xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
2023
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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Delaware | 26-2335939 | ||||||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||
| 7900 Harkins Road | Lanham, | MD | 20706 | ||||||||||||
(Address of | (Zip Code) | ||||||||||||||
Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company operations; September 30, December 31, Assets Current assets Cash and cash equivalents $ 202,434 $ 168,730 Accounts receivable, net 42,332 7,860 Prepaid expenses and other assets 12,950 8,108 Total current assets 257,716 184,698 Property and equipment, net 45,025 15,596 Goodwill 67,600 — Amortizable intangible assets, net 84,795 34,131 Prepaid expenses and other assets, non-current 21,214 9,895 Total assets $ 476,350 $ 244,320 Liabilities and stockholders’ equity Current liabilities Accounts payable and accrued expenses $ 32,496 $ 14,724 Accrued compensation and related benefits 15,031 16,491 Deferred revenue 16,628 3,137 Other current liabilities 9,795 6,717 Total current liabilities 73,950 41,069 Non-current lease-related liabilities 17,626 7,620 Deferred government grant obligations 3,500 — Deferred tax liabilities, net 9,602 — Other non-current liabilities 2,160 394 Total liabilities 106,838 49,083 Commitments and contingencies (Note 6) 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, 52,136,056 shares issued and outstanding as of September 30, 2017; 47,151,635 shares issued and outstanding as of December 31, 2016 52 47 Additional paid-in capital 579,422 371,455 Accumulated deficit (206,345 ) (176,265 ) Accumulated other comprehensive loss (3,617 ) — Total stockholders’ equity 369,512 195,237 Total liabilities and stockholders’ equity $ 476,350 $ 244,320 Changes in Stockholders’ Equity Three Months Ended Nine Months Ended 2017 2016 2017 2016 Revenue $ 70,250 $ 51,960 $ 200,074 $ 148,514 Costs and expenses Curriculum and teaching 1,792 — 1,792 — Servicing and support 12,939 10,351 37,322 30,123 Technology and content development 12,735 8,670 33,080 24,787 Marketing and sales 41,311 28,165 113,223 79,304 General and administrative 17,227 11,569 44,821 32,960 Total costs and expenses 86,004 58,755 230,238 167,174 Loss from operations (15,754 ) (6,795 ) (30,164 ) (18,660 ) Interest income 18 37 267 220 Interest expense (36 ) — (37 ) (35 ) Other income (expense), net 59 — (972 ) — Loss before income taxes (15,713 ) (6,758 ) (30,906 ) (18,475 ) Income tax benefit 974 — 974 — Net loss $ (14,739 ) $ (6,758 ) $ (29,932 ) $ (18,475 ) Net loss per share, basic and diluted $ (0.30 ) $ (0.14 ) $ (0.62 ) $ (0.40 ) Weighted-average shares of common stock outstanding, basic and diluted 48,961,914 46,903,628 47,962,201 46,453,480 Other comprehensive loss Foreign currency translation adjustments, net of tax of $0 for all periods presented (3,617 ) — (3,617 ) — Comprehensive loss $ (18,356 ) $ (6,758 ) $ (33,549 ) $ (18,475 ) Additional Accumulated Total Common Stock Paid-In Accumulated Other Stockholders’ Shares Amount Capital Deficit Comprehensive Loss Equity Balance, December 31, 2016 47,151,635 $ 47 $ 371,455 $ (176,265 ) $ — $ 195,237 Cumulative-effect of accounting change (Note 2) — — 148 (148 ) — — Balance, December 31, 2016, adjusted 47,151,635 47 371,603 (176,413 ) — 195,237 Exercise of stock options 485,146 — 4,118 — — 4,118 Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 451,775 1 (1,310 ) — — (1,309 ) Issuance of common stock, net of issuance costs 4,047,500 4 189,474 — — 189,478 Stock-based compensation expense — — 15,537 — — 15,537 Net loss — — — (29,932 ) — (29,932 ) Foreign currency translation adjustment — — — — (3,617 ) (3,617 ) Balance, September 30, 2017 52,136,056 $ 52 $ 579,422 $ (206,345 ) $ (3,617 ) $ 369,512 Nine Months Ended 2017 2016 Cash flows from operating activities Net loss $ (29,932 ) $ (18,475 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 13,318 7,060 Stock-based compensation expense 15,537 11,593 Changes in operating assets and liabilities: Increase in accounts receivable, net (33,915 ) (19,999 ) Increase in prepaid expenses and other assets (1,638 ) (316 ) Increase in accounts payable and accrued expenses 6,101 2,810 (Decrease) increase in accrued compensation and related benefits (1,447 ) 386 Increase in deferred revenue 11,723 421 (Increase) decrease in payments to university clients (12,146 ) 1,320 Increase in other liabilities, net 5,349 778 Other 971 — Net cash used in operating activities (26,079 ) (14,422 ) Cash flows from investing activities Purchase of a business, net of cash acquired (97,102 ) — Purchases of property and equipment (20,924 ) (3,665 ) Additions of amortizable intangible assets (16,383 ) (12,493 ) Net cash used in investing activities (134,409 ) (16,158 ) Cash flows from financing activities Proceeds from issuance of common stock, net of offering costs 189,917 — Proceeds from exercise of stock options 4,118 4,324 Proceeds from debt 4,033 — Payments on debt (1,517 ) — Tax withholding payments associated with settlement of restricted stock units (1,310 ) (378 ) Other — (168 ) Net cash provided by financing activities 195,241 3,778 Effect of exchange rate changes on cash (1,049 ) — Net increase (decrease) in cash and cash equivalents 33,704 (26,802 ) Cash and cash equivalents, beginning of period 168,730 183,729 Cash and cash equivalents, end of period $ 202,434 $ 156,927 Consolidation an annual reporting basis. impairment charges. The convertible senior notes. 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. estimated remaining restructuring charges relate to leased facilities and will be recognized as expense over the remaining lease terms, ranging from 1 to 9 years. 2030 Notes to be repurchased, plus accrued and unpaid interest, if any. Grant Obligations Estimated Average Purchase Price (in thousands) Cash and cash equivalents $ 1,584 Current assets 3,568 Property and equipment, net 479 Amortizable intangible assets: Capitalized technology 3 3,000 Capitalized content development 4 7,700 University client relationships 9 25,000 Trade names and domain names 10 9,100 Goodwill* 70,147 Current liabilities (9,110 ) Non-current liabilities** (12,782 ) $ 98,686 Three Months Ended Nine Months Ended 2017 2016 2017 2016 (in thousands) Pro forma revenue $ 70,250 $ 58,703 $ 207,768 $ 160,508 Pro forma net loss (14,739 ) (7,386 ) (34,306 ) (24,535 ) Pro forma net loss per share, basic and diluted $ (0.30 ) $ (0.16 ) $ (0.72 ) $ (0.53 ) September 30, 2017 December 31, 2016 Estimated Gross Accumulated Net Gross Accumulated Net (in thousands) Capitalized technology 3 $ 26,678 $ (10,457 ) $ 16,221 $ 17,100 $ (7,822 ) $ 9,278 Capitalized content development 4 54,365 (19,913 ) 34,452 37,956 (15,367 ) 22,589 University client relationships 9 24,162 (671 ) 23,491 — — — Trade names and domain names 10 11,555 (924 ) 10,631 2,761 (497 ) 2,264 Total amortizable intangible assets, net $ 116,760 $ (31,965 ) $ 84,795 $ 57,817 $ (23,686 ) $ 34,131 Remainder of 2017 $ 4,538 2018 18,215 2019 16,248 2020 10,040 2021 6,666 Thereafter 18,566 Total $ 74,273 Condensed Consolidated Financial Statements (Continued) Outstanding restricted stock units Outstanding performance restricted stock units Three Months Ended Nine Months Ended 2017 2016 2017 2016 (in thousands) Curriculum and teaching $ 2 $ — $ 2 $ — Servicing and support 1,100 825 2,956 2,399 Technology and content development 904 633 2,447 1,739 Marketing and sales 463 360 1,235 973 General and administrative 3,678 2,255 8,897 6,482 Total stock-based compensation expense $ 6,147 $ 4,073 $ 15,537 $ 11,593 approximately 1.6 years. Three and Nine Months Ended 2017 2016 Stock options 4,912,509 4,943,556 Restricted stock units 1,435,180 1,411,878 Three Months Ended Nine Months Ended 2017 2016 2017 2016 Numerator (in thousands): Net loss $ (14,739 ) $ (6,758 ) $ (29,932 ) $ (18,475 ) Denominator: Weighted-average shares of common stock outstanding, basic and diluted 48,961,914 46,903,628 47,962,201 46,453,480 Net loss per share, basic and diluted $ (0.30 ) $ (0.14 ) $ (0.62 ) $ (0.40 ) Condensed Consolidated Financial Statements (Continued) Three Months Ended Nine Months Ended 2017 2016 2017 2016 (in thousands) Revenue by segment* Graduate Program Segment $ 65,924 $ 51,960 $ 195,748 $ 148,514 Short Course Segment** 4,326 — 4,326 — Total revenue $ 70,250 $ 51,960 $ 200,074 $ 148,514 Adjusted EBITDA (loss) by segment Graduate Program Segment $ (718 ) $ (188 ) $ 1,693 $ (7 ) Short Course Segment (3,002 ) — (3,002 ) — Total adjusted EBITDA (loss) $ (3,720 ) $ (188 ) $ (1,309 ) $ (7 ) Condensed Consolidated Financial Statements (Continued) Three Months Ended Nine Months Ended 2017 2016 2017 2016 (in thousands) Net loss $ (14,739 ) $ (6,758 ) $ (29,932 ) $ (18,475 ) Adjustments: Interest income (18 ) (37 ) (267 ) (220 ) Interest expense 36 — 37 35 Foreign currency (gain) loss (59 ) — 972 — Depreciation and amortization expense 5,887 2,534 13,318 7,060 Income tax benefit (974 ) — (974 ) — Stock-based compensation expense 6,147 4,073 15,537 11,593 Total adjustments 11,019 6,570 28,623 18,468 Adjusted EBITDA (loss)* $ (3,720 ) $ (188 ) $ (1,309 ) $ (7 ) September 30, December 31, (in thousands) Total assets Graduate Program Segment $ 361,455 $ 244,320 Short Course Segment* 114,895 — Total assets $ 476,350 $ 244,320 21, 2023. Components of Operating Results two- to six-month period following initial enrollment. licensing expenses. Technology and content content. fair value. debt obligations. Alternative Credential Segment. 2022 Three Months Ended Nine Months Ended 2017 2016 2017 2016 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses Curriculum and teaching 2.6 — 0.9 — Servicing and support 18.4 19.9 18.7 20.3 Technology and content development 18.1 16.7 16.5 16.7 Marketing and sales 58.8 54.2 56.6 53.4 General and administrative 24.5 22.3 22.4 22.2 Total costs and expenses 122.4 113.1 115.1 112.6 Loss from operations (22.4 ) (13.1 ) (15.1 ) (12.6 ) Other income (expense): Interest income 0.0 0.1 0.1 0.2 Interest expense (0.0 ) 0.0 0.0 0.0 Other income (expense), net 0.0 — (0.5 ) — Total other income (expense) 0.0 0.1 (0.4 ) 0.2 Loss before income taxes (22.4 ) (13.0 ) (15.5 ) (12.4 ) Income tax benefit 1.4 — 0.5 — Net loss (21.0 )% (13.0 )% (15.0 )% (12.4 )% Three Months Ended Nine Months Ended 2017 2016 2017 2016 Graduate program full course equivalent enrollments 24,062 19,126 71,822 55,658 Graduate program average revenue per full course equivalent enrollment $ 2,740 $ 2,717 $ 2,725 $ 2,668 Three Months Ended Nine Months Ended 2017 2016 2017 2016 Short courses full course equivalent enrollments 4,079 — * — Short courses average revenue per full course equivalent enrollment** $ 1,232 $ — $ * $ — Three Months Ended Nine Months Ended 2017 2016 2017 2016 (in thousands) Net loss $ (14,739 ) $ (6,758 ) $ (29,932 ) $ (18,475 ) Adjustments: Interest income (18 ) (37 ) (267 ) (220 ) Interest expense 36 — 37 35 Foreign currency (gain) loss (59 ) — 972 — Depreciation and amortization expense 5,887 2,534 13,318 7,060 Income tax benefit (974 ) — (974 ) — Stock-based compensation expense 6,147 4,073 15,537 11,593 Total adjustments 11,019 6,570 28,623 18,468 Adjusted EBITDA (loss) $ (3,720 ) $ (188 ) $ (1,309 ) $ (7 ) 2022 Nine Months Ended 2017 2016 (in thousands) Cash (used in) provided by: Operating activities $ (26,079 ) $ (14,422 ) Investing activities (134,409 ) (16,158 ) Financing activities 195,241 3,778 Effects of exchange rate changes on cash (1,049 ) — Net changes in cash and cash equivalents $ 33,704 $ (26,802 ) our debt. and Estimates impairment test result. Second Amended Credit Agreement were $378.1 million. A hypothetical increase in interest rates by 100 basis points would not have a material impact on our financial position. 2023 at a reasonable assurance level. Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 2.1 10-Q 001-36376 2.1 May 4, 2017 2.2 8-K 001-36376 2.1 July 3, 2017 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-36376 3.1 April 4, 2014 3.2 8-K 001-36376 3.2 April 4, 2014 31.1 X 31.2 X 32.1 X 32.2 X 101.INS XBRL Instance Document. X 101.SCH XBRL Taxonomy Extension Schema Document. X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. X Christopher J. Paucek Chief Executive Officer By: /s/ Chief Financial OfficerTitle 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 x☒ Yes o☐ Noand posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x☒ Yes o☐ Nocompany”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer x☒ o☐ o☐ o☐ o☐ o☐o☐ Yes x☒ NoNovember 2, 2017,August 4, 2023, there were 52,222,34381,419,968 shares of the registrant’s common stock, par value $0.001 per share, outstanding.332022 32022 42023 and 2022 2022 67172425252526282828282830and which are subject to substantial risks and uncertainties. All statements, other than statements of historical fact, are forward-looking statements. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statementsFactors that may cause actual results to differ materially from current expectations include, statements about:·but are not limited to:·· (“SaaS”) technology and technology-enabled services to university clients and students;· anticipated launch dates of graduate programs and short courses;·dependence on third parties to provide certain technological services or components used in our platform;·university clients and expand our graduate programs and short coursesofferings with existing university clients;·Get Educated International Proprietary Limited, or GetSmarter,our acquisitions, including our acquisition of edX, to achieve the expected benefits of the acquisitionour acquisitions and manage, expand and grow the combined company;·in the international, undergraduateincluding expansion internationally and non-degree alternative markets;·grow our enterprise business;acquirerecruit prospective students for our graduate programs and short courses;·offerings;affectmaintain or increase student retention rates in our graduatedegree programs;·growth strategy;·ability to attract, hire and retain qualified employees;cloud-based SaaS technology;· our expected expenses in future periods and their relationship to revenue;·platform; and· that we expect our cash balances and other available financial resources towill be sufficient to fund our operations.this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 20162022, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified timeframe,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. June 30,
2023December 31,
2022 (unaudited) Assets Current assets Cash and cash equivalents $ 53,301 $ 167,518 Restricted cash 13,398 15,060 Accounts receivable, net 87,347 62,826 Other receivables, net 29,685 33,813 Prepaid expenses and other assets 42,131 43,090 Total current assets 225,862 322,307 Other receivables, net, non-current 16,369 14,788 Property and equipment, net 42,691 45,855 Right-of-use assets 67,501 72,361 Goodwill 712,858 734,620 Intangible assets, net 403,440 549,755 Other assets, non-current 69,696 71,173 Total assets $ 1,538,417 $ 1,810,859 Liabilities and stockholders’ equity Current liabilities Accounts payable and accrued expenses $ 122,010 $ 110,020 Deferred revenue 107,189 90,161 Lease liability 14,735 13,909 Accrued restructuring liability 2,424 6,692 Other current liabilities 49,477 58,210 Total current liabilities 295,835 278,992 Long-term debt 856,399 928,564 Deferred tax liabilities, net 315 282 Lease liability, non-current 90,404 99,709 Other liabilities, non-current 1,946 1,796 Total liabilities 1,244,899 1,309,343 Commitments and contingencies (Note 5) 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, 80,957,654 shares issued and outstanding as of June 30, 2023; 78,334,666 shares issued and outstanding as of December 31, 2022 81 78 Additional paid-in capital 1,727,874 1,700,855 Accumulated deficit (1,407,688) (1,179,972) Accumulated other comprehensive loss (26,749) (19,445) Total stockholders’ equity 293,518 501,516 Total liabilities and stockholders’ equity $ 1,538,417 $ 1,810,859
2017
2016 Three Months Ended
June 30,Six Months Ended
June 30, 2023 2022 2023 2022 Revenue $ 222,089 $ 241,464 $ 460,593 $ 494,793 Costs and expenses Curriculum and teaching 34,102 32,145 66,942 65,375 Servicing and support 33,585 37,061 69,694 76,685 Technology and content development 44,250 45,616 89,734 96,673 Marketing and sales 95,882 116,350 196,057 247,332 General and administrative 32,657 41,523 71,907 91,758 Restructuring charges 3,622 16,753 8,497 17,540 Impairment charges 134,117 — 134,117 58,782 Total costs and expenses 378,215 289,448 636,948 654,145 Loss from operations (156,126) (47,984) (176,355) 0 (159,352) Interest income 371 241 736 498 Interest expense (17,916) (13,906) (35,873) (27,796) Debt modification expense and loss on debt extinguishment — — (16,735) — Other income (expense), net 227 (1,367) 834 (2,397) Loss before income taxes (173,444) (63,016) (227,393) (189,047) Income tax (expense) benefit (210) 164 (323) 415 Net loss $ (173,654) $ (62,852) $ (227,716) $ (188,632) Net loss per share, basic and diluted $ (2.16) $ (0.82) $ (2.85) $ (2.46) Weighted-average shares of common stock outstanding, basic and diluted 80,560,755 77,059,157 79,939,048 76,667,681 Other comprehensive loss Foreign currency translation adjustments, net of tax of $0 for all periods presented (4,001) (7,674) (7,304) (345) Comprehensive loss $ (177,655) $ (70,526) $ (235,020) $ (188,977) Operations and Comprehensive Lossand per share amounts)
September 30,
September 30, Common Stock Additional
Paid-In
CapitalAccumulated
DeficitAccumulated
Other
Comprehensive LossTotal
Stockholders’
Equity Shares Amount Balance, December 31, 2022 78,334,666 $ 78 $ 1,700,855 $ (1,179,972) $ (19,445) $ 501,516 Issuance of common stock in connection with employee stock purchase plan 207,160 1 1,176 — — 1,177 Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 1,047,765 1 (362) — — (361) Exercise of stock options 17,166 — 110 — — 110 Stock-based compensation expense — — 14,563 — — 14,563 Net loss — — — (54,062) — (54,062) Foreign currency translation adjustment — — — — (3,303) (3,303) Balance, March 31, 2023 79,606,757 80 1,716,342 (1,234,034) (22,748) 459,640 Issuance of common stock in connection with employee stock purchase plan 255,169 — 925 — — 925 Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 1,095,728 1 (376) — — (375) Stock-based compensation expense — — 10,983 — — 10,983 Net loss — — — (173,654) — (173,654) Foreign currency translation adjustment — — — — (4,001) (4,001) Balance, June 30, 2023 80,957,654 $ 81 $ 1,727,874 $ (1,407,688) $ (26,749) $ 293,518 Common Stock Additional
Paid-In
CapitalAccumulated
DeficitAccumulated
Other
Comprehensive LossTotal
Stockholders’
Equity Shares Amount 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 — — (114,551) 32,817 — (81,734) Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 577,416 1 (920) — — (919) Exercise of stock options 284,455 — 875 — — 875 Stock-based compensation expense — — 24,424 — — 24,424 Net loss — — — (125,780) — (125,780) Foreign currency translation adjustment — — — — 7,329 7,329 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 464,984 — (822) — — (822) Exercise of stock options 2,278 — 17 — — 17 Issuance of common stock in connection with employee stock purchase plan 136,039 — 1,282 — — 1,282 Stock-based compensation expense — — 22,349 — — 22,349 Net loss — — — (62,852) — (62,852) Foreign currency translation adjustment — — — — (7,674) (7,674) Balance, June 30, 2022 77,219,835 $ 77 $ 1,668,282 $ (1,046,453) $ (16,256) $ 605,650
September 30,Six Months Ended June 30, 2023 2022 Cash flows from operating activities Net loss $ (227,716) $ (188,632) Adjustments to reconcile net loss to net cash provided by operating activities: Non-cash interest expense 6,818 5,664 Depreciation and amortization expense 57,348 65,757 Stock-based compensation expense 25,546 46,773 Non-cash lease expense 8,804 11,405 Restructuring charges (13) — Impairment charges 134,117 58,782 Provision for credit losses 4,245 4,610 Loss on debt extinguishment 12,123 — Other (787) 2,920 Changes in operating assets and liabilities, net of assets and liabilities acquired: Accounts receivable, net (26,968) (6,632) Other receivables, net 723 (2,790) Prepaid expenses and other assets 4,358 2,585 Accounts payable and accrued expenses 5,014 3,484 Deferred revenue 16,736 45,549 Other liabilities, net (19,166) (20,831) Net cash provided by operating activities 1,182 28,644 Cash flows from investing activities Purchase of a business, net of cash acquired — 5,010 Additions of amortizable intangible assets (23,027) (34,854) Purchases of property and equipment (2,105) (5,218) Advances made to university clients — (310) Advances repaid by university clients 100 200 Other — (7) Net cash used in investing activities (25,032) (35,179) Cash flows from financing activities Proceeds from debt 269,223 385 Payments on debt (352,533) (3,793) Prepayment premium on extinguishment of senior secured term loan facility (5,666) — Payment of debt issuance costs (4,411) — Tax withholding payments associated with settlement of restricted stock units (736) (1,741) Proceeds from exercise of stock options 110 892 Proceeds from employee stock purchase plan share purchases 2,102 1,282 Net cash used in financing activities (91,911) (2,975) Effect of exchange rate changes on cash (118) (2,614) Net decrease in cash, cash equivalents and restricted cash (115,879) (12,124) Cash, cash equivalents and restricted cash, beginning of period 182,578 249,909 Cash, cash equivalents and restricted cash, end of period $ 66,699 $ 237,785 Recent Accounting Pronouncements2U, Inc. (the “Company”) provides an integrated solution comprisedPrinciples of cloud-based software-as-a-service (“SaaS”), fused with technology-enabled services (together, the “Platform”), that allows leading colleges and universities to deliver high-quality digital graduate programs and short courses, extending the universities’ reach and distinguishing their brands. The Company’s SaaS technology consists of (i) a comprehensive learning environment, which acts as the hub for all student and faculty academic and social interaction, and (ii) a comprehensive suite of integrated applications, which the Company uses to launch, operate and support the graduate programs it enables. The Company also provides a suite of technology-enabled services optimized with data analysis and machine learning techniques that support the complete lifecycle of a higher education program, including attracting students, advising prospective students through the admissions application process, providing technical, success coaching and other support, facilitating accessibility to individuals with disabilities, and facilitating in-program field placements.On July 1, 2017, the Company completed its acquisition of all of the outstanding equity interests of Get Educated International Proprietary Limited (“GetSmarter”), a leader in collaborating with universities to offer premium online short courses to working professionals. The acquisition will enable the Company to expand its total addressable market by offering short course certificates to students not seeking a full graduate degree and to provide a better product-market fit for international audiences. As a result of the acquisition of GetSmarter, the Company now manages its operations in two operating segments: the Graduate Program Segment and the Short Course Segment. See Note 3 for further information on the GetSmarter acquisition.Basis of Presentationand Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (“SEC”(the “SEC”). They include the assets, liabilities, results of operations and cash flows of the Company, including its wholly owned subsidiaries. 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 accompanying 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 ninesix months ended SeptemberJune 30, 20172023 and 20162022 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, 2016.2022. All significant intercompany accounts and transactions have been eliminated in consolidation. year-end condensed consolidated balance sheet data as of December 31, 2022 was derived from the audited financial statements, but does not include all disclosures required by GAAP.ReclassificationsThe Company has reclassified capitalized technology and content development, as well as other amortizable intangible assets, into amortizable intangible assets, netU.S. GAAP on the condensed consolidated balance sheets and condensed consolidated statements of cash flows. In addition, certain other prior period amounts in the condensed consolidated balance sheets and condensed consolidated statements of cash flows have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on total assets, total liabilities, total operating activities or total investing activities previously reported for any periods presented. the 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 andRecent Accounting PronouncementsIn January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates step two from the goodwill impairment test and requires an entity to recognize an impairment charge for the amount by which theamountamounts of a reporting unit exceeds its fair value, up to the amount of goodwill allocated to that reporting unit. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact that this standard will have on its consolidated financial position or related disclosures.In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business and provides new guidance in evaluating when a set of transferredcertain assets and activitiesliabilities, 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.business. The amendmentsliability in this ASU are effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company early adopted this ASU inan orderly transaction between market participants at the third quarter of 2017, in connection with the acquisition of GetSmarter.In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB Emerging Issues Task Force. The ASU requires companies to explain the changes in the combined total of restricted and unrestricted cash balances in the statement of cash flows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, with early adoption permitted. Adoption of the ASU is retrospective to each prior period presented. The Company early adopted this ASU in the second quarter of 2017. Adoption of this standard did not have a material impact on the presentation of prior periods.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice surrounding how certain transactions are classified in the statement of cash flows. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the effect that this standard will have on its consolidated statements of cash flows and related disclosures.In March 2016, the FASB issued ASU No. 2016-09, Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU simplifies various aspects related to the accounting and presentation of share-based payments. The guidance also allows employers to withhold shares to satisfy minimum statutory withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. Additionally, the guidance stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax withholding purposes should be classified as a financing activity on the statement of cash flows, and allows companies to elect an accounting policy to either estimate the share-based award forfeitures (and expense) or account for forfeitures (and expense) as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016. The Company adopted this ASU on January 1, 2017. In connection with the adoption of this standard, the Company elected to no longer apply an estimated forfeiture rate and will instead account for forfeitures as they occur. Accordingly, the Company applied the modified retrospective adoption approach, which resulted in a $0.1 million cumulative-effect reduction to retained earnings with an offset to additional paid-in-capital.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU introduces a model for lessees requiring most leases to be reported on the balance sheet. Lessor accounting remains substantially similar to current U.S. GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018. The Company is currently evaluating the effect that this ASU will have on its consolidated financial position and related disclosures, and believes that this standard may materially increase its other non-current assets and non-current liabilities on the consolidated balance sheets in order to record right-of-use assets and related liabilities for its existing operating leases.In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU requires that an entity’s management evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after themeasurement date, that the financial statements are issued. The amendments in this ASU are effective for annual reporting periods ending after December 15, 2016. The Company adopted this ASU on January 1, 2017. Adoption of this standard did not have a material impact on the Company’s financial reporting process.In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB deferred the mandatory effective date of this ASU by one year from January 1, 2017 to January 1, 2018. Early application is permitted, but not prior to the original effective date of January 1, 2017. Subsequently, the FASB has issued the following standards related to ASU No. 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASUNo. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company must adopt ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20 with ASU No. 2014-09 (collectively, the “new revenue standard”). The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. While we are still in the process of finalizing our assessment, primarily related to costs associated with revenue and revenue related to the Company’s Short Course Segment (established in July 2017 in connection with the Company’s acquisition of GetSmarter), the Company has concluded that the impact of the new revenue standard related to its Graduate Program Segment will not have a material impact on the amount and timing of revenue recognized. The Company will adopt the new revenue standard on January 1, 2018 and will determine the method of adoption in part based on the Company’s completionprincipal or, in the absence of its overall assessment.2.Summarya principal, most advantageous, market for the specific asset or liability.Significant Accounting PoliciesBusiness Combinationspurchase price of an acquisition is allocated to theCompany remeasures non-financial assets acquired, includingsuch 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 3 for further discussion of assets measured at fair value on a nonrecurring basis. The three tiers are defined as follows:assumed,in active markets; respective fair values at the acquisition date. Acquisition-related costs are expensed as incurred. The excess of the cost of an acquired entity of the net of the amounts assignedJune 30, 2023 and December 31, 2022. Refer to the assets acquired and liabilities assumed is recognized as goodwill. The net assets and results of operations of an acquired entity are included inNote 8for more information regarding the Company’s condensed consolidated financial statements from the acquisition date.Goodwillis the excess of purchase price over the fair value of identified net assets of the business acquired. and Other Indefinite-lived Intangible Assetsat leastand other indefinite-lived intangible assets for impairment annually, as of October 1, for possible impairment. Goodwill is reviewed for possible impairment between annual testsand more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unitgoodwill or an indefinite-lived asset below its carrying value. its goodwill at the reporting unit level, which is an operating segment or one level below an operating segment.the two-stepa quantitative goodwill impairment review. The Company will review itsreviews goodwill for impairment using the two-step processa 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 itsa qualitative assessment. Upon the completion of the two-step process,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 goodwill recorded.Concentrationreporting unit.Credit RiskFinancial instruments that subjecta reporting unit by utilizing a weighted combination of income-based and market-based approaches.concentrationsassumptions and estimates. These assumptions and estimates primarily include, but are not limited to, discount rates, terminal growth rates, and forecasts of creditrevenue and margins. 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.consist primarilyassociated with the operations at the time of cashthe 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.equivalentsconversion 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 accounts receivable. Allrequires 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. Balance as of December 31, 2022 Impairment Charges* Foreign Currency Translation Adjustments Balance as of June 30, 2023 (in thousands) Degree Program Segment Gross goodwill $ 192,459 $ — $ — $ 192,459 Accumulated impairments — — — — Net goodwill 192,459 — — 192,459 Alternative Credential Segment Gross goodwill $ 691,531 $ — $ (5,045) $ 686,486 Accumulated impairments (149,370) (16,717) — (166,087) Net goodwill 542,161 (16,717) (5,045) 520,399 Total Gross goodwill $ 883,990 $ — $ (5,045) $ 878,945 Accumulated impairments (149,370) (16,717) — (166,087) Net goodwill $ 734,620 $ (16,717) $ (5,045) $ 712,858 * Refer to Note 2 for further information about the impairment charges recorded during the second quarter of 2023. June 30, 2023 December 31, 2022 Estimated
Average Useful
Life (in years)Gross
Carrying
AmountAccumulated
AmortizationNet
Carrying
AmountGross
Carrying
AmountAccumulated
AmortizationNet
Carrying
Amount (in thousands) Definite-lived intangible assets Capitalized technology 3-5 $ 240,943 $ (149,270) $ 91,673 $ 226,761 $ (132,621) $ 94,140 Capitalized content development 4-5 254,970 (184,418) 70,552 261,844 (177,154) 84,690 University client relationships 9-10 208,298 (64,895) 143,403 210,138 (55,556) 154,582 Enterprise client relationships 10 14,300 (2,323) 11,977 14,300 (1,609) 12,691 Trade names and domain names 5-10 29,743 (22,208) 7,535 29,701 (21,749) 7,952 Total definite-lived intangible assets $ 748,254 $ (423,114) $ 325,140 $ 742,744 $ (388,689) $ 354,055 June 30, 2023 December 31, 2022 Gross
Carrying
AmountAccumulated
Impairments*Net
Carrying
AmountGross
Carrying
AmountAccumulated
Impairments*Net
Carrying
Amount (in thousands) Indefinite-lived intangible assets Trade names** $ 255,000 $ (176,700) $ 78,300 $ 255,000 $ (59,300) $ 195,700 Total indefinite-lived intangible assets $ 255,000 $ (176,700) $ 78,300 $ 255,000 $ (59,300) $ 195,700 * During the first and third quarter of 2022, the Company recorded impairment charges of $30.0 million and $29.3 million, respectively, related to its indefinite-lived intangible asset. During the second quarter of 2023, the Company recorded impairment charges of $117.4 million related to its indefinite-lived intangible asset. Refer to Note 2 for further information about these impairment charges. ** The Company concluded that due to changes in facts and circumstances, the trade name, which was previously classified as indefinite-lived, is now finite-lived. In the third quarter of 2023, the Company will begin to amortize the trade name on a straight-line basis over its estimated useful life. Future Amortization Expense (in thousands) Remainder of 2023 $ 41,852 2024 71,439 2025 50,143 2026 36,209 2027 27,232 Thereafter 122,904 Total $ 349,779 June 30, 2023 December 31, 2022 (in thousands) Accrued university and instructional staff compensation $ 35,861 $ 30,807 Accrued marketing expenses 19,847 15,988 Accrued compensation and related benefits 17,853 16,213 Accounts payable and other accrued expenses 48,449 47,012 Total accounts payable and accrued expenses $ 122,010 $ 110,020 institutions that management believes to be of high credit quality. Thestatements included in the Company’s bank accounts exceed federally insured limits at times. Annual Report on Form 10-K for the fiscal year ended December 31, 2022.not experienced any losses on cash to date. To manage accounts receivable risk,entered into agreements with certain of its university clients in the Degree Program Segment that require the Company maintainsto make future minimum payments in the event that certain program metrics are not achieved on an allowance for doubtful accounts, if needed.2017, four university clients each accounted for 10% or more2022, the Company completed the planned headcount reductions and consolidated its in-person operations to its offices in Lanham, Maryland and Cape Town, South Africa.the Graduate Program Segment’s revenue, as follows: $19.6approximately $35 million $10.8 million, $7.2 million and $7.1 million, which equals 28%, 15%, 10% and 10% of the segment’s total revenue, respectively. During the third quarter of 2016, three university clients each accounted for 10% or more of the Graduate Program Segment’s revenue, as follows: $18.4 million, $8.7 million and $5.5 million, which equals 35%, 17% and 11% of the segment’s total revenue, respectively.During the first nine months of 2017, four university clients each accounted for 10% or more of the Graduate Program Segment’s revenue, as follows: $58.4 million, $34.6 million, $21.0 million and $20.3 million, which equals 30%, 17%, 11% and 10% of the segment’s total revenue, respectively. During the first nine months of 2016, three university clients each accounted for 10% or more of the Graduate Program Segment’s revenue, as follows: $53.9 million, $25.5to $40 million. The Company recorded $3.2 million and $15.8 million which equals 36%, 17%in restructuring11%2022, respectively. The Company recorded $7.7 million and $15.8 million in restructuring charges related to the 2022 Strategic Realignment Plan for the six months ended June 30, 2023 and 2022, respectively. The majority of the segment’s total revenue, respectively.Three Months Ended
June 30, 2023Three 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 Lease and lease-related charges 2,129 682 — — Professional and other fees relating to restructuring activities 404 — 554 — Other 13 — — — 2,546 682 9,326 6,431 Other restructuring charges* $ 373 $ 21 $ 926 $ 70 Total restructuring charges $ 2,919 $ 703 $ 10,252 $ 6,501 Six Months Ended
June 30, 2023Six 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 $ 1,231 $ — $ 8,772 $ 6,431 Lease and lease-related charges 4,272 1,441 — — Professional and other fees relating to restructuring activities 744 — 554 — Other 26 — — — 6,273 1,441 9,326 6,431 Other restructuring charges* $ 753 $ 30 $ 1,615 $ 168 Total restructuring charges $ 7,026 $ 1,471 $ 10,941 $ 6,599 * Includes severance and severance-related costs and lease-related charges. Balance as of December 31, 2022 Additional Costs Cash Payments Balance as of June 30, 2023 (in thousands) 2022 Strategic Realignment Plan Severance and severance-related costs $ 5,225 $ 1,231 $ (4,696) $ 1,760 Professional and other fees relating to restructuring activities 923 825 (1,292) 456 Lease and lease-related charges 83 6,486 (6,545) 24 Other severance and severance-related costs 461 211 (488) 184 Total restructuring $ 6,692 $ 8,753 $ (13,021) $ 2,424 Three Months Ended
June 30,Six Months Ended
June 30,2023 2022 2023 2022 (in thousands) Operating lease expense $ 4,346 $ 5,611 $ 8,803 $ 11,372 Short-term lease expense 35 157 69 268 Variable lease expense 1,362 1,546 3,269 3,369 Sublease income (481) (228) (908) (456) Total lease expense $ 5,262 $ 7,086 $ 11,233 $ 14,553 June 30, 2023 (in thousands) Remainder of 2023 $ 12,248 2024 24,227 2025 20,446 2026 20,997 2027 21,571 Thereafter 49,412 Total lease payments 148,901 Less: imputed interest (43,762) Total lease liability $ 105,139 June 30, 2023 December 31, 2022 (in thousands) Term loan facilities $ 378,100 $ 566,622 Revolving facility — — Convertible senior notes 527,000 380,000 Deferred government grant obligations 3,500 3,500 Other borrowings 2,685 3,688 Less: unamortized debt discount and issuance costs (49,673) (17,666) Total debt 861,612 936,144 Less: current portion of long-term debt (5,213) (7,580) Total long-term debt $ 856,399 $ 928,564 2017,2021 through the maturity date and (ii) three university clients each accountedfinancial covenants solely for 10% or morethe benefit of the Graduate Program Segment’s accounts receivablerevolving lenders, in respect of a maximum consolidated senior secured net leverage ratio, a maximum consolidated total net leverage ratio, and a minimum consolidated fixed charge coverage ratio. The Second Amended Credit 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 Second Amended Credit Agreement); failure of any material provision of the Second Amended Credit 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 Second Amended Credit Agreement. As of both June 30, 2023 and December 31, 2022, the Company was in compliance with the covenants under the Second Amended Credit Agreement.as follows: $14.4 million, $6.7of unamortized debt discount and issuance costs related to the term loan under the Second Amended Credit Agreement was $25.2 million and $6.4$12.8 million, which equals 34%respectively. For the three months ended June 30, 2023 and 2022, the associated effective interest rate for the term loan under the Second Amended Credit Agreement was approximately 14.4% and 8.0%, 16%respectively. For the six months ended June 30, 2023 and 15%2022, the associated effective interest rate for the term loan under the Second Amended Credit Agreement was approximately 14.1% and 8.0%, respectively. For the three and six months ended June 30, 2023 the associated interest rate for the revolving loan under the Second Amended Credit Agreement was approximately 10.6% and 10.4%, respectively. For the three months ended June 30, 2023 and 2022, the associated interest expense for these facilities was approximately $13.3 million and $11.1 million, respectively. For the six months ended June 30, 2023 and 2022, the associated interest expense for these facilities was approximately $26.5 million and $22.2 million, respectively.segment’s total accounts receivable,Securities Act of 1933, as amended. The net proceeds from the offering of the 2025 Notes were approximately $369.6 million after deducting the initial purchasers’ discounts, commissions and offering expenses payable by the Company.June 30, 2023 December 31, 2022 (in thousands) Principal $ 380,000 $ 380,000 Unamortized issuance costs (3,854) (4,898) Net carrying amount $ 376,146 $ 375,102 December 31, 2016, two university clients each accounted for 10% or moreJune 30, 2023, the conditions allowing holders of the Graduate Program Segment’s accounts receivable2025 Notes to convert had not been met and the Company has the right under the 2025 Indenture to determine the method of settlement at the time of conversion. Therefore, the 2025 Notes are classified as non-current on the condensed consolidated balance sheets.follows: $5.8the 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.June 30, 2023 (in thousands) Principal $ 147,000 Unamortized debt discount and issuance costs (20,594) Net carrying amount $ 126,406 $1.4$4.3 million, which equals 74%respectively.17%after January 11, 2023 until the close of business on the second scheduled trading day immediately before the maturity date;segment’s total accounts receivable, respectively.DuringOwnership Cap (as defined below), over which threshold a settlement of such conversion could be made in cash; andthird quarteroccurrence of a default with regard to the Company’s financial covenants under the Indenture.first nine monthsis subject to adjustment upon the occurrence of 2017, Short Course Segment revenue associated with two university clients each accountedcertain specified events as set forth in the 2030 Indenture. Upon conversion, the Company will pay or deliver, as applicable, cash, shares of Common Stock or a combination of cash and shares of Common Stock, at the Company’s election (subject to aforementioned Ownership Cap). Upon the occurrence of a “Make-Whole Fundamental Change” (as defined in the 2030 Indenture) the Company will in certain circumstances increase the conversion rate for 10% or morea specified period of time.segment’s total revenue, as follows: $2.4 million and $1.1 million, which equals 56% and 26%2030 Notes may require the Company to repurchase their 2030 Notes at a cash repurchase price equal to the principal amount of the segment’s total revenue, respectively.Grantsas deferred government grant obligations within long-term liabilitiesdebt on the Company’s condensed consolidated balance sheets until all contingencies are resolved and the grant is grants are determined to be realized.Income TaxesThe Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.The Company records net deferred tax assets to the extent that it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations; this evaluation is made on an ongoing basis. In the event the Company was to determine that it was able to realize net deferred income tax assets in the future in excess of their net recorded amount, the Company would record an adjustment to the valuation allowance, which would reduce the provision for income taxes.Revenue RecognitionConsistent with the Company’s revenue recognition policy related to the Graduate Program Segment, revenue related to the Short Course Segment is recognized when all of the following conditions are met: (i) persuasive evidence of an arrangement exists, (ii) rendering of services is complete, (iii) fees are fixed or determinable and (iv) collection of fees is reasonably assured. Please refer to Note 2 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of the Company’s Annual Report on Form 10-K, filed with the SEC on February 24, 2017, for the significant accounting policy on revenue recognition of the Graduate Program Segment.With respect to the Company’s Graduate Program Segment, the Company recognizes revenue based on its share of net program proceeds from its university clients. With respect to the Company’s Short Course Segment, the Company derives its revenue from providing premium online short courses to working professionals. A portion of revenues is shared with the university clients, in the form of a royalty, for providing the content and certifying the course. The Company has determineda total of two 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 it is the principal in this arrangement asmay be forgiven, provided that the Company is the entity thatattains certain conditions related to employment levels at 2U’s Lanham, Maryland headquarters. The conditional loan with Prince George’s County has promised to provide the short course to the student. Therefore, revenues for the Short Course Segment reflect gross proceeds from studentsa maturity date of June 22, 2027 and the university client royalty amounts are recorded as an expense within curriculum and teaching on the condensed consolidated statements of operations and comprehensive loss.Foreign Currency TranslationFor the portion of the Company’s non-U.S. business where the local currency is the functional currency, operating results are translated into U.S. dollars using the average rate of exchange for the period, and assets and liabilities are converted at the closing rates on the period end date. Gains and losses on translation of these accounts are accumulated and reported as a separate component of stockholder’s equity and comprehensive loss.For any transaction that is in a currency different from the entity’s functional currency, the Company records a gain or loss based on the difference between the exchange rate at the transaction date and the exchange rate at the transaction settlement date (or rate at period end, if unsettled) as other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.Non-cash Investing and Financing ActivitiesDuring the first nine months of 2017, the Company had new capital asset additions of $49.6 million, which was comprised of $25.0 million of leasehold improvements, $17.0 million in capitalized technology and content development and $7.6 million of other property and equipment. The $49.6 million increase consisted of $37.3 million in cash capital expenditures,conditional loan agreement with the remainder primarily comprisedState of landlord funded leasehold improvements.During the first nine months of 2016, the Company had new capital asset additions of $18.4 million, which was primarily comprised of $4.4 million of leasehold improvements and $13.0 million in capitalized technology and content development. The $18.4 million increase consisted of $16.2 million in cash capital expenditures, with the remainder primarily comprised of landlord funded leasehold improvements.3.Business CombinationOn July 1, 2017, the Company, throughMaryland has a wholly owned subsidiary (“2U South Africa”), completed its acquisition of all of the outstanding equity interests of GetSmarter pursuant to a Share Sale Agreement, dated as of May 1, 2017 (the “Share Sale Agreement”), as amended by an addendum, dated asmaturity date of June 29, 2017, for a net purchase price of $98.7 million in cash. In addition, 2U South Africa agreed to pay a potential earn out payment of up to $20.0 million, subject to the achievement of certain financial milestones in calendar years 2017 and 2018. Under the terms of the Share Sale Agreement, the Company has issued restricted stock units for shares of its common stock, par value $0.001 per share, to certain employees and officers of GetSmarter. These awards are subject to the 2014 2U, Inc. Equity Incentive Plan and will vest over either a two or four-year period. As a result of the transaction, GetSmarter became an indirect wholly owned subsidiary of the Company.30, 2028. The net assets and results of operations of GetSmarter are included in the Company’s condensed consolidated financial statements and in the newly established Short Course Segment as of July 1, 2017.The Company has completed its provisional valuation of the assets acquired and liabilities assumed of GetSmarter. The fair values assigned to the intangible assets acquired were based on preliminary estimates, assumptions, and other information compiled by management. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition:
Useful Life (in years)
Allocation* During the third quarter of 2017, the provisional goodwill balance changed as a result of a currency translation adjustment of approximately $2.6 million.** Included in non-current liabilities is contingent consideration in the amount of $1.9 million.The Company’s provisional valuation of the assets acquired and liabilities assumed is preliminary and the fair values recorded were based upon provisional valuations and estimates and assumptions used in such valuations are subject to change, which could be significant, within the measurement period (up to one year from the acquisition date). As of September 30, 2017, the Company is awaiting information to finalize the valuation, primarilyinterest expense related to the recording of intangible assets, contingent consideration, the related deferred taxes and the final amount of residual goodwill.The goodwill balance is primarily attributed to the assembled workforce, expanded market opportunities and cost and other operating synergies anticipated upon the integration of the operations of 2U and GetSmarter. The goodwill resulting from the acquisition is not expected to be tax deductible.The unaudited pro forma combined financial information below is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the business combination occurred as of the dates indicated or what the results would be for any future periods. The following table presents the Company’s unaudited pro forma combined revenue and pro forma combined net loss,these loans for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016 as if the acquisition2022 was immaterial. As of GetSmarter had occurred on January 1, 2016:
September 30,
September 30,4.Amortizable Intangible AssetsAmortizable intangible assets consisted of the following as of:
Average Useful
Life (in years)
Carrying
Amount
Amortization
Carrying
Amount
Carrying
Amount
Amortization
Carrying
AmountIncluded in the amounts presented above are $10.5 million and $8.7 million of in process capitalized technology and content development as of SeptemberJune 30, 20172023 and December 31, 2016, respectively.The Company recorded amortization expense related to amortizable intangible assets of $3.62022, the Company’s combined accrued interest balance associated with the deferred government grant obligations was $0.7 million and $2.1$0.6 million, for the third quarterrespectively.amortizable intangible assetsCondensed Consolidated Financial Statements (Continued)$8.7 million and $5.7 million for the first nine months of 2017 and 2016, respectively.As of September 30, 2017, the estimated future amortization expense for amortizable intangible assets placed in service is as follows (in thousands):5.Accrued ExpensesAs of September 30, 2017, accrued expenses included $12.5 million in marketing costs and $5.6 million in facility costs for both operational expenses and improvements. As of December 31, 2016, accrued expenses included $5.6 million of marketing costs.6.Commitments and ContingenciesLegal ContingenciesFrom time to time, the Company may become involved in legal proceedings or other contingencies in the ordinary course of its business. The Company is not presently involved in any legal proceeding or other contingency that, if determined adversely to it, would individually or in the aggregate have a material adverse effect on its business, operating results, financial condition or cash flows. Accordingly, the Company does not believe that there is a reasonable possibility that a material loss exceeding amounts already recognized may have been incurred as of the date of the balance sheets presented herein.Operating LeasesIn February 2017, the Company signed a lease for new office space in Brooklyn, New York, which is expected to be occupied beginning in 2018. The lease covers three floors totaling approximately 80,000 square feet, requires total future minimum lease payments of approximately $51.8 million and will expire approximately eleven years and nine months after the July 1, 2017 lease commencement date. Related to this lease, the Company could be eligible for certain state and local incentives that are dependent on construction build, employment levels, the Company’s taxable income and other factors. The Company is in the process of applying for such eligibility, but is not currently able to assess the potential benefit these incentives may yield over the lease term.7.DebtLines of CreditIn June 2017, the Company and Comerica amended its credit agreement for a $25.0 million revolving line of credit pursuant to which, among other things, Comerica consented to the Company’s acquisition of GetSmarter and the Company’s formation of certain subsidiaries in connection therewith, and the parties extended the maturity date through July 31, 2017. In the third quarter of 2017, the Company further amended its credit agreement to extend the maturity date through December 31, 2017. No amounts were outstanding under this credit agreement as of September 30, 2017 or December 31, 2016. The Company intends to extend this agreement under comparable terms, prior to expiration. prior to September 30, 2017 require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of SeptemberJune 30, 2017,2023, the Company has entered into standby letters of credit totaling $11.5$12.7 million as security deposits for the applicable leased facilities. Additionally,facilities and in June 2017,connection with the deferred government grant obligations.June 30, 2023 (in thousands) Remainder of 2023 $ 1,900 2024 3,800 2025 383,800 2026 368,600 2027* 1,500 Thereafter* 149,000 Total future principal payments $ 908,600 * Amounts due in 2027 and thereafter include $1.5 million and $2.0 million, respectively, of conditional loan obligations that may be forgiven, provided that the Company attains certain conditions related to employment levels at 2U’s Lanham, Maryland headquarters. standby lettersthe Second Amended Credit Agreement, which amended the Amended Term Loan Facilities. Certain investors in the Amended Term Loan Facilities participated in the Second Amended Credit Agreement and the change in the present value of credit totaling $3.5 millionfuture cash flows between the investments was less than 10%. Accordingly, the Company accounted for this refinancing event for these investors as a debt modification. Certain investors in the Amended Term Loan Facilities did not participate in the Second Amended Credit Agreement or the change in the present value of future cash flows between the investments was greater than 10%. Accordingly, the Company accounted for this refinancing event for these investors as a debt extinguishment. In applying debt modification accounting in connection with two government grants, as described later in this Note. These lettersrefinancing event, during the first quarter of credit reduced the aggregate amount2023, the Company may borrow under its revolving linerecorded $12.1 million in loss on debt extinguishment and $4.6 million in debt modification expense.$10.0 million.Short Course Segment has $1.9 millionincome tax provisions for all periods consist of revolving debt facilities. Allfederal, state and foreign income taxes. The income tax provision for the three and six months ended June 30, 2023 and 2022 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.facilities mature on December 31, 2017 with payment due on January 1, 2018. As of Septemberthree and six months ended June 30, 2017, no significant amounts were outstanding under these facilities2023 and 2022 was less than 1%. For the interest rate was 10.25%.Government GrantsOnthree months ended June 22, 2017, the Company executed a conditional loan agreement and received financing from Prince George’s County, Maryland that provides for a grant in the form of a forgivable loan of $1.5 million. The financing was secured by a letter of credit pursuant to30, 2023, the Company’s line of credit with Comerica Bank. The conditional loan obligation is recorded as “Deferred government grant obligations” onincome tax expense was $0.2 million. For the condensed consolidated balance sheets. The proceeds from this loan are to be used in connection with the relocation of 2U’s headquarters, leasehold improvements thereto and other purposes. The loan has a maturity date ofthree months ended June 22, 2027, and bears interest at a rate of 3% per annum. If 2U does not employ at least 650 employees at its Lanham headquarters at any time during the term of the loan period or otherwise defaults on the loan, the entire principal balance, plus accrued interest, will become due and payable. If 2U does not employ at least 1,300 employees at its Lanham headquarters by January 1, 2020, the Company will be required to repay a prorated portion of the loan ($2,252 per employee, for every employee below 1,300), plus interest. During the third quarter and first nine months of 2017, the Company did not incur a material amount of interest expense on this forgivable loan.On June 27, 2017, 2U Harkins Road LLC (a wholly owned subsidiary of the Company) executed a loan agreement and received financing from the Department of Commerce (a principal department of the State of Maryland) that provides for a grant in the form of a forgivable loan of $2.0 million. The financing was secured by a letter of credit pursuant to30, 2022, the Company’s line of credit with Comerica Bank. The conditional loan obligation is recorded as “Deferred government grant obligations” on the condensed consolidated balance sheets. The proceeds from this loan are to be used in connection with the relocation of 2U’s headquarters, leasehold improvements thereto and other purposes. The loan has a maturity date of December 31, 2026, and bears interest at a rate of 3% per annum. If 2U does not employ at least 650 employees at its Lanham headquarters at any time during the term of the loan period or otherwise defaults on the loan, the entire principal balance, plus accrued interest, will become due and payable. If 2U does not employ at least 1,600 employees at its Lanham headquarters by December 31, 2020, and at each December 31st thereafter through 2026, the Company will be required to repay a prorated portion of the loan ($2,105 per employee, for every employee below 1,600), plus interest. During the third quarter and first nine months of 2017, the Company did not incur a material amount of interest expense on this forgivable loan.8.Income TaxesDuring the third quarter and first nine months of 2017, the Company recognized a $1.0 million tax benefit. Theincome tax benefit primarily relates towas $0.2 million. For the amortization of intangible assets established in connection withsix months ended June 30, 2023, the GetSmarter acquisition and losses generated fromCompany’s income tax expense was $0.3 million. For the acquired operations. six months ended June 30, 2022, the Company’s income tax benefit was $0.4 million.its current and accumulated net operating losses.9.On September 7, 2017, the Company sold 4,047,500 shares of its common stock to the public, including 547,500 shares sold pursuant to the underwriters’ over-allotment option. The Company received net proceeds of $189.5 million, which the Company intends to use for general corporate purposes, including expenditures for graduate program and short course marketing, technology and content development, in connection with new graduate program and short course launches and growing existing graduate programs and short courses.SeptemberJune 30, 2017,2023, the Company was authorized to issue 205,000,000 total shares of capital stock, consisting of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. At SeptemberAs of June 30, 2017,2023, there were 80,957,654 shares of common stock outstanding, and the Company had reserved a total of 10,757,99250,543,589 of its authorized shares of common stock for future issuance as follows:Outstanding stock options4,912,509Possible future issuance under 2014 Equity Incentive Plan4,410,303Shares Reserved for Future Issuance 6,384,461 1,435,1802,153,760 Outstanding stock options 4,892,309 Reserved for convertible senior notes 37,113,059 Total shares of common stock reserved for future issuance 50,543,589 10,757,992The Compensation Committee of the Company’s board of directors, acting under authority delegated from the board of directors, granted in October 2017 option awards to employees to purchase an aggregate of 32,356 shares of common stock at a weighted-average exercise price of $56.77 and restricted stock unit awards for an aggregate of 20,126 shares of common stock, in each case under the 2014 Equity Incentive Plan (as defined in Note 10 below).10.The Company provides equity-based compensation awards to employees, independent contractors and directors as an effective means for attracting, retaining and motivating such individuals. share-basedstock-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 and began using the 2014 Planawards. The shares available for grants of new equity awards.The number of shares of the Company’s common stock that may be issuedfuture issuance under the 2014 Plan will automatically increase on January 1st of each year, for a period of ten years, from January 1, 2015 continuing through January 1, 2024, by 5% of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year, or a lesser number of shares as may be determined by the Company’s board of directors. The shares available for issuance increased by 2,357,5793,916,733 and 2,288,8203,782,719 on January 1, 20172023 and 2016,2022, respectively, pursuant to the automatic share reserve increase provision underin the 2014 Plan.Stock-Based Compensation ExpenseStock-based compensation expense related to stock-based awards is included in the following line items in the accompanying condensed consolidated statements of operations and comprehensive loss:
September 30,
September 30,Employee Stock Purchase PlanOn June 5, 2017, 2U’s stockholders voted upon and approved the Company’sThe ESPP providesDuring the second quarter of 2023, shares available for (i) multiple offering periods each year and (ii) that the purchase price for shares of 2U common stock purchased under the ESPP will not be less than 85%increased by 2,000,000 shares, pursuant to an amendment to the Company’s ESPP to increase the number of authorized shares available under such plan. As of June 30, 2023, 1,917,341 shares remained available for purchase under the ESPP. Three Months Ended
June 30,Six Months Ended
June 30, 2023 2022 2023 2022 (in thousands) Curriculum and teaching $ 51 $ 49 $ 91 $ 96 Servicing and support 2,239 4,321 5,516 8,680 Technology and content development 1,960 2,635 3,617 6,497 Marketing and sales 1,369 1,722 2,523 3,848 General and administrative 5,364 13,622 13,799 27,652 Total stock-based compensation expense $ 10,983 $ 22,349 $ 25,546 $ 46,773 Number of
UnitsWeighted-
Average Grant
Date Fair Value per ShareOutstanding balance as of December 31, 2022 4,739,861 $ 14.24 Granted 3,865,105 6.58 Vested (1,954,263) 15.68 Forfeited (266,242) 13.34 Outstanding balance as of June 30, 2023 6,384,461 $ 9.20 commonPRSU activity for the period indicated. As of June 30, 2023 and December 31, 2022, there were 1.4 million and 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 June 30, 2023 and December 31, 2022, and have been excluded from the tables below. No PRSUs were granted during each of the three months ended June 30, 2023 and 2022.Six Months Ended
June 30, 2023Risk-free interest rate 4.68% Expected term (years) 1.00 Expected volatility 108% Dividend yield 0% Weighted-average grant date fair value of the TSR-performance component $0.39 Six Months Ended
June 30, 2022Risk-free interest rate 0.39% – 1.88% Expected term (years) 1.00 – 3.00 Expected volatility 49% – 97% Dividend yield 0% Weighted-average grant date fair value per share $18.67 Number of
UnitsWeighted-
Average Grant
Date Fair Value per ShareOutstanding balance as of December 31, 2022 1,651,864 $ 22.74 Granted 1,176,077 9.55 Vested — — Forfeited (674,181) 20.22 Outstanding balance as of June 30, 2023 2,153,760 $ 16.08 onoptions to eligible participants. Stock options issued under the purchase date. NotwithstandingStock Plans generally are exercisable for periods not to exceed 10 years and generally vest over a three- or four-year period.foregoing,assumptions used for estimating the Compensation Committeefair value of the stock options granted for the period presented. No stock options were granted during the three months ended June 30, 2023.Three Months Ended
June 30, 2022Risk-free interest rate 2.8% – 3.0% Expected term (years) 5.63 – 5.78 Expected volatility 75% – 77% Dividend yield 0% Weighted-average grant date fair value per share $7.03 Six Months Ended
June 30,2023 2022 Risk-free interest rate 3.6% 1.9% – 3.0% Expected term (years) 5.69 5.63 – 5.78 Expected volatility 87% 75% – 77% Dividend yield 0% 0% Weighted-average grant date fair value per share $4.93 $6.99 Boardstock option activity for the period indicated. Number of
OptionsWeighted-Average
Exercise Price per
ShareWeighted-Average
Remaining
Contractual Term
(in years)Aggregate
Intrinsic
Value
(in thousands)Outstanding balance as of December 31, 2022 5,195,538 $ 25.28 5.88 $ 78 Granted 66,910 6.76 9.74 Exercised (17,166) 6.38 0.67 Forfeited (127,532) 10.96 Expired (225,441) 12.73 Outstanding balance as of June 30, 2023 4,892,309 26.05 5.42 — Exercisable as of June 30, 2023 3,411,916 $ 31.71 4.06 $ — Directors may exercise its discretion, subject to certain conditions, to make changes to certain aspects ofoptions exercised during the ESPP including, but not limitedsix months ended June 30, 2023 and 2022 was $0.1 million and $3.2 million, respectively.lengthunvested options not yet recognized as of the offering periodsJune 30, 2023 was $10.4 million, and that the purchase price will be 85%recognized over a weighted-average period of the lesser of the fair market value of 2U’s common stock on the purchase date or the fair market value of 2U’s common stock on the first day of the offering period. The first offering period is expected to begin onJanuary 1, 2018, and will end on June 30, 2018. Eligible employees will be able to select a rate of payroll deduction between 1% and 15% of their salary or wage compensation received from the Company as in effect at the start of the offering period, subject to a maximum payroll deduction per calendar year of $25,000. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 1,000,000 shares of 2U’s common stock may be issued under the ESPP, subject to adjustments for certain capital transactions.three and nine months ended September 30, 2017 and 2016:
September 30,Basicperiods indicated. Three and Six Months Ended
June 30, 2023 2022 Stock options 4,892,309 5,964,973 Restricted stock units 6,384,461 5,477,279 Performance restricted stock units 2,153,760 2,515,924 Shares related to convertible senior notes 29,776,706 13,443,374 Total antidilutive securities 43,207,236 27,401,550 is calculated as follows:
September 30,
September 30,12.Segment InformationAs a resultfor each of the acquisition of GetSmarter on July 1, 2017, the Company’s operations consist of two operating segmentsperiods indicated. Three Months Ended
June 30,Six Months Ended
June 30, 2023 2022 2023 2022 Numerator (in thousands): Net loss $ (173,654) $ (62,852) $ (227,716) $ (188,632) Denominator: Weighted-average shares of common stock outstanding, basic and diluted 80,560,755 77,059,157 79,939,048 76,667,681 Net loss per share, basic and diluted $ (2.16) $ (0.82) $ (2.85) $ (2.46) GraduateDegree Program Segment and the Short CourseAlternative Credential Segment. The Company’s Graduatereportable 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 providesincludes the technology and services provided to well-recognized nonprofit colleges and universities primarily in the United States to enable the online delivery of graduatedegree programs. The Company’s Short CourseAlternative Credential Segment providesincludes the premium online short coursesexecutive education programs and technical skills-based boot camps provided through relationships with nonprofit colleges, universities, and other leading organizations.working professionals. The reportable segments represent businesses for which separate financial information is utilized by the chief operating decision maker for the purpose of allocating resources and evaluating performance.summarizespresents financial information regarding each of the Company’s reportable segment’s results of operations for each of the periods presented:
September 30,
September 30, Three Months Ended
June 30,Six Months Ended
June 30, 2023 2022 2023 2022 (dollars in thousands) Revenue by segment* Degree Program Segment $ 119,494 $ 143,090 $ 259,974 $ 297,257 Alternative Credential Segment 102,595 98,374 200,619 197,536 Total revenue $ 222,089 $ 241,464 $ 460,593 $ 494,793 Segment profitability** Degree Program Segment $ 33,111 $ 39,539 $ 80,315 $ 75,357 Alternative Credential Segment (11,319) (17,637) (28,332) (41,175) Total segment profitability $ 21,792 $ 21,902 $ 51,983 $ 34,182 Segment profitability margin*** Degree Program Segment 27.7 % 27.6 % 30.9 % 25.4 % Alternative Credential Segment (11.0) (17.9) (14.1) (20.8) Total segment profitability margin 9.8 % 9.1 % 11.3 % 6.9 % * The Company has excluded immaterial amounts of intersegment revenues from each of the three and six months ended June 30, 2023 and 2022. ** 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, 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, debt modification expense and 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 Company did not have any material intersegment revenues for any periods presented.** Revenue excludes $0.7 million which is relatedan adjustment recorded as part of the provisional valuation of GetSmarter (see Note 3).reconcilespresents a reconciliation of the Company’s total segment profitability to net loss to adjusted EBITDA (loss):
September 30,
September 30, Three Months Ended
June 30,Six Months Ended
June 30, 2023 2022 2023 2022 (in thousands) Net loss $ (173,654) $ (62,852) $ (227,716) $ (188,632) Adjustments: Stock-based compensation expense 10,983 22,349 25,546 46,773 Other (income) expense, net (227) 1,367 (834) 2,397 Net interest expense 17,545 13,665 35,137 27,298 Income tax expense (benefit) 210 (164) 323 (415) Depreciation and amortization expense 27,328 31,342 57,348 65,757 Impairment charges 134,117 — 134,117 58,782 Debt modification expense and loss on debt extinguishment — — 16,735 — Restructuring charges 3,622 16,753 8,497 17,540 Other* 1,868 (558) 2,830 4,682 Total adjustments 195,446 84,754 279,699 222,814 Total segment profitability $ 21,792 $ 21,902 $ 51,983 $ 34,182 ** Includes (i) transaction and integration expense of $0.1 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and $3.4 million for the six months ended June 30, 2023 and 2022, respectively, and (ii) stockholder activism and litigation-related expense (recovery) of $1.8 million and $(1.6) million for the three months ended June 30, 2023 and 2022, respectively, and $2.6 million and $1.3 million for the six months ended June 30, 2023 and 2022, respectively. Company evaluates segment performance based on adjusted EBITDA, that it defines as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization, foreign currency gains or losses, acquisition-related gains or losses and stock-based compensation expense. Some or all of these items may not be applicable in any given reporting period.Thefollowing table presents the Company’s total assets by segment as of each of the dates indicated. June 30,
2023December 31,
2022 (in thousands) Total assets Degree Program Segment $ 368,453 $ 459,252 Alternative Credential Segment 1,169,964 1,351,607 Total assets $ 1,538,417 $ 1,810,859 follows:
2017
2016 June 30,
2023December 31,
2022 (in thousands) Degree Program Segment accounts receivable $ 32,339 $ 20,612 Degree Program Segment unbilled revenue 21,024 8,496 Alternative Credential Segment accounts receivable 41,108 51,360 Total 94,471 80,468 Less: Provision for credit losses (7,124) (17,642) Trade accounts receivable, net $ 87,347 $ 62,826 * Total goodwillProvision for Credit Losses (in thousands) Balance as of December 31, 2022 $ 17,642 Current period provision 2,270 Amounts written off (12,795) Foreign currency translation adjustments 7 Balance as of June 30, 2023 $ 7,124 connection withthese receivables. The carrying value of these receivable balances approximate their fair value. The following table presents the acquisitioncomponents of GetSmarter has been allocatedthe Company’s other receivables, net, as of each of the dates indicated.June 30,
2023December 31,
2022(in thousands) Other receivables, amortized cost $ 51,607 $ 52,180 Less: Provision for credit losses (5,553) (3,579) Other receivables, net $ 46,054 $ 48,601 Other receivables, net, current $ 29,685 $ 33,813 Other receivables, net, non-current $ 16,369 $ 14,788 Short Course Segment. change in provision for credit losses for 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, 2022 $ 3,579 Current period provision 1,974 Balance as of June 30, 2023 $ 5,553 assessment of goodwillCompany considers receivables to reporting units for purposes of future assessments of goodwill impairment hasbe past due when amounts contractually due under the extended payment plans have not been completedpaid. As of June 30, 2023, 82% of other receivables, net due under extended payment plans were current.Septemberof the dates indicated.June 30, 2023 Year of Origination 2023 2022 2021 2020 2019 & Prior Total (in thousands) Credit Quality Tier High $ 9,184 $ 6,636 $ 1,014 $ 822 $ 547 $ 18,203 Mid 7,785 6,825 2,002 1,796 1,753 20,161 Low 3,129 3,405 3,001 1,789 1,919 13,243 Total $ 20,098 $ 16,866 $ 6,017 $ 4,407 $ 4,219 $ 51,607 December 31, 2022 Year of Origination 2022 2021 2020 2019 2018 Total (in thousands) Credit Quality Tier High $ 15,737 $ 2,285 $ 48 $ 18 $ 115 $ 18,203 Mid 14,005 3,773 1,239 1,363 392 20,772 Low 6,160 3,099 1,677 1,939 330 13,205 Total $ 35,902 $ 9,157 $ 2,964 $ 3,320 $ 837 $ 52,180 June 30,
2023December 31,
2022 (in thousands) Degree Program Segment deferred revenue $ 24,180 $ 1,245 Alternative Credential Segment deferred revenue 83,009 88,916 Total contract liabilities $ 107,189 $ 90,161 2017.2023 and 2022 the Company recognized $0.1 million and $0.1 million of revenue related to its deferred revenue balances that existed at the end of each preceding year, respectively. Revenue recognized in this segment during the six months ended June 30, 2023 and 2022 that was included in the deferred revenue balance that existed at the end of each preceding year was $1.2 million and $1.4 million, respectively.2016.2022. 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”), as amended.. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Many factors could cause or contribute to these differences, including those discussed in Part I, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016,2022, and our other filings with the Securities and Exchange Commission or “SEC.”(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.2016,2022, which are included in our Annual Report on Form 10-K, filed with the SEC on February 24, 2017.Our Businessprovider of cloud-based software-as-a-service, or SaaS,online education platform company. Our mission is to expand access to high-quality education and unlock human potential. As a trusted partner to top-ranked nonprofit universities and other leading organizations, we deliver technology and technology-enabled services that enable our clients to bring their educational offerings online at scale. We provide 78 million people worldwide with access to world-class education in partnership with 250 top-ranked global universities and other leading organizations. Through edX, our education consumer marketplace, we offer more than 4,300 high-quality online learning opportunities, including open courses, executive education offerings, boot camps, micro-credentials, professional certificates as well as undergraduate and graduate degree programs.deliver theirenable the online delivery of degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate programs at scale to students anywhere. Our SaaS technology consists of an innovative online learning environment, where our university clients deliver their high-quality educational content to students in a live, intimate and engaging setting. We also provide a comprehensive suite of integrated applications, including a content management system and a customer relationship management system, that serve as the back-end infrastructuredegree of the graduatesame quality they would receive on campus.we enable. This technology is fusedtechnical, skills-based boot camps and micro-credential programs through relationships with technology-enabled services, including student acquisition services, content development services, student and faculty support, clinical placement services, and admissions applications advising services. This suite of technology tightly integrated with technology-enabled services, optimized with data analysis and machine learning techniques, provides a comprehensive set of capabilities that would otherwise require the purchase of multiple, disparate point solutions, and allows our graduate programs to expand and operate at scale, providing the comprehensive infrastructurenonprofit colleges and universities needand other leading organizations. Students enrolled in these offerings are generally seeking to attract, enroll, educate, supportreskill or upskill for career advancement or personal development through shorter duration, lower-priced offerings. In addition to selling these offerings directly to individuals, we also sell to organizations and graduate students.Recent DevelopmentsGetSmarter AcquisitionOn July 1, 2017, throughinstitutions, including employers, non-profits, governments and governmental entities to enable upskilling and reskilling of their workforces.wholly owned subsidiary (“2U South Africa”),First Amended Term Loan Agreement to, among other things, extend the maturity date from December 2024 to December 2026. In connection with amending the terms and extending the maturities under the First Amended Term Loan Agreement, we completedissued the 2030 Notes with an aggregate principal amount of $147.0 million. We used cash on hand and the $127.1 million of net proceeds from the 2030 Notes to reduce the outstanding principal amount of secured debt under our acquisition of allterm loan facilities from $567 million to $380 million. As part of the outstanding equity interestsrefinancing transaction, in addition to extending the maturity date, the lenders provided us with a senior secured first lien revolving loan facility in the principal amount of GetSmarter pursuant to a Share Sale Agreement, dated as$40 million. In connection with this refinancing event, during the first quarter of May 1, 2017 (the “Share Sale Agreement”), as amended by an Addendum, dated as of June 29, 2017, for a net purchase price of $98.72023, we recorded $12.1 million in cash. In addition, 2U South Africa agreed to pay a potential earn out payment of up to $20.0loss on debt extinguishment and $4.6 million subject to the achievement of certain financial milestones in calendar years 2017 and 2018. We will include the results of GetSmarter in our financial statements from the closing date forward.debt modification expense. Refer to Note 38 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additionalmore information regarding our debt.GetSmarter acquisition.GetSmarter powers engaging online short courses in collaboration with somesecond quarter of 2022, we accelerated our planned transition to a platform company (the “2022 Strategic Realignment Plan”). The plan was 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 world’s most renowned higher education institutions, including threeplan, we simplified our executive structure, reduced employee headcount, rationalized our real estate footprint and implemented steps to optimize marketing spend. Implementation of the top universities2022 Strategic Realignment Plan has resulted in the United Kingdom — University of Cambridge, University of Oxfordimproved profitability, and London School of Economics, three of the top universities in the United States — Harvard University’s strategic online learning initiative, HarvardX, Massachusetts Institute of Technologywe expect it will lead to further profitability improvements going forward.University of Chicago, and three of Africa’s top universities — University of Cape Town, University of the Witwatersrand and University of Stellenbosch Business School. GetSmarter’s portfolio currently includes over 70 short courses and, since inception, GetSmarter has served more than 50,000 students from more than 140 countries with course completion rates that average 88%.The GetSmarter acquisition will expand our product offering to short course certificiates and extend our reach to international audiences. We also believe that the GetSmarter acquisition will accelerate our growth as a result of GetSmarter’s increased new university client acquisition activities during 2016 and 2017. As a result of the GetSmarter acquisition, we now manage our business in two operating segments: our Graduate Program Segment and our Short Course Segment.September 2017 Public OfferingOn September 11, 2017, we sold 4,047,500 shares of our common stock to the public, including 547,500 shares sold pursuant to the underwriters’ over-allotment option. We received net proceeds of $189.5 million, which we intend to use for general corporate purposes, including expenditures for graduate program and short course marketing, technology and content development, in connection with new graduate program and short course launches and growing existing graduate programs and short courses.Resultscomponents of OperationsThird Quarter 2017 Highlights·our operating results are described below.was $70.3 million, an increaseDrivers35.2%our revenue from $52.0 millionrevenue-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. Our contracts generally have 10 to 15 year terms and do not include termination rights for convenience. From time to time, we have entered into and we may in the third quarterfuture enter into agreements to strategically exit certain of 2016.· Net loss was $(14.7) million, or $(0.30) per share, compared to $(6.8) million or $(0.14) per share, in the third quarter of 2016.· Adjusted EBITDA loss was $(3.7) million, compared to $(0.2) million in the third quarter of 2016.RevenueRevenueour clients’ programs. These agreements may provide for the third quarterprovision of 2017 was $70.3 million, an increasetransition services and make-whole fees. In our Alternative Credential Segment, we derive substantially all of 35.2%,our revenue from $52.0 million fortuition and fees from students taking our executive education programs, boot camps, and premium online open courses. Revenue in each segment is primarily driven by the same periodnumber of 2016. Graduate Program Segment revenue increased by 26.9%, primarily duestudent enrollments in our offerings. a 25.8% increase in full course equivalent enrollments. We also reported an incremental revenue increase of 8.3% related to our Short Course Segment.Revenue for the first nine months of 2017 was $200.1 million, an increase of 34.7%, from $148.5 million for the same period of 2016. Graduate Program Segment revenue increased by 31.8%, primarily due to a 29.0% increase in full course equivalent enrollments. We also reported an incremental revenue increase of 2.9% related to our Short Course Segment.CostsCosts consist of curriculum and teaching, servicing and support, technology and content development, 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 generalSocial Media Optimization, as well as personnel and administrative. To supportpersonnel-related expense for our anticipated growth,marketing and recruiting teams.expectdo not believe it is meaningful to continuedirectly compare current period revenue to hire new employees (whichcurrent period marketing and sales expense. Further, in this segment we believe that our marketing and sales expense in future periods will increase both our cash and non-cash compensation and benefit costs, including stock-based compensation), increase our promotion and student acquisition efforts, expand our technology infrastructure and increase our other support capabilities. As a result, we expect our costs to increase in absolute dollars, but to decreasegenerally decline as a percentage of the revenue reported in those same periods as our revenue base from returning students in existing programs increases.time as we achieve economies of scale through the expansion of our business.Non-cash stock-based compensation expense is a component of compensation cost within each of the five cost categories described above. In early 2014, the Compensation Committee of our Board of Directors approved a framework for granting equity awards under our 2014 Equity Incentive Plan. Under this framework, the majority of our equity awards are made on or around April 1 of each year and typically have four-year vesting periods.teaching.Teachingcosts are associatedexpense consists primarily of amounts due to universities for licenses to use their brand names and other trademarks in connection with our Short Course Segmentexecutive education and consist primarily of costs related to royalties due to our university clientsboot camp offerings. The payments are based on contractually specified percentages of the revenue associated with short coursetuition and fees we receive from students in those offerings. It also includes costs to compensate short course tutors, as well as cash compensation costs to employees related to our support of this function. Curriculum and teaching costsexpense also includes personnel and personnel-related expense for the third quarterour executive education and first nine monthsboot camp instructional staff.support.Supportcosts consistexpense consists primarily of cashpersonnel and non-cash compensation and benefit costs (including stock-based compensation) related topersonnel-related expense associated with the management and operations of graduate programsour educational offerings, as well as supporting students and short courses. Itfaculty members. Servicing and support expense also includes software licensing, telecommunications, technicalexpenses to support and other costs related to providing access to and support for our SaaS technology for our university clients and students. In addition, servicing and support includes costs toplatform, facilitate in-program field placements and student immersions, and other student enrichment experiences, as well as costs to assist our university clients with their state compliance requirements.Servicing and support costs for the third quarter of 2017 were $12.9 million, an increase of 25.0%, from $10.3 million for the same period of 2016. This was primarily due to a 18.6% increase in cash and non-cash compensation and benefit costs within our Graduate Program Segment, as we increased our headcount by 15% to serve a growing number of students and faculty in existing and new graduate programs. The increase also included 3.3% of additional servicing and support costs associated with our Short Course Segment. The remainder of the increase related to other net costs to service and support our Graduate Program Segment.Servicing and support costs for the first nine months of 2017 were $37.3 million, an increase of 23.9%, from $30.1 million for the same period of 2016. This was primarily due to a 16.8% increase in cash and non-cash compensation and benefit costs within our Graduate Program Segment, as we increased our headcount by 16% to serve a growing number of students and faculty in existing and graduate programs. Additionally, 3.9% of the increase related to rent, other facilities costs and travel costs within our Graduate Program Segment. The increase also included 1.1% of additional servicing and support costs associated with our Short Course Segment. The remainder of the increase related to other net costs to service and support our Graduate Program Segment.content development.Content Developmentcosts consistexpense consists primarily of cashpersonnel and non-cash compensation and benefit costs (including stock-based compensation) and outsourced services costs related topersonnel-related expense associated with the ongoing improvement and maintenance of our SaaS technology, and the developed content for our graduate programs and short courses. It also includes the associated amortization expense related to capitalized technology and content development,platform, as well as hosting and other costs associated with maintaining our SaaS technology in a cloud environment. Additionally, it includes the costs to support our internal infrastructure, including our cloud-based server usage.development costs forexpense also includes the third quarteramortization of 2017 were $12.7 million, an increase of 46.9%, from $8.7 million for the same period of 2016. This was due in part to a 13.1% increase in cash and non-cash compensation and benefit costs (net of amounts capitalized for technology and content development) within our Graduate Program Segment, as we increased our headcount by 24% to support the scaling of existing and launch of new graduate programs. Additionally, 15.1% of the increase related to higher amortization expense associated with capitalized technology and content development, as well as higher hosting and licensing costs, within our Graduate Program Segment due to the larger number of courses that have been developed and the continued maintenance of our SaaS technology in a cloud environment. The increase also included 18.1% of additional technology and content development costs associated with our Short Course Segment. The remainder of the increase related to other net costs to support and maintain our internal software applications in our Graduate Program Segment.Technology and content development costs for the first nine months of 2017 were $33.1 million, an increase of 33.4%, from $24.8 million for the same period of 2016. This was due in part to a 11.1% increase in cash and non-cash compensation and benefit costs (net of amounts capitalized for technology and content development) within our Graduate Program Segment, as we increased our headcount by 28% to support the scaling of existing and launch of new graduate programs. Additionally, 13.8% of the increase related to higher amortization expense associated with capitalized technology and content development, as well as higher hosting and licensing costs, within our Graduate Program Segment due to the larger number of courses that have been developed and the continued maintenance of our SaaS technology in a cloud environment. The increase also included 6.3% of additional technology and content development costs associated with our Short Course Segment. The remainder of the increase related to other net costs to support and maintain our internal software applications in our Graduate Program Segment.Marketing and sales. Marketing and sales costs consist primarily of costs related to student acquisition. This includes the cost of online advertising and prospective student generation, as well as cash and non-cash compensation and benefit costs (including stock-based compensation) for our graduate program and short course marketing, search engine optimization, marketing analytics and admissions application counseling personnel.Marketing and sales costs for the third quarter of 2017 were $41.3 million, an increase of 46.7%, from $28.2 million for the same period of 2016. This was primarily due to a 18.4% increase in direct internet marketing costs to acquire students for our Graduate Program Segment. Additionally, 6.8% of the increase related to cash and non-cash compensation and benefit costs, as we increased our headcount by 23% within our Graduate Program Segment to acquire students for, and drive revenue growth in existing and new graduate programs. The increase also included 15.2% of additional marketing and sales costs associated with our Short Course Segment. The remainder of the increase related to other net costs to support graduate program marketing efforts within our Graduate Program Segment.Marketing and sales costs for the first nine months of 2017 were $113.2 million, an increase of 42.8%, from $79.3 million for the same period of 2016. This was primarily due to a 23.0% increase in direct internet marketing costs to acquire students for our Graduate Program Segment. Additionally, 8.6% of the increase related to cash and non-cash compensation and benefit costs, as we increased our headcount by 24% within our Graduate Program Segment to acquire students for, and drive revenue growth in, existing and new graduate programs. The increase also included 5.4% of additional marketing and sales costs associated with our Short CourseSegment. The remainder of the increase related to other net costs to support our graduate program marketing efforts within our Graduate Program Segment.administrative.Administrativecosts consistexpense consists primarily of cashpersonnel and non-cash compensation and benefit costs (including stock-based compensation)personnel-related expense for employees in our centralized functions, including executive administrative,management, legal, finance, and accounting, legal, communications and human resources, functions. Itand other departments that do not provide direct operational services. General and administrative expense also includes external legal, accounting and other professional fees telecommunications charges and other corporate costs such as insuranceexpenses.travel that are not related to another function.General and administrativeseverance-related costs, for the third quarter of 2017 were $17.2 million, an increase of 48.9%, from $11.6 million for the same period of 2016. This was primarily due to a 19.5% increase in cash and non-cash compensation and benefit costs within our Graduate Program Segment, as we increased our headcount by 15% to support our growing business. Additionally, 8.8% of the increase related to higher consulting and other professional services within our Graduate Program Segment primarily driven by additional recurring and non-recurring costs associated with the acquisitionexit of GetSmarter, partially offset by reductions in year-over-year costs after the integration of our enterprise resource planning system which was completed in the second quarter of 2017. The increase also included 14.0% of additional generalfacilities, and administrative costs associated with our Short Course Segment. The remainderprofessional services.increase relatedcarrying value of assets to other net costs to support growth within our Graduate Program Segment.General and administrative costs for the first nine months of 2017 were $44.8 million, an increase of 36.0%, from $33.0 million for the same period of 2016. This was primarily due to a 14.6% increase in cash and non-cash compensation and benefit costs within our Graduate Program Segment, as we increased our headcount by 17% to support our growing business, and a 4.0% combined increase in rent, other facilities costs and travel costs within our Graduate Program Segment. Additionally, 7.0% of the increase related to higher consulting and other professional services within our Graduate Program Segment primarily driven by additional recurring and non-recurring costs associated with the acquisition of GetSmarter and partially offset by reductions in year-over-year costs after the integration of our enterprise resource planning system which was completed in the second quarter of 2017. The increase also included 4.9% of additional general and administrative costs associated with our Short Course Segment. The remainder of the increase related to other net costs to support growth within our Graduate Program Segment.Interestis derived(expense) consists primarily of interest expense from our long-term debt and interest received onincome from our cash and cash equivalents. Interest expense consists primarily ofalso includes the amortization of deferred financing costs associated withdebt issuance costs.line of credit. Net interest income (expense) reflects the aggregation of interest income and interest expense. In the third quarter of 2017, we incurred net interest expense of $18,000, compared to net interest income of $37,000 in the same period of 2016. In the first nine months of 2017, we earned interest income of $230,000, an increase of 24.1%, from $185,000 for the same period of 2016. consists of foreign currency gains and losses. losses, gains and losses related to the sale of investments and other non-operating income and expense.Three Months Ended June 30, 2023 2022 Period-to-Period Change Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage (dollars in thousands) Revenue $ 222,089 100.0 % $ 241,464 100.0 % $ (19,375) (8.0) % Costs and expenses Curriculum and teaching 34,102 15.4 32,145 13.3 1,957 6.1 Servicing and support 33,585 15.1 37,061 15.3 (3,476) (9.4) Technology and content development 44,250 19.9 45,616 18.9 (1,366) (3.0) Marketing and sales 95,882 43.2 116,350 48.2 (20,468) (17.6) General and administrative 32,657 14.7 41,523 17.2 (8,866) (21.4) Restructuring charges 3,622 1.6 16,753 6.9 (13,131) (78.4) Impairment charges 134,117 60.4 — — 134,117 * Total costs and expenses 378,215 170.3 289,448 119.8 88,767 30.7 Loss from operations (156,126) (70.3) (47,984) (19.8) (108,142) 225.4 Interest income 371 0.2 241 0.1 130 53.9 Interest expense (17,916) (8.1) (13,906) (5.8) (4,010) 28.8 Other income (expense), net 227 0.1 (1,367) (0.6) 1,594 (116.6) Loss before income taxes (173,444) (78.1) (63,016) (26.1) (110,428) 175.2 Income tax (expense) benefit (210) (0.1) 164 0.1 (374) (228.0) Net loss $ (173,654) (78.2) % $ (62,852) (26.0) % $ (110,802) 176.3 % * Not meaningful for comparative purposes. thirdsecond quarter of 2017,2023, we earned otherrecorded impairment charges of $16.7 million and $117.4 million to goodwill and the indefinite-lived intangible asset, respectively.of $59,000,was $0.2 million for the three months ended June 30, 2023, as compared to no activity in the same period of 2016. In the first nine months of 2017, we incurred other expense, net of $972,000 primarly$1.4 million for the three months ended June 30, 2022. This change was primarily due to fluctuations in foreign currency rate fluctuations associated with the acquisition andrates impacting our operations of our Short Course Segment, compared to no activity in the same period of 2016.Duringthird quarter and first ninethree months of 2017,ended June 30, 2023, we recognized a $1.0income tax expense of $0.2 million, and our effective tax benefit. Therate was less than 1%. For the three months ended June 30, 2022, we recognized an income tax benefit primarily relates to the amortization of intangible assets established in connection with the GetSmarter acquisition$0.2 million, and losses generated from the acquired operations.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. Our tax rate will fluctuate from period to period due to changes in the mixthe need to record valuation allowances against our subsidiaries’ earnings.Consolidated Statements of Operations as a Percentage of Revenuesets forthpresents selected condensed consolidated statementsstatement of operations data as a percentage of revenue for each of the periods indicated.
September 30,
September 30,Key BusinessSix Months Ended June 30, 2023 2022 Period-to-Period Change Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage (dollars in thousands) Revenue $ 460,593 100.0 % $ 494,793 100.0 % $ (34,200) (6.9) % Costs and expenses Curriculum and teaching 66,942 14.5 65,375 13.2 1,567 2.4 Servicing and support 69,694 15.1 76,685 15.5 (6,991) (9.1) Technology and content development 89,734 19.5 96,673 19.5 (6,939) (7.2) Marketing and sales 196,057 42.6 247,332 50.0 (51,275) (20.7) General and administrative 71,907 15.6 91,758 18.5 (19,851) (21.6) Restructuring charges 8,497 1.8 17,540 3.5 (9,043) (51.6) Impairment charge 134,117 29.1 58,782 11.9 75,335 128.2 Total costs and expenses 636,948 138.2 654,145 132.1 (17,197) (2.6) Loss from operations (176,355) (38.2) (159,352) (32.1) (17,003) 10.7 Interest income 736 0.2 498 0.1 238 47.8 Interest expense (35,873) (7.8) (27,796) (5.6) (8,077) 29.1 Debt modification expense and loss on debt extinguishment (16,735) (3.6) — — (16,735) * Other income (expense), net 834 0.2 (2,397) (0.5) 3,231 (134.8) Loss before income taxes (227,393) (49.2) (189,047) (38.1) (38,346) 20.3 Income tax (expense) benefit (323) (0.1) 415 0.1 (738) (177.8) Net loss $ (227,716) (49.3) % $ (188,632) (38.0) % $ (39,084) 20.7 % * Not meaningful for comparative purposes. Financial Performance MetricsWe useaverage revenue per FCE enrollment increased from $2,418 to $2,453, or 1.4%.numberresult of key metricsan increase in amounts due to evaluateuniversity clients driven by higher revenue in certain offerings in our business, measureAlternative Credential Segment.performance, identify trends affecting our business, formulate financial projectionsplatform and make strategic decisions. software applications.additionthe second quarter of 2023, we recorded impairment charges of $16.7 million and $117.4 million to adjusted EBITDA, which we discuss below and revenuegoodwill and the componentsindefinite-lived intangible asset, respectively. 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.fromon debt extinguishment. In the first quarter of 2023, we recorded $12.1 million in loss on debt extinguishment and $4.6 million in debt modification expense related to the refinancing of the Second Amended Credit Agreement.section above entitled “—ComponentsAlternative Credential Segment.Operating Results$0.3 million, and Resultsour effective tax rate was less than 1%. For the six months ended June 30, 2022, we recognized an income tax benefit of Operations”,$0.4 million, and our effective tax rate was less than 1%. To date, we utilize full course equivalent enrollments as a key metrichave not been required to evaluate the successpay U.S. federal income taxes because of our growth strategy.Platform Revenue Retention RateBeginning with this Quarterly Reportcurrent and accumulated net operating losses.Form 10-Q, we have ceased using platform revenue retention rate to evaluate the successdebt extinguishment, and stock-based compensation expense. Some of our growth strategy. In our Graduate Program Segment, we operate under long-term contracts,these items may not be applicable in any given reporting period and since inception, have not lost a contract for an operating program or had material period over period revenue declines in the programs we operate under these contracts. We have also extended seven of our first 11 contracts prior to expiration and have no contracts that are scheduled to expire prior to 2021. Given these facts, we have determined that platform revenue retention rate currently provides little to no value in evaluating our business and is not expected to provide value in the future.Full Course Equivalent EnrollmentsWe measure full course equivalent enrollments for each of the courses offered during a particular period, the number of students enrolled in that course multiplied by the percentage of the course completed during that period. We use this metric to account for the fact that many courses we enable straddle two or more fiscal quarters. For example, if a course had 25 enrolled students and 40% of the course was completed during a particular period, we would count the course as having 10 full course equivalent enrollments for that period. Any individual student may be enrolled in more than one course during a period.Average revenue per full course equivalent enrollment represents our weighted-average revenue per course across the mix of courses being offered during a period within 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 full course equivalent enrollments within the applicable segment during that same period. This amountthey may vary from period to period depending on the academic calendars of our university clients, the relative growth rates of graduate programs and short courses, as applicable, with varying tuition levels, the launch of new graduate programs or short courses with higher or lower than average net tuition costs and annual tuition increases instituted by our university clients.The following table sets forth the full course equivalent enrollments and average revenue per full course equivalent enrollment in our Graduate Program Segment for the periods presented.
September 30,
September 30,* Of the increase in full course equivalent enrollments for the third quarter and first nine months of 2017, 502 or 10.2% and 927 or 5.7%, respectively, were attributable to graduate programs launched during the 12 months ended September 30, 2017.The following table sets forth the full course equivalent enrollments and average revenue per full course equivalent enrollment in our Short Course Segment for the periods presented.
September 30,
September 30,* We acquired GetSmarter on July 1, 2017 and their results of operations are included in our financial results effective with the third quarter of 2017. As such, the full course equivalent enrollment measures of our short courses are measured only for the third quarter of 2017.** The calculation of short courses average revenue per full course equivalent enrollment includes $0.7 million of revenue that was excluded in the results of operations for the third quarter of 2017, due to an adjustment recorded as partperiod. Total segment profitability is a non-GAAP measure when presented outside of the provisional valuation of GetSmarter.Adjusted EBITDAAdjusted EBITDA represents our earnings before net interest income (expense), taxes, depreciation and amortization, foreign currency gains or losses, acquisition-related gains or losses and stock-based compensation expense. Adjusted EBITDAfinancial statement footnotes. Total segment profitability is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans.plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses in calculating adjusted EBITDAtotal segment profitability can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDAtotal 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.Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with U.S. GAAP. In addition, adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA in the same manner as we do. We prepare adjusted EBITDA to eliminate the impact of stock-based compensation expense, which we do not consider indicative of our core operating performance.Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are:· although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;· adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;· adjusted EBITDA does not reflect acquisition related gains and losses such as, but not limited to, post-acquisition changes in the value of contingent consideration reflected in operations;· adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;· adjusted EBITDA does not reflect interest or tax payments that may represent a reduction in cash available to us; and· other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.Because of these and other limitations, you should consider adjusted EBITDA alongside other U.S. GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other U.S. GAAP results. to adjusted EBITDA for each of the periods indicated:
September 30,
September 30, Three Months Ended
June 30,Six Months Ended
June 30, 2023 2022 2023 2022 (in thousands) Net loss $ (173,654) $ (62,852) $ (227,716) $ (188,632) Adjustments: Stock-based compensation expense 10,983 22,349 25,546 46,773 Other (income) expense, net (227) 1,367 (834) 2,397 Net interest expense 17,545 13,665 35,137 27,298 Income tax expense (benefit) 210 (164) 323 (415) Depreciation and amortization expense 27,328 31,342 57,348 65,757 Impairment charges 134,117 — 134,117 58,782 Debt modification expense and loss on debt extinguishment — — 16,735 — Restructuring charges 3,622 16,753 8,497 17,540 Other* 1,868 (558) 2,830 4,682 Total adjustments 195,446 84,754 279,699 279699000 222,814 Total segment profitability $ 21,792 $ 21,902 $ 51,983 $ 34,182 * Includes (i) transaction and integration expense of $0.1 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and $3.4 million for the six months ended June 30, 2023 and 2022, respectively, and (ii) stockholder activism and litigation-related expense (recovery) of $1.8 million and $(1.6) million for the three months ended June 30, 2023 and 2022, respectively, and $2.6 million and $1.3 million for the six months ended June 30, 2023 and 2022, respectively. LiquidityCapital ResourcesSources of LiquidityIn June 2017, we amended our credit agreement with Comerica for a $25.0 million revolving line of credit pursuant to which, among other things, Comerica consented to our acquisition of GetSmarter and our formation of certain subsidiaries in connection therewith, and we extended the maturity date through July 31, 2017. In the third quarter of 2017, we further amended our credit agreement to extend the maturity date through December 31, 2017. No amounts were outstanding under this credit agreement as of September 30, 2017 or December 31, 2016.Certain of our operating lease agreements entered into require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of September 30, 2017, we have entered into standby letters of credit totaling $11.5 million, as security deposits for the applicable leased facilities. Additionally, in June 2017, the Company entered into standby letters of credit totaling $3.5 million in connection with two government grants. These letters of credit reduced the aggregate amount we may borrow under our revolving line of credit to $10.0 million.Under this revolving line of credit, we have the option of borrowing funds subject to (i) a base rate, which is equal to 1.5% plus the greater of Comerica Bank’s prime rate, the federal funds rate plus 1% or the 30 day LIBOR plus 1%, or (ii) LIBOR plus 2.5%. For amounts borrowed under the base rate, we may make interest-only payments quarterly, and may prepay such amounts with no penalty. For amounts borrowed under LIBOR, we may make interest-only payments in periods of one, two and three months and will be subject to a prepayment penalty if we repay such borrowed amounts before the end of the interest period.Borrowings under the line of credit are collateralized by substantially all of our assets. The availability of borrowings under this credit line is subject to our compliance with reporting and financial covenants, including, among other things, that we achieve specified minimum three-month trailing revenue levels during the term of the agreement and specified minimum six-month trailing profitability levels for some of our graduate programs, measured quarterly. In addition, we are required to maintain a minimum adjusted quick ratio, which measures our short-term liquidity, of at least 1.10 to 1.00. As of September 30, 2017 and December 31, 2016, our adjusted quick ratios were 6.27 and 5.43, respectively.The covenants under the line of credit also place limitations on our ability to incur additional indebtedness or to prepay permitted indebtedness, grant liens on or security interests in our assets, carry out mergers and acquisitions, dispose of assets, declare, make or pay dividends, make capital expenditures in excess of specified amounts, make investments, loans or advances, enter into transactions with our affiliates, amend or modify the terms of our material contracts, or change our fiscal year. If we are not in compliance with the covenants under the line of credit, after any opportunity to cure such non-compliance, or we otherwise experience an event of default under the line of credit, the lenders may require repayment in full of all principal and interest outstanding. If we fail to repay such amounts, the lenders could foreclose on the assets we have pledged as collateral under the line of credit. We are currently in compliance with all such covenants.Our Short Course Segment has $1.9 million of revolving debt facilities. All of the facilities mature on December 31, 2017 with payment due on January 1, 2018. As of September 30, 2017, no significant amounts were outstanding under these facilities and the interest rate was 10.25%.Public Offering of Common StockOn September 11, 2017, we sold 4,047,500 shares of our common stock to the public, including 547,500 shares sold pursuant to the underwriters’ over-allotment option. We received net proceeds of $189.5 million, which we intend to use for general corporate purposes, including expenditures for graduate program and short course marketing, technology and content development, in connection with new graduate program and short course launches and growing existing graduate program and short courses.Cash Flowssummarizes our cash flowspresents revenue by segment and segment profitability for each of the periods presented:
September 30,Operating ActivitiesCash usedindicated.Three Months Ended June 30, Period-to-Period Change 2023 2022 Amount Percentage (dollars in thousands) Revenue by segment* Degree Program Segment $ 119,494 $ 143,090 $ (23,596) (16.5) % Alternative Credential Segment 102,595 98,374 4,221 4.3 Total revenue $ 222,089 $ 241,464 $ (19,375) (8.0) % Segment profitability Degree Program Segment $ 33,111 $ 39,539 $ (6,428) (16.3) % Alternative Credential Segment (11,319) (17,637) 6,318 35.8 Total segment profitability $ 21,792 $ 21,902 $ (110) (0.5) % * Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended June 30, 2023 and 2022. operating activities for the first nine months of 2017 was $26.1 million, an increase of 80.8% from $14.4 million for the same period of 2016.2022. This decrease was primarily due to a 42.8% increase$23.6 million decrease in net loss and a 93.4% increase in up front and marketing rights payments to universities, which wererevenue, partially offset by changeslower operating expenses due to the implementation of the 2022 Strategic Realignment Plan.working capital and non-cash expenses. In addition, there was an2022. This increase of 10.4% in cash used in operating activites associated with the GetSmarter acquisition.Investing ActivitiesCash used in investing activies for the first nine months of 2017 was $134.4 million, an increase of $118.2 million from $16.2 million for the same period of 2016. This was primarily due to $97.1lower operating expenses due to the implementation of the 2022 Strategic Realignment Plan.Six Months Ended June 30, Period-to-Period Change 2023 2022 Amount Percentage (dollars in thousands) Revenue by segment* Degree Program Segment $ 259,974 $ 297,257 $ (37,283) (12.5) % Alternative Credential Segment 200,619 197,536 3,083 1.6 Total revenue $ 460,593 $ 494,793 $ (34,200) (6.9) % Segment profitability Degree Program Segment $ 80,315 $ 75,357 $ 4,958 6.6 % Alternative Credential Segment (28,332) (41,175) 12,843 31.2 % Total segment profitability $ 51,983 $ 34,182 $ 17,801 52.1 % * Immaterial amounts of intersegment revenue have been excluded from the above results for the six months ended June 30, 2023 and 2022. net cash paid to acquire GetSmarter, a $17.3 million2022. This increase due to purchases of property, plant and equipment for our new office locations and a $3.9 million increase in additions to amortizable intangible assets to support a greater number of launched graduate programs and short courses.Financing ActivitiesCash provided by financing activities for the first nine months of 2017 was $195.2 million, an increase of $191.5 million from $3.8 million for the same period of 2016. This was primarily due to $189.9lower operating expenses due to the implementation of the 2022 Strategic Realignment Plan, partially offset by a $37.3 million decrease in revenue.proceeds received from2022. This decrease was primarily due to lower operating expenses due to the implementation of the 2022 Strategic Realignment Plan.public offeringprincipal sources of liquidity were cash and cash equivalents totaling $53.3 million, which were held for working capital and general corporate purposes.$2.5the cost of the capped call transactions. As of June 30, 2023, the conditions allowing holders of the 2025 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 2025 Notes, therefore, are classified as a non-current on the condensed consolidated balance sheets.in debt.Operating and Capital Expenditure RequirementsDuring the first nine months(the “2021 Term Loan Facilities”), which had an initial maturity date of 2017, we had new capital asset additions of $49.6 million,December 28, 2024. Loans under this facility, which was comprisedamended in January 2023 as described below, bore interest at a per annum rate equal to a base rate or adjusted Eurodollar rate, as applicable, plus the applicable margin of $25.0 million4.75% in the case of leasehold improvements, $17.0 millionthe base rate loans and 5.75% in capitalized technologythe case of the Eurodollar loans. We used the proceeds of the Term Loan Facilities to fund a portion of the edX Acquisition and content developmentto pay related costs, fees and $7.6 millionexpenses. 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 Facilities”) primarily to provide for an incremental facility to us in an original principal amount of other property$100 million. The proceeds of the Amended Term Loan Facilities may be used for general corporate purposes.equipment.First Incremental Agreement to Credit and Guaranty Agreement, (the “Second Amended Credit Agreement”), which amended the Amended Term Loan Facilities. The $49.6 million increase consistedprovisions of $37.3 million in cash capital expenditures, with the remainder primarily comprisedSecond Amended Credit Agreement became effective upon the satisfaction of landlord funded leasehold improvements. We also incurred approximately $0.4 millioncertain conditions set for therein, including, without limitation, the funding of deferred offering costs included in accounts payablethe 2030 Notes referenced below and accrued expenses, in connection with our public offeringthe prepayment of common stock. Forcertain existing term loans to reduce the full yearoutstanding principal amount of 2017, we expect new capital asset additions of approximately $64 to $69 million, of which approximately $11 to $13 million will be funded by landlord leasehold improvement allowances.Contractual Obligations and CommitmentsWe have non-cancelable operating leases for our office space, and we are also contractually obligated to make fixed payments to certain of our university clients in exchange for contract extensions and various marketing and other rights.We have a $25.0 million line of credit from Comerica Bank (with letters of credit reducing the aggregate amount we may borrow to $10.0 million), as well as $1.9 million of revolving debt facilities. As of September 30, 2017, no amounts wereterm loans outstanding under the lineCredit Agreement from $567 million to $380 million. Pursuant to the Second Amended Credit Agreement, the lenders thereunder agreed to, among other amendments, extend the maturity date of creditthe term loans thereunder from December 28, 2024 to December 28, 2026 (or, if more than $40 million of our 2025 Notes remain outstanding on January 30, 2025, January 30, 2025) and no significantto provide a senior secured first lien revolving loan facility in the principal amount of $40 million. The termination date for such revolving loans will be June 28, 2026 (or, if more than $50 million of the 2025 Notes remain outstanding on January 1, 2025, January 1, 2025). Loans under the Credit Agreement will bear interest at a per annum rate equal to (i) with respect to term loans, a base rate or the Term SOFR rate, as applicable, plus a margin of 5.50% in the case of the base rate loans and 6.50% in the case of Term SOFR loans and (ii) with respect to revolving loans, a base rate or the Term SOFR rate, as applicable, plus a margin of 4.50% in the case of the base rate loans and 5.50% in the case of Term SOFR loans. were outstanding under the revolving debt facilities.SeeSecond Amended Term Loan Facility. We have the right under the 2030 Indenture to determine the method of settlement at the time of conversion. Therefore, the 2030 Notes are classified as non-current on the condensed68 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 and “Legal Proceedings” contained in Part II, Item 1 of this Quarterly Report on Form 10-Q for additionalmore information regarding contingencies. Six Months Ended
June 30, 2023 2022 Net cash provided by operating activities $ 1,182 $ 28,644 Net cash used in investing activities (25,032) (35,179) Net cash used in financing activities (91,911) (2,975) Effect of exchange rate changes on cash (118) (2,614) Net decrease in cash, cash equivalents and restricted cash $ (115,879) $ (12,124) Net loss $ (227,716) Non-cash interest expense 6,818 Depreciation and amortization expense 57,348 Stock-based compensation expense 25,546 Non-cash lease expense 8,804 Restructuring charges (13) Impairment charges 134,117 Provision for credit losses 4,245 Loss on debt extinguishment 12,123 Other (787) Net loss (adjusted for non-cash charges) $ 20,485 Changes in operating assets and liabilities, net of assets and liabilities acquired: Cash used in accounts receivable, net and other receivables, net $ (26,245) Cash used in prepaid expenses, other assets, and other liabilities, net (14,808) Cash provided by accounts payable and accrued expenses 5,014 Cash provided by deferred revenue 16,736 Net cash used in changes in operating assets and liabilities $ (19,303) Consistent with our revenue recognition policy related to the Graduate Program Segment, revenue related to the Short Course Segment is recognized when Receivables and Provision for Credit Losses the following conditions are met: (i) persuasive evidence of an arrangement exists, (ii) rendering of services is complete, (iii) fees are fixed or determinable and (iv) collection of fees is reasonably assured. Please refer to Note 2 in the “Notes to Consolidated Financial Statements” included in Part II, Item 8 of our Annual Report on Form 10-K, filed with the SEC on February 24, 2017, for the significant accounting policy on revenue recognition of the Graduate Program Segment.With respect to our Graduate Program Segment, we recognize revenue based on our share of net program proceeds from our university clients.With respect to our Short Course Segment, we derive our revenue from providing premium online short courses to working professionals. A portion of revenues is sharedcontractual 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.formtransaction 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 a royalty,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.providing the contenttuition and certifying the course. Wefees, less credit card fees and other specified charges we have determined that we are the principalagreed to exclude in certain university contracts. Our contracts with university clients in this arrangementsegment typically have terms of 10 to 15 years and have a single performance obligation, as we are the entity that has promisedpromises 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 short coursecontext 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 student. Therefore, revenuesrelated 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.Short Course Segment reflect grosstuition and fees paid to enroll in, and progress through, our executive education programs and boot camps. Our executive education programs run between 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 andwith the associated university client, in exchange for licenses to use the university client royaltybrand name and other university trademarks. These amounts are recordedrecognized as an expense within curriculum and teaching expenses on theour condensed consolidated statements of operations and comprehensive loss.GoodwillGoodwill 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.purchase priceamounts 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.of identified net assets(discounted cash flow) of the business acquired. asset or asset group. Our impairment analysis is based upon cumulative results and forecasted performance.at leastand other indefinite-lived intangible assets for impairment annually, as of October 1, for possible impairment. Goodwill is reviewed for possible impairment between annual testsand more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unitgoodwill or an indefinite-lived asset below its carrying value.the two-stepa quantitative goodwill impairment review. We will review goodwill for impairment using the two-step processa 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 oura qualitative assessment. Upon the completion of the two-step process,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.recorded.Recent Accounting Pronouncements Three Months Ended
June 30,Six Months Ended
June 30, 2023 2022 2023 2022 Degree Program Segment FCE enrollments 50,490 60,303 105,981 122,912 Average revenue per FCE enrollment $ 2,367 $ 2,373 $ 2,453 $ 2,418 Alternative Credential Segment* FCE enrollments 25,840 23,443 47,830 46,107 Average revenue per FCE enrollment $ 3,591 $ 3,891 $ 3,868 $ 3,951 * FCE enrollments and average revenue per FCE exclude the impact of enrollments in edX offerings and the related revenue of $9.8 million and $7.1 million for the three months ended June 30, 2023 and 2022, respectively. FCE enrollments and average revenue per FCE exclude the impact of enrollments in edX offerings and the related revenue of $15.6 million and $15.4 million for the six months ended June 30, 2023 and 2022, respectively. Three Months Ended
June 30,Six Months Ended
June 30, 2023 2022 2023 2022 (in thousands) Net loss $ (173,654) $ (62,852) $ (227,716) $ (188,632) Adjustments: Stock-based compensation expense 10,983 22,349 25,546 46,773 Other (income) expense, net (227) 1,367 (834) 2,397 Net interest expense 17,545 13,665 35,137 27,298 Income tax expense (benefit) 210 (164) 323 (415) Depreciation and amortization expense 27,328 31,342 57,348 65,757 Impairment charges 134,117 — 134,117 58,782 Debt modification expense and loss on debt extinguishment — — 16,735 — Restructuring charges 3,622 16,753 8,497 17,540 Other* 1,868 (558) 2,830 4,682 Total adjustments 195,446 84,754 279,699 222,814 Adjusted EBITDA $ 21,792 $ 21,902 $ 51,983 $ 34,182 * Includes (i) transaction and integration expense of $0.1 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and $3.4 million for the six months ended June 30, 2023 and 2022, respectively, and (ii) stockholder activism and litigation-related expense (recovery) of $1.8 million and $(1.6) million for the three months ended June 30, 2023 and 2022, respectively, and $2.6 million and $1.3 million for the six months ended June 30, 2023 and 2022, respectively. 24, 2017, except for21, 2023.changesSecond Amended Credit Agreement will bear interest at a per annum rate equal to (i) with respect to term loans, a base rate or the Term SOFR (as defined in foreign currency exchange risk resulting fromthe Second Amended Credit Agreement) rate, as applicable, plus a margin of 5.50% in the case of the base rate loans and 6.50% in the case of Term SOFR loans and (ii) with respect to revolving loans, a base rate or the Term SOFR rate, as applicable, plus a margin of 4.50% in the case of the base rate loans and 5.50% in the case of Term SOFR loans. As of June 30, 2023, borrowings under our acquisition of GetSmarter, as described below.Prior to July 1, 2017, we did not have significant foreign currency exchange risk. Beginning in the third quarter of 2017, with the acquisition of GetSmarter, we nowatin 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 atin 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.third quarter of 2017three months ended June 30, 2023 and 2016,2022, our foreign currency translation adjustment was a loss of $3.6losses were $4.0 million and zero,$7.7 million, respectively. For the third quarter of 2017six months ended June 30, 2023 and 2016,2022, our foreign currency translation adjustment losses were $7.3 million and $0.3 million, respectively.$0.1$0.2 million and zero,a loss of $1.4 million, respectively, included inon our condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2023 and 2022, we recognized a foreign currency exchange gain of $0.8 million and a loss of $2.8 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss.The scope of management’s assessment of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017 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 GetSmarter that are subsumed by internal control over financial reporting. We acquired GetSmarter on July 1, 2017 and their results of operations are included in our financial statements effective with the third quarter of 2017. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2017. GetSmarter represented 24.1% of total assets as of September 30, 2017 and 6.2% and 2.2% of total revenue for the third quarter and first nine months of 2017, respectively.During the first quarter of 2017, we finished the migration of our Human Capital Management and payroll systems to a single enterprise resource planning (“ERP”) system called Workday and in the second quarter of 2017 we finished the migration of our accounting and financial reporting systems to Workday. This two-phase ERP system implementation impacts various internal processes and controls for business activities within human resources, payroll and accounting, as well as financial reporting. While the Company believes that this new system and the related changes to internal controls will ultimately strengthen its internal controls over financial reporting, there are inherent risks in implementing any ERP system, and the Company will continue to evaluate and test control order to provide certification on the effectiveness, in all material respects, of its internal controls over financial reporting for the year ending December 31, 2017.In addition to our implementation of Workday as described above, we enhanced our internal controls over financial reporting for the consolidation process during the third quarter of 2017 in light of the GetSmarter acquisition. The Company has modified and will continue to modify its internal controls relating to its business and financial processes throughout the entire ERP system implementation. Additionally, we are currently in the process of assessing and integrating GetSmarter’s internal control over financial reporting withduring the three months ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our existing internal control over financial reporting.65 in “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.2016,2022, which was filed with the SEC on February 24, 2017,21, 2023, remain current in all material respects, except for the additional risk factors below.respects. These risks do not identify all risks that we face.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 Relating to the GetSmarter Acquisition and the Combined CompanyCombining the two companies may be more difficult, costly or time consuming than expected and the anticipated strategic benefits of the GetSmarter acquisition may not be realized.The success of the GetSmarter acquisition, including anticipated strategic benefits, will depend, in part, on our ability to successfully combine and integrate our business with the business of GetSmarter.The GetSmarter acquisition will involve the integration of GetSmarter’s business with our existing business, which is a complex, costly and time-consuming process. It is possible that the integration process could result in material challenges, including, without limitation:· the diversion of management’s attention from ongoing business concerns and performance shortfalls at one or both of the companies as a result of the devotion of management’s attention to the GetSmarter acquisition;· managing a larger combined international company;· maintaining employee morale and retaining key management and other employees;· the possibility of faulty assumptions underlying expectations regarding the integration process;· retaining existing business and operational relationships and attracting new business and operational relationships;· consolidating corporate and administrative infrastructures and eliminating duplicative operations and inconsistencies in standards, controls, procedures and policies;· coordinating geographically separate organizations;· unanticipated issues in integrating information technology, communications and other systems; and· unforeseen expenses associated with integration of the GetSmarter 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 materially affect the combined company’s financial position, results of operations and cash flows.If we experience difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully or at all, or may take longer to realize than expected. In addition, the actual strategic benefits of the acquisition could be less than anticipated.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 GetSmarter acquisition.Following the completion of the acquisition, the size of the combined company’s business may be significantly larger than the current size of either our or GetSmarter’s respective businesses. The combined company’s 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 and strategic benefits currently anticipated from the GetSmarter acquisition.The combined company incurred substantial expenses related to the completion of the acquisition of GetSmarter and expects to incur additional expense in connection with the integration of 2U and GetSmarter.We and GetSmarter have incurred, and expect to continue to incur, a number of non-recurring costs associated with the GetSmarter acquisition and combining the operations of the two companies. The substantial majority of non-recurring expenses will be comprised of transaction costs related to the GetSmarter acquisition.We also will 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 incurred in the integration of the two companies’ businesses. Although we expect that the realization of other efficiencies related to the integration of the businesses should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.GetSmarter may underperform relative to our expectations.GetSmarter may not be able to achieve the levels of revenue, earnings or operating efficiency that we expected it to. GetSmarter’s business and financial performance are subject to certain risks and uncertainties, including, among others, the following: (i) the risk of the loss of, or changes to, its relationships with its customers; (ii) its ability to acquire a new customers and expand short courses with current customers; (iii) its ability to continue to acquire prospective students for its current short courses; (iv) the acceptance, adoption and growth of online learning, particularly via short course certificates, by colleges and universities, faculty, students, employers, accreditors and state and federal licensing bodies, if applicable; and (v) the lack of predictability and visibility and the non-recurring nature of its business model. GetSmarter may be unable to achieve the same growth, revenues and earnings that GetSmarter has achieved in the past.The combined company may underperform relative to our expectations.If GetSmarter underperforms relative to our expectations, we may not be able to maintain the levels of revenue, earnings or operating efficiency that we and GetSmarter have achieved or might achieve separately. In addition, due to the short-term nature and lower price point of GetSmarter’s short course certificates and the shorter contractual terms with its university clients, we may not be able to reliably forecast or predict the impact that GetSmarter will have on the combined company’s revenue or other aspects of our results of operations.Uncertainties associated with the GetSmarter acquisition may cause the departure of management personnel and other key employees of GetSmarter or us, which could adversely affect the future business and operations of the combined company.We and GetSmarter are dependent upon the experience and industry knowledge of our respective officers and other key employees to execute our respective business plans. The combined company’s success after the GetSmarter acquisition will depend in part upon its ability to retain key management personnel and other key employees of 2U and GetSmarter. Current and prospective employees of 2U and GetSmarter may experience uncertainty about their future roles with the combined company, which may materially adversely affect the ability of each of 2U and GetSmarter to attract and retain key personnel after the acquisition which could adversely impact operations of the combined company.GetSmarter’s operations in South Africa expose us to risks that could have an adverse effect on our business.As of September 30, 2017, GetSmarter employed approximately 330 employees in South Africa, and it expects to continue adding personnel. GetSmarter may incur costs complying with labor laws, rules and regulations in South Africa, including laws that regulate work time, provide for mandatory compensation in the event of termination of employment for operational reasons, and impose monetary penalties for non-compliance with administrative and reporting requirements in respect of affirmative action policies. GetSmarter’s reliance on a workforce in South Africa also exposes us to disruptions in the business, political, and economic environment in that region. Maintenance of a stable political environment is important to GetSmarter’s operations, and terrorist attacks and acts of violence or war may directly affect our physical facilities and workforce or contribute to general instability. GetSmarter’s operations in South Africa require us to comply with complex local laws and regulatory requirements and expose us to foreign currency exchange rate risk. The economy of South Africa in the past has been, and in the future may continue to be, characterized by rates of inflation and interest rates that are substantially higher than those prevailing in the United States, which could increase our South-African based costs and decrease our operating margins. GetSmarter’s operations may also subject us to trade restrictions, exchange control limitations, reduced or inadequate protection for intellectual property rights, security breaches, and other factors that may adversely affect our business. Negative developments in any of these areas could increase our costs of operations or otherwise harm our business.GetSmarter’s international operations expose us to flucutations in currency exchange rates that could negatively impact ourfinancial results and cash flows.After the GetSmarter acquisition, we conduct a more substantial portion of our business outside the U.S. and we accordingly make certain business and resource decisions considering assumptions about foreign currency. As a result, we face exposure to adverse movements in foreign currency exchange rates, in particular with respect to the volatility of the South African rand. Our exposure to adverse movements in foreign currency exchange rates, including the South African rand, could have a material adverse impact on our financial results and cash flows.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 revenues or decreases our expenses, impacts our ability to accurately predict our future results and earnings.The market price of our common stock may decline as a result of the GetSmarter acquisition.The market price of our common stock may decline as a result of the GetSmarter acquisition if, among other things, we are unable to achieve the expected growth in revenue, or if the strategic benefits are not realized or if the transaction costs related to the GetSmarter 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 GetSmarter acquisition as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the GetSmarter acquisition on our financial results is not consistent with the expectations of financial or industry analysts.Trading Arrangement Action Date Rule 10b5-1* Non-Rule 10b5-1** Total Shares to be Sold Expiration Date Matthew J. Norden (Chief Legal Officer) Adopt June 16, 2023 X 30,000 June 14, 2024 * Intended to satisfy the affirmative defense of Rule 10b5-1(c) ** A “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K None.Exhibit
NumberDescription Form File No. Exhibit
NumberFiling Date Filed/Furnished Herewith 8-K 001-36376 3.1 June 10, 2022 8-K 001-36376 3.2 June 10, 2022 X X X X X X 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. X 101.SCH XBRL Taxonomy Extension Schema Document. X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document. X 101.LAB XBRL Taxonomy Extension Label Linkbase Document. X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. X 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). X † Indicates management contract or compensatory plan. *
Portions of this exhibit have been omitted pursuant to Item 601(b) of Regulation S-K.
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SIGNATURES(1) Previously filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36376), filed with the Commission on April 4, 2014, and incorporated by reference herein.(2) Previously filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36376), filed with the Commission on April 4, 2014, and incorporated by reference herein.2U, Inc.2U, Inc. November 7, 2017By:August 8, 2023 By: /s/ Christopher J. Paucek November 7, 2017Catherine A. GrahamCatherine A. Graham