Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SeptemberJune 30, 20192020


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

For the transition period from to

Commission File Number: 001-36376
001-36376

2U, INC.
(Exact name of registrant as specified in its charter)

Delaware26-233593926-2335939
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
7900 Harkins RoadLanham,MD20706
(Address of Principal Executive Offices)(Zip Code)

(301) (301) 892-4350
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.001 par value per shareTWOUThe Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒ Yes  ☐ No

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes  ☒ No
As of November 8, 2019,July 28, 2020, there were 63,476,90264,403,712 shares of the registrant’s common stock, par value $0.001 per share, outstanding.


Table of Contents

TABLE OF CONTENTS
Item 1.
Financial Statements
4
Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20192020 (unaudited) and December 31, 20182019
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019
Condensed Consolidated Statements of Cash Flows (unaudited) for the ninesix months ended SeptemberJune 30, 20192020 and 20182019



1
Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
        
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and which are subject to substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Factors whichthat may cause actual results to differ materially from current expectations include, but are not limited to:
•trends in the higher education market and the market for online education, and expectations for growth in those markets;
•the acceptance, adoption and growth of online learning by colleges and universities, faculty, students, employers, accreditors and state and federal licensing bodies;
•the impact of competition on our industry and innovations by competitors;
•our ability to comply with evolving regulations and legal obligations related to data privacy, data protection and information security;
•our expectations about the potential benefits of our cloud-based software-as-a-service or SaaS, technology and technology-enabled services to university clients and students;
•our dependence on third parties to provide certain technological services or components used in our platform;
our ability to meet the anticipated launch dates of our graduate programs, short courses and boot camps;
•our expectations about the predictability, visibility and recurring nature of our business model;
•our ability to meet the anticipated launch dates of our degree programs, short courses and boot camps;
•our ability to acquire new university clients and expand our graduatedegree programs, short courses and boot camps with existing university clients;
•our ability to successfully integrate the operations of our acquisitions, including Get Educated International Proprietary Limited, or GetSmarter, and Trilogy, Education Services, Inc., or Trilogy,to achieve the expected benefits of our acquisitions and manage, expand and grow the combined company;
•our ability to refinance our indebtedness on attractive terms, if at all, to better align with our focus on profitability;
•our ability to service our substantial indebtedness and comply with the financialcovenants and other restrictive covenantsconversion obligations contained in the credit agreementIndenture (as defined below) governing our convertible senior secured term loannotes and the Credit Agreement (as defined below) governing our revolving credit facility;
•our ability to generate sufficient future operating cash flows from recent acquisitions to ensure related goodwill is not impaired;
•our ability to execute our growth strategy in the international, undergraduate and non-degree alternative markets;
•our ability to continue to acquirerecruit prospective students for our graduate programs, short courses and boot camps;offerings;
•our ability to affectmaintain or increase student retention rates in our graduatedegree programs;
•our ability to attract, hire and retain qualified employees;
•our expectations about the scalability of our cloud-based platform;
our expectations regarding future expenses in relation to future revenue;
•potential changes in regulations applicable to us or our university clients; and
•our expectations regarding the amount of time our cash balances and other available financial resources will be sufficient to fund our operations.operations;
•the impact and cost of stockholder activism;

2
Table of Contents

•the impact of any natural disasters or public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic;
•our expectations regarding the effect of the capped call transactions and regarding actions of the option counterparties and/or their respective affiliates; and
•other factors beyond our control.
You should refer to the risks described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as amended and supplemented by Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
        
You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. In this Quarterly Report on Form 10-Q, the terms “2U,” “Company,“our company,” “we,” “us,” and “our” refer to 2U, Inc. and its subsidiaries, unless the context indicates otherwise.
3

Table of Contents

PART I.  FINANCIAL INFORMATION
 
Item 1. Financial Statements

2U, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)

September 30,
2019		 December 31,
2018		 June 30,
2020		December 31,
2019
(unaudited)   (unaudited) 
Assets 
  
Assets  
Current assets 
  
Current assets  
Cash and cash equivalents$154,091
 $449,772
Cash and cash equivalents$194,803  $170,593  
Restricted cash16,739
 —
Restricted cash18,228  19,276  
Investments—
 25,000
Accounts receivable, net84,797
 32,636
Accounts receivable, net71,580  33,655  
Prepaid expenses and other assets39,239
 14,272
Prepaid expenses and other assets40,378  37,424  
Total current assets294,866
 521,680
Total current assets324,989  260,948  
Property and equipment, net56,105
 52,299
Property and equipment, net55,066  57,643  
Right-of-use assets40,391
 —
Right-of-use assets49,813  43,401  
Goodwill414,027
 61,852
Goodwill406,340  418,350  
Amortizable intangible assets, net336,373
 136,605
Amortizable intangible assets, net320,559  333,075  
University payments and other assets, non-current71,808
 34,918
University payments and other assets, non-current75,793  73,413  
Total assets$1,213,570
 $807,354
Total assets$1,232,560  $1,186,830  
Liabilities and stockholders’ equity 
  
Liabilities and stockholders’ equity  
Current liabilities 
  
Current liabilities  
Accounts payable and accrued expenses$59,607
 $27,647
Accounts payable and accrued expenses$84,541  $65,381  
Accrued compensation and related benefits27,256
 23,001
Accrued compensation and related benefits29,090  21,885  
Deferred revenue58,634
 8,345
Deferred revenue77,071  48,833  
Lease liability7,104
 —
Lease liability8,484  7,320  
Other current liabilities12,362
 9,487
Other current liabilities13,785  12,535  
Total current liabilities164,963
 68,480
Total current liabilities212,971  155,954  
Long-term debt245,856
 3,500
Long-term debt263,129  246,620  
Deferred tax liabilities, net6,172
 6,949
Deferred tax liabilities, net2,424  5,133  
Lease liability, non-current62,709
 —
Lease liability, non-current73,592  66,974  
Other liabilities, non-current812
 23,416
Other liabilities, non-current1,073  899  
Total liabilities480,512
 102,345
Total liabilities553,189  475,580  
Commitments and contingencies (Note 6)


 


Commitments and contingencies (Note 6)
Stockholders’ equity

 

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, 63,388,705 shares issued and outstanding as of September 30, 2019; 57,968,493 shares issued and outstanding as of December 31, 201863
 58
Preferred stock, $0.001 par value, 5,000,000 shares authorized, NaN issuedPreferred stock, $0.001 par value, 5,000,000 shares authorized, NaN issued—  —  
Common stock, $0.001 par value, 200,000,000 shares authorized, 64,300,599 shares issued and outstanding as of June 30, 2020; 63,569,109 shares issued and outstanding as of December 31, 2019Common stock, $0.001 par value, 200,000,000 shares authorized, 64,300,599 shares issued and outstanding as of June 30, 2020; 63,569,109 shares issued and outstanding as of December 31, 201964  63  
Additional paid-in capital1,180,298
 957,631
Additional paid-in capital1,306,483  1,197,379  
Accumulated deficit(434,804) (244,166)Accumulated deficit(605,661) (479,388) 
Accumulated other comprehensive loss(12,499) (8,514)Accumulated other comprehensive loss(21,515) (6,804) 
Total stockholders’ equity733,058
 705,009
Total stockholders’ equity679,371  711,250  
Total liabilities and stockholders’ equity$1,213,570
 $807,354
Total liabilities and stockholders’ equity$1,232,560  $1,186,830  
 
See accompanying notes to condensed consolidated financial statements.
4

Table of Contents

2U, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited, in thousands, except share and per share amounts)

Three Months Ended
September 30,		 Nine Months Ended
September 30,		 Three Months Ended
June 30,		Six Months Ended
June 30,
2019 2018 2019 2018 2020201920202019
Revenue$153,798
 $106,963
 $411,493
 $296,674
Revenue$182,687  $135,461  $358,166  $257,695  
Costs and expenses       Costs and expenses
Curriculum and teaching21,336
 6,351
 41,345
 16,665
Curriculum and teaching26,256  13,308  46,734  20,009  
Servicing and support27,351
 16,586
 71,518
 49,116
Servicing and support30,294  23,993  60,827  44,167  
Technology and content development34,132
 16,361
 79,969
 45,436
Technology and content development37,307  26,043  72,817  45,837  
Marketing and sales93,521
 60,548
 260,231
 171,982
Marketing and sales98,341  89,749  197,556  166,710  
General and administrative42,040
 18,974
 93,471
 63,323
General and administrative39,554  28,408  83,207  51,431  
Impairment charge70,379
 —
 70,379
 —
Total costs and expenses288,759

118,820

616,913

346,522
Total costs and expenses231,752  181,501  461,141  328,154  
Loss from operations(134,961) (11,857) (205,420) (49,848)Loss from operations(49,065) (46,040) (102,975) (70,459) 
Interest income924
 1,799
 5,087
 3,053
Interest income154  1,814  667  4,163  
Interest expense(5,651) (27) (8,130) (81)Interest expense(6,518) (2,424) (12,011) (2,479) 
Other expense, net(710) (273) (1,093) (1,493)
Loss on debt extinguishmentLoss on debt extinguishment(11,671) —  (11,671) —  
Other income (expense), netOther income (expense), net570  (13) (1,701) (383) 
Loss before income taxes(140,398)
(10,358)
(209,556)
(48,369)Loss before income taxes(66,530) (46,663) (127,691) (69,158) 
Income tax (expense) benefit(714) 414
 18,918
 5,207
Income tax benefitIncome tax benefit363  18,691  1,418  19,632  
Net loss$(141,112)
$(9,944)
$(190,638)
$(43,162)Net loss$(66,167) $(27,972) $(126,273) $(49,526) 
Net loss per share, basic and diluted$(2.23) $(0.17) $(3.14) $(0.78)Net loss per share, basic and diluted$(1.03) $(0.46) $(1.98) $(0.83) 
Weighted-average shares of common stock outstanding, basic and diluted63,358,890
 57,663,361
 60,690,536
 55,128,845
Weighted-average shares of common stock outstanding, basic and diluted64,075,405  60,516,662  63,850,869  59,334,246  
Other comprehensive loss 
  
  
  
Other comprehensive loss  
Foreign currency translation adjustments, net of tax of $0 for all periods presented(5,856) (2,781) (3,985) (12,327)Foreign currency translation adjustments, net of tax of $0 for all periods presented1,404  2,243  (14,711) 1,871  
Comprehensive loss$(146,968)
$(12,725)
$(194,623)
$(55,489)Comprehensive loss$(64,763) $(25,729) $(140,984) $(47,655) 
 
See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

2U, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited, in thousands, except share amounts)

Common StockAdditional
Paid-In
Capital		Accumulated
Deficit		Accumulated
Other Comprehensive
Income (Loss)		Total
Stockholders’
Equity
Common Stock 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 SharesAmount
Shares Amount 
Balance, December 31, 201857,968,493
 $58
 $957,631
 $(244,166) $(8,514) $705,009
Balance, December 31, 2019Balance, December 31, 201963,569,109  $63  $1,197,379  $(479,388) $(6,804) $711,250  
Issuance of common stock in connection with settlement of restricted stock units, net of withholdingsIssuance of common stock in connection with settlement of restricted stock units, net of withholdings96,683  1  (1) —  —  —  
Exercise of stock options211,506
 —
 1,928
 —
 —
 1,928
Exercise of stock options37,275  —  384  —  —  384  
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings9,319
 —
 —
 —
 —
 —
Stock-based compensation expense—
 —
 9,584
 —
 —
 9,584
Stock-based compensation expense—  —  20,870  —  —  20,870  
Net loss—
 —
 —
 (21,554) —
 (21,554)Net loss—  —  —  (60,106) —  (60,106) 
Foreign currency translation adjustment—
 —
 —
 —
 (372) (372)Foreign currency translation adjustment—  —  —  —  (16,115) (16,115) 
Balance, March 31, 201958,189,318
 $58
 $969,143
 $(265,720) $(8,886) $694,595
Balance, March 31, 2020Balance, March 31, 202063,703,067  $64  $1,218,632  $(539,494) $(22,919) $656,283  
Issuance of common stock in connection with settlement of restricted stock units, net of withholdingsIssuance of common stock in connection with settlement of restricted stock units, net of withholdings355,506  —  (463) —  —  (463) 
Exercise of stock options85,539
 —
 452
 —
 —
 452
Exercise of stock options158,453  —  1,441  —  —  1,441  
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings348,418
 —
 (2,558) —
 —
 (2,558)
Issuance of common stock in connection with business combination, net of offering costs4,608,101
 5
 184,317
 —
 —
 184,322
Issuance of common stock in connection with employee stock purchase planIssuance of common stock in connection with employee stock purchase plan83,573  —  1,771  —  —  1,771  
Equity component of convertible senior notes, net of issuance costsEquity component of convertible senior notes, net of issuance costs—  —  114,551  —  —  114,551  
Purchases of capped calls in connection with convertible senior notesPurchases of capped calls in connection with convertible senior notes—  —  (50,540) —  —  (50,540) 
Stock-based compensation expense—
   9,967
 —
 —
 9,967
Stock-based compensation expense—  —  21,091  —  —  21,091  
Net loss—
 —
 —
 (27,972) —
 (27,972)Net loss—  —  —  (66,167) —  (66,167) 
Foreign currency translation adjustment—
 —
 —
 —
 2,243
 2,243
Foreign currency translation adjustment—  —  —  —  1,404  1,404  
Balance, June 30, 201963,231,376
 $63
 $1,161,321
 $(293,692) $(6,643) $861,049
Exercise of stock options41,828
 —
 562
 —
 —
 562
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings61,016
 —
 (15) —
 —
 (15)
Issuance of common stock in connection with employee stock purchase plan54,485
 —
 1,895
 —
 —
 1,895
Stock-based compensation expense—
 

 16,535
 —
 —
 16,535
Net loss—
 —
 —
 (141,112) —
 (141,112)
Foreign currency translation adjustment—
 —
 —
 —
 (5,856) (5,856)
Balance, September 30, 201963,388,705
 $63
 $1,180,298
 $(434,804) $(12,499) $733,058
Balance, June 30, 2020Balance, June 30, 202064,300,599  $64  $1,306,483  $(605,661) $(21,515) $679,371  

See accompanying notes to condensed consolidated financial statements.

6
Table of Contents

2U, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Continued)
(unaudited, in thousands, except share amounts)

Common StockAdditional
Paid-In
Capital		Accumulated
Deficit		Accumulated
Other Comprehensive
Income (Loss)		Total
Stockholders’
Equity
Common Stock 
Additional
Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated
Other Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 SharesAmount
Shares Amount 
Balance, December 31, 201752,505,856
 $53
 $588,289
 $(205,836) $5,326
 $387,832
Balance, December 31, 2018Balance, December 31, 201857,968,493  $58  $957,631  $(244,166) $(8,514) $705,009  
Issuance of common stock in connection with settlement of restricted stock units, net of withholdingsIssuance of common stock in connection with settlement of restricted stock units, net of withholdings9,319  —  —  —  —  —  
Exercise of stock options186,049
 —
 2,120
 —
 —
 2,120
Exercise of stock options211,506  —  1,928  —  —  1,928  
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings154,111
 —
 (1,002) —
 —
 (1,002)
Stock-based compensation expense—
 —
 7,122
 —
 —
 7,122
Stock-based compensation expense—  —  9,584  —  —  9,584  
Net loss—
 —
 —
 (14,871) —
 (14,871)Net loss—  —  —  (21,554) —  (21,554) 
Foreign currency translation adjustment—
 —
 —
 —
 4,632
 4,632
Foreign currency translation adjustment—  —  —  —  (372) (372) 
Balance, March 31, 201852,846,016
 $53
 $596,529
 $(220,707) $9,958
 $385,833
Balance, March 31, 2019Balance, March 31, 201958,189,318  $58  $969,143  $(265,720) $(8,886) $694,595  
Issuance of common stock in connection with business combination, net of offering costsIssuance of common stock in connection with business combination, net of offering costs4,608,101  5  184,317  —  —  184,322  
Issuance of common stock in connection with settlement of restricted stock units, net of withholdingsIssuance of common stock in connection with settlement of restricted stock units, net of withholdings348,418  —  (2,558) —  —  (2,558) 
Exercise of stock options315,482
 —
 2,673
 —
 —
 2,673
Exercise of stock options85,539  —  452  —  —  452  
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings320,753
 —
 (2,405) —
 —
 (2,405)
Issuance of common stock in connection with a public offering of common stock, net of offering costs3,833,334
 4
 330,858
 —
 —
 330,862
Stock-based compensation expense—
 —
 9,009
 —
 —
 9,009
Stock-based compensation expense—  —  9,967  —  —  9,967  
Net loss—
 —
 —
 (18,347) —
 (18,347)Net loss—  —  —  (27,972) —  (27,972) 
Foreign currency translation adjustment—
 —
 —
 —
 (14,178) (14,178)Foreign currency translation adjustment—  —  —  —  2,243  2,243  
Balance, June 30, 201857,315,585
 $57
 $936,664
 $(239,054) $(4,220) $693,447
Exercise of stock options499,043
 —
 2,239
 —
 —
 2,239
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings68,228
 1
 (44) —
 —
 (43)
Issuance of common stock in connection with employee stock purchase plan22,483
 —
 1,278
 —
 —
 1,278
Stock-based compensation expense—
 —
 7,933
 —
 —
 7,933
Net loss—
 —
 —
 (9,944) —
 (9,944)
Foreign currency translation adjustment—
 —
 —
 —
 (2,781) (2,781)
Balance, September 30, 201857,905,339
 $58
 $948,070
 $(248,998) $(7,001) $692,129
Balance, June 30, 2019Balance, June 30, 201963,231,376  $63  $1,161,321  $(293,692) $(6,643) $861,049  

See accompanying notes to condensed consolidated financial statements.
7

Table of Contents

2U, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)

Nine Months Ended
September 30,		Six Months Ended June 30,
2019 2018 20202019
Cash flows from operating activities 
  
Cash flows from operating activities  
Net loss$(190,638) $(43,162)Net loss$(126,273) $(49,526) 
Adjustments to reconcile net loss to net cash used in operating activities:   Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expenseNon-cash interest expense5,675  520  
Depreciation and amortization expense46,639
 23,382
Depreciation and amortization expense47,470  24,351  
Stock-based compensation expense36,086
 24,064
Stock-based compensation expense41,961  19,551  
Non-cash lease expense8,407
 —
Non-cash lease expense7,299  5,264  
Bad debt expense1,785
 —
Impairment charge70,379
 —
Changes in operating assets and liabilities:   
Provision for credit lossesProvision for credit losses1,267  993  
Loss on debt extinguishmentLoss on debt extinguishment11,671  —  
Changes in operating assets and liabilities, net of assets and liabilities acquired:Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net(39,743) (35,543)Accounts receivable, net(39,521) (25,548) 
Payments to university clients(22,257) (11,066)Payments to university clients4,354  (20,060) 
Prepaid expenses and other assets(6,760) (5,426)Prepaid expenses and other assets(8,774) (8,796) 
Accounts payable and accrued expenses12,712
 10,796
Accounts payable and accrued expenses19,606  18,081  
Accrued compensation and related benefits(109) 1,185
Accrued compensation and related benefits7,383  (5,964) 
Deferred revenue20,162
 12,210
Deferred revenue28,843  15,849  
Other liabilities, net(24,263) (3,976)Other liabilities, net(9,299) (23,056) 
Other1,939
 1,493
Other1,694  392  
Net cash used in operating activities(85,661)
(26,043)Net cash used in operating activities(6,644) (47,949) 
Cash flows from investing activities 
  
Cash flows from investing activities  
Purchase of a business, net of cash acquired(388,004) —
Purchase of a business, net of cash acquired(949) (387,815) 
Additions of amortizable intangible assets(50,950) (51,713)Additions of amortizable intangible assets(32,497) (32,430) 
Purchases of property and equipment(11,310) (8,027)Purchases of property and equipment(4,254) (8,135) 
Purchase of investments(10,000) (25,000)Purchase of investments—  (5,000) 
Proceeds from maturities of investments25,000
 —
Proceeds from maturities of investments—  25,000  
Advances made to university clients(100) (300)Advances made to university clients—  (100) 
Advances repaid by university clients350
 25
Advances repaid by university clients275  200  
Other4
 —
Net cash used in investing activities(435,010)
(85,015)Net cash used in investing activities(37,425) (408,280) 
Cash flows from financing activities 
  
Cash flows from financing activities  
Proceeds from issuance of common stock, net of offering costs—
 330,862
Proceeds from debtProceeds from debt371,708  243,726  
Payments on debtPayments on debt(250,409) —  
Payment of debt issuance costsPayment of debt issuance costs(3,419) (1,953) 
Purchases of capped calls in connection with issuance of convertible senior notesPurchases of capped calls in connection with issuance of convertible senior notes(50,540) —  
Prepayment premium on extinguishment of senior secured term loan facilityPrepayment premium on extinguishment of senior secured term loan facility(2,528) —  
Proceeds from exercise of stock options2,942
 7,032
Proceeds from exercise of stock options1,825  2,380  
Proceeds from debt243,726
 —
Tax withholding payments associated with settlement of restricted stock units(2,573) (3,450)Tax withholding payments associated with settlement of restricted stock units(464) (2,558) 
Proceeds from ESPP share purchases1,895
 1,278
Proceeds from employee stock purchase plan share purchasesProceeds from employee stock purchase plan share purchases1,771  —  
Payments for acquisition of amortizable intangible assets(1,283) (4,900)Payments for acquisition of amortizable intangible assets—  (1,283) 
Payment of debt issuance costs(1,953) —
Net cash provided by financing activities242,754

330,822
Net cash provided by financing activities67,944  240,312  
Effect of exchange rate changes on cash(1,025) (908)Effect of exchange rate changes on cash(713) (371) 
Net (decrease) increase in cash, cash equivalents and restricted cash(278,942) 218,856
Net increase (decrease) in cash, cash equivalents and restricted cashNet increase (decrease) in cash, cash equivalents and restricted cash23,162  (216,288) 
Cash, cash equivalents and restricted cash, beginning of period449,772
 223,370
Cash, cash equivalents and restricted cash, beginning of period189,869  449,772  
Cash, cash equivalents and restricted cash, end of period$170,830

$442,226
Cash, cash equivalents and restricted cash, end of period$213,031  $233,484  
See accompanying notes to condensed consolidated financial statements.

8
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)



1. Organization

2U, Inc. (together with its subsidiaries, the “Company”) is a leading provider of education technology company that well-recognizedfor nonprofit colleges and universities trust to bring them intouniversities. The Company builds, delivers, and supports more than 435 digital and in-person educational offerings, including graduate and undergraduate degrees, professional certificates, boot camps, and short courses, across the digital age. The Company’s comprehensive platform of tightly integrated technology and services provides the digital infrastructure universities need to attract, enroll, educate and support students at scale. With the Company’s platform, students can pursue their education anytime, anywhere, without quitting their jobs or moving; and university clients can improve educational outcomes, skills attainment and career prospects for a greater number of students than they could on their own.Career Curriculum Continuum.

The Company has 2 reportable segments: the Graduate Program Segment and the Alternative Credential Segment (formerly known as the Short Course Segment).Segment. The Company’s Graduate 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 degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate programs.degree of the same quality they would receive on campus. The Company’s Alternative Credential Segment provides short form non-degree offerings, such asincludes the premium online short courses and technical, skills-based boot camps to working professionals around the worldprovided through relationships with leadingnonprofit colleges and universities. In the first quarter of 2019, we changed the name of this segment from Short Course to Alternative Credential to more accurately reflect the nature and breadth of educationalStudents enrolled in these offerings within this segment. Refer to Note 13 for further information about the Company’s segments.are generally working professionals seeking career advancement through skills attainment.

On May 22, 2019, the Company completed its acquisition of Trilogy, a workforce accelerator that prepares adult learners for high-growth careers in the digital economy through its boot camp offerings. The acquisition expanded 2U’s university portfolio and deepened relationships across both 2U’s and Trilogy’s partners to make education more accessible for lifelong learners. The results of Trilogy’s operations are included in the Alternative Credential Segment. Refer to Note 3 for further information about the acquisition of Trilogy.
2. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements, which include the assets, liabilities, results of operations and cash flows of the Company have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (“SEC”(the “SEC”). As permitted under such rules, certain notes and other financial information normally required by U.S. GAAP have been condensed or omitted. The Company believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 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, 2018.2019. All significant intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet data as of December 31, 20182019 was derived from the audited financial statements, but does not include all disclosures required by U.S. GAAP on an annual reporting basis.

Use of Estimates

The preparation of 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 and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Significant estimates and assumptions are inherent in the analysis and the measurement of deferred taxprovisions for credit losses, acquired intangible assets, and the recoverability of goodwill.goodwill and deferred tax assets. Due to the inherent uncertainty involved in making estimates, particularly in light of the COVID-19 pandemic, actual results reported in
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2.    Significant Accounting Policies (Continued)

future periods may be affected by changes in those estimates. The Company evaluates its estimates and assumptions on an ongoing basis.

Accounts Receivable, Contract Assets and Liabilities
Restricted Cash

The Company maintains restricted cash as collateral for standby letters        Balance sheet items related to contracts consist of credit for the Company’s leased facilitiesaccounts receivable, net and in connection with the deferred government grant obligations.

Investments

The Company’s investments within current assets on the condensed consolidated balance sheets relate to certificates of deposit with original maturities between three months and one year. As of December 31, 2018, the Company had a $25.0 million certificate of deposit included in investments that qualified as a Level 1 fair value measurement asset and was stated at cost, which approximated fair value. This certificate of deposit matured in the first quarter of 2019.

Revenue Recognition

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

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

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

The Alternative Credential Segment derives revenue primarily from contracts with students for the tuition and fees paid to enroll in, and progress through, the Company’s short courses and boot camps. The Company’s short courses run between six and 16 weeks, while boot camps run between 12 and 24 weeks. In this segment, the Company’s 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. The Company recognizes the gross proceeds received from the students enrolled and shares contractually specified amounts received from students with the associated university client, in exchange for licenses to use the university brand name and other university trademarks. These amounts are recognized as curriculum and teaching costs on the Company’s condensed consolidated statementsbalance sheets. Included in accounts receivable, net are trade accounts receivable, which are comprised of operationsbilled and comprehensive loss.unbilled revenue. Accounts receivable, net is stated at amortized cost net of provision for credit losses. The Company’s contracts with university clients in this segmentmethodology to measure the provision for credit losses requires an estimation of loss rates based upon historical loss experience adjusted for factors that are typically shorterrelevant to determining the expected collectability of accounts receivable. Some of these factors include current market conditions, delinquency trends, aging behavior of receivables and less restrictive than the Company’s contracts with university clients in the Graduate Program Segment.credit and liquidity quality indicators for industry groups, customer classes or individual customers.

9
Business Combinations
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2. Significant Accounting Policies (Continued)


The Company’s estimates are reviewed and revised periodically based on the ongoing evaluation of credit quality indicators. Historically, actual write-offs for uncollectible accounts have not significantly differed from prior estimates. The Company recognizes unbilled revenue when revenue recognition occurs in advance of billings. Unbilled revenue is recognized in the Graduate Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. The Company’s unbilled revenue represents contract assets. Unbilled accounts receivable is recognized in the Alternative Credential Segment once the presentation period commences for amounts to be invoiced to students under installment plans that are paid over the same presentation period.
The purchase price of an acquisition is allocated tofollowing table presents the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. Acquisition-related costs are expensed as incurred. The excess of the cost of an acquired entity, net of the amounts assigned to the assets acquired and liabilities assumed, is recognized as goodwill. The net assets and results of operations of an acquired entity are includedchange in provision for credit losses on the Company’s consolidated financial statements frombalance sheets for the acquisition date.period indicated:

Provision for Credit Losses
(in thousands)
Balance as of January 1, 2020$1,330 
Current period provision1,267 
Amounts written off(46)
Balance as of June 30, 2020$2,551 
Equity Interests

AsDeferred revenue represents the excess of September 30, 2019, the Company had a $10.0 million investmentamounts billed or received as compared to amounts recognized in an education technology company recorded within university payments and other assets, non-current on the condensed consolidated balance sheet. This investment does not have a readily determinable fair value, and is accounted for as a cost method investment, which is subject to fair value remeasurement upon the occurrence of an observable event.

Marketing and Sales Costs

The majority of the marketing and sales costs incurred by the Company are directly related to acquiring students for its university clients’ graduate programs, with lesser amounts related to acquiring students for its short courses and boot camps and marketing and advertising efforts related to the Company’s own brand. For the three and nine months ended September 30, 2019 and 2018, costs related to the Company’s marketing and advertising efforts of its own brand were not material. All such costs are expensed as incurred and reported in marketing and sales expenserevenue on the Company’s condensed consolidated statements of operations and comprehensive loss.

Leases

Forloss as of the end of the reporting period, and such amounts are reflected as a current liability on the Company’s operating leases, an assessment is performedcondensed consolidated balance sheets. The Company generally receives payments from Graduate 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 determine if an arrangement is a lease at inception. Right-of-use (“ROU”) assets representcompletion of the service period. These payments are recorded as deferred revenue until the services are delivered or until the Company’s rightobligations are otherwise met, at which time revenue is recognized.
Convertible Senior Notes
In April 2020, the Company issued 2.25% convertible senior notes due May 1, 2025 (the “Notes”) in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to use an underlying assetpurchase additional Notes, in a private offering. Refer to Note 8 for more information regarding the Notes.
The Notes are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”). Pursuant to ASC 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the lease termliability (debt) and lease liabilities representequity (conversion option) components of the Company’s obligation to make lease payments arisinginstrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option using a market-based approach. The amount of the equity component is then calculated by deducting the fair value of the liability component from the lease. Operating lease ROU assetsprincipal amount of the instrument. The difference between the principal amount and lease liabilities are recognized at the lease commencement dateliability component represents a debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.
Recent Accounting Pronouncements
In March 2020, the present value of lease payments over the lease term. As the information necessary to determine the rate implicit in the Company’s leases is not readily available, the Company determines its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any prepaid lease payments made, less lease incentives. The Company’s lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not have any finance leases for any periods presented.

The Company has elected, as an accounting policy for its leases of real estate, to account for lease and non-lease components in a contract as a single lease component. In addition, the recognition requirements are not applied to leases with a term of 12 months or less. Rather, the lease payments for short-term leases are recognized on the condensed consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term.

Variable payments that depend on an index or a rate are initially measured using the index or rate at the lease commencement date. Such variable payments are included in the total lease payments when measuring the lease liabilities and ROU assets. The Company will only remeasure variable payments that depend on an index or a rate when the Company is remeasuring the lease liabilities due to anyFASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the following occurring: (i)Effects of Reference Rate Reform on Financial Reporting. This ASU is intended to provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, to ease the lease is modifiedpotential accounting and financial reporting burden associated with the modification is not accounted forexpected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU may be applied as a separate contract; (ii) a contingency, upon which some or all of the variable lease paymentsbeginning of any interim period that will be paid over the remainderincludes its effective date (i.e., March 12, 2020) through
10
Table of the lease term are based, is resolved; (iii) there is a change in lease term; (iv) there is a change in the probability of exercising a purchase option; or (v) there is a change in the amount probable of being owed under residual value guarantees. Until the lease liabilities are remeasured due to one of the aforementioned events, additional payments for an increase in the index or rate will be recognized in the period in which they are incurred. Variable payments that do not depend on an index or a rate are excluded from the measurement of the lease liabilities and recognized in the condensed consolidated statements of operations and comprehensive loss in the period in which the obligation for those payments is incurred. 


Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2. Significant Accounting Policies (Continued)

December 31, 2022. The Company does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements or related disclosures.
Long-Lived Asset Additions        In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU No. 2020-01 was issued to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative in ASC 321, immediately before applying or discontinuing the equity method of accounting. The update regarding forward contracts and purchased options is not applicable as the Company does not have any forward contracts or purchased options. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company is evaluating the impact that this ASU will have on its condensed consolidated financial statements and related disclosures.

During the nine months ended September 30,        In December 2019, the Company had capital asset additionsFASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of $62.0 million in property and equipment and capitalized technology and content development, which included an immaterial amount of non-cash capital expenditures. Dueits initiative to extended payment terms associated with the timing of cash capital expenditures made more than 90 days after the date of purchase, $1.3 million of these additions were classified as cash flows from financing activitiesreduce complexity in the accounting standards. The amendments in the ASU include removal of certain exceptions to the general principles in Topic 740 related to recognizing deferred taxes for investments, performing intraperiod tax allocation and calculating income taxes in an interim period. The ASU also clarifies and simplifies other aspects of the accounting for income taxes, including the recognition of deferred tax liabilities for outside basis differences. The amendments in this ASU are effective for annual and interim periods in fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact that this ASU will have on its condensed consolidated statement of cash flows for the nine months ended September 30, 2019.

During the nine months ended September 30, 2018, the Company had capital asset additions of $70.7 million in propertyfinancial statements and equipment and capitalized technology and content development, of which $6.1 million consisted of non-cash capital expenditures, primarily related to the acquisition of certain long-lived assets for which a liability was accrued.

Goodwill

Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company’s goodwill balance relates to its acquisitions of GetSmarter in July 2017 and Trilogy in May 2019. The Company reviews goodwill at least annually, as of October 1. Between annual tests, goodwill is reviewed for possible impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company tests goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. The Company initially assesses qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment review. The Company reviews goodwill for impairment using a quantitative approach if it decides to bypass the qualitative assessment or determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on a qualitative assessment. Upon completion of a quantitative assessment, the Company may be required to recognize an impairment based on the difference between the carrying value and the fair value of the reporting unit.

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

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

The Company experienced a sustained decline in its stock price during the three months ended September 30, 2019, which management deemed a triggering event that required the Company to perform an interim goodwill impairment test as of September 1, 2019. The Company’s test relied in part on the work of an independent valuation firm engaged to provide inputs as to the fair value of the reporting units and to assist in the related calculations and analysis. The results of the interim impairment test indicated that the carrying value of the boot camp business acquired in 2019 within the Company’s Alternative Credential Segment exceeded the fair value by $70.4 million. The decrease in this reporting unit’s fair value was primarily due to lower expectations of future performance due to the impact of changes in key management as well as an increased focus in integrating the operations of the newly acquired reporting unit, which impacted the estimated operating cash flows. As a result, the Company recorded an impairment charge of $70.4 million on the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2019.

Other than the recently impaired reporting unit, the Company had no reporting units whose estimated fair values as of September 30, 2019 exceeded their carrying value by less than 10%. It is possible that future changes in the Company’s
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2.    Significant Accounting Policies (Continued)

circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, could require the Company to record additional impairment charges in the future.

Debt Issuance Costs

Debt issuance costs are incurred as a result of entering into certain borrowing transactions and are presented as a reduction from the carrying amount of the debt liability on the Company’s condensed consolidated balance sheets. Debt issuance costs are amortized over the term of the associated debt instrument. The amortization of debt issuance costs is included as a component of interest expense on the Company’s condensed consolidated statements of operations and comprehensive loss. If the Company extinguishes debt prior to the end of the underlying instrument’s full term, some or all of the unamortized debt issuance costs may need to be written off, and a loss on extinguishment may need to be recognized. Refer to Note 8 for further information about the Company’s debt.

Recent Accounting Pronouncements

disclosures.
In April 2019, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU No. 2019-04 provides corrections,updates and clarifications to the previously issued updates of ASU No. 2016-01, ASU No. 2016-13 and ASU No. 2017-12. Various areas of the Accounting Standards CodificationASC wereimpacted by the update. This standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted theprevious ASUs, in which case the effective date will vary according to each specific ASU adoption. As the Company has adopted ASU No. 2016-01, the amendments related to ASU No. 2016-01 are effective for annual and interim periods in fiscal years beginning after December 15, 2019. As the Company has not yet adopted ASU No. 2016-13, the amendments related to ASU No. 2016-13 are effective for fiscal years beginning after December 15, 2019. Refer below for further discussion of ASU No. 2016-13. The Company is evaluating the impact thatadopted the amendments related to ASU Nos. 2016-132016-01 and 2016-01 will have on its consolidated financial position and related disclosures. The amendments to ASU No. 2017-12 are not applicable to the Company.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires customers in cloud computing arrangements that are service contracts to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company early adopted this ASU on July 1, 2018 under the prospective method. As a result of adopting this standard, as of September 30, 2019 and December 31, 2018, the Company had balances of $2.3 million and $0.4 million, respectively, of capitalized implementation costs incurred to integrate the software associated with its cloud computing arrangements, within university payments and other assets, non-current on the condensed consolidated balance sheets. Such capitalized costs are subject to amortization over the remaining contractual term of the associated cloud computing arrangement, with a useful life of between three to five years. The Company did not incur a material amount of such amortization for the three and nine months ended September 30, 2019.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, which clarifies and corrects unintended applications of guidance, and makes improvements to several Accounting Standards Codification topics. The applicable amendments in this ASU are effective for the Company in annual periods beginning after December 15, 2018. The Company adopted this ASU2016-13 on January 1, 2019.2020 under the modified retrospective transition method, with the exception of the amendments related to equity securities without readily determinable fair values for which an entity elects the measurement alternative, which have been adopted prospectively. Adoption of this standardthese amendments did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.

In June 2018, the FASB issued Refer below for further discussion of ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees.2016-13. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU on January 1, 2019. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.

2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2.    Significant Accounting Policies (Continued)

In January 2017, the FASB issued 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 the carrying amount of a reporting unit exceeds its fair value, up2017-12 are not applicable 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 early adopted this ASU on January 1, 2019. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.Company.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Subsequently, the FASB has issued the following standards related to ASU No. 2016-13: ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; and ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU No. 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model, which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU No. 2016-13 also requires enhanced disclosures to help financial statement users better understand assumptions used in estimating expected credit losses. The amendments in these ASUs are effective for annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact that the new guidance will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases (Topic 840). The ASU introduces a model for lessees requiring most leases to be reported on the balance sheet. The Company adopted this ASU and the related amendments on January 1, 20192020 under the modified retrospective transition method, which resulted in no cumulative-effect adjustment to retained earnings. The Company’s financial results for periods ending after January 1, 2019 are presented in accordance with the requirements of Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 840.

Upon adoption, the Company elected to not recognize ROU assets or lease liabilities for leases with a term of 12 months or less, as permitted by the short-term lease practical expedient. In transition, the Company also applied the package of practical expedients that permit entities to not reassess (i) whether expired or existing contracts contain a lease under the new standard, (ii) the lease classification for expired or existing leases, or (iii) whether previously capitalized initial direct costs would qualify for capitalization under the new standard. The Company also applied the practical expedient that permits a lessee to account for lease and non-lease components in a contract as a single lease component. In addition, the Company did not use hindsight during transition.

Upon adoption, the Company recorded ROU assets of approximately $34 million, which have been reduced for accrued rent, and the remaining balance of any lease incentives upon transition, and also recorded corresponding current and non-current lease liabilities for its operating leases of approximately $5 million and $58 million, respectively, on the condensed consolidated balance sheets. Adoption of this standard did not have a material impact on the Company’s condensed consolidated statements of operations and comprehensive loss, the condensed consolidated statements of changes in stockholders’ equity or the condensed consolidated statements of cash flows. Refer to Note 7 for more information about the Company’s lease-related obligations.


3.  Business Combination

On May 22, 2019, the Company completed its acquisition of Trilogy pursuant to an Agreement and Plan of Merger and Reorganization, dated as of April 7, 2019 (the “Merger Agreement”), for a net purchase price of $608.6 million in cash and stock consideration, subject to final adjustments related to working capital and indebtedness. These final adjustments to the purchase price were paid in the first quarter of 2020. Under the terms of the Merger Agreement, the Company has issued
11
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

3. Business Combination (Continued)
restricted stock units for shares of its common stock, par value $0.001 per share, to certain employees and officers of Trilogy. These awards were issued pursuant to the Company’s 2014 Equity Incentive Plan, are subject to future service requirements and will primarily vest over an 18-month period. In addition, a portion of the purchase price held in escrow was recognized as compensation expense in the three months ended September 30,third quarter of 2019 as the service requirements of certain key employees was determined to be fulfilled. The net assets and results of operations of Trilogy are
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

3.    Business Combination (Continued)

included inon the Company’s condensed consolidated financial statements within the Alternative Credential Segment as of May 22, 2019.

The following table reflects the Company’s provisional valuation of the assets acquired and liabilities assumed of Trilogy as of the date of the acquisition:
 Estimated Average Useful Life (in years) Purchase Price Allocation
   (in thousands)
Cash and cash equivalents  $35,320
Current assets  29,954
Property and equipment, net  2,411
Other non-current assets  6,276
Amortizable intangible assets:   
Developed technology3 48,096
Developed content4 48,050
University client relationships10 84,150
Trade names and domain names5 7,100
Goodwill  425,678
Current liabilities  (56,917)
Non-current liabilities  (21,523)
   $608,595


The Company’s provisional valuation of the assets acquired and liabilities assumed is preliminary and the fair values recorded were based upon preliminary estimates, assumptions and other information compiled by management, and are subject to change (which could be significant) within the measurement period of up to one year from the acquisition date. During the three months ended September 30, 2019, the Company made adjustments to the provisional valuation that affected deferred tax liabilities and the residual goodwill. As of September 30, 2019, the Company is awaiting information to finalize the valuation, primarily related to the recording of intangible assets, 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 operating synergies anticipated upon the integration of the operations of 2U and Trilogy. The goodwill resulting from the acquisition is not expected to be tax deductible. Refer to Note 4 for details.

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 datesdate indicated or what the results would be for any future periods. The following table presents the Company’s unaudited pro forma combined revenue, pro forma combined net loss and pro forma combined net loss per share for the three and ninesix months ended SeptemberJune 30, 2019, and 2018 as if the acquisition of Trilogy had occurred on January 1, 2018:2019:

Three Months Ended
June 30, 2019		Six Months Ended
June 30, 2019
(in thousands, except per share amounts)
Pro forma revenue$157,865  $311,174  
Pro forma net loss(52,805) (110,169) 
Pro forma net loss per share, basic and diluted$(0.87) $(1.86) 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
 (in thousands, except per share amounts)
Pro forma revenue$153,798
 $130,553
 $459,756
 $355,009
Pro forma net loss(141,020) (24,715) (226,901) (99,204)
Pro forma net loss per share, basic and diluted$(2.23) $(0.43) $(3.74) $(1.80)


4.  Goodwill and Amortizable Intangible Assets

The following table below summarizespresents the changes in the carrying amount of goodwill by reportable segment:segment on the Company’s condensed consolidated balance sheets for the periods indicated.
Graduate
Program Segment		Alternative
Credential Segment		Total
 (in thousands)
Balance as of December 31, 2019$—  $418,350  $418,350  
Foreign currency translation adjustments—  (12,010) (12,010) 
Balance as of June 30, 2020$—  $406,340  $406,340  
        The carrying amount of goodwill in the Alternative Credential Segment included accumulated impairment charges of $70.4 million as of both June 30, 2020 and December 31, 2019.
        The following table presents the components of amortizable intangible assets, net on the Company’s condensed consolidated balance sheets as of each of the dates indicated.
  June 30, 2020December 31, 2019
 Estimated
Average Useful
Life (in years)		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
 (in thousands)
Capitalized technology3-5$153,588  $(57,710) $95,878  $142,712  $(41,106) $101,606  
Capitalized content development4-5187,936  (70,492) 117,444  167,758  (54,736) 113,022  
University client relationships9-10105,810  (16,570) 89,240  110,344  (12,419) 97,925  
Trade names and domain names5-1025,315  (7,318) 17,997  26,462  (5,940) 20,522  
Total amortizable intangible assets, net$472,649  $(152,090) $320,559  $447,276  $(114,201) $333,075  
12
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

4.  Goodwill and Amortizable Intangible Assets (Continued)

 Graduate
Program Segment		 
Alternative
Credential Segment
 Total
 (in thousands)
Balance as of December 31, 2018$—
 $61,852
 $61,852
Goodwill recognized in connection with business combination—
 425,678
 425,678
Impairment charge—
 (70,379) (70,379)
Foreign currency translation adjustments—
 (3,124) (3,124)
Balance as of September 30, 2019$—

$414,027

$414,027


The Company experienced a sustained decline in its stock price during the three months ended September 30, 2019, which management deemed a triggering event that required the Company to perform an interim goodwill impairment test as of September 1, 2019. The Company’s test relied in part on the work of an independent valuation firm engaged to provide inputs as to the fair value of the reporting units and to assist in the related calculations and analysis. The results of the interim impairment test indicated that the carrying value of the boot camp business acquired in 2019 within the Company’s Alternative Credential Segment exceeded the fair value by $70.4 million. The decrease in this reporting unit’s fair value was primarily due to lower expectations of future performance due to the impact of changes in key management as well as an increased focus in integrating the operations of the newly acquired reporting unit, which impacted the estimated operating cash flows. As a result, the Company recorded an impairment charge of $70.4 million on the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2019.

Amortizable intangible assets, net consisted of the following as of:
   September 30, 2019 December 31, 2018
 
Estimated
Average Useful
Life (in years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 (in thousands)
Capitalized technology3-5 $136,961
 $(32,625) $104,336
 $68,291
 $(16,945) $51,346
Capitalized content development4-5 158,136
 (46,457) 111,679
 79,725
 (31,662) 48,063
University client relationships9-10 108,587
 (9,148) 99,439
 25,616
 (4,269) 21,347
Trade names and domain names5-10 25,856
 (4,937) 20,919
 18,793
 (2,944) 15,849
Total amortizable intangible assets, net  $429,540
 $(93,167) $336,373
 $192,425
 $(55,820) $136,605


The amounts presented in the table above include $24.2$29.5 million and $40.3$30.7 million of in process capitalized technology and content development as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Amortizable
        The Company recorded amortization expense related to amortizable intangible assets recognized in connection with the acquisition of Trilogy consisted of developed technology of $48.1 million, developed content of $48.1 million, university client relationships of $84.2$20.8 million and trade names$11.9 million for the three months ended June 30, 2020 and domain names2019, respectively. The Company recorded amortization expense related to amortizable intangible assets of $7.1$41.0 million and are$18.9 million for the six months ended June 30, 2020 and 2019, respectively.
        The following table presents the estimated future amortization expense of the Company’s amortizable intangible assets placed in service as of June 30, 2020.
Future Amortization Expense
(in thousands)
Remainder of 2020$40,377  
202176,013  
202260,367  
202342,876  
202425,533  
Thereafter45,933  
Total$291,099  

5. Accrued Expenses
        The following table presents the components of accounts payable and accrued expenses on the Company’s condensed consolidated balance sheets as of each of the dates indicated.
June 30, 2020December 31, 2019
(in thousands)
Accrued university and instructional staff compensation$21,402  $23,419  
Accrued marketing costs26,900  22,055  
Accrued transaction, integration and restructuring-related costs*1,894  4,459  
Accounts payable and other accrued expenses34,345  15,448  
Total accounts payable and accrued expenses$84,541  $65,381  
*As of June 30, 2020 and December 31, 2019, accrued transaction, integration and restructuring-related costs included 0 and $0.5 million, respectively, related to an employee termination benefits reserve for organizational restructuring.
        For the three and six months ended June 30, 2020 and 2019, expense related to the Company’s marketing and advertising efforts of its own brand were not material.
In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses. Most significantly, under the Coronavirus Aid, Relief, and Economic Security Act, which was enacted in the balances presented inUnited States on March 27, 2020, the table aboveCompany is allowed to defer payment of the employer’s share of Social Security taxes incurred from March 2020 through December 31, 2020. The Company currently estimates the amount of payroll taxes subject to deferred payment is approximately $3.9 million, which has been reflected within accrued compensation and related benefits on the Company’s condensed consolidated balance sheet as of SeptemberJune 30, 2019.2020.

During 2018, the Company acquired certain third-party technologies to enhance the Company’s platform, which is
referred to as the 2U Operating System, or 2UOS, for aggregate consideration
13
Table of $9.5 million. As of September 30, 2019, the Company has a remaining obligation to pay the seller $0.7 million by December 31, 2019.

Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

4.    Goodwill and Amortizable Intangible Assets (Continued)

The Company recorded amortization expense related to amortizable intangible assets of $19.2 million and $6.4 million for the three months ended September 30, 2019 and 2018, respectively. The Company recorded amortization expense related to amortizable intangible assets of $38.1 million and $17.1 million for the nine months ended September 30, 2019 and 2018, respectively.

As of September 30, 2019, the estimated future amortization expense for amortizable intangible assets placed in service is as follows (in thousands):
Remainder of 2019$18,998
202073,413
202167,803
202253,678
202335,611
Thereafter62,699
Total$312,202


5.     Accrued Expenses

Included within accounts payable and accrued expenses on the Company’s condensed consolidated balance sheet as of September 30, 2019 was $20.8 million of accrued university and head tutor compensation and $19.7 million of accrued marketing costs. As of December 31, 2018, accounts payable and accrued expenses included $10.3 million of accrued marketing costs. As of September 30, 2019, the Company maintained a reserve for its September 2019 organizational restructuring of approximately $2.9 million related to employee termination benefits.

6. Commitments and Contingencies

Legal Contingencies

From time to time, the Company is involved in legal proceedings and subject to claims in the ordinary course of its business.
With respect to current legal proceedings, the Company does not believe it is probable a material loss exceeding amounts already recognized has been incurred as of the date of the balance sheets presented herein.

The Company is involved in various claims and legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. While the Company does not expect that the ultimate resolution of any existing claims and proceedings (other than the specific matter described below, if decided adversely), individually or in the aggregate, will have a material adverse effect on its financial position, an unfavorable outcome in some or all of these proceedings could have a material adverse impact on the results of operations or cash flows for a particular period. This assessment is based on the Company’s current understanding of relevant facts and circumstances. With respect to current legal proceedings, the Company does not believe it is probable a material loss exceeding amounts already recognized has been incurred as of the date of the balance sheets presented herein. As such, the Company’s view of these matters is subject to inherent uncertainties and may change in the future.
In re 2U, Inc., Securities Class Action, No. 1:19-cv-7390 (S.D.N.Y.)

On August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaints against the Company, Christopher J. Paucek, the Company’s CEO, and Catherine A. Graham, the Company’s former CFO, in the United States District Court for the Southern District of New York.  The district court consolidated the two actions on August 27, 2019, with the caption In re 2U, Inc., Securities Class Action, No. 1:19-cv-7390 (S.D.N.Y.). The complaints allegeYork, alleging violations of SectionSections 10(b) and 20(a) of the Securities Exchange Act, of 1934, and SEC Rule 10b-5 promulgated thereunder, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. The district court transferred the cases to the United States District Court for the District of Maryland, consolidated them under docket number 8:19-cv-3455 (D. Md.), and appointed Fiyyaz Pirani as the lead plaintiff in the consolidated action. On July 30, 2020, Mr. Pirani filed a consolidated class action complaint (“CAC”), adding Harsha Mokkarala, the Company’s former Chief Marketing Officer, as a defendant.The CAC also asserts claims under Sections 11, 12(A)(2), and 15 of the Securities Act of 1933, as amended, against Mr. Paucek, Ms. Graham, members of the Company’s Board of Directors, and the Company’s underwriters, based on allegations related to the Company’s secondary stock offering on May 23, 2018.The proposed class consists of all persons who acquired the Company’s securities between February 26, 2018 and July 30, 2019. The deadline for the defendants to file a motion to dismiss is September 29, 2020.

2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

6.    Commitments and Contingencies (Continued)


The Company believes that the claims are without merit and it intends to vigorously defend against these claims. However, due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.
Stockholder Derivative Suit

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

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

14
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
6. Commitments and Contingencies (Continued)
Future Minimum Payments to University Clients

Pursuant to certain of the Company’s contracts in the Graduate Program Segment, the Company has made, or is obligated to make, payments to university clients in exchange for contract extensions and various marketing and other rights. As of SeptemberJune 30, 2019,2020, the future minimum payments due to university clients hashave not materially changed relative to the amounts provided in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

2019.
Contingent Payments

The Company has entered into agreements with certain of its university clients in the Graduate Program Segment under which the Company would be obligated to make future minimum payments in the event that certain program metrics are not achieved on an annual basis. The Company recognizes any estimated contingent payments under these agreements as contra revenue over the period in which they relate, and records a liability in other current liabilities on the condensed consolidated balance sheets.
As of September 30, 2019, theThe Company hadhas entered into an obligationagreement to make an additional investment in an education technology company of up towith $5.0 million outstanding, upon demand by the investee.
7. Leases

The Company leases facilities under non-cancelablenon-cancellable operating leases primarily in the United States, South Africa, the United Kingdom Canada and Hong Kong.Canada. The Company’s operating leases have remaining lease terms of between one to 11 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. These options to extend the terms of the Company’s operating leases were not deemed to be reasonably certain of exercise as of lease commencement and are therefore not included in the determination of their respective non-cancelablenon-cancellable lease terms. The future lease payments due under non-cancelablenon-cancellable operating lease arrangements contain fixed rent increases over the term of the lease. The Company also leases office equipment under non-cancelablenon-cancellable leases. The Company did not have any subleases as of SeptemberJune 30, 2019.2020.

The following table presents the components of lease expense consistedon the Company’s condensed consolidated statements of operations and comprehensive loss for each of the following for the periods presented:indicated.
Three Months Ended
June 30,		Six Months Ended
June 30,
2020201920202019
(in thousands)
Operating lease expense$3,721  $2,714  $7,341  $5,336  
Short-term lease expense121  154  234  390  
Variable lease expense1,211  1,091  2,671  2,005  
Total lease expense$5,053  $3,959  $10,246  $7,731  
 Three Months Ended Nine Months Ended
 September 30, 2019 September 30, 2019
 (in thousands)
Operating lease expense$3,053
 $8,389
Short-term lease expense188
 578
Variable lease expense1,031
 3,036
Total lease expense$4,272
 $12,003
15

Table of Contents

2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

7. Leases (Continued)


As of SeptemberJune 30, 2019,2020, for the Company’s operating leases, the weighted-average remaining lease term was 8.17.6 years and the weighted-average discount rate was 12.5%11.8%. For the ninesix months ended SeptemberJune 30, 2020 and 2019, cash paid for amounts included in the measurement of operating lease liabilities was $9.6 million.$8.3 million and $5.9 million, respectively.

As of September 30, 2019,        The following table presents the maturities of the Company’s operating lease liabilities were as follows (in thousands):of the date indicated.
Remainder of 2019$3,865
202014,801
202113,801
202212,902
202312,508
Thereafter55,165
Total lease payments113,042
Less: imputed interest(43,229)
Total lease liability$69,813

June 30, 2020
(in thousands)
Remainder of 2020$8,834  
202117,088  
202216,354  
202316,063  
202415,603  
Thereafter52,166  
Total lease payments126,108  
Less: imputed interest(44,032) 
Total lease liability$82,076  

As of SeptemberJune 30, 2019,2020, the Company has additional operating leases for facilities that have not yet commenced with future minimum lease payments of approximately $99.3$66.3 million. These operating leases will commence during fiscal years 20192020 through 2021, with lease terms of between four to twelve12 years.

As of December 31, 2018, the future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year were as follows (in thousands):
2019$12,941
202014,020
202113,900
202213,633
202313,959
Thereafter68,347
Total future minimum lease payments$136,800


8. Debt

The Company’sfollowing table presents the components of outstanding long-term debt wason the Company’s condensed consolidated balance sheets as follows:of each of the dates indicated.
June 30, 2020December 31, 2019
(in thousands)
Convertible senior notes$380,000  $—  
Senior secured term loan facility—  250,000  
Deferred government grant obligations3,500  3,500  
Other borrowings1,798  998  
Less: unamortized debt issuance costs(121,557) (7,238) 
Total debt263,741  247,260  
Less: current portion of long-term debt(612) (640) 
Total long-term debt$263,129  $246,620  
 September 30, 2019 December 31, 2018
 (in thousands)
Senior secured term loan facility$250,000
 $—
Deferred government grant obligations3,500
 3,500
Less: unamortized debt issuance costs(7,644) —
Long-term debt$245,856
 $3,500
16
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


8.  Debt (Continued)
The Company believes the carrying value of its long-term debt approximates the fair value of the debt as the terms and interest rates approximate the market rates. Asrates, other than the convertible senior notes, which had an estimated fair value of $565.7 million as of June 30, 2020. Each of the Company’s long-term debt instruments were classified as Level 2 within the fair value hierarchy.
Convertible Senior Notes
In April 2020, the Company issued the Notes in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The net proceeds from the offering of the Notes were approximately $369.6 million after deducting the initial purchasers’ discounts, commissions and offering expenses payable by the Company.
        The Notes are governed by an indenture (the “Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The Notes bear interest at a rate of 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Notes will mature on May 1, 2025, unless earlier repurchased, redeemed or converted. The interest expense related to the Notes for each of the three- and six-month periods ended June 30, 2020, including amortization of the debt discount and debt issuance costs, was $5.0 million. The associated effective interest rate of the Notes for each of the three- and six-month periods ended June 30, 2020 was approximately 10.3%.
        The Notes are the senior, unsecured obligations of the Company and are equal in right of payment with the Company’s senior unsecured indebtedness, senior in right of payment to the Company’s indebtedness that is expressly subordinated to the Notes, effectively subordinated to the Company’s senior secured indebtedness (including the Loans (as defined below)), to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated using a discount rate of 10.3%, which was determined by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option, excluding debt issuance costs, was $117.8 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate over the contractual term of the Notes.
Holders may convert their Notes at their option in the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on September 30, 20192020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock, exceeds 130% of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and December 31, 2018,including, the last trading day of the immediately preceding calendar quarter;
•during the 5 consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;
•upon the occurrence of certain corporate events or distributions on the Company’s common stock, as provided in the Indenture;
•if the Company had no currentcalls such Notes for redemption; and
•at any time from, and including, November 1, 2024 until the close of business on the second scheduled trading day immediately before the maturity date.
        The initial conversion rate for the Notes is 35.3773 shares of the Company’s common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $28.27 per share of the Company’s common stock, and is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Upon
17
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

8.  Debt (Continued)
conversion, the Company will pay or deliver, as applicable, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time.
        In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
        The Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after May 5, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice, and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a “make-whole fundamental change” with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if such Note is converted after it is called for redemption. No sinking fund is provided for the Notes.
In connection with the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain counterparties. The Capped Call Transactions are generally expected to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions is initially $44.34 per share. The cost of the Capped Call Transactions was approximately $50.5 million.
        In April 2020, the Company used a portion of long-term debt.

the proceeds from the sale of the Notes to repay in full all amounts outstanding, and discharge all obligations in respect of, the Term Loan (as defined below). The Company intends to use the remaining net proceeds from the sale of the Notes for working capital or other general corporate purposes, which may include capital expenditures, potential acquisitions and strategic transactions.
Credit Agreement

On May 22, 2019,June 25, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and certain other lenders party thereto that provides for $50 million in revolving loans (the “Loans”). The Credit Agreement allows for incremental borrowings from time to time in an aggregate amount for all such incremental amounts not to exceed (i) the lesser of (x) $50 million and (y) an amount such that the aggregate principal amount of the lenders’ commitments under the revolving credit facility does not exceed $100 million, plus (ii) certain specified prepayments of indebtedness, plus (iii) an unlimited amount subject to satisfaction of a leverage ratio based compliance test.

The Loans mature on December 26, 2023 and bear interest, at the Company’s option, at variable rates based on (i) a customary base rate plus an applicable margin of 2.75% or (ii) an adjusted LIBOR rate (with a floor of 0.00%) for the interest period relevant to such borrowing plus an applicable margin of 3.75%.

The Credit Agreement contains customary conditions to borrowing, events of default and covenants, including covenants that restrict the Company’s ability to incur indebtedness, grant liens, make investments and acquisitions, pay dividends, repurchase equity interests in the Company and enter into affiliate transactions and asset sales. The Credit Agreement also contains financial covenants that require the Company to (i) maintain minimum liquidity and minimum consolidated EBITDA (as defined in the Credit Agreement) through the Company’s fiscal quarter ending on December 31, 2021 and (ii) not exceed certain maximum leverage and fixed charge ratios for any period of four consecutive fiscal quarters ending after (but not including) December 31, 2021 through the maturity date.

As of June 30, 2020, the Company’s borrowing capacity was $50.0 million and 0 amounts were outstanding under the Credit Agreement.
18
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

8.  Debt (Continued)
Senior Secured Term Loan Facility
The Company had a credit agreement with Owl Rock Capital Corporation, as administrative agent and collateral agent, and certain other lenders party thereto that providesprovided for a $250 million senior secured term loan facility (the “Term Loan”). Subject to certain exceptions,On April 23, 2020, the Company repaid its $250 million Term Loan under the Credit Agreement may be increased or new term loans may be established in an amount not to exceed (i) $50 millionfull, plus (ii) the amountaccrued interest of certain prepayments made by$1.3 million. In addition, the Company plus (iii) an unlimited amount, subject to the achievementrecognized a loss on debt extinguishment of either$11.7 million, consisting of a certain First
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

8.     Debt (Continued)

Lien LQA University Segment Revenue Leverage Ratio (as defined in the Credit Agreement) or a certain First Lien Net Leverage Ratio (as defined in the Credit Agreement), as applicable.

The Term Loan matures on May 22, 2024 and bears interest, at the Company’s option, at variable rates based on (i) a customary alternative base rate (with a floorwrite-off of 2.00%) plus an applicable marginpreviously capitalized deferred financing costs of 4.75% or (ii) an adjusted LIBOR rate (with a floor of 1.00%) for the interest period relevant to such borrowing plus an applicable margin of 5.75%. The effective interest rate of the Term Loan for the three and nine months ended September 30, 2019 was 9.04% and 9.11%, respectively. During the three and nine months ended September 30, 2019, the Company incurred interest expense of $5.5$9.2 million and $7.9a prepayment premium of $2.5 million, respectively, in connection withand terminated the Credit Agreement. As of September 30, 2019, the Company’s accrued interest balance associated with the Credit Agreement was $0.2 million.

Comerica Line of Credit

Effective in the second quarter of 2019, the Company terminated its $25.0 million revolving line of credit agreement and letters of credit with Comerica Bank. NaN amounts were outstanding under this credit agreement as of September 30, 2019 or December 31, 2018.

Owl Rock Capital Corporation.
Deferred Government Grant Obligations

The Company has a total of 2 outstanding conditional loan agreements with Prince George’s County, Maryland and the State of Maryland for an aggregate amount of $3.5 million, each bearing an interest rate of 3% per annum. These agreements are conditional loan obligations that may be forgiven provided that the Company attains certain conditions related to employment levels at 2U’s Lanham, Maryland headquarters. The conditional loan with the State of Maryland has a maturity date of December 31, 2026, and the conditional loan with Prince George’s County Maryland has a maturity date of June 22, 2027. On July 1, 2020, the Company amended its conditional loan agreement with Prince George’s County to extennd the date on which the Company must comply with the employment level thresholds. The interest expense related to these loans for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 was immaterial. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company’s combined accrued interest balance associated with the deferred government grant obligations was $0.2$0.3 million and $0.2$0.3 million, respectively.

19
Letters
Table of Credit

Certain of the Company’s operating lease agreements entered into prior to September 30, 2019 require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of September 30, 2019, the Company has entered into standby letters of credit totaling $15.7 million as security deposits for the applicable leased facilities and in connection with the deferred government grant obligations.

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


Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

9. Income Taxes

The Company’s income tax provisions for all periods consist of federal, state and foreign income taxes. The income tax provisions for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were based on estimated full-year effective tax rates, including the mix of income for the period between higher-taxed and lower-taxed jurisdictions, after giving effect to significant items related specifically to the interim periods, and loss-making entities for which it is not more likely than not that a tax benefit will be realized.

The Company’s effective tax rate was approximately (1)%1% and 4%40% for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively. The Company’s effective tax rate was approximately 9%1% and 11%28% for the ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively. A one-time tax benefit of approximately $17.8 million related to the acquisition of Trilogy was included in the Company’s income tax (expense) benefit for the nine months ended September 30, 2019. This one-time benefit relates to the reversal of the Company’s tax valuation allowance that was no longer needed as a result of recognizing an additional net deferred tax liability, due to the acquisition of Trilogy. Excluding the one-time tax benefit, theThe Company’s tax benefit of $1.1$1.4 million for the ninesix months ended SeptemberJune 30, 20192020 related to losses generated by operations and the amortization of acquired intangibles in the Alternative Credential Segment that are expected to be realized through future reversing taxable temporary differences. The Company’s tax benefit of $19.6 million for the six months ended June 30, 2019 related to the reversal of its tax valuation allowance that was no longer needed as a result of recognizing an additional net deferred tax liability due to the acquisition of Trilogy. The Company expects to continue to recognize a tax benefit in the future for the Alternative Credential Segment to the extent that this segment continues to generate pre-tax losses while carrying deferred tax liabilities that are in excess of deferred tax assets. To date, the Company has not been required to pay U.S. federal income taxes because of current and accumulated net operating losses.

10. Stockholders’ Equity

Common Stock
On May 22, 2019, the Company issued 4,608,101 shares of common stock in connection with its acquisition of Trilogy.

On May 22, 2018, the Company sold 3,833,334 shares of its common stock to the public, including 500,000 shares sold pursuant to the underwriters’ over-allotment option, and received net proceeds of $330.9 million. The Company will use the net proceeds from this public offering of common stock for working capital and other general corporate purposes, including expenditures for marketing, technology and content development, in connection with new offering launches and growing existing offerings, as well as strategic acquisitions of, or investments in, complementary products, technologies, solutions or businesses.

As of SeptemberJune 30, 2019,2020, the Company was authorized to issue 205,000,000 total shares of capital stock, consisting of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of SeptemberJune 30, 2019,2020, there were 64,300,599 shares of common stock outstanding, and the Company had reserved a total of 14,423,47926,638,801 of its authorized shares of common stock for future issuance as follows:
Outstanding stock options4,404,386
Shares Reserved for Future Issuance
Possible future issuance under 2014 Equity Incentive Plan7,480,316
Outstanding restricted stock units1,656,9333,534,193 
Available for future issuance under 2017 Employee Stock Purchase PlanOutstanding performance restricted stock units881,8441,831,648 
Outstanding stock options4,132,718 
Reserved for convertible senior notes17,140,242 
Total shares of common stock reserved for future issuance14,423,47926,638,801 

Stock-Based Compensation

The shares available for future issuance increased by 2,896,365 and 2,625,292 on January 1, 2019 and 2018, respectively, pursuant to the automatic share reserve increase provision underCompany maintains two stock-based compensation plans: the Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”). The Company has not declared or paid cash dividends on its common stock to date.

11.    Stock-Based Compensation

The Company provides equity-based compensation awards to employees, independent contractors and directors as an effective means for attracting, retaining and motivating such individuals. The Company maintains 2 share-based compensation plans: 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 usingawards. The shares available for future issuance under the 2014 Plan for grants of new equity awards.increased by 3,175,011 and 2,896,365 on January 1, 2020 and 2019, respectively, pursuant to the automatic share reserve increase provision in the 2014 Plan.
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

11.    Stock-Based Compensation (Continued)



Stock-Based Compensation Expense

Stock-based compensation expense related to stock-based awards, as well as theThe Company also has a 2017 Employee Stock Purchase Plan (the “ESPP”), is included in.During the following line items on the condensed consolidated statements of operations and comprehensive loss:
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
 (in thousands)
Curriculum and teaching$30
 $3
 $38
 $10
Servicing and support2,626
 1,346
 6,129
 3,538
Technology and content development2,228
 1,089
 5,732
 2,875
Marketing and sales2,238
 839
 4,981
 2,046
General and administrative9,413
 4,656
 19,206
 15,595
Total stock-based compensation expense$16,535
 $7,933

$36,086

$24,064


Stock Options

The following is a summary of the stock option activity for the ninesix months ended SeptemberJune 30, 2019:
 
Number of
Options
 
Weighted-Average
Exercise Price per
Share
Outstanding balance as of December 31, 20184,057,788
 $27.23
Granted769,452
 63.68
Exercised(338,873) 8.68
Forfeited(73,404) 54.67
Expired(10,577) 49.47
Outstanding balance as of September 30, 20194,404,386
 34.51
Exercisable as of September 30, 2019*2,982,717
 19.97
*As of September 30, 2019, the aggregate intrinsic value of options exercisable was $14.9 million and such shares had a weighted-average remaining contractual term of 4.90 years.

Restricted Stock Units

Under the 2014 Plan, the Company grants restricted stock units (“RSUs”) to the Company’s directors and certain of the Company’s employees, and grants performance restricted stock units (“PRSUs”) to certain of the Company’s employees. The terms of these grants under the 2014 Plan, including the vesting periods, are determined by the Company’s Board of Directors or the Compensation Committee, or a subcommittee thereof.

During the first quarter of 2019, the Company granted 186,433 PRSUs with an aggregate grant date fair value of $11.5 million to certain of its employees. These PRSU awards are generally subject to vesting over periods of approximately one or two years, based on the Company achieving pre-determined consolidated revenue and adjusted EBITDA performance targets for the 2019 fiscal year. The PRSU award agreements provide that the quantity of units subject to vesting may range from 100% to 0% of the granted quantities, depending on the achievement of performance targets. The expense recognized each period is dependent upon the Company’s estimate of the number of shares that will ultimately be issued.

The following is a summary of RSU and PRSU activity for the nine months ended September 30, 2019:
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

11.    Stock-Based Compensation (Continued)


 
Number of
Units
 
Weighted-
Average Grant
Date Fair Value per Share
Outstanding balance as of December 31, 20181,139,045
 $52.47
Granted1,120,287
 57.43
Vested(454,655) 43.51
Forfeited(147,744) 58.91
Outstanding balance as of September 30, 20191,656,933
 57.71


Employee Stock Purchase Plan

During the three and nine months ended September 30, 2019,2020, an aggregate of 54,48583,573 shares of 2U’sthe Company’s common stock were purchased in accordance with the ESPP. Net proceeds from the issuance of these shares of 2U’s common stock under the ESPP for the nine months ended September 30, 2019 were $1.9was $1.8 million. As of SeptemberJune 30, 2019, 881,8442020, 729,391 shares remainremained available for purchase under the ESPP.

The following table presents stock-based compensation expense related to the Stock Plans and the ESPP, contained on the following line items on the Company’s condensed consolidated statements of operations and comprehensive loss for each of the periods indicated.
20
Table of Contents
12.2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

10. Stockholders’ Equity (Continued)
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
 (in thousands)
Curriculum and teaching$58  $5  $191  $8  
Servicing and support3,642  1,834  7,570  3,503  
Technology and content development2,936  1,648  6,105  3,504  
Marketing and sales1,853  1,487  5,086  2,743  
General and administrative12,602  4,993  23,009  9,793  
Total stock-based compensation expense$21,091  $9,967  $41,961  $19,551  

Restricted Stock Units
The 2014 Plan provides for the issuance of restricted stock units (“RSUs”) to employees and certain non-employees. RSUs generally vest over a three- or four-year period. The following table presents a summary of the Company’s RSU activity for the period indicated.
 Number of
Units		Weighted-
Average Grant
Date Fair Value per Share
Outstanding balance as of December 31, 20192,281,142  $40.49  
Granted1,865,348  20.11  
Vested(476,317) 52.61  
Forfeited(135,980) 32.13  
Outstanding balance as of June 30, 20203,534,193  $28.42  

Performance Restricted Stock Units
The 2014 Plan provides for the issuance of performance restricted stock units (“PRSUs”) to employees and certain non-employees. PRSUs generally include both service conditions and market conditions related to total shareholder return targets relative to that of companies comprising the Russell 3000 Index. The following table presents a summary of the Company’s PRSU activity for the period indicated.
 Number of
Units		Weighted-
Average Grant
Date Fair Value per Share
Outstanding balance as of December 31, 20191,413,773  $28.12  
Granted653,879  22.46  
Vested(444) 64.51  
Forfeited(235,560) 52.91  
Outstanding balance as of June 30, 20201,831,648  $22.90  

Stock Options
The Stock Plans provide for the issuance of stock options to employees and certain non-employees. Stock options issued under the Stock Plans generally are exercisable for periods not to exceed 10 years and generally vest over four years. The following table presents a summary of the Company’s stock option activity for the period indicated.
21
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

10. Stockholders’ Equity (Continued)
 Number of
Options		Weighted-Average
Exercise Price per
Share		Weighted-Average Remaining Contractual Term (in years)Aggregate
Intrinsic
Value
(in thousands)
Outstanding balance as of December 31, 20194,373,895  $34.24  5.88$28,736  
Granted8,597  19.61  
Exercised(195,728) 9.32  
Forfeited(22,294) 57.38  
Expired(31,752) 41.11  
Outstanding balance as of June 30, 20204,132,718  35.22  5.5458,683  
Exercisable as of June 30, 20203,162,499  $25.87  4.72$57,663  
The weighted-average grant date fair value of stock options granted during the six months ended June 30, 2020 and 2019 was $11.48 and $32.71 per share, respectively.
The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2020 and 2019 was $4.4 million and $13.2 million, respectively.
The total unrecognized compensation cost related to the unvested stock options as of June 30, 2020 was $26.5 million and will be recognized over a weighted-average period of approximately 2.60 years.
11. Net Loss per Share

Diluted net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive,antidilutive, given the Company’s net loss. The following table presents a summary of the securities that have been excluded from the calculation of weighted-average shares of common stock outstanding because the effect is anti-dilutiveantidilutive for each of the three and nine months ended September 30, 2019 and 2018:periods indicated.
 Three and Nine Months Ended
September 30,
 2019 2018
Stock options4,404,386
 4,097,480
Restricted stock units1,656,933
 1,217,161

 Three and Six Months Ended
June 30,
 20202019
Stock options4,132,718  4,325,728  
Restricted stock units3,534,193  1,208,112  
Performance restricted stock units1,831,648  199,636  
Shares related to convertible senior notes3,432,837  —  
Total antidilutive securities12,931,396  5,733,476  

Basic        The following table presents the calculation of the Company’s basic and diluted net loss per share is calculated as follows: for each of the periods indicated.
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
Numerator (in thousands):  
Net loss$(66,167) $(27,972) $(126,273) $(49,526) 
Denominator:  
Weighted-average shares of common stock outstanding, basic and diluted64,075,405  60,516,662  63,850,869  59,334,246  
Net loss per share, basic and diluted$(1.03) $(0.46) $(1.98) $(0.83) 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
Numerator (in thousands): 
  
  
  
Net loss$(141,112) $(9,944) $(190,638) $(43,162)
Denominator: 
  
  
  
Weighted-average shares of common stock outstanding, basic and diluted63,358,890
 57,663,361
 60,690,536
 55,128,845
Net loss per share, basic and diluted$(2.23) $(0.17) $(3.14) $(0.78)
22


Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

13.    Segment and Geographic Information (Continued)

13.12. Segment and Geographic Information

The Company has 2 reportable segments: the Graduate Program Segment and the Alternative Credential Segment (formerly known asSegment. The Company’s reportable segments are determined based on (i) financial information reviewed by the Short Course Segment).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 Graduate 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 Alternative Credential Segment provides short form non-degree offerings such asincludes the premium online short courses and technical skills-based boot camps to working professionals around the worldprovided through relationships with leadingnonprofit colleges and universities.

Graduate Program Segment

For the three months ended SeptemberJune 30, 2020, one university client accounted for 10% or more of the Company’s consolidated revenue, contributing $18.8 million, or approximately 10% of the Company’s consolidated revenue. For the three months ended June 30, 2019, one university client accounted for 10% or more of the Company’s consolidated revenue, with $20.5contributing $21.2 million, or approximately 13%16 % of the Company’s consolidated revenue.
For the threesix months ended SeptemberJune 30, 2018, three2020, one university clients eachclient accounted for 10% or more of the Company’s consolidated revenue, as follows: $24.0 million, $13.0 million and $10.8contributing $36.3 million, or approximately 22%, 12% and 10% of the Company’s consolidated revenue, respectively.

revenue. For the ninesix months ended SeptemberJune 30, 2019, one university client accounted for 10% or more of the Company’s consolidated revenue, with $64.3contributing $43.8 million, or approximately 16%17% of the Company’s consolidated revenue. For the nine months ended September
        As of June 30, 2018, three2020, one university clients eachclient accounted for 10% or more of the Company’s consolidated revenue, as follows: $65.0 million, $39.5 million and $30.6accounts receivable, net balance, contributing $15.2 million, or approximately 22%, 13% and 10%21% of the Company’s consolidated revenue, respectively.

accounts receivable, net balance. As of September 30,December 31, 2019, two university clients each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, as follows: $11.8contributing $6.1 million and $9.0$4.9 million, or approximately 14%18% and 11% of the Company’s consolidated accounts receivable, net balance, respectively. As of December 31, 2018, two university clients each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, as follows: $11.9 million and $11.8 million, or approximately 36% and 36%15% of the Company’s consolidated accounts receivable, net balance, respectively.

Alternative Credential Segment

For the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, there were no customers or individual university clients that had associated offerings that accounted for 10% or more of the Company’s consolidated revenue. In addition, as of SeptemberJune 30, 20192020 and December 31, 2018,2019, no customers had accounts receivable, net balances that accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, as customers are individual students or third parties paying on their behalf, rather than university clients.

For the three months ended SeptemberJune 30, 2019,2020, offerings associated with one university client accounted for 10% or more of the segment’s revenue, with $8.3contributing $9.2 million, or approximately 16%14% of the segment’s revenue. For the three months ended SeptemberJune 30, 2018,2019, offerings associated with fourtwo university clients each accounted for 10% or more of the segment’s revenue, and when combined, accounted for approximately 91%37% of the segment’s revenue.

For the ninesix months ended SeptemberJune 30, 2019,2020, offerings associated with one university client accounted for 10% or more of the segment’s revenue, with $26.0contributing $17.1 million, or approximately 25%14% of the segment’s revenue. For the ninesix months ended SeptemberJune 30, 2018,2019, offerings associated with three university clients each accounted for 10% or more of the segment’s revenue, and when combined, accounted for approximately 82%56% of the segment’s revenue.

Segment Performance
        The following table presents financial information regarding each of the Company’s reportable segment’s results of operations for each of the periods indicated.
23
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

13.12. Segment and Geographic Information (Continued)

Segment Performance

The following table summarizes financial information regarding each reportable segment’s results of operations for the periods presented:
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
 (in thousands)
Revenue by segment* 
  
  
  
Graduate Program Segment$103,393
 $89,719
 $308,970
 $251,487
Alternative Credential Segment50,405
 17,244
 102,523
 45,187
Total revenue$153,798

$106,963

$411,493

$296,674
        
Segment profitability** 
  
  
  
Graduate Program Segment$1,213
 $5,564
 $(6,126) $(615)
Alternative Credential Segment(11,936) (889) (22,778) (1,787)
Total segment profitability$(10,723)
$4,675

$(28,904)
$(2,402)
        
Segment profitability margin*** 
  
  
  
Graduate Program Segment1.2 % 6.2 % (2.0)% (0.2)%
Alternative Credential Segment(23.7) (5.2) (22.2) (4.0)
Total segment profitability margin(7.0)
4.4

(7.0)
(0.8)
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
 (dollars in thousands)
Revenue by segment*  
Graduate Program Segment$115,685  $101,403  $234,142  $205,577  
Alternative Credential Segment67,002  34,058  124,024  52,118  
Total revenue$182,687  $135,461  $358,166  $257,695  
Segment profitability**  
Graduate Program Segment$4,703  $(8,049) $11,163  $(7,339) 
Alternative Credential Segment(6,790) (6,926) (17,554) (10,842) 
Total segment profitability$(2,087) $(14,975) $(6,391) $(18,181) 
Segment profitability margin***  
Graduate Program Segment4.1 %(7.9)%4.8 %(3.6)%
Alternative Credential Segment(10.1) (20.3) (14.2) (20.8) 
Total segment profitability margin(1.1)%(11.1)%(1.8)%(7.0)%
*The Company has excluded immaterial amounts of intersegment revenues from the three and nine month periods ended September 30, 2019 and 2018.
**The Company defines segment profitability as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, foreign currency gains or losses, acquisition-related gains or losses, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, impairment charges, 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 has excluded immaterial amounts of intersegment revenues from the three- and six-month periods ended June 30, 2020 and 2019.
** The Company defines segment profitability as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, foreign currency gains or losses, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some or all of these items may not be applicable in any given reporting period.
*** The Company defines segment profitability margin as segment profitability as a percentage of the respective segment’s revenue.

24
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

13.12. Segment and Geographic Information (Continued)

The following table reconcilespresents a reconciliation of the Company’s net loss to total segment profitability:profitability for each of the periods indicated.
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
 (in thousands)
Net loss$(66,167) $(27,972) $(126,273) $(49,526) 
Adjustments:
Net interest expense (income)6,364  610  11,344  (1,684) 
Foreign currency (gain) loss(570) 13  1,701  383  
Income tax benefit(363) (18,691) (1,418) (19,632) 
Depreciation and amortization expense23,985  14,653  47,470  24,351  
Deferred revenue fair value adjustment—  3,352  —  3,352  
Transaction and integration costs359  3,093  1,083  5,024  
Restructuring-related costs196  —  484  —  
Stockholder activism costs1,347  —  5,586  —  
Stock-based compensation expense21,091  9,967  41,961  19,551  
Loss on debt extinguishment11,671  —  11,671  —  
Total adjustments64,080  12,997  119,882  31,345  
Total segment profitability$(2,087) $(14,975) $(6,391) $(18,181) 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
 (in thousands)
Net loss$(141,112) $(9,944) $(190,638) $(43,162)
Adjustments:       
Interest income(924) (1,799) (5,087) (3,053)
Interest expense5,651
 27
 8,130
 81
Foreign currency loss710
 273
 1,093
 1,493
Income tax expense (benefit)714
 (414) (18,918) (5,207)
Depreciation and amortization expense22,288
 8,599
 46,639
 23,382
Deferred revenue fair value adjustment5,927
 —
 9,279
 —
Transaction costs92
 —
 4,466
 —
Integration costs2,436
 —
 2,493
 —
Restructuring-related costs6,581
 —
 7,174
 —
Impairment charge70,379
 —
 70,379
 —
Stock-based compensation expense16,535
 7,933
 36,086
 24,064
Total adjustments130,389
 14,619
 161,734
 40,760
Total segment profitability$(10,723) $4,675
 $(28,904) $(2,402)


The following table presents the Company’s total assets by segment are as follows:of each of the dates indicated.
 June 30,
2020		December 31,
2019
 (in thousands)
Total assets  
Graduate Program Segment$560,137  $507,187  
Alternative Credential Segment672,423  679,643  
Total assets$1,232,560  $1,186,830  
 September 30,
2019		 December 31,
2018
 (in thousands)
Total assets 
  
Graduate Program Segment$523,449
 $702,827
Alternative Credential Segment690,121
 104,527
Total assets$1,213,570

$807,354
25

Table of Contents

Trade Accounts Receivable and Contract Liabilities

The Company’s trade accounts receivable and contract liabilities in each segment are as follows:
 September 30,
2019		 December 31,
2018
 (in thousands)
Trade accounts receivable 
  
Graduate Program Segment accounts receivable, net of allowance for doubtful accounts of $0 for all periods presented$28,917
 $31,110
Graduate Program Segment unbilled revenue*36,380
 265
Alternative Credential Segment accounts receivable, net of allowance for doubtful accounts of $1.8 million and $257 thousand as of September 30, 2019 and December 31, 2018, respectively19,500
 982
Total trade accounts receivable$84,797
 $32,357
    
Contract liabilities 
  
Graduate Program Segment deferred revenue$5,484
 $2,864
Alternative Credential Segment deferred revenue53,150
 5,481
Total contract liabilities$58,634

$8,345

*Unbilled revenue represents contract assets.
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

13.12. Segment and Geographic Information (Continued)


Trade Accounts Receivable and Contract Liabilities

        The following table presents the Company’s trade accounts receivable and contract liabilities in each segment as of each of the dates indicated.
 June 30,
2020		December 31,
2019
 (in thousands)
Trade accounts receivable  
Graduate Program Segment accounts receivable$17,185  $3,454  
Graduate Program Segment unbilled revenue27,777  12,123  
Alternative Credential Segment accounts receivable29,158  19,408  
Provision for credit losses(2,540) (1,330) 
Total trade accounts receivable$71,580  $33,655  
Contract liabilities  
Graduate Program Segment deferred revenue$15,112  $2,210  
Alternative Credential Segment deferred revenue61,959  46,623  
Total contract liabilities$77,071  $48,833  

For the Graduate Program Segment, no revenue recognized during each of the three months ended SeptemberJune 30, 20192020 and 20182019 was included in the deferred revenue balance at the beginning of each year, respectively.respective year. Revenue recognized in this segment during the ninesix months ended SeptemberJune 30, 20192020 and 20182019 that was included in the deferred revenue balance at the beginning of each year was $2.4$2.2 million and $2.5$2.4 million, respectively.

For the Alternative Credential Segment, no revenue recognized during the three months ended SeptemberJune 30, 20192020 and 2018 was included in the deferred revenue balance at the beginning of each year, respectively. Revenue recognized in this segment during the nine months ended September 30, 2019 and 2018 that was included in the deferred revenue balance at the beginning of each year was $5.4$12.2 million and $4.50, respectively. Revenue recognized in this segment during the six months ended June 30, 2020 and 2019 that was included in the deferred revenue balance at the beginning of each year was $46.6 million and $5.4 million, respectively.

Contract Acquisition Costs

The Graduate Program Segment had $0.5 million and $0.3$0.5 million of net capitalized contract acquisition costs recorded primarily within university payments and other assets, non-current on the condensed consolidated balance sheets as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. During the three months ended September 30, 2019 and 2018, the Company did not capitalize a material amount of contract acquisition costs and did not record a material amount of associated amortization expense in the Graduate Program Segment in either period. For the nine months ended September 30, 2019 and 2018, the Company capitalized $0.2 million and $0.3 million, respectively, of such costs and did not record a material amount of associated amortization expense in the Graduate Program Segment in either period.

Geographical Information

The Company’s non-U.S. revenue which is based uponon the currency of the country in which the university client primarily operates,operates. The Company’s non-U.S. revenue was $10.6$17.2 million and $8.8$11.1 million for the three months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively, and was sourced entirely from the Alternative Credential Segment’s operations outside of the U.S.respectively. The Company’s non-U.S. revenue which is based upon the currency of the country in which the university client primarily operates, was $29.4$30.0 million and $26.0$18.9 million for the ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, respectively, andrespectively. Substantially all of the Company’s non-U.S. revenue for each of the aforementioned periods was
sourced entirely from the Alternative Credential Segment’s operations outside of the U.S. The Company’s long-lived tangible assets in non-U.S. countries as of SeptemberJune 30, 20192020 and December 31, 20182019 totaled approximately $2.6$1.8 million and $2.7 million, respectively.




26
Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
13. Supplemental Cash Flow Information
The Company’s cash interest payments, net of amounts capitalized, were $6.2 million and $1.9 million for the six months ended June 30, 2020 and 2019, respectively. The Company’s accrued but unpaid capital expenditures were $1.1 million and $1.2 million for the six months ended June 30, 2020 and 2019, respectively.



27
Table of Contents

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2018.2019. 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 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, 2018,2019, 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.

Unless the context otherwise requires, all references to “we”,“we,” “us” or “our” refer to 2U, Inc., together with its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2018,2019, which are included in our Annual Report on Form 10-K, filed with the SEC on February 26, 2019.28, 2020.
Overview

Our Business

We are a leading provider of education technology company that well-recognizedfor nonprofit colleges and universities trust to bring them intouniversities. We build, deliver, and support more than 435 digital and in-person educational offerings, including graduate degrees, undergraduate degrees, professional certificates, boot camps, and short courses, across the digital age. Career Curriculum Continuum. Together with our university clients, we have positively transformed the lives of more than 245,000 students.
Our comprehensive platform of tightly integrated technology and services provides the digital infrastructure that universities need to attract, enroll, educate and support students at scale. With our platform, students can pursue their education anytime, anywhere, without quitting their jobs or moving; and university clients can improveprovide broader access to their educational offerings, thereby improving outcomes, skills attainment and career prospects for a greater number of students than they could on their own.

students.
We have two reportable segments: the Graduate Program Segment and the Alternative Credential Segment.
OurIn our Graduate Program Segment, provideswe provide the technology and services to nonprofit colleges and universities primarily in the United States to enable the online delivery of graduatedegree programs. WeStudents enrolled in these programs are generally target students seeking a fullan undergraduate or graduate degree of the same quality they would receive on-campus.on campus.
OurIn our Alternative Credential Segment, provides short form non-degree offerings such aswe provide premium online short courses and technical, skills-based boot camps to working professionals around the world through relationships with nonprofit colleges and universities. We target working professionalsStudents enrolled in these offerings are generally seeking career advancementto reskill or upskill through skills attainment. shorter duration, lower-priced offerings that are relevant to the needs of industry and society.
COVID-19 Update
In March 2020, the firstWorld Health Organization characterized COVID-19 as a pandemic and, as of the date of this report, COVID-19 continues to spread around the world. In response to the COVID-19 pandemic, we have taken several steps to ensure the continuity of our business, to provide unique solutions to our university clients, and to ensure the health and safety of our employees in the current environment. For example, we have:
•shifted our global workforce to work-from-home arrangements other than essential personnel;
•shifted boot camp offerings and other campus-based experiences from physical classrooms to online;
•modified our course production capability into a “Studio-in-a-Box” approach, which allows faculty to record asynchronous content directly in their home or office with virtual assistance from our course designers;
•provided training to our university clients’ campus-based faculty on best practices for successful online teaching through No Back Row® PRO; and
28
Table of Contents
•offered new solutions for existing and new clients, including 2UOS Essential and 2UOS Plus, which provide continuity and support for university clients to conduct classes online.
During the second quarter of 2019,2020 we changedexperienced increasing demand from prospective and current university clients as universities planned for the nameFall 2020 academic term, which we expect to begin having an impact on our results of operations in 2021. For example, we recently signed agreements with Amherst College and Simmons University to transform their on-campus courses into online learning experiences beginning in the Fall 2020 academic term. We believe that COVID-19 will continue to accelerate university adoption of online education and that, over the longer term, online programs will constitute a larger portion of universities’ overall offerings.

During the second quarter of 2020 we also experienced increasing demand for our offerings from prospective students, which we expect to continue for the foreseeable future. Given the lag between enrollment and revenue in much of our portfolio, we expect this segmenthigher demand to have an increasing impact on our results of operations beginning in 2021.

While we have observed increasing demand from Short Course to Alternative Credential to more accurately reflect the nature and breadth of educational offerings within this segment.

Our growth strategy is to launch graduate programs, short courses and boot camps with new and existing university clients to increase student enrollments across our portfolio of offerings. We are also committed to continuously improving our platform to deliver high-quality user experiences and outcomes at scale.


Table of Contents

Third Quarter 2019 Highlights

For the three months ended September 30, 2019, our revenue was $153.8 million, an increase of 43.8% from $107.0 million for the three months ended September 30, 2018. Excluding the revenue from Trilogy, revenue growth was 16.5%. Our net loss was $141.1 million, or $(2.23) per share, compared to $9.9 million, or $(0.17) per share, for the three months ended September 30, 2018. Our adjusted EBITDA loss* was $10.7 million, compared to Adjusted EBITDA of $4.7 million for the three months ended September 30, 2018, and was primarily driven by the inclusion of Trilogy’s results. As of September 30, 2019, our available cash and cash equivalents was $154.1 million. We also launched seven new graduate programs and seven new short coursesprospective students during the three months ended September 30, 2019.
*
Adjusted EBITDA is a financial measure not in accordance with U.S. GAAP. For more information about adjusted EBITDA and a reconciliation of net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, to adjusted EBITDA, see the section below titled “Key Business and Financial Performance Metrics—Adjusted EBITDA.”

second quarter of 2020, we cannot estimate the impact of COVID-19 on these demand trends, our business or economic conditions generally. For a discussion of additional risks related to COVID-19, see Part II, Item 1.A. “Risk Factors” below.
Our Business Model and Components of Operating Results

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

Revenue Drivers
Revenue

OurIn our Graduate Program Segment, deriveswe derive substantially all of our revenue primarily from revenue-share arrangements with our university clients under which we receive a contractually specified percentagespercentage of the amounts students pay them to enroll in degree programs. In our university clients receiveAlternative Credential Segment, we derive substantially all of our revenue from their students in 2U-enabled graduate programs for tuition and fees less credit card fees and other specified charges that we have agreed to exclude in certain university contracts. Our contracts with university clients in this segment typically have terms of 10 to 15 years.

Our Alternative Credential Segment derives revenue primarily from contracts with students for the tuition and fees paid to enroll in, and progress through,taking our short courses and boot camps. We recognizeRevenue in each segment is primarily driven by the gross proceeds received from the students enrolled and share contractually specified amounts received from students with the associated university client, in exchange for licenses to use the university brand name and other university trademarks. These amounts are recognized as curriculum and teaching costs on our condensed consolidated statementsnumber of operations and comprehensive loss. Our contracts with university clients in this segment are typically shorter and less restrictive than our contracts with university clientsstudent enrollments in our Graduate Program Segment.offerings and the prices of those offerings.

Operating Expense
Marketing and Sales Costs

Our most significant cost in each fiscal periodexpense relates primarily to student acquisitionmarketing and sales activities to attract students to our offerings across eachboth of our segments. This includes the cost of online advertisingSearch Engine Optimization, Search Engine Marketing and demand generation,Social Media Optimization, as well as compensationpersonnel and benefit costspersonnel-related expense for our marketing analytics and admissions application counseling personnel.recruiting teams.

For all ofIn our educational offerings, we have the primary responsibility for identifying qualified students, generating potential student interest, and driving admissions applications. The number of students who enroll in our offerings in any given period is significantly dependent on the amount we have spent on these student acquisition activities.

Graduate Program Segment,

Our our marketing and sales spendexpense in any period generates student enrollments eight months after the initial spend,later, on average. We then generate revenue as students matriculateprogress through their programs, which generally occurs over a two yeartwo-year period following initial enrollment. As a result,Accordingly, our marketing and sales spendexpense in any period is largely attributablean investment to generate revenue that we expect to receive over time in future periods. We expect that the total revenueTherefore, we will receive over time relateddo not believe it is meaningful to students who enroll in our graduate programs as a result of current period marketing and sales spend, will be significantly greater as a multiple of that current period expense than is implied by the multiple ofdirectly compare current period revenue to current period marketing and sales expense.


Table of Contents

Alternative Credential Segment

Our Further, in this segment we believe that our marketing and sales spendexpense in future periods will generally decline as a percentage of the revenue reported in those same periods as our revenue base from returning students in existing programs increases.
In our Alternative Credential Segment, our marketing and sales expense in any period generates student enrollments six toas much as 24 weeks after the initial spend,later, on average. We then generate revenue as students matriculateprogress through offerings,their courses, which typically occurs over a threetwo- to six monthsix-month period following initial enrollment.

Other Costs and Expenses

Our other costs and expenses consist of the following:

Curriculum and teaching.Teaching
Curriculum and teaching costs are associated with our Alternative Credential Segment andexpense consists primarily relate toof amounts due to our university clientsuniversities for licenses to use the universitytheir brand namenames and other university trademarks.trademarks in connection with our short course and boot camp offerings. The payments are based on contractually specified percentages of the gross proceedstuition and fees we receive from our students.students in those offerings. Curriculum and teaching costsexpense also include amounts paid to compensateincludes personnel and personnel-related expense for our instructors related to the delivery of educational services to students.short course and boot camp instructional staff.

Servicing and support.Support
Servicing and support costs consistexpense consists primarily of compensationpersonnel and benefit costs related topersonnel-related expense associated with the management and operations of our educational offerings, as well as supporting students and faculty members. ThisServicing and support expense also includes costs related to enabling accesssupport our platform, facilitatingfacilitate in-program field placements and student immersions, and assistingassist with compliance requirements.
29
Table of Contents

Technology and content development.Content Development
Technology and content development costs consistexpense consists primarily of compensationpersonnel and benefit costs related topersonnel-related expense associated with the ongoing improvement and maintenance of our platform, as well as hosting and licensing costs. ItTechnology and content expense also includes the amortization expense related toof capitalized technology and content development.content.

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

other corporate expense.
Net Interest Income (Expense)

InterestNet interest income is derived(expense) consists primarily of interest expense from our long-term debt and interest received onincome from our cash and cash equivalents. Interest expense consistsalso includes the amortization of interest on our long-term debt and associated debt issuance costs.
Loss on Debt Extinguishment
Loss on debt extinguishment consists of amounts recorded related to the retirement of our debt obligations.
Other Income (Expense), Net interest
Other income (expense) reflects the aggregation, net primarily consists of interest incomeforeign currency gains and interest expense.

losses.
Income Taxes

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

Results of Operations

Consolidated Operating Results

Comparison of Three Months Ended SeptemberJune 30, 20192020 and 2018

2019
The following table sets forthpresents selected condensed consolidated statement of operations data for each of the periods indicated.

Three Months Ended June 30,
 20202019Period-to-Period Change
 AmountPercentage of RevenueAmountPercentage of RevenueAmountPercentage
(dollars in thousands)
Revenue$182,687  100.0 %$135,461  100.0 %$47,226  34.9 %
Costs and expenses
Curriculum and teaching26,256  14.4  13,308  9.8  12,948  97.3  
Servicing and support30,294  16.6  23,993  17.7  6,301  26.3  
Technology and content development37,307  20.4  26,043  19.2  11,264  43.2  
Marketing and sales98,341  53.8  89,749  66.3  8,592  9.6  
General and administrative39,554  21.7  28,408  21.0  11,146  39.2  
Total costs and expenses231,752  126.9  181,501  134.0  50,251  27.7  
Loss from operations(49,065) (26.9) (46,040) (34.0) (3,025) 6.6  
Interest income154  0.1  1,814  1.3  (1,660) (91.5) 
Interest expense(6,518) (3.6) (2,424) (1.8) (4,094) 168.8  
Loss on debt extinguishment(11,671) (6.4) —  —  (11,671) *
Other income (expense), net570  0.3  (13) 0.0  583  *
Loss before income taxes(66,530) (36.5) (46,663) (34.5) (19,867) 42.6  
Income tax benefit363  0.2  18,691  13.8  (18,328) (98.1) 
Net loss$(66,167) (36.3)%$(27,972) (20.7)%$(38,195) 136.5 %
30
Table of Contents

 Three Months Ended September 30,    
 2019 2018 Period-to-Period Change
 Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage
 (dollars in thousands)
Revenue$153,798
 100.0 % $106,963
 100.0 % $46,835
 43.8 %
Costs and expenses           
Curriculum and teaching21,336
 13.9
 6,351
 5.9
 14,985
 235.9
Servicing and support27,351
 17.8
 16,586
 15.5
 10,765
 64.9
Technology and content development34,132
 22.2
 16,361
 15.3
 17,771
 108.6
Marketing and sales93,521
 60.8
 60,548
 56.5
 32,973
 54.5
General and administrative42,040
 27.3
 18,974
 17.7
 23,066
 121.6
Impairment charge70,379
 45.8
 —
 —
 70,379
 *
Total costs and expenses288,759
 187.8
 118,820
 110.9
 169,939
 143.0
Loss from operations(134,961) (87.8) (11,857) (10.9) (123,104) *
Interest income924
 0.6
 1,799
 1.7
 (875) (48.6)
Interest expense(5,651) (3.7) (27) 0.0
 (5,624) *
Other expense, net(710) (0.5) (273) (0.3) (437) 160.1
Loss before income taxes(140,398) (91.4) (10,358) (9.5) (130,040) *
Income tax (expense) benefit(714) (0.5) 414
 0.4
 (1,128) (272.3)
Net loss$(141,112) (91.9)% $(9,944) (9.1)% $(131,168) *
*Not meaningful for comparative purposes.

The following table sets forth the revenue by segment for each of the periods indicated.
 Three Months Ended September 30, Period-to-Period Change
 2019 2018 Amount Percentage
 (dollars in thousands)
Revenue by segment* 
  
  
  
Graduate Program Segment$103,393
 $89,719
 $13,674
 15.2%
Alternative Credential Segment50,405
 17,244
 33,161
 192.3
Total revenue$153,798
 $106,963
 $46,835
 43.8
*Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended September 30, 2019 and 2018.

*Not meaningful for comparative purposes.
Revenue. Revenue for the three months ended June 30, 2020 increased $46.8$47.2 million, or 43.8%. Trilogy accounted for $29.234.9%, to $182.7 million or 62.3%, of theas compared to $135.5 million in 2019. This increase was driven by a 14.1% increase in our consolidated revenue.

Graduate Program Segment revenue and a 96.7% increase in Alternative Credential Segment revenue. The increase in revenue from the Alternative Credential Segment includes incremental revenue of $24.7 million from Trilogy, which we acquired in May 2019.
Revenue from our Graduate Program Segment increased $13.7$14.3 million, or 15.2%. This increase was14.1%, primarily driven bydue to growth in full course equivalent (“FCE”) enrollments of 8,245,6,962, or 25.2%17.8%, partially offset by a decrease in the average revenue per full course equivalentFCE enrollment, from $2,747$2,588 to $2,527.$2,507. We expect to continue to see a decline in average revenue per FCE enrollment in this segment due to increasing enrollments in our undergraduate offerings.

Revenue from our Alternative Credential Segment revenue increased $33.2$32.9 million, or 192.3%. This increase was96.7%, primarily driven by our acquisition of Trilogy, which contributed significantlydue to this segment’s overall growth in full course equivalentFCE enrollments of 5,792,7,773, or 64.8%61.4%, as well as this segment’san increase in the average revenue per full course equivalentFCE enrollment, from $1,930$2,955 to $3,825. Excluding$3,279. These increases were primarily due to the impactaddition of 2,149 incremental FCE enrollments from acquiring Trilogy, the Alternative Credential Segment revenue growth was $4.0 million, or 23.2%. Fluctuations in foreign currency exchange rates did not have a material impact on revenue.

Trilogy.
Curriculum and Teaching.Teaching. Curriculum and teaching costsexpense increased $15.0$13.0 million, or 235.9%. This increase was primarily due97.3%, to boot camps offered through Trilogy and an increase$26.3 million as compared to $13.3 million in short courses taken in our Alternative Credential Segment.


Table of Contents

Servicing and Support.  Servicing and support costs increased $10.8 million, or 64.9%.2019. This increase was primarily due to a $9.5$9.6 million increase in university and instructional staff compensation expense from the addition of Trilogy boot camps. The remaining increase was primarily due to a $3.4 million increase in university and benefit costs, as we increased our headcount in servicinginstructional staff compensation expense from short courses.
Servicing and Support. Servicing and support by 60%, which reflects the impact of our acquisition of Trilogy, and in order to serve a growing number of students and faculty in existing and new offerings. The remaining $1.3 million of the increase primarily related to higher travel, rent and other servicing and support costs, due in part to an increase in headcount.

Technology and Content Development.  Technology and content development costsexpense increased $17.8$6.3 million, or 108.6%. This increase was due26.3%, to $30.3 million as compared to $24.0 million in part to a $10.6 million increase related to higher amortization expense associated with capitalized technology and content development, which reflects the impact of our acquisition of Trilogy. Additionally, the increase included $5.4 million of higher compensation and benefit costs (net of amounts capitalized for technology and content development), as we increased our headcount in technology and content development by 81%, which reflects the impact of our acquisition of Trilogy and hiring to support scaling of existing offerings and the launch of new offerings. The remaining $1.8 million of the increase primarily related to higher other net costs to support and maintain our internal software applications.

Marketing and Sales.  Marketing and sales costs increased $33.0 million, or 54.5%.2019. This increase was primarily due to higher direct internet marketing costsa $4.3 million increase in personnel and personnel-related expense to serve a greater number of $17.7students and faculty. The remaining increase was primarily due to a $3.9 million addition of servicing and support expense from Trilogy boot camps. These increases were partially offset by a $2.2 million decrease in travel and related expense due to cost efficiencies and the impact of COVID-19.
Technology and Content Development. Technology and content development expense increased $11.3 million, or 43.2%, to $37.3 million as wecompared to $26.0 million in 2019. This increase was primarily due to a $6.5 million addition of technology and content development expense from Trilogy boot camps. The remaining increase was primarily due to a $3.5 million increase in amortization expense and a $2.7 million increase in personnel and personnel-related expense. These increases were partially offset by a $1.6 million decrease in travel and related expense due to cost efficiencies and the impact of COVID-19.
Marketing and Sales. Marketing and sales expense increased our student acquisition activities$8.6 million, or 9.6%, to drive future enrollments$98.3 million as compared to $89.7 million in our offerings. Additionally, the2019. This increase included $10.9was primarily due to a $12.1 million of higher compensation and benefit costs, as we increased our headcountincrease in marketing and sales by 43%, in order to drive future enrollment and revenue growth in existing and new offerings and $2.7 millionexpense from the addition of higher depreciation and amortization expense.Trilogy boot camps. The remaining $1.7 million of the increase primarily related to higher other marketing and sales costs.

General and Administrative.  General and administrative costs increased $23.0 million, or 121.6%. This was primarily due to a $1.2 million increase in direct marketing costs. These increases were partially offset by a $3.5 million decrease in travel and related expense due to cost efficiencies and the impact of the acquisition of Trilogy, as well as transaction, integrationCOVID-19, and restructuring-related costs incurred.a $2.1 million decrease in personnel and personnel-related expense.

Impairment chargeGeneral and Administrative. InGeneral and administrative expense increased $11.2 million, or 39.2%, to $39.6 million as compared to $28.4 million in 2019. This increase was primarily due to a $12.4 million increase in personnel and personnel-related expense and a $1.5 million increase in restructuring-related and stockholder activism expense. The remaining increase was primarily due to a $2.4 million addition of general and administrative expense from Trilogy boot camps. These increases were partially offset by a $2.7 million decrease in transaction and integration-related expense and a $1.7 million decrease in travel and related expense due to cost efficiencies and the three months ended September 30, 2019, we recorded an impairment chargeimpact of $70.4 million. Refer to Note 2 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this impairment charge.COVID-19.

Net Interest Income (Expense). In the three months ended September 30, 2019, we incurred netNet interest expense of $4.7was $6.4 million compared to net interest income of $1.8 million in the same period of 2018. This change of $6.5 million was primarily driven by an increase in interest expense of $5.1 million related to our senior secured term loan facility and $0.4 million related to the amortization of debt issuance costs, partially offset by higher interest income of $0.9 million as a result of a higher cash balance.

Other Expense, Net. For the three months ended September 30, 2019, we incurred other expense, net, of $710 thousand, compared to $273 thousand in the same period of 2018.

Income Tax (Expense) Benefit. Our income tax provisions 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.

Our effective tax rate was approximately (1)% and 4% for the three months ended September 30, 2019 and 2018, respectively. Our net tax expense of $0.7$0.6 million for the three months ended SeptemberJune 30, 2020 and 2019, includedrespectively. The net interest expense of $1.5 million for a purchase accounting adjustment to the one-time tax benefit related to the acquisition of Trilogy, and a benefit of $0.8 million due to losses generated by operations and the amortization of acquired intangibles in our Alternative Credential Segment that are expected to be realized through future reversing taxable temporary differences. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

Comparison of Nine Months Ended Septemberthree months ended June 30, 2019 and 2018

The following table sets forth selected consolidated statement of operations data for each of the periods indicated.

Table of Contents

 Nine Months Ended September 30,    
 2019 2018 Period-to-Period Change
 Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage
 (dollars in thousands)
Revenue$411,493
 100.0 % $296,674
 100.0 % $114,819
 38.7 %
Costs and expenses           
Curriculum and teaching41,345
 10.0
 16,665
 5.6
 24,680
 148.1
Servicing and support71,518
 17.4
 49,116
 16.6
 22,402
 45.6
Technology and content development79,969
 19.4
 45,436
 15.3
 34,533
 76.0
Marketing and sales260,231
 63.2
 171,982
 58.0
 88,249
 51.3
General and administrative93,471
 22.7
 63,323
 21.3
 30,148
 47.6
Impairment charge70,379
 17.1
 —
 —
 70,379
 *
Total costs and expenses616,913
 149.8
 346,522
 116.8
 270,391
 78.0
Loss from operations(205,420) (49.8) (49,848) (16.8) (155,572) 312.1
Interest income5,087
 1.2
 3,053
 1.0
 2,034
 66.6
Interest expense(8,130) (2.0) (81) —
 (8,049) *
Other expense, net(1,093) (0.3) (1,493) (0.5) 400
 (26.8)
Loss before income taxes(209,556) (50.9) (48,369) (16.3) (161,187) 333.2
Income tax benefit18,918
 4.6
 5,207
 1.8
 13,711
 263.3
Net loss$(190,638) (46.3)% $(43,162) (14.5)% $(147,476) 341.7
*Not meaningful for comparative purposes.

The following table sets forth the revenue by segment for each of the periods indicated.
 Nine Months Ended September 30, Period-to-Period Change
 2019 2018 Amount Percentage
 (dollars in thousands)
Revenue by segment* 
  
  
  
Graduate Program Segment$308,970
 $251,487
 $57,483
 22.9%
Alternative Credential Segment102,523
 45,187
 57,336
 126.9
Total revenue$411,493
 $296,674
 $114,819
 38.7
*Immaterial amounts of intersegment revenue have been excluded from the above results for the nine months ended September 30, 2019 and 2018.

Revenue. Revenue increased $114.8 million, or 38.7%. Trilogy accounted for $41.1 million, or 35.8%, of the increase in our consolidated revenue.

Graduate Program Segment revenue increased $57.5 million, or 22.9%. This increase was primarily driven by growth in full course equivalent enrollments of 26,619, or 28.6%, partially offset by a decrease in the average revenue per full course equivalent enrollment, from $2,705 to $2,583.

Alternative Credential Segment revenue increased $57.3 million, or 126.9%. This increase was primarily driven by our acquisition of Trilogy, which contributed significantly to this segment’s overall growth in full course equivalent enrollments of 13,358, or 57.7%, as well as this segment’s increase in the average revenue per full course equivalent enrollment, from $1,951 to $3,061. Excluding the impact from acquiring Trilogy, the Alternative Credential Segment revenue growth was $16.2 million, or 35.9%. Fluctuations in foreign currency exchange rates did not have a material impact on revenue.

Curriculum and Teaching.  Curriculum and teaching costs increased $24.7 million, or 148.1%. This increase2020 was primarily due to boot camps offered through Trilogyour $380 million aggregate principal amount of 2.25% convertible senior notes due 2025 (the “Notes”) and an increase in short courses taken in our Alternative Credential Segment.


Table of Contents

Servicing and Support.  Servicing and support costs increased $22.4$250 million or 45.6%senior secured term loan facility (“Term Loan”). This increaseThe net interest expense for the three months ended June 30, 2019 was primarily due to a $19.2our Term Loan, partially offset by interest earned on our cash balances.
31
Table of Contents
Loss on Debt Extinguishment. Loss on debt extinguishment was $11.7 million increase in compensation and benefit costs, as we increased our headcount in servicingzero for the three months ended June 30, 2020 and support by 72%, to serve a growing number of students and faculty in existing and new offerings. Additionally, there was a $1.2 million increase in other costs, which reflects the impact of our acquisition of Trilogy. The remaining $2.0 million of the increase primarily related to higher rent, travel and other servicing and support costs, due in part to an increase in headcount.

Technology and Content Development.  Technology and content development costs increased $34.6 million, or 76.0%.2019, respectively. This increase was due to a $18.2 million increase related to higher amortization expense associatedthe write-off of deferred financing costs and fees paid in connection with capitalized technology and content development, which reflects the impactextinguishment of our acquisition of Trilogy, as well as $3.5 million of higher hosting and licensing costs due to the larger number of courses that have been developed and the continued maintenance of our platformTerm Loan in a cloud environment. Additionally, there was a $10.3 million increase in compensation and benefit costs (net of amounts capitalized for technology and content development), as we increased our headcount in technology and content development by 95%, which reflects the impact of our acquisition of Trilogy and hiring to support scaling of existing offerings and the launching of new offerings. The remaining $2.6 million of the increase primarily related to higher other net costs to support and maintain our internal software applications.April 2020.

Marketing and Sales.  Marketing and sales costs increased $88.2 million, or 51.3%. This increase was primarily due to higher direct internet marketing costs of $54.4 million to drive future enrollments in our offerings. The increase also included $24.2 million of higher compensation and benefit costs, as we increased our headcount in marketing and sales by 53%, to drive future enrollment and revenue growth in existing and new offerings and $4.0 million of higher depreciation and amortization expense. Additionally, the increase included $1.6 million of higher hosting and licensing costs, $1.4 million of higher rent and facilities expenses. The remaining $2.6 million of the increase primarily related to higher other marketing and sales costs.

General and Administrative.  General and administrative costs increased $30.2 million, or 47.6%. This was primarily due to the impact of the acquisition of Trilogy, as well as transaction, integration and restructuring-related costs incurred.

Impairment charge. In the nine months ended September 30, 2019, we recorded an impairment charge of $70.4 million. Refer to Note 2 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this impairment charge.

Net Interest Income (Expense). In the nine months ended September 30, 2019, we incurred net interest expense of $3.0 million, compared to net interest income of $3.0 million in the same period of 2018. This change of $6.0 million was primarily driven by an increase in interest expense of $7.3 million related to our senior secured term loan facility and $0.6 million related to the amortization of debt issuance costs, partially offset by higher interest income of $2.0 million as a result of a higher cash balance from our May 2018 public offering of common stock.

Other Income (Expense), Net. ForOther income (expense), net was $0.6 million and $(13) thousand for the ninethree months ended SeptemberJune 30, 2020 and 2019, we incurred other expense, net, of $1.1 million, comparedrespectively. This change was primarily due to $1.5 millionfluctuations in foreign currency rates impacting our operations in the same period of 2018.Alternative Credential Segment.

Income Tax Benefit. Our income tax provisions were based on estimated full-year effective tax rates, includingFor 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 thatthree months ended June 30, 2020, we recognized a tax benefit will be realized.

Ourof $0.4 million, and our effective tax rate was approximately 9%1%. This tax benefit was due to net operating losses and 11% for the ninereversal of taxable temporary differences of the acquired intangibles in our Alternative Credential Segment. For the three months ended SeptemberJune 30, 2019, and 2018, respectively. Ourwe recognized a tax benefit of $18.9$18.7 million, for the nine months ended September 30, 2019 includes a one-time tax benefit related to the acquisition of Trilogy. This one-time benefitwhich primarily relates to the reversal of our tax valuation allowance that was no longer needed as a result of recognizing an additional net deferred tax liability due to the acquisition of Trilogy. Excluding the one-time tax benefit, our tax benefit related to losses generated by operations and the amortization of acquired intangibles in our Alternative Credential Segment that are expected to be realized through future reversing taxable temporary differences. We expect to continue to recognize a tax benefit in the future for our Alternative Credential Segment to the extent that this segment continues to generate pre-tax losses while carrying a net deferred tax liabilities that are in excess of deferred tax assets.liability. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.
Comparison of Six Months Ended June 30, 2020 and 2019
The following table presents selected condensed consolidated statement of operations data for each of the periods indicated.
Six Months Ended June 30,
 20202019Period-to-Period Change
 AmountPercentage of RevenueAmountPercentage of RevenueAmountPercentage
(dollars in thousands)
Revenue$358,166  100.0 %$257,695  100.0 %$100,471  39.0 %
Costs and expenses
Curriculum and teaching46,734  13.0  20,009  7.8  26,725  133.6  
Servicing and support60,827  17.0  44,167  17.1  16,660  37.7  
Technology and content development72,817  20.3  45,837  17.8  26,980  58.9  
Marketing and sales197,556  55.2  166,710  64.7  30,846  18.5  
General and administrative83,207  23.2  51,431  20.0  31,776  61.8  
Total costs and expenses461,141  128.7  328,154  127.4  132,987  40.5  
Loss from operations(102,975) (28.7) (70,459) (27.4) (32,516) 46.1  
Interest income667  0.2  4,163  1.6  (3,496) (84.0) 
Interest expense(12,011) (3.4) (2,479) (1.0) (9,532) 384.6  
Loss on debt extinguishment(11,671) (3.3) —  —  (11,671) *
Other expense, net(1,701) (0.5) (383) (0.1) (1,318) 344.1  
Loss before income taxes(127,691) (35.7) (69,158) (26.9) (58,533) 84.6  
Income tax benefit1,418  0.4  19,632  7.6  (18,214) (92.8) 
Net loss$(126,273) (35.3)%$(49,526) (19.3)%$(76,747) 155.0 %
*Not meaningful for comparative purposes.
Revenue. Revenue for the six months ended June 30, 2020 increased $100.5 million, or 39.0%, to $358.2 million as compared to $257.7 million in 2019. This increase was driven by a 13.9% increase in Graduate Program Segment revenue and a 138.0% increase in Alternative Credential Segment revenue. The increase in revenue from the Alternative Credential Segment includes incremental revenue of $60.1 million from Trilogy, which we acquired in May 2019.
Revenue from our Graduate Program Segment increased $28.6 million, or 13.9%, primarily due to growth in FCE enrollments of 13,184, or 16.8%, partially offset by a decrease in the average revenue per FCE enrollment, from $2,612 to $2,548. We expect to continue to see a decline in average revenue per FCE enrollment in this segment in the future due to increasing enrollments for our undergraduate offerings.

32
Table of Contents

Revenue from our Alternative Credential Segment increased $71.9 million, or 138.0%, primarily due to growth in FCE enrollments of 15,314, or 75.6%, as well as an increase in the average revenue per FCE enrollment, from $2,738 to $3,486. These increases were primarily due to the addition of 5,678 incremental FCE enrollments from Trilogy.

Curriculum and Teaching. Curriculum and teaching expense increased $26.7 million, or 133.6%, to $46.7 million as compared to $20.0 million in 2019. This increase was primarily due to a $22.2 million increase in university and instructional staff compensation expense from the addition of Trilogy boot camps. The remaining increase was primarily due to a $4.6 million increase in university and instructional staff compensation expense from short courses.
Servicing and Support. Servicing and support expense increased $16.6 million, or 37.7%, to $60.8 million as compared to $44.2 million in 2019. This increase was primarily due to a $9.7 million increase in personnel and personnel-related expense to serve a greater number of students and faculty. The remaining increase was primarily due to a $9.4 million addition of servicing and support expense from Trilogy boot camps. These increases were partially offset by a $2.3 million decrease in travel and related expense due to cost efficiencies and the impact of COVID-19.
Technology and Content Development. Technology and content development expense increased $27.0 million, or 58.9%, to $72.8 million as compared to $45.8 million in 2019. This increase was primarily due to a $16.8 million addition of technology and content development expense from Trilogy boot camps. The remaining increase was primarily due to a $7.3 million increase in amortization expense and a $4.8 million increase in personnel and personnel-related expense. These increases were partially offset by a $1.6 million decrease in travel and related expense due to cost efficiencies and the impact of COVID-19.
Marketing and Sales. Marketing and sales expense increased $30.9 million, or 18.5%, to $197.6 million as compared to $166.7 million in 2019. This increase was primarily due to a $31.7 million increase in marketing and sales expense from the addition of Trilogy boot camps. The remaining increase was primarily due to a $4.0 million increase in direct marketing costs. These increases were partially offset by a $3.7 million decrease in travel and related expense due to cost efficiencies and the impact of COVID-19, and a $1.6 million decrease in personnel and personnel-related expense.
General and Administrative. General and administrative expense increased $31.8 million, or 61.8%, to $83.2 million as compared to $51.4 million in 2019. This increase was primarily due to a $22.1 million increase in personnel and personnel-related expense. The remaining increase was primarily due to a $14.3 million addition of general and administrative expense from Trilogy boot camps. In addition, $6.1 million of the increase related to restructuring-related and stockholder activism expense. These increases were partially offset by a $3.9 million decrease in transaction and integration-related expense, and a $2.7 million decrease in travel and related expense due to cost efficiencies and the impact of COVID-19.
Net Interest Income (Expense). Net interest income (expense) was $(11.3) million and $1.7 million for the six months ended June 30, 2020 and 2019, respectively. The net interest expense for the six months ended June 30, 2020 was primarily due to our Term Loan and our Notes. The net interest income for the six months ended June 30, 2019 was primarily due to interest earned on our cash balances, partially offset by interest related to our Term Loan.
Loss on Debt Extinguishment. Loss on debt extinguishment was $11.7 million and zero for the six months ended June 30, 2020 and 2019, respectively. This increase was due to the write-off of deferred financing costs and fees paid in connection with the extinguishment of our Term Loan in April 2020.
Other Expense, Net. Other expense, net was $1.7 million and $0.4 million for the six months ended June 30, 2020 and 2019, respectively. This increase was primarily due to fluctuations in foreign currency rates impacting our operations in the Alternative Credential Segment.
Income Tax Benefit. For the six months ended June 30, 2020, we recognized a tax benefit of $1.4 million, and our effective tax rate was approximately 1%. This tax benefit was due to net operating losses and the reversal of taxable temporary differences of the acquired intangibles in our Alternative Credential Segment. For the six months ended June 30, 2019, we recognized a tax benefit of $19.6 million, which primarily relates to the reversal of our tax valuation allowance that was no longer needed as a result of recognizing an additional net deferred tax liability due to the acquisition of Trilogy. We expect to continue to recognize a tax benefit for our Alternative Credential Segment to the extent that this segment continues to generate pre-tax losses while carrying a net deferred tax liability. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.
Business Segment Operating Results

We define segment profitability as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, foreign currency gains or losses, acquisition-related gains or losses, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, impairment charges, losses on debt
33
Table of Contents
extinguishment, and stock-based compensation expense. Some or all of these items may not be applicable in any given reporting period. Total segment profitability is a non-GAAP measures when presented outside of the financial statement footnotes. Total segment profitability is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to develop short- and long-term operational plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses in calculating total segment profitability can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that total segment profitability provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

The following table reconcilespresents a reconciliation of net loss to total segment profitability:profitability for each of the periods indicated.
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
 (in thousands)
Net loss$(66,167) $(27,972) $(126,273) $(49,526) 
Adjustments:
Net interest expense (income)6,364  610  11,344  (1,684) 
Foreign currency (gain) loss(570) 13  1,701  383  
Income tax benefit(363) (18,691) (1,418) (19,632) 
Depreciation and amortization expense23,985  14,653  47,470  24,351  
Deferred revenue fair value adjustment—  3,352  —  3,352  
Transaction and integration costs359  3,093  1,083  5,024  
Restructuring-related costs196  —  484  —  
Stockholder activism costs1,347  —  5,586  —  
Loss on debt extinguishment11,671  —  11,671  —  
Stock-based compensation expense21,091  9,967  41,961  19,551  
Total adjustments64,080  12,997  119,882  31,345  
Total segment profitability$(2,087) $(14,975) $(6,391) $(18,181) 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
 (in thousands)
Net loss$(141,112) $(9,944) $(190,638) $(43,162)
Adjustments:       
Interest income(924) (1,799) (5,087) (3,053)
Interest expense5,651
 27
 8,130
 81
Foreign currency loss710
 273
 1,093
 1,493
Income tax expense (benefit)714
 (414) (18,918) (5,207)
Depreciation and amortization expense22,288
 8,599
 46,639
 23,382
Deferred revenue fair value adjustment5,927
 —
 9,279
 —
Transaction costs92
 —
 4,466
 —
Integration costs2,436
 —
 2,493
 —
Restructuring-related costs6,581
 —
 7,174
 —
Impairment charge70,379
 —
 70,379
 —
Stock-based compensation expense16,535
 7,933
 36,086
 24,064
Total adjustments130,389
 14,619
 161,734
 40,760
Total segment profitability$(10,723) $4,675
 $(28,904) $(2,402)

Three Months Ended SeptemberJune 30, 20192020 and 20182019

RevenueThe following table presents revenue by segment and segment profitability for each of the three months ended September 30, 2019 and 2018 were as follows:periods indicated.
 Three Months Ended September 30, Period-to-Period Change
 2019 2018 Amount Percentage
 (dollars in thousands)
Revenue by segment* 
  
  
  
Graduate Program Segment$103,393
 $89,719
 $13,674
 15.2 %
Alternative Credential Segment50,405
 17,244
 33,161
 192.3
Total revenue$153,798
 $106,963
 $46,835
 43.8
        
Segment profitability 
  
  
  
Graduate Program Segment$1,213
 $5,564
 $(4,351) (78.2)
Alternative Credential Segment(11,936) (889) (11,047) **
Total segment profitability$(10,723) $4,675
 $(15,398) (329.2)
Three Months Ended June 30,Period-to-Period Change
 20202019AmountPercentage
 (dollars in thousands)
Revenue by segment*    
Graduate Program Segment$115,685  $101,403  $14,282  14.1 %
Alternative Credential Segment67,002  34,058  32,944  96.7  
Total revenue$182,687  $135,461  $47,226  34.9 %
Segment profitability    
Graduate Program Segment$4,703  $(8,049) $12,752  **
Alternative Credential Segment(6,790) (6,926) 136  (1.9) 
Total segment profitability$(2,087) $(14,975) $12,888  (86.0)%
*The Company has excluded immaterial amounts of intersegment revenues from the three months ended September 30, 2019 and 2018.
**Not meaningful for comparative purposes.

Segment profitability in our Graduate Program Segment*Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended SeptemberJune 30, 2019 was $1.22020 and 2019.
** Not meaningful for comparative purposes.
34
Table of Contents
Graduate Program Segment profitability increased $12.8 million a decrease of $4.4to $4.7 million or 78.2%, from $5.6as compared to $(8.0) million for the same period of 2018.in 2019. This period-over-period decrease in segment profitabilityincrease was primarily due to marketing spend and marketing and program staffing costs growing more quickly than revenue as wegrowth of $14.3 million, a reduced launch new programs and absorb market driven adjustments to enrollment expectations in existing programs. Going forward, we intend to realign these costs with revenue, improve efficiency in the segment’s overallschedule, cost structure and adjust the cadence of new program launches, which are a significant driver of losses in the near term. These

Table of Contents

actions are expected to increase segment profitability over time. However, the impact of ourcontrol initiatives, to improve specific and overall costmarketing efficiencies and the actual timing of new program launches may result in significant variability in the Graduate Program Segment’s profitability between future periods.reduced travel and related expense.

Segment profitability in our Alternative Credential Segment profitability increased $0.1 million, or 1.9%, to $(6.8) million as compared to $(6.9) million in 2019. This increase was primarily due to improvements driven by short course marketing efficiencies and boot camp integration efforts. Segment profitability for the three months ended SeptemberJune 30, 2019 was $(11.9) million, a decreaseincluded Trilogy’s results of $11.0 million,operations from $(0.9) million forMay 22, 2019, the same perioddate of 2018. The primary factor impacting segment profitability was the acquisition of Trilogy. There were also changes in relative expense levels and expense timing in this period of rapid growth for the Alternative Credential Segment, year-over-year and quarter-over-quarter. Therefore, changes in segment profitability do not necessarily represent a business trend. Changes in segment profitability are highly dependent upon the timing of launches of new and existing offerings. We expect to increase investment in the development, marketing and support of newer and newly launching offerings in this segment. Based on timing differences between the addition of costs related to the increased investment and the related recognition of revenue, we expect that there will be significant variability in segment profitability in this segment between periods.acquisition.

NineSix Months Ended SeptemberJune 30, 20192020 and 20182019

RevenueThe following table presents revenue by segment and segment profitability for each of the nine months ended September 30, 2019 and 2018 were as follows:periods indicated.
 Nine Months Ended September 30, Period-to-Period Change
 2019 2018 Amount Percentage
 (dollars in thousands)
Revenue by segment* 
  
  
  
Graduate Program Segment$308,970
 $251,487
 $57,483
 22.9%
Alternative Credential Segment102,523
 45,187
 57,336
 126.9
Total revenue$411,493
 $296,674
 $114,819
 38.7
        
Segment profitability 
  
  
  
Graduate Program Segment$(6,126) $(615) $(5,511) **
Alternative Credential Segment(22,778) (1,787) (20,991) **
Total segment profitability$(28,904) $(2,402) $(26,502) **
Six Months Ended June 30,Period-to-Period Change
 20202019AmountPercentage
 (dollars in thousands)
Revenue by segment*    
Graduate Program Segment$234,142  $205,577  $28,565  13.9 %
Alternative Credential Segment124,024  52,118  71,906  138.0  
Total revenue$358,166  $257,695  $100,471  39.0 %
Segment profitability    
Graduate Program Segment$11,163  $(7,339) $18,502  **
Alternative Credential Segment(17,554) (10,842) (6,712) 61.9  
Total segment profitability$(6,391) $(18,181) $11,790  (64.8)%
*The Company has excluded immaterial amounts of intersegment revenues from the nine months ended September 30, 2019 and 2018.
**Not meaningful for comparative purposes.

*Immaterial amounts of intersegment revenue have been excluded from the above results for the six months ended June 30, 2020 and 2019.
Segment profitability in our ** Not meaningful for comparative purposes.
Graduate Program Segment for the nine months ended September 30, 2019 was $(6.1)profitability increased $18.5 million a decrease of $5.5to $11.2 million from $(0.6)as compared to $(7.3) million for the same period of 2018.in 2019. This period-over-period decrease in segment profitabilityincrease was primarily due to marketing spend and marketing and program staffing costs growing more quickly than revenue as wegrowth of $28.6 million, a reduced launch new programs and absorb market driven adjustments to enrollment expectations in existing programs. Going forward, we intend to realign these costs with revenue, improve efficiency in the segment’s overallschedule, cost structure and adjust the cadence of new program launches, which are a significant driver of losses in the near term. These actions are expected to increase segment profitability over time. However, the impact of ourcontrol initiatives, to improve specific and overall costmarketing efficiencies and the actual timing of new program launches may result in significant variability in the Graduate Program Segment’s profitability between future periods.reduced travel and related expense.
Segment profitability in our Alternative Credential Segment for the nine months ended September 30, 2019profitability decreased $6.7 million, or 62%, to $(17.6) million as compared to $(10.8) million in 2019. This decrease was $(22.8) million, a decrease of $21.0 million, from $(1.8) million for the same period of 2018. The primary factor impacting segment profitability in this segment was acquisition of Trilogy. There were also changes in relative expense levels and expense timing in this period of rapid growth for the Alternative Credential Segment, year-over-year and quarter-over-quarter. Therefore, changes in segment profitability do not necessarily represent a business trend. Changes in segment profitability are highly dependent upon the timing of launches of new and existing offerings. We expectprimarily due to increase investment in the development, marketing and support of newer and newly launching offerings in this segment. Based on timing differences between the addition of costs related toTrilogy’s results of operations since the increased investmentacquisition date.

Liquidity and the related recognitionCapital Resources
As of revenue, we expect that there will be significant variability in segment profitability in this segment between periods.


TableJune 30, 2020, our principal sources of Contents

Capital Resourcesliquidity were cash and Liquidity

Capital Expenditures

During the nine months ended September 30, 2019, we had capital asset additions of $62.0cash equivalents totaling $194.8 million, which were comprised of $51.5 millionheld for working capital and general corporate purposes, and the ability to borrow under our revolving credit facility as discussed below.
In April 2020, we issued the Notes in capitalized technology and content development, $5.2 million of leasehold improvements, $4.8 million of other property and equipment, $0.3 million of trade and domain names, and an immaterialaggregate principal amount of non-cash capital expenditures. Due$380 million, including the exercise by the initial purchasers of an option to extended paymentpurchase additional Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act. The Notes are governed by an indenture (the “Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The Notes bear interest at a rate of 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Notes mature on May 1, 2025, unless repurchased, redeemed or converted in accordance with their terms associatedprior to such date. Prior to November 1, 2024, the Notes are convertible only upon satisfaction of certain conditions, and thereafter at any time until the close of business on the second scheduled trading date immediately before the maturity date. In connection with the timingNotes, we entered into privately negotiated capped call transactions with a premium cost of approximately $50.5 million. The capped call transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or to offset any cash capital expenditures made more than 90 dayspayments we are required to make in excess of the principal amount of the converted Notes, with such reduction and/or offset subject to the cap. The net proceeds from the issuance of the Notes were $319.0 million after deducting the dateinitial purchasers’ discount, offering expenses and the cost of purchase, an additional $1.3 million for purchases made in prior year wasthe capped call transactions. As of June 30, 2020, the Notes are not currently convertible into our common stock and are therefore classified as cash flows from financing activitieslong-term debt. Refer to Note 8 in the condensed consolidated statement“Notes to Condensed
35
Table of cash flowsContents
Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for the nine months ended September 30, 2019. For the full year of 2019, we expect new capital asset additions of approximately $81 million to $85 million, of which approximately $2 million to $5 million will be funded by landlord leasehold improvement allowances.

Sources of Liquidity

Credit Agreement

more information regarding our Notes.
On May 22, 2019,June 25, 2020, we entered into a $50 million credit agreement (the “Credit Agreement”) with Owl Rock Capital Corporation,Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and certain other lenders party thereto that provides for a $250$50 million senior secured term loan facility (the “Term Loan”). Subject to certain exceptions, the Term Loan under thein revolving loans. The Credit Agreement may be increased or new term loans may be establishedallows for incremental borrowings from time to time in an aggregate amount for all such incremental amounts not to exceed (i) the lesser of (x) $50 million and (y) an amount such that the aggregate principal amount of the lenders’ commitments under the revolving credit facility does not exceed $100 million, plus (ii) the amountcertain specified prepayments of certain prepayments made by usindebtedness, plus (iii) an unlimited amount subject to the achievementsatisfaction of either a certain First Lien LQA University Segment Revenue Leverage Ratio (as defined inleverage ratio based compliance test. As of June 30, 2020, our borrowing capacity was $50.0 million and no amounts were outstanding under the Credit Agreement) or a certain First Lien Net Leverage Ratio (as defined in the Credit Agreement), as applicable.Agreement.

TheOn April 23, 2020, we repaid our $250 million Term Loan matures on May 22, 2024in full (including interest and bear interest, atprepayment premium) and terminated our option, at variable rates based on (i) a customary alternative base rate (with a floor of 2.00%) plus an applicable margin of 4.75% or (ii) an adjusted LIBOR rate (with a floor of 1.00%) for the interest period relevant to such borrowing plus an applicable margin of 5.75%. During the three and nine months ended September 30, 2019, we incurred interest expense of $5.5 million and $7.9 million, respectively, incredit agreement with Owl Rock Capital Corporation. In connection with the Credit Agreement. For additional information regardingextinguishment of the Credit Agreement, including its prepayment provisions and related covenants, see our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on May 22, 2019.

Comerica LineTerm Loan, we recognized a charge of Credit

Effectiveapproximately $11.7 million in the second quarter of 2019, we terminated our $25.0 million revolving line of credit agreement and letters of credit with Comerica Bank. No amounts were outstanding under this credit agreement as of September 30, 2019 or December 31, 2018.2020.

Deferred Government Grant Obligations

We have a 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 may be forgiven provided that we attain certain conditions related to employment levels at our Lanham, Maryland headquarters. The conditional loan with the State of Maryland has a maturityTo date, of December 31, 2026, and the conditional loan with Prince George’s County, Maryland has a maturity date of June 22, 2027. The interest expense related to these loans for the three and nine months ended September 30, 2019 and 2018 was immaterial.

Letters of Credit

Certain of our operating lease agreements entered into prior to September 30, 2019 require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of September 30, 2019, we have entered into standby letters of credit totaling $15.7 million as security deposits for the applicable leased facilitiesfinanced our operations primarily through payments from university clients and in connection with the deferred government grant obligations.

We maintain restricted cash as collateral for standby letters of creditstudents for our leased facilitiestechnology and in connection withservices, the Term Loan, the Notes, and public and private equity financings. We believe that our deferred government grant obligations.


Working Capital

Table of Contents


We define working capital as current assets minus current liabilities. Our working capital as of September 30, 2019 and December 31, 2018 was $129.9 million and $453.2 million, respectively. Ourexisting cash and cash equivalents, balances within working capital as of September 30, 2019together with cash generated from operations and December 31, 2018 were $154.1 million and $449.8 million, respectively. The decrease inavailable borrowing capacity under the Credit Agreement, will be sufficient to meet our working capital primarily relates toand capital expenditure requirements for the cash used to complete the Trilogy acquisition and the negative working capital assumed.

next 12 months.
We do not enter into investmentsor our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for tradingequity or speculative purposes. We investdebt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, cash in excess ofwill be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our immediateliquidity requirements, in investments designed to preserve the principal balancecontractual restrictions and provide liquidity. Accordingly, our cash is invested primarily in demand deposit accounts or certificates of deposit that are currently providing only a minimal return.

Cash Flows

other factors. The following table summarizes our cash flows for the periods presented:
 Nine Months Ended
September 30,		 Period-to-Period Change
 2019 2018 Amount Percentage
 (dollars in thousands)
Cash (used in) provided by: 
  
    
Operating activities$(85,661) $(26,043) $(59,618) 228.9 %
Investing activities(435,010) (85,015) (349,995) 411.7
Financing activities242,754
 330,822
 (88,068) (26.6)
Effect of exchange rate changes on cash(1,025) (908) (117) 13.0
Net (decrease) increase in cash, cash equivalents and restricted cash$(278,942) $218,856
 $(497,798) (227.5)

amounts involved may be material.
Operating Activities

Cash used inflows from operating activities was $85.7 million for the nine months ended September 30, 2019, an increase of $59.6 million, or 228.9%,have typically been generated from $26.0 million for the same period of 2018. Our cash used in operating activities during the nine months ended September 30, 2019 primarily reflected our net loss of $190.6 million, adjustments for non-cash items of $163.3 million,income (loss) and a net decreaseby changes in our operating assets and liabilities, particularly from accounts receivable, adjusted for non-cash expense items such as amortization and depreciation expense and stock-based compensation expense.
Net cash used in operating activities for the six months ended June 30, 2020 consisted primarily of $58.3 million. Non-cash charges included a $70.4our net loss of $126.3 million, impairment charge, $46.6adjusted for non-cash items including $47.5 million of depreciation and amortization expense, and $36.1$42.0 million of stock-based compensation expense, an $11.7 million loss on the extinguishment of our Term Loan, $7.3 million of reductions in the carrying amounts of our right-of-use assets, and $5.7 million of non-cash interest expense. The net changeschange in operating assets and liabilities includedof $4.3 million was favorable to cash flows from operations primarily due to a $39.7 million increase in accounts receivable, net, a $24.3 million decrease in other liabilities, net, a $22.3 million increase in payments to university clients, a $20.2$28.8 million increase in deferred revenue and a $12.7$19.6 million increase in accounts payable and accrued expenses.expenses, partially offset by an increase in accounts receivable of $39.5 million.

Cash used in operating activities was $26.0 million for the nine months ended September 30, 2018, a decrease of $36 thousand, or 0.1%, from $26.1 million for the same period of 2017. OurNet cash used in operating activities duringfor the ninesix months ended SeptemberJune 30, 20182019 consisted primarily reflectedof our net loss of $43.2$49.5 million, adjustmentsadjusted for non-cash items including $24.4 million of $47.4 million,depreciation and a net decrease in our operating assets and liabilities of $30.3 million. Non-cash charges included $24.1amortization expense, $19.6 million of stock-based compensation expense, and $23.4$5.3 million of depreciation and amortization expense.reductions in the carrying amounts of our right-of-use-assets. The net changeschange in operating assets and liabilities includedof $49.1 million was unfavorable to cash flows from operations primarily due to a $35.5$25.5 million increase in accounts receivable, net, an $11.1a $23.1 million increasedecrease in other liabilities, a $20.1 million change in payments to university clients, a $12.2 million increase in deferred revenue and a $10.8 million increasepartially offset by favorable changes in accounts payable and accrued expenses.

expenses of $18.1 million and deferred revenue of $15.8 million.
Investing Activities

CashNet cash used in investing activities for the ninesix months ended SeptemberJune 30, 2020 was $37.4 million, consisting primarily of $32.5 million of additions of amortizable intangible assets and $4.3 million of purchases of property, plant and equipment.
Net cash used in investing activities for the six months ended June 30, 2019 was $435.0$408.3 million, an increaseconsisting primarily of $350.0 million, or 411.7%, from $85.0 million for the same period of 2018. This increase was primarily due to a $388.0$387.8 million outflow related to our acquisition of Trilogy, net of cash acquired. The increase was also due to higheracquired, additions of amortizable intangible assets of $32.4 million and purchases of property and equipment of $3.3 million as we expanded into new facilities.$8.1 million. These increases in outflows were partially offset by a $25.0 million inflow from the maturity of a certificate of deposit as well as a $15.0 million year-over-year decrease in the purchase of investments.

investment.
Financing Activities


Table of Contents

CashNet cash provided by financing activities for the ninesix months ended SeptemberJune 30, 2020 was $67.9 million, consisting primarily of $319.0 million of proceeds from the issuance of the Notes (net of payments related to the initial purchasers’
36
Table of Contents
discount, offering expenses and the cost of the capped call transactions), partially offset by the repayment of $252.9 million of principal, interest and prepayment premium associated with the extinguishment of our Term Loan and a $2.5 million payment of debt issuance costs.
Net cash provided by financing activities for the six months ended June 30, 2019 was $242.8$240.3 million, a decreaseconsisting primarily of $88.1$241.8 million from $330.8 million for the same period of 2018. This decrease was primarily due to $330.9 million in proceeds, receivednet of issuance costs, from our public offeringTerm Loan and $2.4 million of common stock in May 2018, a $4.1 million decrease in proceeds received from the exercise of stock options and $2.0 million related to payments made for debt issuance costs.options. These decreases in cash provided by financing activitiesinflows were partially offset by $243.7 million of proceeds from our Term Loan, a $3.6 million decrease in payments made for the acquisitions of amortizable intangible assets and a $0.9 million decrease of tax withholding payments associated with the settlement of restricted stock units in the prior year.of $2.6 million.

Other

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

Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts

We generate substantially all of our revenue from contractual arrangements, with either our university clients or students, to provide a comprehensive platform of tightly integrated technology and technology-enabled services that support our graduate programs, short courses and technical skills-based boot camps.

offerings.
Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

 The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the expected value method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period, and if necessary, we adjust our estimate of the overall transaction price. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
Our Graduate Program Segment derives revenue primarily from contractually specified percentages of the amounts our university clients receive from their students in 2U-enabled graduatedegree programs for tuition and fees, less credit card fees and other specified charges we have agreed to exclude in certain university contracts. Our contracts with university clients in this segment typically have terms of 10 to 15 years and have a single performance obligation, as the promises to provide a platform of tightly integrated technology and services that university clients need to attract, enroll, educate and support students are not distinct within the context of the contracts. The single performance obligation is delivered as the university clients receive and consume benefits, which occurs ratably over a series of academic terms. The amounts received from university clients over the term of the arrangement are variable in nature in that they are dependent upon the number of students that are enrolled in the program within each academic term. These amounts are allocated to and are recognized ratably over the related academic term, defined as the period beginning on the first day of classes through the last. Revenue is recognized net of an allowance, which is established for our expected obligation to refund tuition and fees to university clients.

Our Alternative Credential Segment derives revenue primarily from contracts with students for the tuition and fees paid to enroll in, and progress through, our short courses and boot camps. Our short courses run between six 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 gross proceeds received, net of any applicable pricing concessions, from the students enrolled and share contractually specified amounts received from students with the associated university client, in exchange for providing items such aslicenses to use the university brand name and other trademarks, as required.university trademarks. These amounts are recognized as curriculum and teaching costs on our condensed consolidated statements of operations and comprehensive loss. Our contracts with university clients in this segment are typically shorter and less restrictive than our contracts with university clients in our Graduate Program Segment.

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

37
Table of Contents
Contract Acquisition Costs


Table of Contents

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

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

Payments to University Clients

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

Accounts Receivable, Contract Assets and Liabilities

Balance sheet items related to contracts consist of accounts receivable, net and deferred revenue on our condensed consolidated balance sheets. Included in accounts receivable, net are trade accounts receivable, which are comprised of billed and unbilled revenue. Accounts receivable, net is stated at amortized cost net realizable value, and we utilizeof provision for credit losses. Our methodology to measure the allowance methodprovision for credit losses requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to provide for doubtful accounts based on management’s evaluation ofdetermining the expected collectability of the amounts due. accounts receivable. Some of these factors include current market conditions, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers.
Our estimates are reviewed and revised periodically based on historical collection experience and a reviewthe ongoing evaluation of the current status of accounts receivable, net.credit quality indicators. Historically, actual write-offs for uncollectible accounts have not significantly differed from prior estimates. We recognize unbilled revenue when revenue recognition occurs in advance of billings. Unbilled revenue is recognized in our Graduate Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. Our unbilled revenue represents contract assets.

 Unbilled accounts receivable is recognized in the Alternative Credential Segment once the presentation period commences for amounts to be invoiced to students under installment plans that are paid over the same presentation period.
Deferred revenue represents the excess of amounts billed or received as compared to amounts recognized in revenue on our condensed consolidated statements of operations and comprehensive loss as of the end of the reporting period, and such amounts are reflected as a current liability on our condensed consolidated balance sheets. We generally receive payments for our share of tuition and fees from graduate programGraduate Program Segment university clients early in each academic term and from short course and boot campAlternative 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.

Long-Lived Assets
GoodwillAmortizable Intangible Assets

Goodwill is the excess of purchase price over the fair value of identified netAcquired Intangible Assets. We capitalize purchased intangible assets, of businesses acquired. Our goodwill balance relates to our acquisitions of GetSmarter in July 2017such as software, websites and Trilogy in May 2019. We review goodwill at least annually, as of October 1. Between annual tests, goodwill is reviewed for possible impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We test goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. We initially assess qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment review. We review goodwill for impairment using a quantitative approach if we decide to bypass the qualitative assessment or if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value baseddomains, and amortize them on a qualitative assessment. Upon completionstraight-line basis over their estimated useful life. Historically, we have assessed the useful lives of a quantitative assessment, we maythese acquired intangible assets to be required to recognize an impairment based on the difference between the carrying value and the fair value of the reporting unit.

The determination of the fair value of a reporting unit using the income-based approach requires us to make significant assumptions and estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies, control premiums and valuation multiples appropriate for acquisitions in the industry in which we compete, discount rates, terminal growth rates, and forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, we consider each reporting unit’s historical results and current operating trends, revenues, 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.


Table of Contents

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

We experienced a sustained decline in our stock price during the three months ended September 30, 2019, which management deemed a triggering event that required us to perform an interim goodwill impairment test as of September 1, 2019. Our test relied in part on the work of an independent valuation firm engaged to provide inputs as to the fair value of the reporting units and to assist in the related calculations and analysis. The results of the interim impairment test indicated that the carrying value of our boot camp business acquired in 2019 within our Alternative Credential Segment exceeded the fair value by $70.4 million. The decrease in this reporting unit’s fair value was primarily due to lower expectations of future performance due to the impact of changes in key management as well as an increased focus in integrating the operations of the newly acquired reporting unit, which impacted the estimated operating cash flows. As a result, we recorded an impairment charge of $70.4 million on our condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2019.10 years.

Other than the recently impaired reporting unit, we have no reporting units whose estimated fair values as of September 30, 2019 exceeded their carrying value by less than 10%. It is possible that future changes in our circumstances, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, could require us to record additional impairment charges in the future.

Internally-Developed Intangible Assets

Capitalized Technology

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

38
Table of Contents
Capitalized Content Development

Development. We develop content for each offering on a course-by-course basis in conjunctioncollaboration with university client faculty and industry experts. Depending upon the faculty for each graduate program, short course and boot camp. Universityoffering, we may use materials provided by university clients and their faculty, generally provide materials used for the course in an on-campus setting, including curricula, case studies, presentations and other reading materials, and presentations.materials. We are responsible for the conversioncreation of the materials into a format suitable for delivery through our online learning platform, including all expenses associated with this effort. With regardrespect to the Graduate Program Segment, the development of content is part of our single performance obligation and is considered a contract fulfillment cost.

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


Table of Contents

Evaluation of Long-Lived Assets

We review long-lived assets, which consist of property and equipment, capitalized technology costs, capitalized content development costs and acquired finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. In order to assess the recoverability of the capitalized technology and content development costs, the costs are grouped by the lowest level of independent cash flows (i.e., by degree program, short course or boot camp, for content development costs).flows. Recoverability of a long-lived asset is measured by a comparison of the carrying value of an asset or asset group to the future undiscounted net cash flows expected to be generated by that asset or asset group. If such assets are not recoverable, the impairment to be recognized is measured by the amount by which the carrying value of an asset exceeds the estimated fair value (discounted cash flow) of the asset or asset group. Our impairment analysis is based upon cumulative results and forecasted performance.

Goodwill
Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Our goodwill balance relates to the acquisitions of GetSmarter in July 2017 and Trilogy in May 2019. We review goodwill at least annually, as of October 1. Between annual tests, goodwill is reviewed for possible impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We test our goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. We initially assess qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment review. We review goodwill for impairment using a quantitative approach if we decide to bypass the qualitative assessment or determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on a qualitative assessment. Upon completion of a quantitative assessment, we may be required to recognize an impairment based on the difference between the carrying value and the fair value of the reporting unit.
We determine the fair value of a reporting unit by utilizing a weighted combination of the income-based and market-based approaches. The income-based approach requires us to make significant assumptions and estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies, discount rates, terminal growth rates, and forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, we consider each reporting unit’s historical results and current operating trends, revenue, profitability, cash flow results and forecasts, and industry trends. These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, market capitalization, the continued efforts of competitors to gain market share and prospective student enrollment patterns.
In addition, the value of a reporting unit using the market-based approach is estimated by comparing the reporting unit to other publicly traded companies and/or to publicly-disclosed business mergers and acquisitions in similar lines of business. The value of a reporting unit is based on pricing multiples of certain financial parameters observed in the comparable companies. We also make estimates and assumptions for market values to determine a reporting unit’s estimated fair value.
Other than the reporting unit impaired in the third quarter of 2019, we had no reporting units whose estimated fair value exceeded their carrying value by less than 10% as of October 1, 2019, the date of our annual goodwill impairment assessment. It is possible that future changes in our circumstances, including a potential impact from COVID-19, or in the
39
Table of Contents
variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, could require us to record additional impairment charges in the future.
Recent Accounting Pronouncements

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

Key Business and Financial Performance Metrics

We use a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. In addition to adjusted EBITDA (loss), which we discuss below, and revenue and the components of loss from operations in the section above entitled “Our Business Model and Components of Operating Results,” we utilize full course equivalentFCE enrollments as a key metric to evaluate the success of our growth strategy.business.

Full Course Equivalent Enrollmentsin Our University Clients’ Offerings

We measure full course equivalentFCE enrollments for each of the courses offered during a particular period by taking the number of students enrolled in that course and multiplying it by the percentage of the course completed during that period. We add the full course equivalentFCE enrollments for each course within each segment to calculate the total full course equivalentFCE enrollments per segment. This metric allows us to consistently view period-over-period changes in enrollments by accounting for the fact that many courses we enable straddle multiple fiscal quarters. For example, if a course had 25 enrolled students and 40% of the course was completed during a particular period, we would count the course as having 10 full course equivalentFCE enrollments for that period. Any individual student may be enrolled in more than one course during a period.

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

The following table sets forthpresents the full course equivalentFCE enrollments and average revenue per full course equivalentFCE enrollment in our Graduate Program Segment and Alternative Credential Segment for each of the periods presented.indicated.
 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019* 2018
Graduate Program Segment 
  
  
  
Full course equivalent enrollments40,910
 32,665
 119,602
 92,983
Average revenue per full course equivalent enrollment$2,527
 $2,747
 $2,583
 $2,705
Alternative Credential Segment 
  
  
  
Full course equivalent enrollments14,729
 8,937
 36,519
 23,161
Average revenue per full course equivalent enrollment**$3,825
 $1,930
 $3,061
 $1,951
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
Graduate Program Segment  
FCE enrollments46,142  39,180  91,876  78,692  
Average revenue per FCE enrollment$2,507  $2,588  $2,548  $2,612  
Alternative Credential Segment*  
FCE enrollments20,435  12,662  35,576  20,262  
Average revenue per FCE enrollment**$3,279  $2,955  $3,486  $2,738  
*We acquired Trilogy on May 22, 2019 and Trilogy’s results of operations are included in our results from the date of acquisition. As such, Trilogy will impact the full course equivalent enrollment measures for our Alternative Credential Segment from the acquisition date forward.

*Trilogy’s results of operations are included in our results of operations since the acquisition date.
Table** The calculation of Contents
the Alternative Credential Segment’s average revenue per FCE enrollment includes $3.3 million of revenue that was excluded from the results of operations during each of the three- and six-month periods ended June 30, 2019, respectively, due to a deferred revenue fair value purchase accounting adjustment recorded in connection with the acquisition of Trilogy.

**The calculation of the Alternative Credential Segment’s average revenue per full course equivalent enrollment includes $6.0 million and $9.3 million of revenue that was excluded from the results of operations in the three and nine months ended September 30, 2019, respectively, due to a deferred revenue fair value purchase accounting adjustment recorded as part of the acquisition of Trilogy.

Of the increase in full course equivalentFCE enrollments in our Graduate Program Segment for the three months ended SeptemberJune 30, 2020 and 2019, and 2018, 1,239,2,018, or 15.0%29.0%, and 3,975,3,276, or 46.2%38.0%, respectively, were attributable to graduatedegree programs launched during the preceding 12 months. Of the increase in full course equivalentFCE enrollments in our Graduate Program Segment for the ninesix months ended SeptemberJune 30, 2020 and 2019, and 2018, 1,772,4,898, or 6.7%37.2%, and 7,766,5,928, or 36.7%32.3%, respectively, were attributable to graduatedegree programs launched during the preceding 12 months.

Of the increase in full course equivalentFCE enrollments in our Alternative Credential Segment for the three months ended SeptemberJune 30, 2020 and 2019, and 2018, 2,799,4,200, or 48.3%54.0%, and 5,561,2,555, or 62.2%57.5%, respectively, were attributable to offerings launched during the preceding
40
Table of Contents
12 months. Of the increase in FCE enrollments in our Alternative Credential Segment for the six months ended June 30, 2020 and 2019, 6,339, or 41.4%, and 4,898, or 81.1%, respectively, were attributable to offerings launched during the preceding 12 months. Of the increase in full course equivalent enrollments in our Alternative Credential Segment for the nine months ended September 30, 2019 and 2018, 7,697, or 57.6%, and 13,997, or 60.4% were attributable to offerings launched during the preceding 12 months.

Adjusted EBITDA

Adjusted EBITDA represents our earnings(Loss)
We define adjusted EBITDA (loss) as net income or net loss, as applicable, before net interest income (expense), taxes, depreciation and amortization expense, foreign currency gains or losses, acquisition-related gains or losses, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, impairment charges, losses on debt extinguishment, and stock-based compensation expense. In the firstsecond quarter of 2019,2020, we revised our definition of adjusted EBITDA (loss) to exclude the impact of transaction costs in connection with the acquisition of Trilogy. losses on debt extinguishment.We believe this change is meaningfuluseful to investors because we did not have material transaction costsa loss on debt extinguishment in prior periods, and as a result, excluding the impact of such costs beginninga loss in the first quarter of 2019this period facilitates a period-to-period comparison of our business. In the second quarter of 2019, we revised our definition of adjusted
Adjusted EBITDA to exclude the impact of the deferred revenue fair value adjustments in connection with the acquisition of Trilogy. Business combination accounting guidance requires the write down of deferred revenue in conjunction with the acquisition. We did not have any deferred revenue fair value adjustments during the three and nine months periods ended September 30, 2018. Therefore, we included these revenues in adjusted EBITDA because they related to a specific transaction and are reflective of our ongoing financial performance. Adjusted EBITDA(loss) 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 EBITDA (loss) can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA (loss) provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA (loss) is not a measure calculated in accordance with U.S. GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with U.S. GAAP. 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 (loss) has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of thesethe limitations are:
•although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA (loss) does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•adjusted EBITDA (loss) does not reflect changes in, or cash requirements for, our working capital needs;
•adjusted EBITDA (loss) does not reflect the impact of changes in foreign currency exchange rates;
•adjusted EBITDA (loss) does not reflect acquisition related gains or losses such as, but not limited to, post-acquisition changes in the value of contingent consideration reflected in operations;
•adjusted EBITDA (loss) does not reflect transaction costs, integration costs, restructuring-related costs, impairment charges, stockholder activism costs or restructuring-related costs;losses on debt extinguishment;
•adjusted EBITDA (loss) does not reflect the impact of deferred revenue fair value adjustments;
•adjusted EBITDA (loss) does not reflect the potentially dilutive impact of equity-based compensation;

Table of Contents•

adjusted EBITDA (loss) 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 (loss) differently, which reduces its usefulness as a comparative measure.

41
Table of Contents
Because of these and other limitations, you should consider adjusted EBITDA (loss) alongside other U.S. GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other U.S. GAAP results. The following table presents a reconciliation of net loss to adjusted EBITDA (loss) for each of the periods indicated:indicated.
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
 (in thousands)
Net loss$(66,167) $(27,972) $(126,273) $(49,526) 
Adjustments:
Interest expense (income), net6,364  610  11,344  (1,684) 
Foreign currency (gain) loss(570) 13  1,701  383  
Income tax benefit(363) (18,691) (1,418) (19,632) 
Depreciation and amortization expense23,985  14,653  47,470  24,351  
Deferred revenue fair value adjustment—  3,352  —  3,352  
Transaction and integration costs359  3,093  1,083  5,024  
Restructuring-related costs196  —  484  —  
Stockholder activism costs1,347  —  5,586  —  
Loss on debt extinguishment11,671  —  11,671  —  
Stock-based compensation expense21,091  9,967  41,961  19,551  
Total adjustments64,080  12,997  119,882  31,345  
Adjusted EBITDA (loss)$(2,087) $(14,975) $(6,391) $(18,181) 

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2019 2018 2019 2018
 (in thousands)
Net loss$(141,112) $(9,944) $(190,638) $(43,162)
Adjustments:       
Interest income(924) (1,799) (5,087) (3,053)
Interest expense5,651
 27
 8,130
 81
Foreign currency loss710
 273
 1,093
 1,493
Income tax expense (benefit)714
 (414) (18,918) (5,207)
Depreciation and amortization expense22,288
 8,599
 46,639
 23,382
Deferred revenue fair value adjustment5,927
 —
 9,279
 —
Transaction costs92
 —
 4,466
 —
Integration costs2,436
 —
 2,493
 —
Restructuring-related costs6,581
 —
 7,174
 —
Impairment charge70,379
 —
 70,379
 —
Stock-based compensation expense16,535
 7,933
 36,086
 24,064
Total adjustments130,389

14,619

161,734

40,760
Adjusted EBITDA (loss)$(10,723)
$4,675

$(28,904)
$(2,402)

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to market risk from the information provided in Part II, Item 7A of our Annual Report on Form 10-K, filed with the SEC on February 26, 2019.

28, 2020.
Foreign Currency Exchange Risk

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

For the ninethree months ended SeptemberJune 30, 2020 and 2019, our foreign currency translation adjustment was a gain of $1.4 million and 2018,$2.2 million, respectively. For the six months ended June 30, 2020 and 2019, our foreign currency translation adjustment was a loss of $4.0$14.7 million and a gain of $12.3$1.9 million, respectively.

For the three months ended SeptemberJune 30, 20192020 and 2018,2019, we recognized foreign currency exchange gains of $0.6 million and losses of $0.7 million and $0.3 million,$13.0 thousand, respectively, included on our condensed consolidated statements of operations and comprehensive loss. For the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, we recognized foreign currency exchange losses of $1.1$1.7 million and $1.5$0.4 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss.

The foreign currency exchange rate volatility of the trailing 12 months ending Septemberended June 30, 2020 was 13% and 9% for the South African rand and British pound, respectively. The foreign exchange rate volatility of the trailing 12 months ended June 30, 2019 was 11%13% and 6% for the South African rand and British pound, respectively. A 10% fluctuation of foreign currency exchange rates would have had an immaterial effect on our results of operations and cash flows for all periods presented. The fluctuations of currencies in which we conduct business can both increase and decrease our overall revenue and expenses for any given fiscal period. Such

Table of Contents

volatility, even when it increases our revenuesrevenue or decreases our expenses,expense, impacts our ability to accurately predict our future results and earnings.

42
Table of Contents
Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The scope of management’s assessment of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019 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 Trilogy that are subsumed by internal control over financial reporting. We acquired Trilogy on May 22, 2019 and their results of operations are included in our financial statements effective with the second quarter of 2019. As of September 30, 2019, the assets acquired in the Trilogy acquisition constituted approximately 4.9% of the Company’s consolidated assets, and revenues attributable to the Trilogy acquisition represent 10.0% of the Company’s revenues for the nine month period ended September 30, 2019. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of June 30, 2020 at a reasonable assurance level as of September 30, 2019.

level.
Changes in Internal Control Over Financial Reporting

Other than the change in our internal control over financial reporting as a result of the acquisition of Trilogy, there wereWe made no other changes in our internal control over financial reporting during the quarterthree months ended SeptemberJune 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We are currentlyreporting, other than changes in our control environment to integrate the business we acquired in the process of assessing and integrating Trilogy’s internal control over financial reporting with our existing internal control over financial reporting.
Trilogy acquisition.

43
Table of Contents


PART II. OTHER INFORMATION
 
Item 1.Legal Proceedings

The information required by this Item is incorporated herein by reference to Note 6 in “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We are involved in various claims and legal proceedings arising in the ordinary course of business. We accrue a liability when a loss is considered probable and the amount can be reasonably estimated. See “Note 6. Commitments and Contingencies—Legal Contingencies” to our unaudited financial statements included elsewhere in this periodic report. While we do not expect that the ultimate resolution of any existing claims and proceedings (other than the specific matter described below, if decided adversely), individually or in the aggregate, will have a material adverse effect on our financial position, an unfavorable outcome in some or all of these proceedings could have a material adverse impact on the results of operations or cash flows for a particular period. This assessment is based on our current understanding of relevant facts and circumstances. As such, our view of these matters is subject to inherent uncertainties and may change in the future.

In re 2U, Inc., Securities Class Action, No. 1:19-cv-7390 (S.D.N.Y.)

On August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaints against us, Christopher J. Paucek, our CEO, and Catherine A. Graham, our former CFO, in the United States District Court for the Southern District of New York. The district court consolidated the two actions on August 27, 2019, with the caption In re 2U, Inc., Securities Class Action, No. 1:19-cv-7390 (S.D.N.Y.). The complaints allegeYork, alleging violations of SectionSections 10(b) and 20(a) of the Securities Exchange Act, of 1934, and SEC Rule 10b-5 promulgated thereunder, based upon allegedly false and misleading statements regarding our company’s business prospects and financial projections. The district court transferred the cases to the United States District Court for the District of Maryland, consolidated them under docket number 8:19-cv-3455 (D. Md.), and appointed Fiyyaz Pirani as the lead plaintiff in the consolidated action. On July 30, 2020, Mr. Pirani filed a consolidated class action complaint (“CAC”), adding Harsha Mokkarala, our former Chief Marketing Officer, as a defendant.The CAC also asserts claims under Sections 11, 12(A)(2), and 15 of the Securities Act, against Mr. Paucek, Ms. Graham, members of our Board of Directors, and our underwriters, based on allegations related to our secondary stock offering on May 23, 2018.The proposed class consists of all persons who acquired our company’s securities between February 26, 2018 and July 30, 2019.

 The deadline for the defendants to file a motion to dismiss is September 29, 2020.
We believe that the claims are without merit and we intend to vigorously defend against these claims. However, due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.

Stockholder Derivative Suit
On April 30, 2020, Richard Theis filed a stockholder derivative complaint purportedly on behalf of our company and against Christopher J. Paucek, our CEO, Catherine A. Graham, our former CFO, and our board of directors in the United States District Court for the Southern District of New York, with docket number 20-cv-3360. The complaint alleges claims for breaches of fiduciary duty, insider sales and misappropriation of information, unjust enrichment, and violations of Section 14(a) of the Exchange Act based upon allegedly false and misleading statements regarding our company’s business prospects and financial projections. On July 22, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.

Item 1A.    Risk Factors

You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results. The risks described in Part I, Item 1A “Risk Factors” inof our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 26, 2019 remain current in all material respects, except asare amended and supplemented by the additional risk factors below.provided below, which supersede and replace any similarly titled risk factors. These risks do not identify all risks that we face. Our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.operations.

The global coronavirus outbreak could harm our business, results of operations, and financial condition.
Risks RelatedIn March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious outbreak, which has continued to the Trilogy Acquisitionspread, and the Combined Companyrelated adverse public health developments, including orders to shelter-in-place, travel restrictions and mandated business closures, have adversely affected workforces, organizations, customers, economies and financial markets globally, leading to an economic downturn and increased market volatility. It has also disrupted the normal operations of many businesses, including ours.

44
Table of Contents
Our international operations expose usThis outbreak, as well as intensified measures undertaken to fluctuations in currency exchange rates thatcontain the spread of COVID-19, could negativelycause disruptions and severely impact our financial results and cash flows.business, including, but not limited to:

After the GetSmarter and Trilogy acquisitions, we conduct a•causing one or more substantial portion of our business outside the U.S.clients to file for bankruptcy protection or shut down;
•reducing student demand for our degree programs, short courses and we accordingly make certain businessboot camps, whether due to funding constraints related to loss of employment or lack of interest in pursuing education during a period of uncertainty;
•impacting current and resource decisions considering assumptions about foreign currency. As a result, we face exposureprospective clients’ desire to adverse movements in foreign currency exchange rates, in particularlaunch new educational offerings with respect to the volatilityus;
•negatively impacting collections of the South African rand, or ZAR. While our reporting currency is in U.S. dollars, a portion of our consolidated revenues and expenses are denominated in ZAR, certain of our assets are denominated in ZAR and we have a significant employee base in South Africa. A decrease in the value of the U.S. dollar in relation to the ZAR could increase our cost of doing business in South Africa.accounts receivable;

Alternatively, if the ZAR depreciates against the U.S. dollar, the value of our ZAR revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. Our exposure to adverse movements in foreign currency exchange rates, including the ZAR, could have a material adverse impact on our financial results and cash flows.

In addition, local political events, financial instability and other factors can lead to economic uncertainty and currency exchange rate fluctuations. For example, the announcement of the Referendum of the U.K.’s Membership of the EU (referred

Table of Contents•

to as “Brexit”), advising for the exit of the U.K. from the EU resulted in significant volatility in the global stock markets and exchange rate fluctuations.

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, impactsnegatively impacting our ability to accurately predictfacilitate in-program placements for students in clinical graduate programs; and
•harming our futurebusiness, results of operations and earnings.

financial condition.
We have incurred substantial transactioncannot predict with any certainty whether and integration expenses related to what degree the acquisitions of GetSmarterdisruption caused by the COVID-19 pandemic and Trilogyreactions thereto will continue, and expect to incur additional integration expenses related to the GetSmarter and Trilogy acquisitions that could negatively impact our financial results and cash flows.

We have incurred, and expect to continue to incur, a number of non-recurring costs associated with the GetSmarter and Trilogy acquisitions and associated integration activities. For example, we expect to incur costsface difficulty accurately predicting our internal financial forecasts.
Our continued access to sources of liquidity also depend on multiple factors, including global economic conditions, the condition of global financial markets, the availability of sufficient amounts of financing and our operating performance. There is no guarantee that additional debt financing will be available in the future to fund our obligations, or that it will be available on commercially reasonable terms, in which case we may need to seek other sources of funding. In addition, the terms of future debt agreements could include more restrictive covenants, which could restrict our business operations.
The outbreak also presents challenges as our workforce is currently working remotely and shifting to assisting new and existing customers and their students who are also generally working remotely. We also transitioned our on-campus boot camp offerings to online, which could result in interruptions or disruptions in boot camp delivery. All of this could affect the anticipated launch dates of, and demand for, our degree programs, short courses and boot camps.
The COVID-19 pandemic may also have the effect of heightening many of the other risks identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019, such as those 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 process. Any expected efficiencies to offset these costs may not be achieved in the near term,disruption or at all.

We maintain offices outside of the United States, have international residents that apply to and enroll in our offerings and plan to expand our international business, which exposes us to risks inherent in international operations.

The acquisitions of GetSmarter and Trilogy significantly increased our international operations, including the number of international applicants and students in our offerings. One elementfailures of our growth strategy is to continue expanding our international operations and to establish a worldwide client base. Our current international operations and future initiatives will involve a variety of risks that could constrain our operations and compromise our growth prospects, including:
the need to localize and adapt online offerings for specific countries, including translation into foreign languages and ensuring that these offerings enable our university clients to comply with local education laws and regulations;
the burden of complying with a wide variety of laws, including those relating to labor and employment matters, education, data protection and privacy;
difficulties in staffing and managing foreign operations, including different pricing environments, longer sales cycles, longer accounts receivable payment cycles and collections issues;
lack of familiarity with and unexpected changes in foreign regulatory requirements;
challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;
new and different sources of competition, and practices which may favor local competitors;
weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;
compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, tax, education, privacy and data protection, and anti-bribery laws and regulations such as the U.S. Foreign Corrupt Practices Actplatform and the U.K. Bribery Act;
increased financial accounting and reporting burdens and complexities;
restrictions on the transfer of funds;
adverse tax consequences, including liabilities for indirect taxes or the potential for required withholding taxes for our overseas employees;
terrorist attacks, acts of violence or war and adverse environmental conditions;
unstable regional and economic political conditions; and
fluctuations in currency exchange rates or restrictions on foreign currency, and the resulting effect on our revenue and expenses.

Our expansion efforts may not be successful. Our experience with attracting university clients and students in the U.S. may not be relevant to our ability to attract clients and students in other markets. If we invest substantial time and resources to

Table of Contents

expand our international operations and are unable to attract university clients and students successfully and in a timely manner, our business and operating results will be harmed.

We face competition from established and emerging companies, which could divert university clients or students to our competitors, result in pricing pressure and significantly reduce our revenue.

We expect that the online learning market will continue to expand and that the number of degree and non-degree offerings available online will proliferate.

Particularly in the Graduate Program Segment, the number of new competitive entrants into the online learning market has expanded rapidly in recent years. As the number of online graduate programs expands, we face increasing competition to enroll students in our offerings. This expansion has also resulted in an increase in regional online graduate program offerings for potential students. In addition to making enrollment decisions based on factors such as program quality and university brand strength, we have observed potential students giving preference to universities located in their region, which has further impacted the competitive landscape in our Graduate Program Segment.

In our Alternative Credential Segment, which has a lower barrier to entry, we are facing increasing competition from traditional massive open online course providers, which have evolved from providing massive open online courses to providing short course certificates, nano degrees and similar non-degree alternatives, as well as from companies that provide corporate training programs and online courses taught outside the university environment (e.g., by experts in various fields).

We expect existing competitors and new entrants to the online learning market to revise and improve their business models constantly in response to challenges from competing businesses, including ours. If these or other market participants introduce new or improved delivery of online education and technology-enabled services that we cannot match or exceed in a timely or cost-effective manner, our ability to grow our revenue and achieve profitability could be compromised.

Some of our competitors and potential competitors have significantly greater resources than we do. Increased competition may result in pricing pressure for us in terms of the percentage of tuition and fees we are able to negotiate to receive. The competitive landscape may also result in longer and more complex sales cycles with a prospective university client or a decrease in our market share among selective nonprofit colleges and universities seeking to offer online graduate programs or short courses, any of which could negatively affect our revenue and future operating results and our ability to grow our business.

A number of competitive factors could cause us to lose potential university clients and students or force us to offer our platform on less favorable economic terms, including:

competitors may develop service offerings that our potential university clients or students find to be more compelling than ours;
competitors may adopt more aggressive pricing policies and offer more attractive sales terms, adapt more quickly to new technologies and changes in university client and student requirements, and devote greater resources to the acquisition of qualified students than we can;
current and potential competitors may establish cooperative relationships among themselves or with third parties to enhance their products and expand their markets, and our industry is likely to see an increasing number of new entrants and increased consolidation. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share; and
colleges and universities may choose to continue using or to develop their own online learning solutions in-house, rather than pay for our platform.

We may not be able to compete successfully against current and future competitors. In addition, competition may intensify as our competitors raise additional capital and as established companies in other market segments or geographic markets expand into our market segments or geographic markets. If we cannot compete successfully against our competitors, our ability to grow our business and achieve profitability could be impaired.

A significant portion of our revenue in the Alternative Credential Segment is attributable to courses with three university clients. The loss of any of these clients, or a decline in enrollment in certain of these courses, could significantly reduce our revenue in this segment.


Table of Contents

We expect that our courses with our three largest university clients in the Alternative Credential Segment will continue to account for a large portion of our revenue in this segment. Any decline in these university clients’ reputations or any increase in the fees charged by the university clients for the courses could adversely affect the number of students that enroll in these courses. Further, these university clients could become resistant to offering online courses through our platform. These university clients are not required to continue using us as their provider for online short courses. If any of these university clients elected to end certain courses or to terminate or not renew their relationships with us, it would significantly reduce our revenue in this segment.

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 Trilogy acquisition.

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

Trilogy may underperform relative to our expectations.

Trilogy may not be able to achieve the levels of revenue, earnings or operating efficiency that we expect. Trilogy’s business and financial performance are subject to certain risks and uncertainties, including, among others: (i) the ability to acquire new university clients and expand offerings with existing university clients; (ii) the demand for skills-based boot camps in web development, data analytics, user experience or user interface design, and cybersecurity; (iii) the acceptance, adoption and growth of Trilogy’s skills-based boot camps by colleges and universities studentsof online delivery of their educational offerings.
It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak and employers; and (iv) the lack of predictability and visibility and the non-recurring nature of Trilogy’s business model.

If Trilogy underperforms relative to our expectations, we may not be able to achieve the levels of revenue, earnings or operating efficiency that we expect, andits effects on our business, and operating results of operations or financial condition at this time, but such effects may be harmed.

Uncertainties associated with the Trilogy acquisition may cause the departure of management personnel and other key employees, which could adversely affect the future business and operations of the combined company.

We depend upon the experience and industry knowledge of our officers and other key employees, including those who joined us after the Trilogy acquisition, to execute our business plans. The combined company’s success will depend, in part, upon our ability to retain key management personnel and other key employees. Current and prospective employees may experience uncertainty about their future roles with the combined company, which may materially adversely affect our ability to attract and retain key personnel and could adversely impact operations of the combined company.

The market price of our common stock may decline as a result of the Trilogy acquisition.

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

material.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations with respect to our indebtedness.

As of SeptemberJune 30, 2019,2020, we had approximately $253.5$385.3 million of indebtedness on a consolidated basis. See Note 8 in the “NotesNotes to Condensed Consolidated Financial Statements”Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
On May 22, 2019 we borrowed $250.0 million under our new senior secured Term Loan with an interest rate of LIBOR (subject to a 1.00% floor) plus 5.75% or, at our option, an alternate base rate (subject to a 2.00% floor) plus 4.75%. We utilized the borrowings under the Term Loan to finance a portion of the Trilogy acquisition.

Table of Contents


Our substantial indebtedness could have important consequences. For example, it could:
•limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, investments and other general corporate purposes;
•require a substantial portion of our cash from operating activities to be dedicated to debt service payments and reduce the amount of cash available for working capital, capital expenditures, investments or acquisitions and other general corporate purposes;
expose us to increased interest rate risk as a significant portion of our indebtedness is subject to variable interest rates;
•place us at a competitive disadvantage compared to certain of our competitors who have less debt;
•hinder our ability to adjust rapidly to changing market conditions;
•limit our ability to secure adequate bank financing in the future with reasonable terms and conditions; and
•increase our vulnerability to, and limit our flexibility in planning for or reacting to, a potential downturn in general economic conditions or in one or more of our businesses.

The Indenture and the Credit Agreement contain, and the agreements governing indebtedness we may incur in the future may contain, affirmative and negative covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.
Our
45
Table of Contents
In addition, any variable rate indebtedness under the revolving credit facility may use LIBORthe London Interbank Offered Rate (“LIBOR”) as a benchmark for establishing the rate. On July 27, 2017, the authority that regulates LIBOR announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index, calculated with a broad set of short-term repurchase agreements backed by treasury securities. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom, the United States or elsewhere.

In addition, the Credit Agreement governing our Term Loan contains affirmative and negative covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.

Despite current indebtedness levels, and existing restrictive covenants, we may still incur additional indebtedness that could further exacerbate the risks associated with our substantial financial leverage.

We may incur significant additional indebtedness in the future under the agreements governing our indebtedness. We will not be restricted under the terms of the Indenture from incurring additional debt. Although the Credit Agreement governing our Term Loan contains, and any future indebtedness may contain, restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of thresholds, qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. Additionally, these restrictions could permit us to incur obligations that, although preferential to our common stock in terms of payment, do not constitute indebtedness.

Furthermore, any future indebtedness may prohibit or otherwise restrict us from making any cash payments on the conversion or repurchase of the Notes. Our failure to make cash payments upon the conversion or repurchase of the Notes as required under the terms of the Notes would permit holders of the Notes to accelerate our obligations under the Notes. In addition, any future indebtedness that we may incur may contain financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with such covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that indebtedness becoming immediately payable in full.
The Credit Agreement contains financial covenants that may limit our operational flexibility.
The Credit Agreement requires us to comply with several customary financial and other restrictive covenants, such as maintaining leverage ratios in certain situations, maintaining insurance coverage, and restricting our ability to make certain investments. We are also required to maintain minimum Liquidity (as defined in the Credit Agreement) as of the last day of each fiscal quarter through the fiscal quarter ending on December 31, 2021, which may limit our ability to engage in new lines of business, make certain investments, pay dividends, or enter into various transactions. The Credit Agreement also includes covenants that require us to (i) meet certain minimum Consolidated EBITDA (as defined in the Credit Agreement) amounts through our fiscal quarter ending on December 31, 2021, (ii) not exceed certain maximum amounts for the Consolidated Secured Leverage Ratio (as defined in the Credit Agreement) as of the last day of any period of four consecutive fiscal quarters ending after (but not including) December 31, 2021 through maturity and (iii) maintain certain minimum amounts for the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) for any period of four consecutive fiscal quarters ending after (but not including) December 31, 2021 through maturity.
These covenants may limit the flexibility of our operations, and failure to meet any one of these financial covenants could result in a default under the Credit Agreement. If such a default were to occur, the lenders would have the right to terminate their commitments to provide loans under the Credit Agreement and declare any and all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, the lenders would have the right to proceed against the collateral in which we granted a first priority security interest to them, which consists of substantially all our assets. If the debt under the Credit Agreement were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could immediately materially and adversely affect our business, financial condition, and results of operations. See Note 8 in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details regarding our Credit Agreement.
To service our indebtedness, we will require a significant amount of cash, and our ability to generate cash depends on many factors beyond our control.

Our ability to make cash payments on and to refinance our indebtedness will depend upon our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors beyond our control.

If we are unable to generate sufficient cash from operating activities or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or amounts paid in cash upon conversion of Notes, or if we fail to comply with the various covenants in the instruments governing our indebtedness and we
46
Table of Contents
are unable to obtain waivers from the required lenders or noteholders, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of our indebtedness could elect to declare all the funds borrowed to be due and payable, together with accrued and unpaid interest. As a result, we could be forced into bankruptcy or liquidation.

Our debt obligationsWe may limitbe unable to raise the funds necessary to repurchase the Notes for cash following a “fundamental change,” or to pay any cash amounts due upon conversion, and our flexibility in managing our business.

The Credit Agreement governing our Term Loan requires us to comply with several customary financial and other restrictive covenants, such as maintaining leverage ratios in certain situations, maintaining insurance coverage, and restricting our ability to make certain investments. See “Management’s Discussion and Analysis of Financial Condition and Results of

Table of Contents

Operations-Capital Resources and Liquidity-Sources of Liquidity-Credit Agreement.” We are also required to maintain liquidity of $25.0 million of unrestricted cash as of the last day of each fiscal quarter, whichindebtedness may limit our ability to engage in new linesrepurchase the Notes or pay cash upon their conversion.
Holders of business, makethe Notes may, subject to certain investments, pay dividends, or enter into various transactions. The Credit Agreement also includes covenants thatexceptions, require us to maintain minimum: (i) annualized last quarter Graduate Program Segment revenue (“Minimum Graduate LQAR”) and (ii) last 12 months Alternative Credential Segment revenue (“Minimum Alternative Credential LTMR”). Asrepurchase their Notes following a “fundamental change” (as defined in the Indenture) at a cash repurchase price generally equal to the principal amount of the quarterNotes to be repurchased, plus accrued and last 12 months ended September 30, 2019, Minimum Graduate LQARunpaid interest, if any. In addition, upon conversion, we will satisfy part or all of our conversion obligation in cash unless we elect to settle conversions solely in shares of our common stock. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Notes or pay the cash amounts due upon conversion. In addition, applicable law, regulatory authorities and Minimum Alternative Credential LTMR were $413.6 millionthe agreements governing our other indebtedness may restrict our ability to repurchase the Notes or pay the cash amounts due upon conversion. Our failure to repurchase Notes or to pay the cash amounts due upon conversion when required will constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and $207.7 million, respectively,the Notes.
Conversion of the Notes may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of the Notes may dilute the ownership interests of existing stockholders to the extent we deliver shares upon any conversion of the Notes. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions. The anticipated conversion of the Notes into shares of our common stock could also depress the price of our common stock.
Provisions in the Indenture and in the Credit Agreement could delay or prevent an otherwise beneficial takeover of us.
Certain provisions in the Notes and the Indenture could make a third-party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a “fundamental change” (as defined in the Indenture), then noteholders will have the right to require us to repurchase their Notes for cash. In addition, if a takeover constitutes a “make-whole fundamental change” (as defined in the Indenture), then we may be required to temporarily increase the conversion rate. In either case, and in other cases, our obligations under the Notes and the Indenture, as well as the Credit Agreement, under which exceededa “change of control” is an event of default resulting in acceleration of all indebtedness thereunder, could increase the requirementscost of $374.7 millionacquiring us or otherwise discourage a third party from acquiring us or removing incumbent management, including in a transaction that noteholders or holders of our common stock may view as favorable.
The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board (the “FASB”) issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification Subtopic 470-20, Debt with Conversion and $165.8 millionOther Options (“ASC 470-20”). Under ASC 470-20, an entity must separately account for the quarterliability and last 12 months ended September 30, 2019, respectively. Forequity components of the quarterconvertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date, and last 12 months ending December 31, 2019,the value attributed to the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to have Minimum Graduate LQARrecord a greater amount of $397.8 millionnon-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes. We will report lower net income in our financial results because ASC 470-20 will require interest to include both the current period’s amortization of the debt discount and Minimum Alternative Credential LTMR $185.0 million, respectively. These covenants may limit the flexibilityinstrument’s coupon interest rate, which could adversely affect our reported or future financial results or the trading price of our operations, and failurecommon stock.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares of common stock issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to meet either one
47
Table of these minimum revenue covenants could result in defaults under Contents
the credit agreement governing our Term Loan evenextent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we have satisfied our payment obligations. Ifelected to settle such a default were to occur, our business, financial condition, and results of operations wouldexcess in shares, are issued. We cannot be materially adversely affected.

We have incurred and may incursure that the accounting standards in the future significant charges duewill continue to impairmentpermit the use of our goodwill.

We review goodwill at least annually,the treasury stock method. For example, the FASB recently published an exposure draft proposing to amend these accounting standards to eliminate the treasury stock method for convertible instruments and more frequentlyinstead require application of the “if-converted” method. Under that method, if indicatorsit is adopted, diluted earnings per share would generally be calculated assuming that all the Notes were converted solely into shares of impairment occur,common stock at the reporting unit level. An interim goodwill impairment test performed duringbeginning of the reporting period, indicated thatunless the carrying value of Trilogy exceeded its fair value, primarily dueresult would be anti-dilutive. If we are unable to lower expectations of future performance of Trilogy that impacted estimated operating cash flows. As a result, we recorded an impairment charge of $70.4 million on our condensed consolidated statements of operations and comprehensive lossuse the treasury stock method in accounting for the three and nine months ended September 30, 2019. Future changes inshares issuable upon conversion of the Notes, then our circumstances or indiluted earnings per share would be adversely affected.
The capped call transactions may affect the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting unitscommon stock.
In connection with the Notes, we entered into capped call transactions with certain option counterparties. The capped call transactions are expected generally to reduce the potential dilution upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap.
The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions from time to time (and are likely to do so following any conversion of the Notes, any repurchase of the Notes by us on any fundamental change repurchase date, any redemption date or any other date on which the Notes are retired by us, in each case, if we exercise our option to terminate the relevant portion of the capped call transactions). This activity could require usalso cause or avoid an increase or a decrease in the market price of our common stock.
In addition, if any such capped call transactions are terminated for any reason, the option counterparties or their respective affiliates may unwind their hedge positions with respect to record additional impairment charges,our common stock, which could adversely affect the value of our common stock.
Furthermore, the option counterparties are financial institutions, and we will be subject to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of a materialnumber of financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the capped call transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse effect ontax consequences and more dilution than we currently anticipate with respect to our business,common stock. We can provide no assurances as to the financial condition, and resultsstability or viability of operations.the option counterparties.


48
Table of Contents

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

(a) Sales of Unregistered Securities

None.

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

None.

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

None.

Item 5.Other Information

None.

49

Table of Contents

Item 6.Exhibits
Exhibit
Number		DescriptionFormFile No.Exhibit
Number		Filing DateFiled/Furnished Herewith
3.1
8-K001-363763.1April 4, 2014 
3.2
8-K001-363763.2April 4, 2014 
4.1
8-K001-363764.1April 27, 2020X
4.2
8-K001-363764.1April 27, 2020X
10.1
8-K001-3637610.1April 27, 2020X
10.2
8-K001-3637610.2April 27, 2020X
10.3
8-K001-3637610.3April 27, 2020X
10.4
8-K001-3637610.1May 1, 2020X
10.5
8-K001-3637610.2May 1, 2020X
10.6
8-K001-3637610.3May 1, 2020X
10.7*
X
10.8†
X
31.1
    X
31.2
    X
            
32.1
         X
            
32.2
         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
             
50
Exhibit
Number
 Description Form File No. 
Exhibit
Number
 Filing Date Filed Herewith
2.1
 
Agreement and Plan of Merger and Reorganization, dated as of April 7, 2019, by and among 2U, Inc., Skywalker Purchaser, LLC, Skywalker Sub, Inc., Fortis Advisors LLC, as stockholder representative and Trilogy Education Services, Inc.

 8-K 001-36376 2.1 April 8, 2019  
             
3.1
 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-36376 3.1 April 4, 2014  
             
3.2
 Amended and Restated Bylaws of the Registrant. 8-K 001-36376 3.2 April 4, 2014  
             
10.1
 Credit Agreement, dated May 22, 2019, by and among 2U, Inc., as borrower, the Guarantors from time to time party thereto, the Lenders from time to time party thereto, Owl Rock Capital Corporation, as administrative agent and collateral agent and Owl Rock Capital Advisors LLC, as Lead Arranger and Bookrunner. 8-K 001-36376 10.1 May 22, 2019  
             
10.2
 Summary of Non-Employee Director Compensation 10-Q 001-36376 10.2 July 30, 2019  
             
10.3
 Amended and Restated 2014 Equity Incentive Plan Restricted Stock Unit Award Agreement         X
             
31.1
 Certification of Chief Executive Officer of 2U, Inc. pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         X
             
31.2
 Certification of Chief Financial Officer of 2U, Inc. pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         X
             
32.1
 Certification of Chief Executive Officer of 2U, Inc. in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.         X
             
32.2
 Certification of Chief Financial Officer of 2U, Inc. in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.         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

Table of Contents

101.DEFXBRL Taxonomy Extension Definition Linkbase Document.X
101.LABXBRL Taxonomy Extension Label Linkbase Document.X
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.X
104Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).X
*Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to supplementally furnish to the Securities and Exchange Commission copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.
† Indicates management contract or compensatory plan.
51
Table of Contents
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
2U, Inc.
July 31, 20202U, Inc.
By:
November 12, 2019By:/s/ Christopher J. Paucek
Christopher J. Paucek
Chief Executive Officer
November 12, 2019July 31, 2020By:/s/ Paul S. Lalljie
Paul S. Lalljie
Chief Financial Officer

5452