10,835		Other*	(558)		1,671		4,682		2,132
Total adjustments	Total adjustments	74,850		56,266		173,105		176,148		Total adjustments	84,754		38,943		222,814		98,255
Total segment profitability	Total segment profitability	$	14,740	$	3,712	$	45,600	$	(2,679)	Total segment profitability	$	21,902	$	17,112	$	34,182	$	30,860



*						Includes (i) transaction and integration expense of ~~$0.8~~$1.0 million and $1.7 million for the three months ended June 30, 2022 and 2021, respectively, and $3.4 million and $1.7 million for the six months ended June 30, 2022 and 2021, respectively, and (ii) stockholder activism and litigation-related (recoveries) expense of $(1.6) million and zero for the three months ended June 30, 2022 and 2021, respectively, and $1.3 million and $0.4 million for the ~~three~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020, respectively, and $2.6 million and $1.5 million for the nine months ended September 30,~~ 2021, and 2020, respectively, (ii) restructuring-related expense of $5.4 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively, and $7.2 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.8 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, and $1.2 million and $6.2 million for the nine months ended September 30, 2021 and 2020, respectively.

The following table presents the Company’s total assets by segment as of each of the dates indicated.


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

		(in thousands)					(in thousands)
Total assets	Total assets					Total assets
Degree Program Segment	Degree Program Segment	$	1,303,115	$	830,706	Degree Program Segment	$	525,076	$	546,572
Alternative Credential Segment	Alternative Credential Segment	730,367		713,558		Alternative Credential Segment	1,508,158		1,562,434
Total assets	Total assets	$	2,033,482	$	1,544,264	Total assets	$	2,033,234	$	2,109,006

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~11. Segment and Geographic Information (Continued)~~

Geographical Information

The Company’s non-U.S. revenue is based on the currency of the country in which the university client primarily operates. The Company’s non-U.S. revenue was ~~$24.7~~$27.2 million and ~~$19.7~~$26.3 million for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The Company’s non-U.S. revenue was ~~$74.1~~$55.3 million and ~~$49.2~~$49.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Substantially all of the Company’s non-U.S. revenue for each of the aforementioned periods was sourced from the Alternative Credential Segment’s operations outside of the U.S. The Company’s long-lived tangible assets in non-U.S. countries as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 totaled approximately ~~$2.3~~$3.5 million and ~~$1.6~~$3.3 million, respectively.

~~12.~~14. Receivables and Contract Liabilities

Trade Accounts Receivable

The ~~Company has~~Company’s trade ~~receivables and receivables with extended payment plans. Trade~~accounts receivable balances relate to amounts due from students or customers occurring in the normal course of business. Trade accounts receivable balances have a term of less than one year and are included in accounts receivable, net on the Company’s condensed consolidated balance sheets. The following table presents the Company’s trade accounts receivable in each segment as of each of the dates indicated.


	June 30, 2022		December 31, 2021

	(in thousands)
Degree Program Segment accounts receivable	$	21,177	$	31,762
Degree Program Segment unbilled revenue	19,048		4,440
Alternative Credential Segment accounts receivable	44,221		42,771
Total	84,446		78,973
Less: Provision for credit losses	(14,602)		(11,686)
Trade accounts receivable, net	$	69,844	$	67,287

The following table presents the change in provision for credit losses for trade accounts receivable on the Company’s condensed consolidated balance sheets for the period indicated.


	Provision for Credit Losses
	(in thousands)
Balance as of December 31, 2021	$	11,686
Current period provision	3,334
Foreign currency translation adjustments	(16)
Other	(402)
Balance as of June 30, 2022	$	14,602

Other Receivables

The Company’s other receivables are comprised of amounts due under tuition payment plans with extended payment ~~plans relate to~~terms from students ~~who take advantage of extended payment plans~~enrolled in certain of the Company’s alternative credential offerings.

These payment plans, which are managed and serviced by third-party providers, are designed to assist students with paying tuition costs after all other student financial assistance and scholarships have been applied. The associated receivables generally have payment terms that ~~exceed one year~~range from 12 to 42 months and are recorded net of any implied pricing concessions, which are determined based on collections history, market data and any time value of money component. There are no fees or origination costs included in these receivables. The carrying value of these receivable balances approximate their fair ~~value and are recorded on the Company’s condensed consolidated balance sheets within other assets.~~

~~Trade Accounts Receivable and Contract Liabilities~~

value. The following table presents the components of the Company’s ~~trade accounts receivable and contract liabilities in each segment~~other receivables, net, as of each of the dates indicated.

September 30,
2021 December 31,
2020
(in thousands)
Trade accounts receivable
Degree Program Segment accounts receivable $ 24,927 $ 16,424
Degree Program Segment unbilled revenue 43,602 6,072
Alternative Credential Segment accounts receivable 37,805 29,717
Provision for credit losses (10,944) (5,936)
Total trade accounts receivable $ 95,390 $ 46,277
Contract liabilities
Degree Program Segment deferred revenue $ 11,224 $ 1,714
Alternative Credential Segment deferred revenue 85,760 73,779
Total contract liabilities $ 96,984 $ 75,493

During each of the three-month periods ended September 30, 2021 and 2020, the Company did not recognize any Degree Program Segment revenue related to its deferred revenue balances that existed at the end of each preceding year. Revenue recognized in this segment during the nine months ended September 30, 2021 and 2020 that was included in the deferred revenue balance that existed at the end of each preceding year was $1.7 million and $2.2 million, respectively.

During each of the three-month periods ended September 30, 2021 and 2020, the Company did not recognize any Alternative Credential Segment revenue related to its deferred revenue balances that existed at the end of each preceding year. Revenue recognized in this segment during the nine months ended September 30, 2021 and 2020 that was included in the deferred revenue balance that existed at the end of each preceding year was $71.9 million and $46.6 million, respectively.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~12. Receivables and Contract Liabilities (Continued)~~


	June 30, 2022		December 31, 2021

	(in thousands)
Other receivables, amortized cost	$	54,919	$	52,428
Less: Provision for credit losses	(2,697)		(1,421)
Other receivables, net	$	52,222	$	51,007
Other receivables, net, current	$	30,938	$	29,439
Other receivables, net, non-current	$	21,284	$	21,568

The following table presents the change in provision for credit losses for ~~trade~~other receivables on the Company’s condensed consolidated balance sheets for the period indicated.


	Provision for Credit Losses
	(in thousands)
Balance as of December 31, ~~2020~~2021	$	~~6,115~~1,421
Current period provision	~~5,712~~
~~Amounts written off~~	—
~~Amounts recovered~~	~~(877)~~
~~Foreign currency translation adjustments~~	~~(6)~~1,276
Balance as of ~~September~~June 30, ~~2021~~2022	$	~~10,944~~2,697

The Company considers receivables to be past due when amounts contractually due under the extended payment plans have not been paid. As of June 30, 2022, 89% of other receivables, net due under extended payment plans were current.

At the time of origination, the Company categorizes its other receivables using a credit quality indicator based on the credit tier rankings obtained from the third-party providers that manage and service the payment plans. The third-party providers utilize credit rating agency data to determine the credit tier rankings. The Company monitors the collectability of its other receivables on an ongoing basis. The adequacy of the allowance for credit losses is determined through analysis of multiple factors, including industry trends, portfolio performance, and delinquency rates. The following tables present other receivables, at amortized cost including interest accretion, by credit quality indicator and year of origination, as of the dates indicated.

Table of Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)


	June 30, 2022
	Year of Origination
	2022		2021		2020		2019		2018		Total

	(in thousands)
Credit Quality Tier
High	$	12,263	$	7,760	$	64	$	21	$	115	$	20,223
Mid	12,122		7,457		910		1,345		392		22,226
Low	4,557		4,239		1,429		1,915		330		12,470
Total	$	28,942	$	19,456	$	2,403	$	3,281	$	837	$	54,919


	December 31, 2021
	Year of Origination
	2021		2020		2019		2018		Total

	(in thousands)
Credit Quality Tier
High	$	18,466	$	1,635	$	24	$	115	$	20,240
Mid	14,352		2,992		1,312		392		19,048
Low	8,135		2,802		1,873		330		13,140
Total	$	40,953	$	7,429	$	3,209	$	837	$	52,428

Contract Liabilities

The Company’s deferred revenue represents contract liabilities. The Company generally receives payments from Degree Program Segment university clients early in each academic term and from Alternative Credential Segment students, either in full upon registration for the course or in full before the end of the course based on a payment plan, prior to completion of the service period. These payments are recorded as deferred revenue until the services are delivered or until the Company’s obligations are otherwise met, at which time revenue is recognized. The following table presents the Company’s contract liabilities in each segment as of each of the dates indicated.


	June 30, 2022		December 31, 2021

	(in thousands)

Degree Program Segment deferred revenue	$	38,303	$	3,462
Alternative Credential Segment deferred revenue	94,169		88,464
Total contract liabilities	$	132,472	$	91,926

For the Degree Program Segment, during the three months ended June 30, 2022 and 2021 the Company recognized $0.1 million and no revenue related to its deferred revenue balances that existed at the end of each preceding year. Revenue recognized in this segment during the six months ended June 30, 2022 and 2021 that was included in the deferred revenue balance that existed at the end of each preceding year was $1.4 million and $1.7 million, respectively.

For the Alternative Credential Segment, during the three months ended June 30, 2022 and 2021 the Company recognized $16.3 million and $16.0 million related to its deferred revenue balances that existed at the end of each preceding year. Revenue recognized in this segment during the six months ended June 30, 2022 and 2021 that was included in the deferred revenue balance that existed at the end of each preceding year was $66.5 million and $71.9 million, respectively.

Table of Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Contract Acquisition Costs

The Degree Program Segment had $0.5 million and $0.5 million of net capitalized contract acquisition costs recorded primarily within other assets, non-current on the condensed consolidated balance sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. For each of the ~~three-~~six months ended June 30, 2022 and ~~nine-month periods ended September 30,~~ 2021, ~~and 2020,~~ the Company capitalized an immaterial amount of contract acquisition costs and recorded an immaterial amount of associated amortization expense in the Degree Program Segment.

~~Other Receivables~~

~~The following table presents the components of the Company’s receivables with extended payment terms as of each of the dates indicated.~~

September 30, 2021 December 31, 2020
(in thousands)
Receivables, gross $ 49,993 $ 25,587
Less: provision for credit losses (899) (179)
Receivables, net $ 49,094 $ 25,408
Short-term receivables $ 25,734 $ 1,076

The Company considers receivables to be past due when amounts contractually due under the extended payment plans have not been paid. As of September 30, 2021, 94% of outstanding receivables due under extended payment plans were current.

~~13.~~15. Supplemental Cash Flow Information

The Company’s cash interest payments, net of amounts capitalized, were ~~$4.5~~$23.5 million and ~~$6.3~~$4.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The Company’s accrued but unpaid capital expenditures were ~~$4.3~~$4.7 million and ~~$3.1~~$2.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

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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, ~~2020.~~2021. 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, and our other filings with the Securities and Exchange Commission (the “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.

Unless the context otherwise requires, all references to “we,” “us” or “our” refer to 2U, Inc., together with its subsidiaries. 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, ~~2020,~~2021, which are included in our Annual Report on Form 10-K, filed with the SEC on ~~February 25, 2021.~~March 1, 2022.

Overview

We are a leading online education platform company. Our mission is to expand access to high-quality educational opportunities that unlock human potential. In November 2021, we acquired substantially all of the assets of edX Inc. (the “edX Acquisition”), including the edX brand, website and marketplace. As a result of the edX Acquisition, we expanded our digital ~~transformation partner for nonprofit colleges~~education offerings to include open courses and ~~universities.~~ micro-credential offerings at the undergraduate and graduate levels and added an education consumer marketplace, edx.org, with over 45 million registered learners.

We ~~build, deliver, and support~~serve more than ~~550 digital~~230 top-ranked global universities and ~~in-person educational~~other leading institutions, and offer more than 4,000 high-quality online learning opportunities, including open courses, executive education offerings, ~~including graduate degrees, undergraduate degrees,~~boot camps, micro-credentials, professional certificates ~~boot camps,~~as well as undergraduate and ~~short courses. Together~~graduate degree programs.

We are positioned as one of the world’s most comprehensive free-to-degree online learning platforms. We believe our platform and robust consumer marketplace provide our clients with ~~our university clients, we have positively transformed the lives of more than 350,000 students.~~

~~Our comprehensive platform of tightly integrated technology and services provides~~ the digital infrastructure ~~that universities rely on~~ to ~~attract, enroll, educate~~launch world-class online education offerings and ~~support~~allow students ~~at scale throughout their lives. We believe ongoing learning is critical~~ to ~~career success today. Our broad array~~easily access high-quality, job-relevant education offerings without the barriers of ~~offerings allow our university clients to meet student needs throughout their lives — whether they are earning a full degree, reskilling to learn something new~~cost or embarking on a new career path. We refer to the spectrum of educational offerings that a learner may benefit from during their lives and careers as the “Career Curriculum Continuum.” Our platform empowers university clients to play a central role at each stage of a student’s learning journey.location.

We have two reportable segments: the Degree Program Segment and the Alternative Credential Segment.

In our Degree Program Segment, we provide the technology and services to nonprofit colleges and universities to enable the online delivery of degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate degree of the same quality they would receive on campus.

In our Alternative Credential Segment, we provide premium online ~~short~~open courses, ~~and~~executive education programs, technical, skills-based boot camps and micro-credential programs at the undergraduate and graduate levels through relationships with nonprofit colleges and ~~universities.~~universities and other leading institutions. Students enrolled in these offerings are generally seeking to reskill or upskill for career advancement or personal development through shorter duration, lower-priced ~~offerings that are relevant to the needs of industry and society.~~

offerings.

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~~COVID-19 Update~~Recent Developments

~~Beginning in~~During the second quarter of ~~2020,~~2022, we accelerated our planned transition to a platform company (the “2022 Strategic Realignment Plan”). This acceleration reflected our increasing confidence in our platform strategy combined with the macroeconomic environment that continued to be challenging. The plan is designed to reorient the company around a single platform allowing us to pursue a portfolio-based marketing strategy that drives traffic to the edX marketplace. As part of the plan, we expect to optimize marketing spend, simplify the current executive structure to reduce silos, reduce employee headcount, and rationalize our real estate footprint. We anticipate the headcount reductions to be completed in the third quarter of 2022 while the remainder of the plan is expected to be completed by the end of 2022. We expect to generate marketing efficiency and approximately $70 million in annualized cost savings, primarily due to savings associated with headcount reduction and reduced real estate costs.

We anticipate that we will incur restructuring charges associated with the 2022 Strategic Realignment Plan of approximately $35 million to $40 million. We recorded $15.8 million in restructuring charges related to the 2022 Strategic Realignment Plan for each of the three and six months ended June 30, 2022. The majority of the estimated remaining restructuring charges relate to planned office closures expected to be completed by December 31, 2022, and will be recognized as expense over the remaining lease terms ranging from 1 to 9 years.

COVID-19 Update

The COVID-19 pandemic continues to have widespread impacts on society and the global economy. Our focus remains on ensuring the health and safety of our employees and clients, while ensuring the continuity of our business. We have adapted our business practices to allow our global workforce to continue to work from home on a voluntary basis. In addition, many of our in-person offerings and other campus-based experiences are offered in a virtual format, including the field placement components in certain of our clinical graduate programs. Our course production capabilities allow faculty to record studio-quality asynchronous content remotely.

We continue to closely monitor the impact of the COVID-19 pandemic on our business. The pandemic initially accelerated the need for online learning and training, but has also created new and different demand dynamics in the market. At the beginning of the pandemic, we experienced increased demand from new and existing university clients and students as ~~a result of~~universities moved classes online. As the ~~COVID-19 pandemic. More recently,~~pandemic continues, we have seen some of these pandemic-related trends subside in certain areas of our business. ~~The COVID-19 pandemic has also had an impact on~~We have experienced fluctuations in our student retention rates, student enrollments and in our marketing costs. In particular, our marketing costs ~~from period~~began to ~~period, with costs being lower earlier in the pandemic and increasing particularly~~increase in the second half of ~~2021. In~~2021 as the ~~third quarter of 2021, we also~~COVID-19 pandemic began to ~~observe~~taper and have since decreased slightly in 2022. In addition, during the past year, competition for talent has increased, resulting in higher employee turnover and ~~increased competition~~additional costs to attract and retain ~~employees, which may result in increased costs.~~ employees.

We cannot estimate the impact of COVID-19 on future demand or cost levels or on our business or economic conditions generally, due to numerous uncertainties, including uncertainties regarding the duration or reemergence of the outbreak in various regions, including the potential impact of variants of the virus, actions that may be taken by governmental authorities, future fluctuations in demand and cost levels and labor market conditions. For a discussion of additional risks related to COVID-19, see Part I, Item 1A1A. “Risk ~~Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.~~Factors.”

Our Business Model and Components of Operating Results

The key elements of our business model and components of our operating results are described below.

Revenue Drivers

In our Degree Program Segment, we derive substantially all of our revenue from revenue-share arrangements with our university clients under which we receive a contractually specified percentage of the amounts students pay them to enroll in degree programs. In our Alternative Credential Segment, we derive substantially all of our revenue from tuition and fees from students taking our ~~short courses~~executive education programs and boot camps. Revenue in each segment is primarily driven by the number of student enrollments in our offerings.

Operating Expense

Marketing and Sales

Our most significant expense relates to marketing and sales activities to attract students to our offerings across both of our segments. This includes the cost of Search Engine Optimization, Search Engine Marketing and Social Media Optimization, as well as personnel and personnel-related expense for our marketing and recruiting teams.

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In our Degree Program Segment, our marketing and sales expense in any period generates student enrollments eight months later, on average. We then generate revenue as students progress through their programs, which generally occurs over a two-year period following initial enrollment. Accordingly, our marketing and sales expense in any period is an investment to generate revenue in future periods. Therefore, we do not believe it is meaningful to directly compare current period revenue to current period marketing and sales expense. Further, in this segment we believe that our 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.

In our Alternative Credential Segment, our marketing and sales expense in any period generates student enrollments as much as 24 weeks later. We then generate revenue as students progress through their courses, which typically occurs over a two- to six-month period following initial enrollment.

Curriculum and Teaching

Curriculum and teaching expense consists primarily of amounts due to universities for licenses to use their brand names and other trademarks in connection with our ~~short course~~executive education and boot camp offerings. The payments are based on contractually specified percentages of the tuition and fees we receive from students in those offerings. Curriculum and teaching expense also includes personnel and personnel-related expense for our ~~short course~~executive education and boot camp instructional staff.

Servicing and Support

Servicing and support expense consists primarily of personnel and personnel-related expense associated with the management and operations of our educational offerings, as well as supporting students and faculty members. Servicing and support expense also includes expenses to support our platform, facilitate in-program field placements and student immersions, and assist with compliance requirements.

Technology and Content Development

Technology and content development expense consists primarily of personnel and personnel-related expense associated with the ongoing improvement and maintenance of our platform, as well as hosting and licensing expenses. Technology and content expense also includes the amortization of capitalized technology and content.

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General and Administrative

General and administrative expense consists primarily of personnel and personnel-related expense for our centralized functions, including executive management, legal, finance, human resources, and other departments that do not provide direct operational services. General and administrative expense also includes professional fees and other corporate expenses.

Restructuring charges

Restructuring charges consist of severance and severance-related costs, costs associated with the exit of facilities, and costs associated with professional services.

Net Interest Income (Expense)

Net interest income (expense) consists primarily of interest expense from our long-term debt and interest income from our cash and cash equivalents. Interest expense also includes the amortization of debt issuance costs.

~~Loss on Debt Extinguishment~~

~~Loss on debt extinguishment consists of amounts recorded related to the retirement of our debt obligations.~~

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency gains and losses, gains and losses related to the sale of investments and other non-operating income and expense.

Income Taxes

Our income tax provisions for all periods consist of U.S. federal, state and foreign income taxes. Our effective tax rate for the period is based on a mix of higher-taxed and lower-taxed jurisdictions.

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Results of Operations

Consolidated Operating Results

Comparison of Three Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

The following table presents selected condensed consolidated statement of operations and comprehensive loss data for each of the periods indicated.

Three Months Ended September 30,
2021 2020 Period-to-Period Change
Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage
(dollars in thousands)
Revenue $ 232,376 100.0 % $ 201,073 100.0 % $ 31,303 15.6 %
Costs and expenses
Curriculum and teaching 30,869 13.3 30,153 15.0 716 2.4
Servicing and support 33,898 14.6 32,536 16.2 1,362 4.2
Technology and content development 43,106 18.6 40,223 20.0 2,883 7.2
Marketing and sales 118,300 50.9 100,068 49.8 18,232 18.2
General and administrative 49,736 21.4 44,000 21.9 5,736 13.0
Total costs and expenses 275,909 118.8 246,980 122.9 28,929 11.7
Loss from operations (43,533) (18.8) (45,907) (22.9) 2,374 5.2
Interest income 474 0.2 713 0.4 (239) 33.6
Interest expense (16,945) (7.3) (7,564) (3.8) (9,381) 124.0
Other income, net (425) (0.2) 42 0.0 (467) *
Loss before income taxes (60,429) (26.1) (52,716) (26.3) (7,713) 14.6
Income tax benefit 319 0.1 162 0.1 157 96.5
Net loss $ (60,110) (26.0) % $ (52,554) (26.2) % $ (7,556) 14.4 %



*						~~Not meaningful for comparative purposes.~~

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~~Revenue~~. Revenue for the three months ended September 30, 2021 increased $31.3 million, or 15.6%, to $232.4 million as compared to $201.1 million in 2020. Revenue from our Degree Program Segment increased $25.8 million, or 21.1%, primarily due to growth in full course equivalent (“FCE”) enrollments of 10,000, or 20.9%, and average revenue per FCE enrollment was essentially flat. Revenue from our Alternative Credential Segment increased $5.5 million, or 7.0%, primarily due to a 22.4% increase in average revenue per FCE enrollment, from $3,426 to $4,193, partially offset by a decrease in FCE enrollments of 2,893, or 12.5%.

~~Curriculum and Teaching~~. Curriculum and teaching expense increased $0.7 million, or 2.4%, to $30.9 million as compared to $30.2 million in 2020. This increase was primarily due to higher expense related to university clients and instructional staff to support additional offerings in our Alternative Credential Segment.

~~Servicing and Support~~. Servicing and support expense increased $1.4 million, or 4.2%, to $33.9 million as compared to $32.5 million in 2020. This increase was primarily due to a $0.7 million increase in personnel and personnel-related expense and a $0.4 million increase in student support costs to serve a greater number of students.

~~Technology and Content Development~~. Technology and content development expense increased $2.9 million, or 7.2%, to $43.1 million as compared to $40.2 million in 2020. This increase was primarily due to a $2.5 million increase in depreciation and amortization expense and a $1.8 million increase in expenses to support our platform and software applications. These increases were partially offset by a $2.0 million decrease in personnel and personnel-related expense.

~~Marketing and Sales~~. Marketing and sales expense increased $18.2 million, or 18.2%, to $118.3 million as compared to $100.1 million in 2020. This increase was primarily due to an $18.1 million increase in marketing expense to support our revenue growth.

~~General and Administrative~~. General and administrative expense increased $5.7 million, or 13.0%, to $49.7 million as compared to $44.0 million in 2020. This increase was primarily due to a $2.5 million increase in professional fees, a $1.8 million increase in personnel and personnel-related expense, a $1.8 million increase in restructuring-related expense.

~~Net Interest Income (Expense).~~ Net interest expense was $16.5 million and $6.9 million for the three months ended September 30, 2021 and 2020, respectively. The net interest expense for the three months ended September 30, 2021 was primarily due to interest incurred on our $475 million term loan facility that was issued in June 2021 and our $380 million aggregate principal amount of 2.25% convertible senior notes due 2025 (the “Notes”). The net interest expense for the three months ended September 30, 2020 was primarily due to interest incurred on our Notes that were issued in April 2020, partially offset by interest earned on our cash balances.

~~Other Income (Expense), Net.~~ Other income (expense), net was $(0.4) million for the three months ended September 30, 2021, as compared to less than $0.1 million for the three months ended September 30, 2020. This change was primarily due to fluctuations in foreign currency rates impacting our operations in the Alternative Credential Segment.

~~Income Tax Benefit~~. For the three months ended September 30, 2021, we recognized an income tax benefit of $0.3 million, and our effective tax rate was less than 1%. For the three months ended September 30, 2020, we recognized income tax benefit of $0.2 million, and our effective tax rate was less than 1%. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

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~~Comparison of Nine Months Ended September 30, 2021 and 2020~~

~~The following table presents selected condensed consolidated statement of operations data for each of the periods indicated.~~


		Nine Months Ended September 30,													Three Months Ended June 30,
		2021				2020				Period-to-Period Change					2022				2021				Period-to-Period Change
		Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage			Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage

		(dollars in thousands)													(dollars in thousands)
Revenue	Revenue	$	702,058	100.0	%	$	559,239	100.0	%	$	142,819	25.5	%	Revenue	$	241,464	100.0	%	$	237,209	100.0	%	$	4,255	1.8	%
Costs and expenses	Costs and expenses													Costs and expenses
Curriculum and teaching	Curriculum and teaching	98,805		14.1		76,887		13.7		21,918		28.5		Curriculum and teaching	32,145		13.3		34,788		14.7		(2,643)		7.6
Servicing and support	Servicing and support	101,947		14.5		93,363		16.7		8,584		9.2		Servicing and support	37,061		15.3		34,865		14.7		2,196		6.3
Technology and content development	Technology and content development	128,539		18.3		113,040		20.2		15,499		13.7		Technology and content development	45,616		18.9		42,509		17.9		3,107		7.3
Marketing and sales	Marketing and sales	346,181		49.3		297,624		53.2		48,557		16.3		Marketing and sales	116,350		48.2		114,644		48.3		1,706		1.5
General and administrative	General and administrative	144,342		20.6		127,207		22.7		17,135		13.5		General and administrative	41,523		17.2		46,160		19.5		(4,637)		10.0
Restructuring charges														Restructuring charges	16,753		6.9		1,334		0.6		15,419		*
Total costs and expenses	Total costs and expenses	819,814		116.8		708,121		126.5		111,693		15.8		Total costs and expenses	289,448		119.8		274,300		115.7		15,148		5.5
Loss from operations	Loss from operations	(117,756)		(16.8)		(148,882)		(26.5)		31,126		20.9		Loss from operations	(47,984)		(19.8)		(37,091)		(15.7)		(10,893)		29.4
Interest income	Interest income	1,188		0.2		1,380		0.2		(192)		14.0		Interest income	241		0.1		352		0.1		(111)		31.5
Interest expense	Interest expense	(33,014)		(4.7)		(19,575)		(3.5)		(13,439)		68.6		Interest expense	(13,906)		(5.8)		(8,188)		(3.5)		(5,718)		69.8
Loss on debt extinguishment	Loss on debt extinguishment	(1,101)		(0.2)		(11,671)		(2.1)		10,570		(90.6)		Loss on debt extinguishment	—		0.0		(1,101)		(0.5)		1,101		*
Other income (expense), net	Other income (expense), net	22,730		3.2		(1,659)		(0.3)		24,389		*		Other income (expense), net	(1,367)		(0.6)		24,070		10.1		(25,437)		105.7
Loss before income taxes	Loss before income taxes	(127,953)		(18.3)		(180,407)		(32.2)		52,454		29.1		Loss before income taxes	(63,016)		(26.1)		(21,958)		(9.5)		(41,058)		187.0
Income tax benefit	Income tax benefit	448		0.1		1,580		0.3		(1,132)		71.7		Income tax benefit	164		0.1		127		0.1		37		*
Net loss	Net loss	$	(127,505)	(18.2)	%	$	(178,827)	(31.9)	%	$	51,322	28.7	%	Net loss	$	(62,852)	(26.0)	%	$	(21,831)	(9.4)	%	$	(41,021)	187.9	%



*						Not meaningful for comparative purposes.

Revenue. Revenue for the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022 increased ~~$142.8~~$4.3 million, or ~~25.5%~~1.8%, to ~~$702.1~~$241.5 million as compared to ~~$559.2~~$237.2 million in ~~2020.~~2021. This increase includes $10.0 million from edX, acquired in the fourth quarter of 2021. Revenue from our Degree Program Segment ~~increased $83.7~~decreased $3.1 million, or ~~23.5%~~2.1%, primarily due to ~~growth in FCE enrollments of 38,560, or 27.6%, partially offset by~~ a ~~3.2%~~1.9% decrease in average revenue per FCE enrollment, from ~~$2,549~~$2,420 to ~~$2,467.~~$2,373. Revenue from our Alternative Credential Segment increased ~~$59.1~~$7.4 million, or ~~29.1%~~8.1%, primarily due to a ~~16.6%~~$7.1 million increase in revenue from the addition of edX offerings and a 1.2% increase in average revenue per FCE enrollment, from ~~$3,463~~$3,843 to ~~$4,038, and growth~~$3,891, partially offset by a decrease in FCE enrollments of ~~6,288,~~236, or ~~10.7%.~~1.0%

Curriculum and Teaching. Curriculum and teaching expense ~~increased $21.9~~decreased $2.6 million, or ~~28.5%~~7.6%, to ~~$98.8~~$32.1 million as compared to ~~$76.9~~$34.8 million in ~~2020.~~2021. This ~~increase~~decrease was primarily due to ~~higher~~lower expense related to university ~~and instructional staff to support to higher FCEs~~clients resulting from lower revenue in certain offerings in our Alternative Credential Segment.

Servicing and Support. Servicing and support expense increased ~~$8.5~~$2.2 million, or ~~9.2%~~6.3%, to ~~$101.9~~$37.1 million as compared to ~~$93.4~~$34.9 million in ~~2020.~~2021. This increase includes $2.9 million of operating expense from edX. The remaining change was primarily due to a ~~$7.8~~$2.0 million ~~increase~~decrease in personnel and personnel-related expense, ~~to serve~~partially offset by a ~~greater number of students.~~$1.3 million increase in other student support costs.

Technology and Content Development. Technology and content development expense increased ~~$15.5~~$3.1 million, or ~~13.7%~~7.3%, to ~~$128.5~~$45.6 million as compared to ~~$113.0~~$42.5 million in ~~2020.~~2021. This increase includes $5.1 million of operating expense from edX. The remaining change was primarily due to a ~~$5.8~~$3.0 million ~~increase~~decrease in ~~depreciation~~personnel and ~~amortization~~personnel-related expense, partially offset by a ~~$5.7~~$1.3 million increase in expenses to support our platform and software ~~applications, and a $3.9 million increase in personnel and personnel-related expense.~~applications.

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Marketing and Sales. Marketing and sales expense increased ~~$48.6~~$1.7 million, or ~~16.3%~~1.5%, to ~~$346.2~~$116.4 million as compared to ~~$297.6~~$114.6 million in ~~2020.~~2021. This increase includes $6.7 million of operating expense from edX. The remaining change was primarily due to a ~~$43.3~~$3.5 million ~~increase~~decrease in marketing expense and a ~~$4.0~~$2.9 million ~~increase~~decrease in personnel and personnel-related ~~expense to support our revenue growth.~~expense. These decreases were partially offset by a $1.1 million increase in depreciation and amortization expense.

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General and Administrative. General and administrative expense ~~increased $17.1~~decreased $4.6 million, or ~~13.5%~~10.0%, to ~~$144.3~~$41.5 million as compared to ~~$127.2~~$46.2 million in ~~2020. This increase~~2021. The three months ended June 30, 2022 includes $1.7 million of operating expense from edX. The remaining change was primarily due to ~~an $8.5~~a $4.5 million ~~increase~~decrease in personnel and personnel-related expense ~~a $5.0 million increase in professional fees, a $4.1 million increase in restructuring-related expense, a $3.3 million increase in provision for credit losses,~~ and a ~~$1.8 million increase in banking fees. These increases were partially offset by a $4.9~~$1.6 million decrease in ~~stockholder activism~~litigation-related expense.

Restructuring Charges. Restructuring charges for the three months ended June 30, 2022 include $15.8 million in severance and ~~litigation-related expense.~~severance-related expense attributable to the 2022 Strategic Realignment Plan.

Net Interest Income (Expense). Net interest expense ~~was $31.8~~increased $5.8 million, ~~and $18.2~~or 74.4%, to $13.7 million ~~for the nine months ended September 30, 2021 and 2020, respectively. The net interest expense for the nine months ended September 30, 2021~~as compared to $7.8 million in 2021. This increase was primarily due to ~~interest incurred on our Notes and our $475~~a $10.7 million ~~aggregate principal amount of term loan facilities that were issued~~increase in ~~June 2021. The net~~ interest expense ~~for the nine months ended September 30, 2020 was primarily due to interest~~ incurred onunder our ~~Notes that were issued in April 2020 and our $250 million senior secured~~ term loan facility, ~~that~~which we entered into in June 2021 and amended in November 2021. This increase was ~~extinguished~~partially offset by a $5.0 million decrease in ~~April 2020.~~interest expense due to the adoption of ASU 2020-06, which eliminated the amortization of the debt discount previously associated with the Notes.

Loss on Debt Extinguishment. ~~Loss on debt extinguishment was $1.1 million and $11.7 million for the nine months ended September 30, 2021 and 2020, respectively.~~ The loss on debt extinguishment for the ~~nine~~three months ended ~~September~~June 30, 2021 was due to the write-off of deferred financing costs and fees paid in connection with the termination of our $50 million credit agreement in June 2021. The loss on debt extinguishment for the nine months ended September 30, 2020 was due to the write-off of deferred financing costs and fees paid in connection with the extinguishment of our $250 million senior secured term loan facility in April 2020.

Other Income (Expense), Net. Other ~~income (expense),~~expense, net was ~~$22.7 million and $(1.7)~~$1.4 million for the ~~nine~~three months ended ~~September~~June 30, ~~2021 and 2020, respectively.~~2022, as compared to other income, net of $24.1 million for the three months ended June 30, 2021. This ~~increase~~change was primarily due to the gain recognized in connection with the sale of our investment in an education technology ~~company.~~company during the three months ended June 30, 2021.

Income Tax Benefit. For the ~~nine~~three months ended ~~September~~June 30, ~~2021,~~2022, we recognized an income tax benefit of ~~$0.4~~$0.2 million, and our effective tax rate was less than 1%. ~~This income tax benefit was due to net operating losses and the reversal of taxable temporary differences of the acquired intangibles in our Alternative Credential Segment.~~ For the ~~nine~~three months ended ~~September~~June 30, ~~2020,~~2021, we recognized an income tax benefit of ~~$1.6~~$0.1 million, and our effective tax rate was ~~less than~~approximately 1%. This tax benefit was due to net operating losses and the reversal of taxable temporary differences of the acquired intangibles in our Alternative Credential Segment. We expect to continue to recognize an income tax benefit for our Alternative Credential Segment to the extent that this segment continues to generate pre-tax losses while carrying a net deferred tax liability. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

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Comparison of Six Months Ended June 30, 2022 and 2021

The following table presents selected condensed consolidated statement of operations and comprehensive loss data for each of the periods indicated.


	Six Months Ended June 30,
	2022				2021				Period-to-Period Change
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage

	(dollars in thousands)
Revenue	$	494,793	100.0	%	$	469,682	100.0	%	$	25,111	5.3	%
Costs and expenses
Curriculum and teaching	65,375		13.2		67,936		14.5		(2,561)		3.8
Servicing and support	76,685		15.5		68,049		14.5		8,636		12.7
Technology and content development	96,673		19.5		85,433		18.2		11,240		13.2
Marketing and sales	247,332		50.0		227,881		48.5		19,451		8.5
General and administrative	91,758		18.5		92,787		19.8		(1,029)		1.1
Restructuring charges	17,540		3.5		1,819		0.4		15,721		864.3
Impairment charges	58,782		11.9		—		—		58,782		*
Total costs and expenses	654,145		132.1		543,905		115.9		110,240		20.3
Loss from operations	(159,352)		(32.1)		(74,223)		(15.9)		(85,129)		114.7
Interest income	498		0.1		714		0.2		(216)		30.3
Interest expense	(27,796)		(5.6)		(16,069)		(3.4)		(11,727)		73.0
Loss on debt extinguishment	—		0.0		(1,101)		(0.2)		1,101		*
Other income (expense), net	(2,397)		(0.5)		23,155		4.9		(25,552)		110.4
Loss before income taxes	(189,047)		(38.1)		(67,524)		(14.4)		(121,523)		180.0
Income tax benefit	415		0.1		129		—		286		221.2
Net loss	$	(188,632)	(38.0)	%	$	(67,395)	(14.4)	%	$	(121,237)	179.9	%



*						Not meaningful for comparative purposes.

Revenue. Revenue for the six months ended June 30, 2022 increased $25.1 million, or 5.3%, to $494.8 million as compared to $469.7 million in 2021.This increase includes $20.9 million from edX, acquired in the fourth quarter of 2021. Revenue from our Degree Program Segment increased $5.2 million, or 1.8%, primarily due to an increase in FCE enrollments of 2,476, or 2.1%, partially offset by a 0.3% decrease in average revenue per FCE enrollment, from $2,425 to $2,418. Revenue from our Alternative Credential Segment increased $19.9 million, or 11.2%, primarily due to a $15.4 million increase in revenue from the addition of edX offerings and an increase in FCE enrollments of 1,350, or 3.0%, partially offset by a 0.4% decrease in average revenue per FCE enrollment, from $3,968 to $3,951.

Curriculum and Teaching. Curriculum and teaching expense decreased $2.6 million, or 3.8%, to $65.4 million as compared to $67.9 million in 2021. This decrease was primarily due to lower expense related to university clients resulting from lower revenue in certain offerings in our Alternative Credential Segment.

Servicing and Support. Servicing and support expense increased $8.6 million, or 12.7%, to $76.7 million as compared to $68.0 million in 2021. This increase includes $5.7 million of operating expense from edX. The remaining increase was primarily due to a $2.7 million increase in other student support costs.

Technology and Content Development. Technology and content development expense increased $11.2 million, or 13.2%, to $96.7 million as compared to $85.4 million in 2021. This increase includes $9.9 million of operating expense from edX. The remaining increase was primarily due to a $2.4 million increase in depreciation and amortization expense and a $0.8 million increase in expenses to support our platform and software applications. These increases were partially offset by a $2.5 million decrease in personnel and personnel-related expense.

Marketing and Sales. Marketing and sales expense increased $19.5 million, or 8.5%, to $247.3 million as compared to $227.9 million in 2021. This increase includes $14.4 million of operating expense from edX. The remaining increase was

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primarily due to a $5.0 million increase in marketing expense and a $3.5 million increase in depreciation and amortization expense primarily related to amortization of acquired trade names. These increases were partially offset by a $4.0 million decrease in personnel and personnel-related expense.

General and Administrative. General and administrative expense decreased $1.0 million, or 1.1%, to $91.8 million as compared to $92.8 million in 2021. This includes $4.3 million of operating expense from edX. The remaining change is primarily due to a $7.8 million decrease in personnel and personnel-related expense, partially offset by a $1.3 million increase in provision for credit losses and a $1.0 million increase in transaction and integration expense.

Impairment Charges. In the first quarter of 2022, we recorded impairment charges of $28.8 million and $30.0 million to goodwill and the indefinite-lived intangible asset, respectively.

Restructuring Charges. Restructuring charges for the six months ended June 30, 2022 include $15.8 million in severance and severance-related expense attributable to the 2022 Strategic Realignment Plan.

Net Interest Income (Expense). Net interest expense increased $11.9 million, or 77.8%, to $27.3 million as compared to $15.4 million in 2021. This increase was primarily due to a $21.7 million increase in interest expense incurred under our term loan facility, which we entered into in June 2021 and amended in November 2021. This increase was partially offset by a $9.9 million decrease in interest expense due to the adoption of ASU 2020-06, which eliminated the amortization of the debt discount previously associated with the Notes.

Loss on Debt Extinguishment. The loss on debt extinguishment for the six months endedJune 30, 2021 was due to the write-off of deferred financing costs and fees paid in connection with the termination of our $50 million credit agreement in June 2021.

Other Income (Expense), Net. Other expense, net was $2.4 million for the six months ended June 30, 2022, as compared to other income, net of $23.2 million for the six months ended June 30, 2021. This change was primarily due to the gain recognized in connection with the sale of our investment in an education technology company during the six months ended June 30, 2021.

Income Tax Benefit. For the six months ended June 30, 2022, we recognized an income tax benefit of $0.4 million, and our effective tax rate was less than 1%. For the six months ended June 30, 2021, we recognized an income tax benefit of $0.1 million, and our effective tax rate was approximately 1%. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

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Business Segment Operating Results

We define segment profitability as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some of these items may not be applicable in any given reporting period and they may vary from period to period. Total segment profitability is a non-GAAP measure when presented outside of the financial statement footnotes. Total segment profitability is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to develop short- and long-term operational plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses in calculating total segment profitability can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that total segment profitability 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.

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The following table presents a reconciliation of total segment profitability to net loss for each of the periods indicated.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(in thousands)									(in thousands)
Net loss	Net loss	$	(60,110)	$	(52,554)	$	(127,505)	$	(178,827)	Net loss	$	(62,852)	$	(21,831)	$	(188,632)	$	(67,395)
Adjustments:	Adjustments:									Adjustments:
Stock-based compensation expense	Stock-based compensation expense	25,022		22,001		74,745		63,962		Stock-based compensation expense	22,349		24,776		46,773		49,723
Other (income) expense, net	Other (income) expense, net	425		(42)		(22,730)		1,659		Other (income) expense, net	1,367		(24,070)		2,397		(23,155)
Net interest expense	Net interest expense	16,471		6,851		31,826		18,195		Net interest expense	13,665		7,836		27,298		15,355
Income tax benefit	Income tax benefit	(319)		(162)		(448)		(1,580)		Income tax benefit	(164)		(127)		(415)		(129)
Depreciation and amortization expense	Depreciation and amortization expense	26,168		23,936		77,577		71,406		Depreciation and amortization expense	31,342		26,422		65,757		51,409
Loss on debt extinguishment	Loss on debt extinguishment	—		—		1,101		11,671		Loss on debt extinguishment	—		1,101		—		1,101
Impairment charges										Impairment charges	—		—		58,782		—
Restructuring charges										Restructuring charges	16,753		1,334		17,540		1,819
Other*	Other*	7,083		3,682		11,034		10,835		Other*	(558)		1,671		4,682		2,132
Total adjustments	Total adjustments	74,850		56,266		173,105		176,148		Total adjustments	84,754		38,943		222,814		98,255
Total segment profitability	Total segment profitability	$	14,740	$	3,712	$	45,600	$	(2,679)	Total segment profitability	$	21,902	$	17,112	$	34,182	$	30,860



*						Includes (i) transaction and integration expense of ~~$0.8~~$1.0 million and $1.7 million for the three months ended June 30, 2022 and 2021, respectively, and $3.4 million and $1.7 million for the six months ended June 30, 2022 and 2021, respectively, and (ii) stockholder activism and litigation-related (recoveries) expense of $(1.6) million and zero for the three months ended June 30, 2022 and 2021, respectively, and $1.3 million and $0.4 million for the ~~three~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020, respectively, and $2.6 million and $1.5 million for the nine months ended September 30,~~ 2021, and 2020, respectively, (ii) restructuring-related expense of $5.4 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively, and $7.2 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.8 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, and $1.2 million and $6.2 million for the nine months ended September 30, 2021 and 2020, respectively.

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Three Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

The following table presents revenue by segment and segment profitability for each of the periods indicated.


		Three Months Ended September 30,				Period-to-Period Change					Three Months Ended June 30,				Period-to-Period Change
		2021		2020		Amount		Percentage			2022		2021		Amount		Percentage

		(dollars in thousands)									(dollars in thousands)
Revenue by segment*	Revenue by segment*									Revenue by segment*
Degree Program Segment	Degree Program Segment	$	147,795	$	122,036	$	25,759	21.1	%	Degree Program Segment	$	143,090	$	146,214	$	(3,124)	(2.1)	%
Alternative Credential Segment	Alternative Credential Segment	84,581		79,037		5,544		7.0		Alternative Credential Segment	98,374		90,995		7,379		8.1
Total revenue	Total revenue	$	232,376	$	201,073	$	31,303	15.6	%	Total revenue	$	241,464	$	237,209	$	4,255	1.8	%

Segment profitability	Segment profitability									Segment profitability
Degree Program Segment	Degree Program Segment	$	32,925	$	9,713	$	23,212	239.1	%	Degree Program Segment	$	39,539	$	27,973	$	11,566	41.4	%
Alternative Credential Segment	Alternative Credential Segment	(18,185)		(6,001)		(12,184)		(203.1)		Alternative Credential Segment	(17,637)		(10,861)		(6,776)		62.4
Total segment profitability	Total segment profitability	$	14,740	$	3,712	$	11,028	297.3	%	Total segment profitability	$	21,902	$	17,112	$	4,790	28.0	%



*						Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

Degree Program Segment profitability increased ~~$23.2~~$11.6 million, or ~~239.1%~~41.4%, to ~~$32.9~~$39.5 million as compared to ~~$9.7~~$28.0 million in ~~2020.~~2021. This increase was primarily due to ~~revenue growth of $25.8 million and~~ operational efficiency ~~initiatives.~~initiatives and the implementation of the 2022 Strategic Realignment Plan.

Alternative Credential Segment profitability decreased ~~$12.2~~$6.8 million, or ~~203.1%~~62.4%, to ~~$(18.2)~~$(17.6) million as compared to ~~$(6.0)~~$(10.9) million in ~~2020.~~2021. This decrease was primarily due to higher operating ~~expenses.~~expenses, including $17.1 million of operating expense from edX, partially offset by revenue growth of $7.4 million, including $7.1 million from the addition of edX offerings.

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~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021

The following table presents revenue by segment and segment profitability for each of the periods indicated.


		Nine Months Ended September 30,				Period-to-Period Change					Six Months Ended June 30,				Period-to-Period Change
		2021		2020		Amount		Percentage			2022		2021		Amount		Percentage

		(dollars in thousands)									(dollars in thousands)
Revenue by segment*	Revenue by segment*									Revenue by segment*
Degree Program Segment	Degree Program Segment	$	439,884	$	356,178	$	83,706	23.5	%	Degree Program Segment	$	297,257	$	292,089	$	5,168	1.8	%
Alternative Credential Segment	Alternative Credential Segment	262,174		203,061		59,113		29.1		Alternative Credential Segment	197,536		177,593		19,943		11.2
Total revenue	Total revenue	$	702,058	$	559,239	$	142,819	25.5	%	Total revenue	$	494,793	$	469,682	$	25,111	5.3	%

Segment profitability	Segment profitability									Segment profitability
Degree Program Segment	Degree Program Segment	$	86,786	$	20,876	$	65,910	315.8	%	Degree Program Segment	$	75,357	$	53,861	$	21,496	39.9	%
Alternative Credential Segment	Alternative Credential Segment	(41,186)		(23,555)		(17,631)		(74.8)		Alternative Credential Segment	(41,175)		(23,001)		(18,174)		79.0
Total segment profitability	Total segment profitability	$	45,600	$	(2,679)	$	48,279	**		Total segment profitability	$	34,182	$	30,860	$	3,322	10.8	%



*						Immaterial amounts of intersegment revenue have been excluded from the above results for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~
**						~~Not meaningful for comparative purposes.~~2021.

Degree Program Segment profitability increased ~~$65.9~~$21.5 million, or ~~315.8%~~39.9%, to ~~$86.8~~$75.4 million as compared to ~~$20.9~~$53.9 million in ~~2020.~~2021. This increase was primarily due to revenue growth of ~~$83.7~~$5.2 million and operational efficiency initiatives.

Alternative Credential Segment profitability decreased ~~$17.6~~$18.2 million, or ~~74.8%~~79.0%, to $(41.2) million as compared to ~~$(23.6)~~$(23.0) million in ~~2020.~~2021. This decrease was primarily due to higher operating ~~expenses.~~expenses, including $35.4 million of operating expense from edX, partially offset by revenue growth of $19.9 million, including $15.4 million from the addition of edX offerings.

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Liquidity and Capital Resources

As of ~~September~~June 30, ~~2021,~~2022, our principal sources of liquidity were cash and cash equivalents totaling ~~$934.3~~$220.8 million, which were held for working capital and general corporate purposes.

In connection with entering into the Term Loan Agreement in June 2021, we terminated our $50 million credit agreement with Morgan Stanley Funding, Inc., dated June 25, 2020. Refer to Note 7 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

In April 2020, we issued the Notes in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act. The Notes are governed by an indenture (the “Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The Notes bear interest at a rate of 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Notes mature on May 1, 2025, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to November 1, 2024, the Notes are convertible only upon satisfaction of certain conditions, and thereafter at any time until the close of business on the second scheduled trading date immediately before the maturity date. In connection with the Notes, we entered into privately negotiated capped call transactions with a premium cost of approximately $50.5 million. The capped call transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or to offset any cash payments we are required to make in excess of the principal amount of the converted Notes, with such reduction and/or offset subject to the cap. The net proceeds from the issuance of the Notes were $319.0 million after deducting the initial purchasers’ discount, offering expenses and the cost of the capped call transactions. As of ~~September~~June 30, ~~2021,~~2022, the conditions allowing holders of the Notes to convert had not been met and we have the right under the Indenture to determine the method of settlement at the time of conversion, and the Notes, therefore, are ~~not convertible between October 1, 2021 and December 31, 2021,~~classified as a non-current on the ~~common stock sale price condition was not met.~~condensed consolidated balance sheets. Refer to Note 79 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our Notes.

~~Table~~On April 23, 2020, we repaid our $250 million senior secured term loan facility in full (including interest and prepayment premium) and terminated our credit agreement with Owl Rock Capital Corporation. In connection with the extinguishment of ~~Contents~~our $250 million senior secured term loan facility, we recognized a charge of approximately $11.7 million in the second quarter of 2020.

On June 25, 2020, we entered into a $50 million credit agreement with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and certain other lenders party thereto that provided for $50 million in revolving loans. In connection with entering into the Term Loan Agreement (as defined below) in June 2021, we terminated our $50 million credit agreement with Morgan Stanley Senior Funding, Inc. Refer to Note 9 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.

On August 6, 2020, we sold 6,800,000 shares of our common stock to the public. We received net proceeds of $299.8 million, which we use for working capital and other general corporate purposes.

In June 2021, we entered into a Term Loan Credit and Guaranty Agreement, dated June 28, 2021 (“the Term Loan Agreement”), with Alter Domus (US) LLC as administrative agent and collateral agent, to make term loans to us in the aggregate principal amount of $475 million (the “Term Loan Facilities”), which have an initial maturity date of December 28, 2024. Loans under this facility bear interest at a per annum rate equal to a base rate or adjusted Eurodollar rate, as applicable, plus the applicable margin of 4.75% in the case of the base rate loans and 5.75% in the case of the Eurodollar loans. We used the proceeds of the Term Loan Facilities to fund a portion of the edX Acquisition and to pay related costs, fees and expenses. On November 4, 2021, we entered into a First Amendment to Term Loan Credit and Guaranty Agreement and a Joinder Agreement, which amended the Term Loan Agreement (collectively, the “Amended Term Loan Facility”) primarily to provide for an incremental facility to us in an original principal amount of $100 million. The proceeds of the Amended Term Loan Facility may be used for general corporate purposes. Refer to Note 9 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our Amended Term Loan Facility.

We have financed our operations primarily through payments from university clients and students for our technology and services, the Amended Term Loan Facility, the Notes, and public and private equity ~~financings, the Term Loan Facilities and the Notes.~~financings. We believe that our existing cash and cash equivalents, together with cash generated from operations and available borrowing capacity under the Amended Term Loan ~~Facilities,~~Facility, will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs, and may consider capital raising and other market opportunities that may be available to us.

Our operations require us to make capital expenditures for content development, capitalized technology, and property and ~~equipment.~~equipment and to service our debt. During the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, our capital asset additions were ~~$54.9~~$44.8 million and ~~$55.3~~$32.1 million, respectively.

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We or our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands).


	Six Months Ended June 30,
	2022		2021

Net cash provided by (used in) operating activities	$	28,644	$	(2,194)
Net cash (used in) provided by investing activities	(35,179)		4,812
Net cash (used in) provided by financing activities	(2,975)		450,563
Effect of exchange rate changes on cash	(2,614)		(713)
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(12,124)	$	452,468

Operating Activities

Cash flows from operating activities have typically been generated from our net income (loss) and by changes in our operating assets and liabilities, ~~particularly from accounts receivable,~~ adjusted for non-cash expense items such as depreciation and amortization expense, ~~and~~ stock-based compensation ~~expense.~~expense and gain on sale of investment.

The following sections set forth the components of our $28.6 million of cash provided by operating activities during the six months ended June 30, 2022.

Net ~~cash used in operating activities~~income (loss) (adjusted for ~~the nine months ended September 30, 2021 was $3.1 million, consisting primarily of~~non-cash charges)

The following table sets forth our net loss ~~of $127.5 million and a $27.8 million gain recognized in connection with the sale of our investment in an education technology company, adjusted~~(adjusted for non-cash ~~items including $77.6 million~~charges) during the six months ended June 30, 2022 thousands):


Net loss	$	(188,632)
Non-cash interest expense	5,664
Depreciation and amortization expense	65,757
Stock-based compensation expense	46,773
Non-cash lease expense	11,405
Provision for credit losses	4,610
Impairment charges	58,782
Other	2,920
Net income (adjusted for non-cash charges)	$	7,279

Table of depreciation and amortization expense, $74.7 million of stock-based compensation expense, $28.3 million of non-cash interest expense and $13.5 million of reductions in the carrying amounts of our right-of-use assets. The net changeContents

Changes in operating assets and liabilities, of $53.6 million was unfavorable to cash flows from operations primarily due to an increase in accounts receivable of $54.7 million, an increase in prepaid expenses and other assets of $31.2 million and a decrease in other liabilities, net of ~~$16.0 million, partially offset~~assets and liabilities acquired

The following table sets forth the net cash provided by ~~a $24.2 million increase in accounts payable and accrued expenses and a $22.0 million increase in deferred revenue.~~

Net cash used in operating activities for the nine months ended September 30, 2020 was $6.9 million, consisting primarily of our net loss of $178.8 million, adjusted for non-cash items including $71.4 million of depreciation and amortization expense, $64.0 million of stock-based compensation expense, $13.2 million of non-cash interest expense, an $11.7 million loss on the extinguishment of our $250 million senior secured term loan facility and $11.2 million of reductions in the carrying amounts of our right-of-use assets. The net changechanges in operating assets and liabilities ~~of $2.1~~during the six months ended June 30, 2022 (in thousands):


Changes in operating assets and liabilities, net of assets and liabilities acquired:
Cash used in accounts receivable, net and other receivables, net	$	(9,422)
Cash used in prepaid expenses, other assets, and other liabilities, net	(18,246)
Cash used in accounts payable and accrued expenses	3,484
Cash provided by deferred revenue	45,549
Net cash provided by changes in operating assets and liabilities	$	21,365

From December 31, 2021 to June 30, 2022:

•Accounts receivable, net and other receivables, net increased $9.4 million ~~was unfavorable to cash flows from operations~~and deferred revenue increased $45.5 million. These increases were primarily due to ~~an increase in accounts receivable~~the timing of ~~$65.1~~our Degree Program Segment clients’ academic terms.

•Accounts payable and accrued expenses increased $3.5 million, primarily due to accrued restructuring and ~~an increase in prepaid expenses and other assets~~restructuring-related charges of ~~$15.0~~$16.8 million as of June 30, 2022, partially offset by a ~~$43.1 million increase~~decrease in ~~deferred revenue~~accrued compensation and ~~a $38.0 million increase in~~other accounts ~~payable and accrued expenses.~~payable.

Investing Activities

~~Net~~Our investing activities primarily consist of strategic acquisitions, divestitures and purchases of property and equipment to support the overall growth of our business. We expect our investing cash flows to be affected by the timing of payments we make for capital expenditures and the strategic acquisition or other growth opportunities we decide to pursue.

During the six months ended June 30, 2022, net cash used in investing activities was $35.2 million. This use of cash was driven by cash outflows of $34.9 million for the ~~nine months ended September 30, 2021 was $12.6 million, consisting primarily of $45.2 million of additions~~addition of amortizable intangible assets and ~~$5.4~~$5.2 million offor purchases of property and equipment, partially offset by ~~$38.8 million~~a purchase price adjustment related to a change in net working capital which reduced the preliminary purchase price of ~~proceeds from~~ the ~~sale of our investment in an education technology company.~~

Net cash used in investing activities for the nine months ended September 30, 2020 was $52.3 million, consisting primarily of $46.8 million of additions of amortizable intangible assets and $5.5 million of purchases of property and equipment.edX Acquisition by $5.0 million.

Financing Activities

~~Net cash provided by~~Our financing activities ~~for~~primarily consist of long-term debt borrowings, the ~~nine months ended September 30, 2021 was $450.5 million, consisting primarily~~repayment of ~~$469.6 million of proceeds from the issuance of our Term Loan Facilities and $6.1 million of proceeds received from the exercise of stock options, partially offset by $14.5 million of~~principal on long-term debt, tax withholding payments associated with the settlement of restricted stock units and ~~a $10.3 million payment~~the exercise of ~~debt issuance costs.~~stock options.

~~Net~~During the six months ended June 30, 2022, net cash ~~provided by~~used in financing activities was $3.0 million. This use of cash was driven by cash outflows of $3.8 million for quarterly amortization payments on our Amended Term Loan Facility and $1.7 million for tax withholding payments associated with the ~~nine months ended September 30, 2020 was $368.9~~settlement of restricted stock units, partially offset by a cash inflow of $2.2 million ~~consisting primarily of $319.0 million of proceeds~~ from ~~the issuance of the Notes (net of payments related to the initial purchasers’ discount, offering expenses and the cost of the capped call transactions) and $299.8 million in~~cash proceeds received from ~~our public offering~~employee stock purchase plan share purchases and the exercise of ~~common~~ stock in August 2020. These increases were partially offset by the repayment of $253.0 million of principal, interest and prepayment premium associated with the extinguishment of our $250 million senior secured term loan facility and a $2.5 million payment of debt issuance costs.

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~~Off-Balance Sheet Arrangements~~

We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.options.

Critical Accounting Policies and Estimates

Revenue Recognition, ~~Accounts Receivable~~Receivables and Provision for Credit Losses

We generate substantially all of our revenue from contractual arrangements, with either our university clients or students, to provide a comprehensive platform of tightly integrated technology and technology-enabled services that support our offerings.

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Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the expected value method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period, and if necessary, we adjust our estimate of the overall transaction price. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.

Our Degree Program Segment derives revenue primarily from contractually specified percentages of the amounts our university clients receive from their students in 2U-enabled degree programs for tuition and fees, less credit card fees and other specified charges we have agreed to exclude in certain university contracts. Our contracts with university clients in this segment typically have terms of 10 to 15 years and have a single performance obligation, as the promises to provide a platform of tightly integrated technology and services that university clients need to attract, enroll, educate and support students are not distinct within the context of the contracts. The single performance obligation is delivered as the university clients receive and consume benefits, which occurs ratably over a series of academic terms. The amounts received from university clients over the term of the arrangement are variable in nature in that they are dependent upon the number of students that are enrolled in the program within each academic term. These amounts are allocated to and are recognized ratably over the related academic term, defined as the period beginning on the first day of classes through the last. Revenue is recognized net of an allowance, which is established for our expected obligation to refund tuition and fees to university clients.

Our Alternative Credential Segment derives revenue primarily from contracts with students for the tuition and fees paid to enroll in, and progress through, our ~~short courses~~executive education programs and boot camps. Our ~~short courses~~executive education programs run between ~~six~~two and 16 weeks, while our boot camps run between 12 and 24 weeks. In this segment, our contracts with students include the delivery of the educational and related student support services and are treated as either a single performance obligation or multiple performance obligations, depending upon the offering being delivered. All performance obligations are satisfied ratably over the same presentation period, which is defined as the period beginning on the first day of the course through the last. We recognize the proceeds received, net of any applicable pricing concessions, from the students enrolled and share contractually specified amounts received from students with the associated university client, in exchange for licenses to use the university brand name and other university trademarks. These amounts are recognized as curriculum and teaching expenses on our condensed consolidated statements of operations and comprehensive loss. Our contracts with university clients in this segment are typically shorter and less restrictive than our contracts with university clients in our Degree Program Segment.

We do not disclose the value of unsatisfied performance obligations for our Degree Program Segment because the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation. We do not disclose the value of unsatisfied performance obligations for our Alternative Credential Segment because the performance obligations are part of contracts that have original durations of less than one year.

~~Contract Acquisition Costs~~

We pay commissions to certain of our employees to obtain contracts with university clients in our Degree Program Segment. These costs are capitalized and recorded on a contract-by-contract basis and amortized using the straight-line method over the expected life, which is generally the length of the contract.

With respect to contract acquisition costs in our Alternative Credential Segment, we have elected to apply the practical expedient in ASC Topic 606 to expense these costs as incurred, as the terms of contracts with students in this segment are less than one year.

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Payments to University Clients

Pursuant to certain of our contracts in the Degree Program Segment, we have made, or are obligated to make, payments to university clients at either the execution of a contract or at the extension of a contract in exchange for various marketing and other rights. Generally, these amounts are capitalized as other assets on our condensed consolidated balance sheets, and amortized as contra revenue over the life of the contract, commencing on the later of when payment is due or when contract revenue recognition begins.

Receivables, Contract Assets and Liabilities

Balance sheet items related to contracts consist of accounts receivable, net, other receivables, net and deferred revenue on our condensed consolidated balance sheets. Accounts receivable, net includes trade accounts receivable, which are comprised of billed and unbilled revenue. Our trade accounts receivable balances have terms of less than one year. Accounts receivable, net is stated at amortized cost net of provision for credit losses. Our methodology to measure the provision for credit losses requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include current market conditions, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual

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customers. Our estimates are reviewed and revised periodically based on the ongoing evaluation of credit quality indicators. Historically, actual write-offs for uncollectible accounts have not significantly differed from prior estimates.

~~Tuition~~We recognize unbilled revenue when revenue recognition occurs in advance of billings. Unbilled revenue is recognized in our Degree Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. Our unbilled revenue represents contract assets.

Other receivables, net are comprised of amounts due under tuition payment plans with extended payment terms ~~are made available to~~from students ~~enrolling~~enrolled in ~~select boot camps within~~certain of our ~~Alternative Credential Segment.~~alternative credential offerings. These plans, which are managed and serviced by third-party providers, are designed to assist students with covering tuition costs after all other student financial assistance and scholarships have been applied. The associated receivables generally have payment terms that exceed one year and are recorded net of any implied pricing concessions, which are determined based on our collections history, market data and any time value of money component. There are no fees or origination costs included in these receivables.

We recognize unbilled revenue when revenue recognition occurs in advance of billings. Unbilled revenue is recognized in our Degree Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. Our unbilled revenue represents contract assets. Unbilled accounts receivable is recognized in our Alternative Credential Segment once the presentation period commences for amounts to be invoiced to students under installment plans that are paid over the same presentation period.

Deferred revenue represents the excess of amounts billed or received as compared to amounts recognized in revenue on our condensed consolidated statements of operations and comprehensive loss as of the end of the reporting period, and such amounts are reflected as a current liability on our condensed consolidated balance sheets. Our deferred revenue represents contract liabilities. We generally receive payments from Degree Program Segment university clients early in each academic term and from Alternative Credential Segment students, either in full upon registration for the course or in full before the end of the course based on a payment plan, prior to completion of the service period. These payments are recorded as deferred revenue until the services are delivered or until our obligations are otherwise met, at which time revenue is recognized.

Business Combinations

The purchase price of an acquisition is allocated to the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. The excess of the cost of an acquired entity, net of the amounts assigned to the assets acquired and liabilities assumed, is recognized as goodwill. The net assets and results of operations of an acquired entity are included on our condensed consolidated financial statements from the acquisition date.

The purchase price allocation process requires management to make significant estimates and assumptions, especially with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions, and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. Unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.

On November 16, 2021, we completed the edX Acquisition for a preliminary purchase price of $773 million. Refer to Note 3 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this transaction.

Long-Lived Assets

Amortizable Intangible Assets

Acquired Definite-lived Intangible Assets. We capitalize purchased definite-lived intangible assets, such as software, websites and domains, and amortize them on a straight-line basis over their estimated useful life. Historically, we have assessed the useful lives of these acquired intangible assets to be between three and 10 years.

Capitalized Technology. Capitalized technology includes certain purchased software and technology licenses, direct third-party costs, and internal payroll and payroll-related costs used in the creation of our internal-use software. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred) and the post-implementation/operation stage (all costs are expensed as incurred). Costs capitalized in the application development stage include costs of designing the application, coding, integrating our and the university’s networks and systems, and the testing of the software. Capitalization of costs requires judgment in determining when a project has reached the application development stage and the period over which we expect to benefit from the use of that software. Once the software is placed in service, these amounts are amortized using the straight-line method over the estimated useful life of the software, which is generally three to five years.

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Capitalized Content Development. We develop content for each offering on a course-by-course basis in collaboration with university client faculty and industry experts. Depending upon the offering, we may use materials provided by university clients and their faculty, including curricula, case studies, presentations and other reading materials. We are responsible for the creation of materials suitable for delivery through our online learning platform, including all expenses associated with this effort. With respect to the Degree Program Segment, the development of content is part of our single performance obligation and is considered a contract fulfillment cost.

The content development costs that qualify for capitalization are third-party direct costs, such as videography, editing and other services associated with creating digital content. Additionally, we capitalize internal payroll and payroll-related expenses incurred to create and produce videos and other digital content utilized in the university clients’ offerings for delivery via our online learning platform. Capitalization ends when content has been fully developed by both us and the university client, at which time amortization of the capitalized content development begins. The capitalized costs for each offering are recorded on a course-by-course basis and included in amortizable intangible assets, net on our condensed consolidated balance sheets. These amounts are amortized using the straight-line method over the estimated useful life of the respective course, which is generally four to five years. The estimated useful life corresponds with the planned curriculum refresh rate. This refresh rate is consistent with expected curriculum refresh rates as cited by faculty members for similar on-campus offerings.

Evaluation of Long-Lived Assets

We review long-lived assets, which consist of property and equipment, capitalized technology, capitalized content development and acquired finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. In order to assess the recoverability of the capitalized technology and content development, the amounts are grouped by the lowest level of independent cash flows. 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. Our impairment analysis is based upon cumulative results and forecasted performance.

Goodwill and Other Indefinite-lived Intangible Assets

Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Our goodwill balance relates to the acquisitions of GetSmarter in July 2017 and Trilogy in May 2019. We review goodwill and other indefinite-lived intangible assets for impairment annually, as of October ~~1. Between annual tests, goodwill is reviewed for possible impairment~~1, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of ~~a reporting unit~~goodwill or an indefinite-lived asset below its carrying value.

Goodwill

We test our goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. We initially assess qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment review. We review goodwill for impairment using a quantitative approach if we decide to bypass the qualitative assessment or determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on a qualitative assessment. Upon completion of a quantitative assessment, we may be required to recognize an impairment based on the difference between the carrying value and the fair value of the reporting unit.

We determine the fair value of a reporting unit by utilizing a weighted combination of the income-based and market-based approaches.

The income-based approach requires us to make significant assumptions and estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies, discount rates, terminal growth rates, and forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, we consider each reporting unit’s historical results and current operating trends, revenue, profitability, cash flow results and forecasts, and industry trends. These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, market capitalization, the continued efforts of competitors to gain market share and prospective student enrollment patterns.

In addition, the value of a reporting unit using the market-based approach is estimated by comparing the reporting unit to other ~~publicly traded~~publicly-traded companies and/or to publicly-disclosed business mergers and acquisitions in similar lines of business. The value of a reporting unit is based on pricing multiples of certain financial parameters observed in the comparable companies. We also make estimates and assumptions for market values to determine a reporting unit’s estimated fair value.

~~Based on our qualitative assessment performed as~~Changes in these estimates and assumptions could materially affect the determination of ~~October 1, 2020,~~fair value and the ~~date of our annual~~ goodwill impairment ~~assessment, we concluded that~~test result. As of June 30, 2022 and December 31, 2021, the estimated fair values of our reporting units exceeded their carrying values by no less than 10%. It is possible that future changes in our circumstances, including potential impacts from COVID-19, or in the variables associated with the judgments, assumptionsgoodwill balance was $788.0 million and ~~estimates used in assessing the fair value of our reporting units, could require us to record additional impairment charges in the future.~~$834.5

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million, respectively, and the indefinite-lived intangible asset balance was $225.0 million and $255.0 million, respectively. Refer to Note 4 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this transaction and for more information regarding goodwill and our indefinite-lived intangible asset.

Other Indefinite-lived Intangible Assets

Our indefinite-lived intangible asset was acquired in November 2021 and represents the established edX trade name.

Interim Impairment Assessment

During the first quarter of 2022, we experienced a significant decline in our market capitalization, which management deemed a triggering event related to goodwill and our indefinite-lived intangible asset. As a result, we performed an interim impairment assessment as of March 1, 2022 and determined the carrying value for one of our reporting units within the Alternative Credential segment and the carrying value of our indefinite-lived intangible asset exceeded their respective estimated fair values. As a result, during the three months ended March 31, 2022, we recorded impairment charges of $28.8 million and $30.0 million to goodwill and the indefinite-lived intangible asset, respectively. These charges are included within operating expense on our condensed consolidated statements of operations. The estimated fair values of the remaining reporting units exceeded their respective carrying values by approximately 10% or more.

We utilized a weighted combination of the income-based approach and market-based approach to determine the fair value of each reporting unit and the income-based approach to determine the fair value of its long-lived intangible asset. Key assumptions used in the income-based approach included forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements, terminal growth rates, and discount rates based upon each respective reporting unit’s or indefinite-lived intangible asset’s weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that were not observable to active markets, which would be deemed “Level 3” fair value measurements. Key assumptions used in the market-based approach included the selection of appropriate peer group companies. Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value and the impairment test result.

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 the FASB’s recent accounting pronouncements and their effect on us.

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 (loss), which we discuss below, and revenue and the components of loss from operations in the section above entitled “Our Business Model and Components of Operating Results,” we utilize FCE enrollments as a key metric to evaluate the success of our business.

Full Course Equivalent Enrollments

We measure FCE enrollments for each of the courses offered during a particular period by taking the number of students enrolled in that course and multiplying it by the percentage of the course completed during that period. We add the FCE enrollments for each course within each segment to calculate the total FCE enrollments per segment. This metric allows us to consistently view period-over-period changes in enrollments by accounting for the fact that many courses we enable straddle multiple 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 FCE enrollments for that period. Any individual student may be enrolled in more than one course during a period.

Average revenue per FCE enrollment represents our weighted-average revenue per course across the mix of courses being offered during a period in each of our operating segments. This number is derived by dividing the total revenue for a period for each of our operating segments by the number of FCE enrollments within the applicable segment during that same period. This amount may vary from period to period depending on the academic calendars of our university clients, the relative growth rates of our degree programs, ~~short courses,~~executive education programs, and boot camps, as applicable, and varying tuition levels, among other factors.

For the Degree Program Segment, FCE enrollments and average revenue per FCE enrollment include enrollments and revenue from edX bachelor’s and master’s degree offerings. For the Alternative Credential Segment, FCE enrollments and average revenue per FCE enrollment exclude enrollments and revenue from edX offerings due to the large number of learners

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taking free or low-cost courses. We believe excluding the impact of these enrollments and revenue is useful to investors because it facilitates a period-to-period comparison.

The following table presents the FCE enrollments and average revenue per FCE enrollment in our Degree Program Segment and Alternative Credential Segment for each of the periods indicated.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

Degree Program Segment
Degree Program Segment*										Degree Program Segment*
FCE enrollments	FCE enrollments	57,842		47,842		178,278		139,718		FCE enrollments	60,303		60,429		122,912		120,436
Average revenue per FCE enrollment	Average revenue per FCE enrollment	$	2,555	$	2,551	$	2,467	$	2,549	Average revenue per FCE enrollment	$	2,373	$	2,420	$	2,418	$	2,425
Alternative Credential Segment
Alternative Credential Segment**										Alternative Credential Segment**
FCE enrollments	FCE enrollments	20,174		23,067		64,931		58,643		FCE enrollments	23,443		23,679		46,107		44,757
Average revenue per FCE enrollment	Average revenue per FCE enrollment	$	4,193	$	3,426	$	4,038	$	3,463	Average revenue per FCE enrollment	$	3,891	$	3,843	$	3,951	$	3,968

Of the increase in FCE enrollments in our Degree Program Segment for the three months ended September 30, 2021 and 2020, 612, or 6.1%, and 714, or 10.3%, respectively, were attributable to degree programs launched during the preceding 12 months. Of the increase in FCE enrollments in our Degree Program Segment for the nine months ended September 30, 2021 and 2020, 929, or 2.4%, and 2,071, or 10.3%, respectively, were attributable to degree programs launched during the preceding 12 months.

Of the FCE enrollments in our Alternative Credential Segment for the three months ended September 30, 2021 and 2020, 2,783 and 5,671, respectively, were attributable to offerings launched during the preceding 12 months. Of the FCE enrollments in our Alternative Credential Segment for the nine months ended September 30, 2021 and 2020, 7,465 and 9,756, respectively, were attributable to offerings launched during the preceding 12 months.



*						FCE enrollments and average revenue per FCE include enrollments in edX degree offerings and revenue from these offerings of $2.8 million and zero for the three months ended June 30, 2022 and 2021, respectively, and $5.5 million and zero for the six months ended June 30, 2022 and 2021, respectively.
**						FCE enrollments and average revenue per FCE exclude the impact of enrollments in edX offerings and the related revenue of $7.1 million and zero for the three months ended June 30, 2022 and 2021, respectively, and $15.4 million and zero for the six months ended June 30, 2022 and 2021, respectively.

Adjusted EBITDA (Loss)

We define adjusted EBITDA (loss) as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some of these items may not be applicable in any given reporting period and they may vary from period to period.

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In the second quarter of 2021, we revised our definition of adjusted EBITDA (loss) to exclude other income (expense), net in connection with the recognition of a gain on the sale of our interest in an education technology company. We believe this change is meaningful to investors because we did not have this activity in prior periods, and as a result, excluding the impact of such a gain in 2021 facilitates a period-to-period comparison of our business. Prior to this revision, our definition of adjusted EBITDA excluded foreign currency gains or losses, which comprised the entirety of our other income (expense), net for all prior periods. The revision to the definition of adjusted EBITDA (loss) had no impact on our reported adjusted EBITDA (loss) for each of the three- and nine-month periods ended September 30, 2020.

Adjusted EBITDA (loss) is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to develop short- and long-term operational plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses that are not reflective of our ongoing operating results in calculating adjusted EBITDA (loss) can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that adjusted EBITDA (loss) provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA (loss) is not a measure calculated in accordance with U.S. GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with U.S. GAAP.

Our use of adjusted EBITDA (loss) 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 the limitations are:

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

•adjusted EBITDA (loss) does not reflect (i) changes in, or cash requirements for, our working capital needs; (ii) the impact of changes in foreign currency exchange rates; (iii) acquisition related gains or losses such as, but not limited to, post-acquisition changes in the value of contingent consideration reflected in operations; (iv) transaction and integration costs; (v) restructuring-related costs; (vi) impairment charges; (vii) stockholder activism costs; (viii) certain litigation-related costs; (ix) losses on debt extinguishment; (x) the impact of deferred revenue fair value adjustments; (xi) interest or tax payments that may represent a reduction in cash; or (xii) the non-cash expense or the potentially dilutive impact of equity-based compensation, which has been, and we expect will continue to be, an important part of our compensation plan; and

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

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

		(in thousands)									(in thousands)				(in thousands)
Net loss	Net loss	$	(60,110)	$	(52,554)	$	(127,505)	$	(178,827)	Net loss	$	(62,852)	$	(21,831)	$	(188,632)	$	(67,395)
Adjustments:	Adjustments:									Adjustments:
Stock-based compensation expense	Stock-based compensation expense	25,022		22,001		74,745		63,962		Stock-based compensation expense	22,349		24,776		46,773		49,723
Other (income) expense, net	Other (income) expense, net	425		(42)		(22,730)		1,659		Other (income) expense, net	1,367		(24,070)		2,397		(23,155)
Net interest expense	Net interest expense	16,471		6,851		31,826		18,195		Net interest expense	13,665		7,836		27,298		15,355
Income tax benefit	Income tax benefit	(319)		(162)		(448)		(1,580)		Income tax benefit	(164)		(127)		(415)		(129)
Depreciation and amortization expense	Depreciation and amortization expense	26,168		23,936		77,577		71,406		Depreciation and amortization expense	31,342		26,422		65,757		51,409
Loss on debt extinguishment	Loss on debt extinguishment	—		—		1,101		11,671		Loss on debt extinguishment	—		1,101		—		1,101
Impairment charges										Impairment charges	—		—		58,782		—
Restructuring charges										Restructuring charges	16,753		1,334		17,540		1,819
Other*	Other*	7,083		3,682		11,034		10,835		Other*	(558)		1,671		4,682		2,132
Total adjustments	Total adjustments	74,850		56,266		173,105		176,148		Total adjustments	84,754		38,943		222,814		98,255
Adjusted EBITDA (loss)		$	14,740	$	3,712	$	45,600	$	(2,679)
Adjusted EBITDA										Adjusted EBITDA	$	21,902	$	17,112	$	34,182	$	30,860



*						Includes (i) transaction and integration expense of ~~$0.8~~$1.0 million and $1.7 million for the three months ended June 30, 2022 and 2021, respectively, and $3.4 million and $1.7 million for the six months ended June 30, 2022 and 2021, respectively, and (ii) stockholder activism and litigation-related (recoveries) expense of $(1.6) million and zero for the three months ended June 30, 2022 and 2021, respectively, and $1.3 million and $0.4 million for the ~~three~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020, respectively, and $2.6 million and $1.5 million for the nine months ended September 30,~~ 2021, and 2020, respectively, (ii) restructuring-related expense of $5.4 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively, and $7.2 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.8 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, and $1.2 million and $6.2 million for the nine months ended September 30, 2021 and 2020, respectively.

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 25, 2021.~~March 1, 2022.

Foreign Currency Exchange Risk

We transact material business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Our primary exposures are related to non-U.S. dollar denominated revenue and operating expenses in South Africa and the United Kingdom. Accounts relating to foreign operations are translated into U.S. dollars using prevailing exchange rates at the relevant period end. As a result, we would experience increased revenue and operating expenses in our non-U.S. operations if there were a decline in the value of the U.S. dollar relative to these foreign currencies. Conversely, we would experience decreased revenue and operating expenses in our non-U.S. operations if there were an increase in the value of the U.S. dollar relative to these foreign currencies. Translation adjustments are included as a separate component of stockholders’ equity.

For the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, our foreign currency translation adjustment was a loss of ~~$4.3~~$7.7 million and a gain of ~~$1.7~~$3.0 million, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, our foreign currency translation adjustment was a loss of ~~$2.1~~$0.3 million and a ~~loss~~gain of ~~$13.0~~$2.2 million, respectively.

For the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, we recognized foreign currency exchange losses of ~~$0.3~~$1.4 million and ~~gains of less than $0.1~~$0.8 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss. For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, we recognized foreign currency exchange losses of ~~$2.1~~$2.8 million and ~~$1.7~~$1.8 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss.

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The foreign exchange rate volatility of the trailing 12 months ended ~~September~~June 30, ~~2021~~2022 was ~~10%~~11% and 6% for the South African rand and British pound, respectively. The foreign exchange rate volatility of the trailing 12 months ended ~~September~~June 30, ~~2020~~2021 was ~~13%~~11% and 9%6% for the South African rand and British pound, respectively. A 10% fluctuation of foreign currency exchange rates would have had an immaterial effect on our results of operations and cash flows for all periods presented. The fluctuations of currencies in which we conduct business can both increase and decrease our overall revenue and expenses for any given fiscal period. Such volatility, even when it increases our revenue or decreases our expense, impacts our ability to accurately predict our future results and earnings.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations for the six months ended June 30, 2022 and 2021, however, our business could be affected by inflation in the future. Inflation is showing signs of acceleration in the U.S. and globally. We continue to monitor all inflation-driven costs, regardless of where they are incurred. If our costs were to become subject to significant inflationary pressures, the price increases implemented by our university clients and our own pricing strategies might not fully offset the higher costs, which could harm our business, financial condition and results of operations.

Item 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 ~~September~~June 30, ~~2021~~2022 at a reasonable assurance level. The scope of management’s assessment of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022 includes all of the Company’s consolidated operations except for, as permitted by SEC guidance for newly acquired businesses, those disclosure controls and procedures of edX that are subsumed by internal control over financial reporting. We acquired edX on November 16, 2021 and their results of operations are included in our financial statements effective with the fourth quarter of 2021. As of June 30, 2022, the assets acquired in the edX acquisition constituted approximately 3% of the Company’s consolidated assets and revenues constituted approximately 3% of the Company’s revenues for each of the three and six months ended June 30, 2022. Based on this evaluation, management concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2022.

Changes in Internal Control Over Financial Reporting

WeAs part of our ongoing integration activities related to the edX Acquisition, we continue to implement our controls and procedures and augment our controls to reflect the risks inherent in the acquisition. Throughout the integration process, we monitor these efforts and take corrective action as needed to reinforce the application of our controls and procedures. Other than the foregoing, we made no changes in internal control over financial reporting during the three months ended ~~September~~June 30, ~~2021~~2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this Item is incorporated herein by reference to Note 56 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~~You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, which was filed with the SEC on ~~February 25, 2021, remain current in all material respects, except for the additional risk factors below.~~March 1, 2022. These risks 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.

~~Risks Related~~ In addition, certain risks to our business from the ~~Term Loan Agreement~~impact of the impairment of certain intangible assets and goodwill are set forth below.

The ~~Term Loan Agreement contains financial covenants that may limit~~impairment of intangible assets and goodwill arising from our ~~operational flexibility.~~

~~In connection with the Membership Interest Purchase Agreement (the “Purchase Agreement”), we entered into the Term Loan Agreement, which requires us~~acquisitions could continue to ~~comply with several customary financial~~negatively impact and other restrictive covenants, such as maintaining leverage ratios in certain situations, maintaining insurance coverage, and restricting our ability to make certain investments. We are also required to maintain minimum Recurring Revenues (as defined in the Term Loan Agreement) as of the last day of any period of four consecutive fiscal quarters of the Company commencing with fiscal quarter ending September 30, 2021 through the Maturity Date (as defined in the Term Loan Agreement), which may limit our ability to engage in new lines of business, make certain investments, pay dividends, or enter into various transactions.

These covenants may limit the flexibility of our operations, and failure to meet any one of these financial covenants could result in a default under the Term Loan Agreement. If such a default were to occur, the lenders would have the right to terminate their commitments to provide loans under the Term Loan Agreement and declare any and all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, the lenders would have the right to proceed against the collateral in which we granted a first priority security interest to them, which consists of substantially all our assets. If the debt under the Term Loan Agreement were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could immediately materially and adversely affect our ~~business, financial condition,~~net income and ~~results of operations.~~

~~Risks Related to the edX Acquisition and the Combined Company~~

~~The edX Acquisition may not be consummated.~~

We have entered into a Purchase Agreement with edX Inc. (“edX”) and Circuit Sub LLC (“edX Sub”), pursuant to which we have agreed to acquire edX Sub (the “edX Acquisition”). Completion of the edX Acquisition is subject to a number of risks and uncertainties, and we can provide no assurance that the various closing conditions to the Purchase Agreement will be satisfied.

~~We may experience difficulties in integrating the operations of edX into our business and in realizing the expected benefits of the edX Acquisition.~~

The success of the edX Acquisition, if completed, will depend in part on our ability to realize the anticipated business opportunities from combining the operations of edX with our business in an efficient and effective manner. Once the edX Acquisition is completed, we will need to integrate the edX business with our existing business, which is a complex and time-consuming process. It is possible that the integration process could result in material challenges, including, without limitation:shareholders’ equity

•~~the~~ ~~disruption~~ ~~of each company’s ongoing businesses, including as~~When we acquire a ~~result of diverting management’s attention to integration efforts;~~

•~~tax costs or inefficiencies;~~

•~~unanticipated issues in integrating operations and systems, including administrative and information technology infrastructure and financial reporting and internal control systems;~~

~~Table of Contents~~

•~~the burden of complying with~~business, a wide variety of laws, including additional privacy, marketing and international trade and economic sanctions related laws, some of which did not apply to edX as a non-profit before the closing of the edX Acquisition;

•~~managing a larger combined company;~~

•~~maintaining employee morale and retaining key management and other employees;~~

•~~the possibility of faulty assumptions underlying expectations regarding the integration process or expected synergies;~~

•~~coordinating geographically separate organizations;~~

•~~increased exposure to foreign currency exchange rates as a result of a more~~ substantial portion of ~~our business being outside~~ the ~~U.S.;~~purchase price of the acquisition may be allocated to goodwill and other indefinite-lived intangible assets. We review goodwill and other indefinite-lived intangible assets for impairment annually, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or an indefinite-lived asset below its carrying value. During the three months ended March 31, 2022, we recorded impairment charges of $28.8 million and $30.0 million to goodwill and the indefinite-lived intangible asset, respectively.

•
~~additional regulatory scrutiny focused on edX~~

Future declines in the results of our acquisitions and other factors could cause us to record an impairment of all or ~~the combined company following the edX Acquisition; and~~

•~~unforeseen expenses associated with the integration~~a portion of the ~~edX business.~~

Many of these factors will be outside of the combined company’s control and any one of them could result in delays, increased costs, decreases in revenues and diversion of management’s time and energy, which could adversely affect our ability to achieve the anticipated benefits of the edX Acquisition and could harm our financial performance. If we are unable to successfully or timely integrate the operations of edX with our business, we may be unable to realize the anticipated benefits resulting from the edX Acquisition, and our business, results of operations and financial condition could be materially and adversely affected.

~~The market price of our common stock may decline as a result of the edX Acquisition.~~

The market price of our common stock may decline as a result of the edX Acquisition if, among other things, we are unable to achieve the expected growth in revenue, or if the strategic benefits or synergies are not realized or if the transaction costs related to the edX Acquisition are greater than expected. The market price of our common stock also may decline if we do not achieve the perceived benefits of the edX Acquisition as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the edX Acquisition on our financial results is not consistent with the expectations of financial or industry analysts.

We have incurred substantial transaction and integration expenses related to the edX Acquisition and expect to incur additional integration expenses related to edX that could negatively impact our financial results and cash flows.

We have incurred, and expect to continue to incur, a number of non-recurring costs associated the edX Acquisition and associated integration activities. For example, we expect to incur costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurredrelevant goodwill in the ~~integration process. Any expected efficiencies to offset these costs may not be achieved in the near term, or at all.~~

~~The future results of the combined company may be adversely impacted if the combined company does not effectively manage its expanded operations following the completion of the edX Acquisition.~~

Following the completion of the edX Acquisition, the size of the combined company’s business will increase significantly. Our ability to successfully manage this expanded business will depend, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of two discrete companies in different geographic locations, but also the increased scale and scope of the combined business with its associated increased costs and complexity. The combined company may not be successful and may not realize the expected operating leverage, synergies and strategic benefits currently anticipated from the edX Acquisition.

~~edX may underperform relative to our expectations.~~

~~edX~~future. We may not be able to achieve our business targets for businesses we previously acquired or will acquire in the ~~levels of revenue or earnings or create~~future, which could result in our incurring additional goodwill and other intangible assets impairment charges. Further declines in our market capitalization increase the ~~operating efficiencies~~risk that we ~~expect. edX’s business and financial performance are subject~~may be required to ~~certain risks and uncertainties, including, among others:~~

•perform another impairment analysis, which could result in an impairment of up to the ~~ability to maintain current enterprise and university clients when their existing contracts expire, including maintaining similar contract periods~~entire balance of our goodwill and other ~~terms, and~~intangible assets based on the quantitative assessment performed.

Implementation of our 2022 Strategic Realignment Plan may not be successful, which could affect our ability to ~~acquire new enterprise and university clients;~~increase our profitability.

~~Table of Contents~~

•On July 28, 2022, we announced a plan to accelerate our transition to a platform company (the “2022 Strategic Realignment Plan”). The plan is designed to reorient the ~~ability~~company around a single platform allowing us to ~~maintain~~pursue a portfolio-based marketing strategy that drives traffic to the ~~reputation and brand of~~ edX ~~including as a result~~marketplace. As part of the ~~edX business ceasing~~plan, the Company expects to optimize marketing spend, simplify the current executive structure to reduce silos, reduce employee headcount, and rationalize its real estate footprint. We expect to record in the aggregate approximately $35 million to $40 million in restructuring charges associated with the 2022 Strategic Realignment Plan. A significant portion of these charges will result in future cash expenditures. The plan is expected to be ~~operated~~substantially completed by ~~a non-profit entity following~~December 31, 2022 with cash expenditures relating to the ~~closing;~~

•employee headcount reduction continuing through the first quarter of 2024 and cash expenditures related to real estate continuing through the duration of lease terms ranging from 1 to 9 years. Although we believe that the 2022 Strategic Realignment Plan will reduce overhead costs, enhance operational efficiency, and result in improved profitability, we cannot guarantee that the ~~ability~~2022 Strategic Realignment Plan will achieve or sustain the expected benefits, or that the benefits, even if achieved, will be adequate to ~~expand offerings~~meet our long-term profitability and operational expectations. Risks associated with ~~existing enterprise~~the impact of the 2022 Strategic Realignment Plan also include additional unexpected costs and ~~university clients;~~

•~~the ability to increase demand for offerings~~negative impacts on ~~the edX platform~~our cash flows from operations and liquidity, employee attrition beyond our ~~ability to persuade learners to expand beyond the free~~intended reductions and ~~audit track offerings available~~adverse effects on ~~the edX platform; and~~

•~~the continued receipt~~employee morale, diversion of ~~high-quality content from university partners for deployment to learners.~~

~~If edX underperforms relative~~management attention, adverse effects to our ~~expectations, we may not be able~~reputation as an employer, which could make it more difficult for us to ~~achieve the levels of revenue, earnings or operating efficiencies that we expect,~~hire and ~~our business and operating results may be harmed.~~

~~We do not control and may be unable to predict~~retain employees in the future, ~~course~~and potential failure or delays to meet operational and growth targets due to the loss of qualified employees and the ~~Open edX Platform.~~

~~Following the closing of the edX Acquisition, many of~~potential negative impact on our offerings may be hosted on the open source learner management platform that is owned by the non-profit entity that will survive the edX Acquisition (the “Open edX Platform”). We do not own the Open edX Platform andreputation among our university partners. If we do not ~~control and may be unable to predict~~realize the ~~future course of open source technology development~~expected benefits or synergies of the ~~Open edX Platform, including the ongoing development~~2022 Strategic Realignment Plan, our business, financial condition, cash flows and results of ~~open source components used in the Open edX Platform, which~~operations could reduce the appeal of our offerings hosted on the Open edX Platform and damage our reputation. If open source software programmers, many of whom we will not employ, or our own internal programmers do not continue to develop and enhance the Open edX Platform, we may be ~~unable to meet student or university requirements.~~negatively impacted.

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

(a) Sales of Unregistered Securities

None.

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(b) Use of Proceeds from Public Offerings of Common Stock

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

(a) On November 4, 2021, we entered into (i) a First Amendment to Term Loan Credit and Guaranty Agreement (the “First Amendment”) with certain of our subsidiaries, Alter Domus (US) LLC, as administrative agent, and the lenders party thereto and (ii) a Joinder Agreement (collectively, with the First Amendment, the “Facility Amendments”) with Alter Domus (US) LLC, as administrative agent, and the lenders party thereto. The Facility Amendments amend the Term Loan Agreement primarily to provide for an incremental facility to us in an original principal amount of $100 million, the proceeds of which may be used for general corporate purposes.None.

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Item 6. Exhibits

Exhibit
Number

Description

Form

File No.

Exhibit
Number

Filing Date

Filed/Furnished Herewith

Exhibit
Number

Description

Form

File No.

Exhibit
Number

Filing Date

Filed/Furnished Herewith

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

8-K

001-36376

3.1

April 4, 2014

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

8-K

001-36376

3.1

June 10, 2022

3.2

Amended and Restated Bylaws of the Registrant.

8-K

001-36376

3.2

April 4, 2014

3.2

Amended and Restated Bylaws of the Registrant.

8-K

001-36376

3.2

June 10, 2022

10.1

First Amendment to Term Loan Credit and Guaranty Agreement.

10.2*

Joinder Agreement.

10.3 †

Amended and Restated 2014 Equity Incentive Plan.

10.1†

Separation, Consulting and Release Agreement, dated as of April 15, 2022, by and between 2U, Inc. and John Ellis.

8-K

001-36376

10.1

April 15, 2022

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.

31.1

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.

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.

32.1

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.

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 Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

101.INS

XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

104

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).



†						Indicates management contract or compensatory plan.
*						Portions of this exhibit have been omitted pursuant to Item 601(b) of Regulation S-K. The registrant hereby undertakes to supplementally furnish to the Securities and Exchange Commission copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

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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.

~~November 9, 2021~~July 28, 2022	By:	/s/ Christopher J. Paucek
		Christopher J. Paucek
		Chief Executive Officer

~~November 9, 2021~~July 28, 2022	By:	/s/ Paul S. Lalljie
		Paul S. Lalljie
		Chief Financial Officer

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	Degree Program Segment		Alternative Credential Segment		Total

	(in thousands)
Balance as of December 31, 2020	$	—	$	415,830	$	415,830
Foreign currency translation adjustments	—		(1,826)		(1,826)
Balance as of September 30, 2021	$	—	$	414,004	$	414,004