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 ~~June 30, 2020~~March 31, 2021


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

For the transition period from to

Commission File Number: 001-36376

2U, INC.

(Exact name of registrant as specified in its charter)

Delaware

26-2335939

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

7900 Harkins Road

Lanham,

20706

(Address of Principal Executive Offices)

(Zip Code)

(301) 892-4350

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.001 par value per share

TWOU

The Nasdaq Global Select Market

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

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

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


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

As of ~~July 28, 2020,~~April 26, 2021, there were ~~64,403,712~~74,404,607 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

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PART I. FINANCIAL INFORMATION			4

Item 1.	Financial Statements	4

Condensed Consolidated Balance Sheets as of ~~June 30, 2020~~March 31, 2021 (unaudited) and December 31, ~~2019~~		2020	4

Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			5

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			6

Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			87

Notes to Condensed Consolidated Financial Statements (unaudited)			98

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2824

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4235

Item 4.	Controls and Procedures	4335

PART II. OTHER INFORMATION			4436

Item 1.	Legal Proceedings	4436

Item 1A.	Risk Factors	4436

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4936

Item 3.	Defaults Upon Senior Securities	4936

Item 4.	Mine Safety Disclosures	4936

Item 5.	Other Information	4936

Item 6.	Exhibits	5037

Signatures			5238

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:

•trends in the higher education market and the market for online education, and expectations for growth in those markets;

•the acceptance, adoption and growth of online learning by colleges and universities, faculty, students, employers, accreditors and state and federal licensing bodies;

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

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

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

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

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

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

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

•our ability to successfully integrate the operations of our acquisitions, including 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 covenants and conversion obligations contained in the Indenture (as defined below) governing our convertible senior notes 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 recruit prospective students for our offerings;

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

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

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

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

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

•the impact and cost of stockholder activism;

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•the impact of 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, ~~2019,~~ ~~as amended and supplemented by~~ ~~Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q,~~2020 for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. In this Quarterly Report on Form 10-Q, the terms “2U,” “our company,” “we,” “us,” and “our” refer to 2U, Inc. and its subsidiaries, unless the context indicates otherwise.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

2U, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)


		June 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
		(unaudited)					(unaudited)
Assets	Assets					Assets
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	194,803	$	170,593	Cash and cash equivalents	$	486,830	$	500,629
Restricted cash	Restricted cash	18,228		19,276		Restricted cash	18,226		18,237
Accounts receivable, net	Accounts receivable, net	71,580		33,655		Accounts receivable, net	74,744		46,663
Prepaid expenses and other assets	Prepaid expenses and other assets	40,378		37,424		Prepaid expenses and other assets	57,770		39,353
Total current assets	Total current assets	324,989		260,948		Total current assets	637,570		604,882
Property and equipment, net	Property and equipment, net	55,066		57,643		Property and equipment, net	50,745		52,734
Right-of-use assets	Right-of-use assets	49,813		43,401		Right-of-use assets	59,653		60,785
Goodwill	Goodwill	406,340		418,350		Goodwill	415,145		415,830
Amortizable intangible assets, net	Amortizable intangible assets, net	320,559		333,075		Amortizable intangible assets, net	306,083		312,770
University payments and other assets, non-current		75,793		73,413
Other assets, non-current						Other assets, non-current	86,317		97,263
Total assets	Total assets	$	1,232,560	$	1,186,830	Total assets	$	1,555,513	$	1,544,264
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Current liabilities	Current liabilities					Current liabilities
Accounts payable and accrued expenses	Accounts payable and accrued expenses	$	84,541	$	65,381	Accounts payable and accrued expenses	$	131,310	$	130,674
Accrued compensation and related benefits		29,090		21,885
Deferred revenue	Deferred revenue	77,071		48,833		Deferred revenue	108,364		75,493
Lease liability	Lease liability	8,484		7,320		Lease liability	10,211		10,024
Other current liabilities	Other current liabilities	13,785		12,535		Other current liabilities	25,315		21,178
Total current liabilities	Total current liabilities	212,971		155,954		Total current liabilities	275,200		237,369
Long-term debt	Long-term debt	263,129		246,620		Long-term debt	280,429		273,173
Deferred tax liabilities, net	Deferred tax liabilities, net	2,424		5,133		Deferred tax liabilities, net	2,054		2,810
Lease liability, non-current	Lease liability, non-current	73,592		66,974		Lease liability, non-current	80,645		83,228
Other liabilities, non-current	Other liabilities, non-current	1,073		899		Other liabilities, non-current	6,697		6,694
Total liabilities	Total liabilities	553,189		475,580		Total liabilities	645,025		603,274
Commitments and contingencies (Note 6)
Commitments and contingencies (Note 5)						Commitments and contingencies (Note 5)	0		0
Stockholders’ equity	Stockholders’ equity					Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, NaN issued	Preferred stock, $0.001 par value, 5,000,000 shares authorized, NaN issued	—		—		Preferred stock, $0.001 par value, 5,000,000 shares authorized, NaN issued	0		0
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, 2019		64		63
Common stock, $0.001 par value, 200,000,000 shares authorized, 74,038,208 shares issued and outstanding as of March 31, 2021; 72,451,521 shares issued and outstanding as of December 31, 2020						Common stock, $0.001 par value, 200,000,000 shares authorized, 74,038,208 shares issued and outstanding as of March 31, 2021; 72,451,521 shares issued and outstanding as of December 31, 2020	74		72
Additional paid-in capital	Additional paid-in capital	1,306,483		1,197,379		Additional paid-in capital	1,662,439		1,646,574
Accumulated deficit	Accumulated deficit	(605,661)		(479,388)		Accumulated deficit	(741,436)		(695,872)
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(21,515)		(6,804)		Accumulated other comprehensive loss	(10,589)		(9,784)
Total stockholders’ equity	Total stockholders’ equity	679,371		711,250		Total stockholders’ equity	910,488		940,990
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,232,560	$	1,186,830	Total liabilities and stockholders’ equity	$	1,555,513	$	1,544,264

See accompanying notes to condensed consolidated financial statements.

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2U, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Revenue	Revenue	$	182,687	$	135,461	$	358,166	$	257,695	Revenue	$	232,473	$	175,479
Costs and expenses	Costs and expenses									Costs and expenses
Curriculum and teaching	Curriculum and teaching	26,256		13,308		46,734		20,009		Curriculum and teaching	33,148		20,478
Servicing and support	Servicing and support	30,294		23,993		60,827		44,167		Servicing and support	33,184		30,533
Technology and content development	Technology and content development	37,307		26,043		72,817		45,837		Technology and content development	42,924		35,510
Marketing and sales	Marketing and sales	98,341		89,749		197,556		166,710		Marketing and sales	113,237		99,215
General and administrative	General and administrative	39,554		28,408		83,207		51,431		General and administrative	47,112		43,653
Total costs and expenses	Total costs and expenses	231,752		181,501		461,141		328,154		Total costs and expenses	269,605		229,389
Loss from operations	Loss from operations	(49,065)		(46,040)		(102,975)		(70,459)		Loss from operations	(37,132)		(53,910)
Interest income	Interest income	154		1,814		667		4,163		Interest income	362		513
Interest expense	Interest expense	(6,518)		(2,424)		(12,011)		(2,479)		Interest expense	(7,881)		(5,493)
Loss on debt extinguishment		(11,671)		—		(11,671)		—
Other income (expense), net		570		(13)		(1,701)		(383)
Other expense, net										Other expense, net	(915)		(2,271)
Loss before income taxes	Loss before income taxes	(66,530)		(46,663)		(127,691)		(69,158)		Loss before income taxes	(45,566)		(61,161)
Income tax benefit	Income tax benefit	363		18,691		1,418		19,632		Income tax benefit	2		1,055
Net loss	Net loss	$	(66,167)	$	(27,972)	$	(126,273)	$	(49,526)	Net loss	$	(45,564)	$	(60,106)
Net loss per share, basic and diluted	Net loss per share, basic and diluted	$	(1.03)	$	(0.46)	$	(1.98)	$	(0.83)	Net loss per share, basic and diluted	$	(0.62)	$	(0.94)
Weighted-average shares of common stock outstanding, basic and diluted	Weighted-average shares of common stock outstanding, basic and diluted	64,075,405		60,516,662		63,850,869		59,334,246		Weighted-average shares of common stock outstanding, basic and diluted	73,676,409		63,626,333
Other comprehensive loss	Other comprehensive loss									Other comprehensive loss
Foreign currency translation adjustments, net of tax of $0 for all periods presented	Foreign currency translation adjustments, net of tax of $0 for all periods presented	1,404		2,243		(14,711)		1,871		Foreign currency translation adjustments, net of tax of $0 for all periods presented	(805)		(16,115)
Comprehensive loss	Comprehensive loss	$	(64,763)	$	(25,729)	$	(140,984)	$	(47,655)	Comprehensive loss	$	(46,369)	$	(76,221)

See accompanying notes to condensed consolidated financial statements.

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2U, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, in thousands, except share amounts)


		Common Stock					Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity	Common Stock				Additional Paid-In Capital		Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
		Shares	Amount															Shares										Total Stockholders’ Equity
Balance, December 31, 2019		63,569,109	$	63	$	1,197,379	$	(479,388)	$	(6,804)	$	711,250
Balance, December 31, 2020													Balance, December 31, 2020	72,451,521		$	72	$	1,646,574	$	(695,872)			$	(9,784)				$	940,990
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	96,683	1		(1)		—		—		—		Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	1,404,971		2		(12,615)		—		—				(12,613)
Exercise of stock options	Exercise of stock options	37,275	—		384		—		—		384		Exercise of stock options	181,716		—		3,533		—		—				3,533
Stock-based compensation expense	Stock-based compensation expense	—	—		20,870		—		—		20,870		Stock-based compensation expense	—		—		24,947		—		—				24,947
Net loss	Net loss	—	—		—		(60,106)		—		(60,106)		Net loss	—		—		—		(45,564)		—				(45,564)
Foreign currency translation adjustment	Foreign currency translation adjustment	—	—		—		—		(16,115)		(16,115)		Foreign currency translation adjustment	—		—		—		—		(805)				(805)
Balance, March 31, 2020		63,703,067	$	64	$	1,218,632	$	(539,494)	$	(22,919)	$	656,283
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings		355,506	—		(463)		—		—		(463)
Exercise of stock options		158,453	—		1,441		—		—		1,441
Issuance of common stock in connection with employee stock purchase plan		83,573	—		1,771		—		—		1,771
Equity component of convertible senior notes, net of issuance costs		—	—		114,551		—		—		114,551
Purchases of capped calls in connection with convertible senior notes		—	—		(50,540)		—		—		(50,540)
Stock-based compensation expense		—	—		21,091		—		—		21,091
Net loss		—	—		—		(66,167)		—		(66,167)
Foreign currency translation adjustment		—	—		—		—		1,404		1,404
Balance, June 30, 2020		64,300,599	$	64	$	1,306,483	$	(605,661)	$	(21,515)	$	679,371
Balance, March 31, 2021													Balance, March 31, 2021	74,038,208		$	74	$	1,662,439	$	(741,436)	$	(10,589)			$	910,488


	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2019	63,569,109	$	63	$	1,197,379	$	(479,388)	$	(6,804)	$	711,250
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	96,683	1		(1)		—		—		0
Exercise of stock options	37,275	—		384		—		—		384
Stock-based compensation expense	—	—		20,870		—		—		20,870
Net loss	—	—		—		(60,106)		—		(60,106)
Foreign currency translation adjustment	—	—		—		—		(16,115)		(16,115)
Balance, March 31, 2020	63,703,067	$	64	$	1,218,632	$	(539,494)	$	(22,919)	$	656,283

See accompanying notes to condensed consolidated financial statements.

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~~2U, Inc.~~

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

~~(unaudited, in thousands, except share amounts)~~

Common Stock Additional
Paid-In
Capital Accumulated
Deficit Accumulated
Other Comprehensive
Income (Loss) Total
Stockholders’
Equity
Shares Amount
Balance, December 31, 2018 57,968,493 $ 58 $ 957,631 $ (244,166) $ (8,514) $ 705,009
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 9,319 — — — — —
Exercise of stock options 211,506 — 1,928 — — 1,928
Stock-based compensation expense — — 9,584 — — 9,584
Net loss — — — (21,554) — (21,554)
Foreign currency translation adjustment — — — — (372) (372)
Balance, March 31, 2019 58,189,318 $ 58 $ 969,143 $ (265,720) $ (8,886) $ 694,595
Issuance of common stock in connection with business combination, net of offering costs 4,608,101 5 184,317 — — 184,322
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings 348,418 — (2,558) — — (2,558)
Exercise of stock options 85,539 — 452 — — 452
Stock-based compensation expense — — 9,967 — — 9,967
Net loss — — — (27,972) — (27,972)
Foreign currency translation adjustment — — — — 2,243 2,243
Balance, June 30, 2019 63,231,376 $ 63 $ 1,161,321 $ (293,692) $ (6,643) $ 861,049

~~See accompanying notes to condensed consolidated financial statements.~~

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2U, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)


		Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019			2021		2020
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net loss	Net loss	$	(126,273)	$	(49,526)	Net loss	$	(45,564)	$	(60,106)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:						Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Non-cash interest expense	Non-cash interest expense	5,675		520		Non-cash interest expense	7,693		492
Depreciation and amortization expense	Depreciation and amortization expense	47,470		24,351		Depreciation and amortization expense	24,987		23,485
Stock-based compensation expense	Stock-based compensation expense	41,961		19,551		Stock-based compensation expense	24,947		20,870
Non-cash lease expense	Non-cash lease expense	7,299		5,264		Non-cash lease expense	4,291		3,620
Provision for credit losses	Provision for credit losses	1,267		993		Provision for credit losses	2,022		629
Loss on debt extinguishment		11,671		—
Changes in operating assets and liabilities, net of assets and liabilities acquired:	Changes in operating assets and liabilities, net of assets and liabilities acquired:					Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net	Accounts receivable, net	(39,521)		(25,548)		Accounts receivable, net	(30,698)		(42,744)
Payments to university clients	Payments to university clients	4,354		(20,060)		Payments to university clients	2,352		2,739
Prepaid expenses and other assets	Prepaid expenses and other assets	(8,774)		(8,796)		Prepaid expenses and other assets	(10,859)		(5,273)
Accounts payable and accrued expenses	Accounts payable and accrued expenses	19,606		18,081		Accounts payable and accrued expenses	(660)		26,423
Accrued compensation and related benefits		7,383		(5,964)
Deferred revenue	Deferred revenue	28,843		15,849		Deferred revenue	32,850		21,650
Other liabilities, net	Other liabilities, net	(9,299)		(23,056)		Other liabilities, net	(4,664)		(3,920)
Other	Other	1,694		392		Other	930		2,272
Net cash used in operating activities		(6,644)		(47,949)
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	7,627		(9,863)
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Purchase of a business, net of cash acquired	Purchase of a business, net of cash acquired	(949)		(387,815)		Purchase of a business, net of cash acquired	0		(958)
Additions of amortizable intangible assets	Additions of amortizable intangible assets	(32,497)		(32,430)		Additions of amortizable intangible assets	(14,219)		(15,808)
Purchases of property and equipment	Purchases of property and equipment	(4,254)		(8,135)		Purchases of property and equipment	(838)		(2,436)
Purchase of investments		—		(5,000)
Proceeds from maturities of investments		—		25,000
Advances made to university clients		—		(100)
Advances repaid by university clients	Advances repaid by university clients	275		200		Advances repaid by university clients	0		100
Net cash used in investing activities	Net cash used in investing activities	(37,425)		(408,280)		Net cash used in investing activities	(15,057)		(19,102)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Proceeds from debt	Proceeds from debt	371,708		243,726		Proceeds from debt	2,908		0
Payments on debt	Payments on debt	(250,409)		—		Payments on debt	(176)		(358)
Payment of debt issuance costs	Payment of debt issuance costs	(3,419)		(1,953)		Payment of debt issuance costs	0		(2,500)
Purchases of capped calls in connection with issuance of convertible senior notes		(50,540)		—
Prepayment premium on extinguishment of senior secured term loan facility		(2,528)		—
Proceeds from exercise of stock options	Proceeds from exercise of stock options	1,825		2,380		Proceeds from exercise of stock options	3,533		384
Tax withholding payments associated with settlement of restricted stock units	Tax withholding payments associated with settlement of restricted stock units	(464)		(2,558)		Tax withholding payments associated with settlement of restricted stock units	(12,613)		0
Proceeds from employee stock purchase plan share purchases		1,771		—
Payments for acquisition of amortizable intangible assets		—		(1,283)
Net cash provided by financing activities		67,944		240,312
Net cash used in financing activities						Net cash used in financing activities	(6,348)		(2,474)
Effect of exchange rate changes on cash	Effect of exchange rate changes on cash	(713)		(371)		Effect of exchange rate changes on cash	(32)		(944)
Net increase (decrease) in cash, cash equivalents and restricted cash		23,162		(216,288)
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(13,810)		(32,383)
Cash, cash equivalents and restricted cash, beginning of period	Cash, cash equivalents and restricted cash, beginning of period	189,869		449,772		Cash, cash equivalents and restricted cash, beginning of period	518,866		189,869
Cash, cash equivalents and restricted cash, end of period	Cash, cash equivalents and restricted cash, end of period	$	213,031	$	233,484	Cash, cash equivalents and restricted cash, end of period	$	505,056	$	157,486

See accompanying notes to condensed consolidated financial statements.

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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~~digital transformation partner for nonprofit colleges and universities. The Company builds, delivers, and supports more than ~~435~~500 digital and in-person educational offerings, including graduate ~~and~~degrees, undergraduate degrees, professional certificates, boot camps, and short courses, across the Career Curriculum Continuum.

The Company has 2 reportable segments: the ~~Graduate~~Degree Program Segment and the Alternative Credential Segment. The Company’s ~~Graduate~~Degree Program Segment ~~includes~~provides the technology and services ~~provided~~ to nonprofit colleges and universities to enable the online delivery of degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate degree of the same quality they would receive on campus. The Company’s Alternative Credential Segment ~~includes the~~provides premium online short courses and technical, skills-based boot camps ~~provided~~ through relationships with nonprofit colleges and universities. Students enrolled in these offerings are generally ~~working professionals~~ seeking ~~career advancement~~to reskill or upskill through ~~skills attainment.~~shorter duration, lower-priced offerings that are relevant to the needs of industry and society.

2. Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements, which include the assets, liabilities, results of operations and cash flows of the Company have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (the “SEC”). As permitted under such rules, certain notes and other financial information normally required by U.S. GAAP have been condensed or omitted. The Company believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ 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, ~~2019.~~2020. All significant intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet data as of December 31, ~~2019~~2020 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 condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Significant items subject to such estimates ~~and assumptions~~include, but are ~~inherent in the analysis and~~not limited to, the measurement of provisions for credit losses, acquired intangible assets, the recoverability of goodwill, ~~and~~ deferred tax ~~assets.~~assets, and the fair value of the convertible senior notes. Due to the inherent uncertainty involved in making estimates, particularly in light of the COVID-19 pandemic, actual results reported in future periods may be affected by changes in those estimates. The Company evaluates its estimates and assumptions on an ongoing basis.

~~Accounts Receivable, Contract Assets~~Recent Accounting Pronouncements

In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. The amendments in this ASU affect a wide variety of topics in the Accounting Standards Codification by either clarifying the codification or correcting unintended application of guidance. The amendments do not change U.S. GAAP and, ~~Liabilities~~

~~Balance sheet items related~~therefore, are not expected to ~~contracts consist~~result in a significant change in current accounting practice. The Company adopted this ASU on January 1, 2021. Adoption of ~~accounts receivable, net and deferred revenue~~ this standard did not have a material impact on the Company’s 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 of provision for credit losses. The Company’s methodology to measure the provision for credit losses requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include current market conditions, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classesfinancial statements or ~~individual customers.~~related disclosures.

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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 following table presents the change in provision for credit losses on the Company’s consolidated balance sheets for the period indicated:~~


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

Deferred revenue represents the excess of amounts billed or received as compared to amounts recognized in revenue on the Company’s 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 the Company’s condensed 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 completion of the service period. These payments are recorded as deferred revenue until the services are delivered or until the Company’s obligations are otherwise met, at which time revenue is recognized.

~~Convertible Senior Notes~~

In ~~April~~August 2020, the ~~Company~~FASB 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 purchase 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,~~ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ~~(“ASC 470-20”). Pursuant~~This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts indexed to ~~ASC 470-20, issuers of certain~~and potentially settled in an entity’s own equity. The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. As a result, in more cases, convertible debt ~~instruments, such~~will be accounted for 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 liability (debt) and equity (conversion option) components of the~~single instrument. 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 principal amount of the instrument. The difference between the principal amount and the liability 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 theguidance also removes certain conditions for equity ~~classification. In accounting for the issuance costs~~classification related to contracts in an entity’s own equity and requires the ~~Notes,~~application of the ~~allocation of issuance costs incurred between~~if-converted method for calculating diluted earnings per share. This ASU is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is evaluating the ~~liability~~impact that this ASU will have on its condensed consolidated financial statements and ~~equity components was based on their relative values.~~related disclosures.

~~Recent Accounting Pronouncements~~

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU is intended to provide optional expedients and exceptions for applying ~~generally accepted accounting principles~~U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, to ease the potential accounting and financial reporting burden associated with the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU may be applied as of the beginning of any interim period that includes its effective date (i.e., March 12, 2020) through

~~Table of Contents~~

~~2U, Inc.~~

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

~~(unaudited)~~

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

December 31, 2022. The Company will adopt this standard when LIBOR is discontinued and does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements orand related disclosures.

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. This 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~~adopted this ASU on January 1, 2021. Adoption of this standard did 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 evaluatinga material impact on the ~~impact that this ASU will have on its~~Company’s condensed consolidated financial statements ~~and~~or related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments in ~~the~~this ASU include removal of certain exceptions to the general principles in Topic 740 related to recognizing deferred taxes for investments, performing intraperiod tax allocation and calculating income taxes in an interim period. The ASU also clarifies and simplifies other aspects of the accounting for income taxes, including the recognition of deferred tax liabilities for outside basis differences. The ~~amendments in~~Company adopted 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 financial statements and related disclosures.

~~In April 2019, the FASB issued 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 ASC were impacted by the update. This standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. The Company adopted the amendments related to ASU Nos. 2016-01 and 2016-13 on January 1, 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.2021. Adoption of ~~these amendments~~this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures. ~~Refer below for further discussion of ASU No. 2016-13. The amendments to ASU No. 2017-12 are not applicable to the 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 Company adopted this ASU and the related amendments on January 1, 2020 under the modified retrospective transition method, which resulted in no cumulative-effect adjustment to retained earnings.

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

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

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 date 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 six months ended June 30, 2019, as if the acquisition of Trilogy had occurred on January 1, 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)

4. Goodwill and Amortizable Intangible Assets

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

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


	Degree Program Segment		Alternative Credential Segment		Total

	(in thousands)
Balance as of December 31, 2020	$	0	$	415,830	$	415,830
Foreign currency translation adjustments	0		(685)		(685)
Balance as of March 31, 2021	$	0	$	415,145	$	415,145

The carrying amount of goodwill in the Alternative Credential Segment included accumulated impairment charges of $70.4 million as of both ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

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, 2020 December 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 technology 3-5 $ 153,588 $ (57,710) $ 95,878 $ 142,712 $ (41,106) $ 101,606
Capitalized content development 4-5 187,936 (70,492) 117,444 167,758 (54,736) 113,022
University client relationships 9-10 105,810 (16,570) 89,240 110,344 (12,419) 97,925
Trade names and domain names 5-10 25,315 (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

129

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

4.3. Goodwill and Amortizable Intangible Assets (Continued)


		March 31, 2021						December 31, 2020
	Estimated Average Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount

	(in thousands)
Capitalized technology	3-5	$	170,876	$	(84,332)	$	86,544	$	165,254	$	(75,822)	$	89,432
Capitalized content development	4-5	217,568		(97,477)		120,091		208,170		(88,168)		120,002
University client relationships	9-10	109,275		(26,083)		83,192		109,498		(23,376)		86,122
Trade names and domain names	5-10	26,636		(10,380)		16,256		26,697		(9,483)		17,214
Total amortizable intangible assets, net		$	524,355	$	(218,272)	$	306,083	$	509,619	$	(196,849)	$	312,770

The amounts presented in the table above include ~~$29.5~~$39.9 million and ~~$30.7~~$38.6 million of ~~in process~~in-process capitalized technology and content development as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

The Company recorded amortization expense related to amortizable intangible assets of ~~$20.8~~$21.6 million and ~~$11.9~~$20.2 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively. The Company recorded amortization expense related to amortizable intangible assets of $41.0 million and $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.~~March 31, 2021.


		Future Amortization Expense			Future Amortization Expense
		(in thousands)			(in thousands)
Remainder of 2020		$	40,377
2021		76,013
Remainder of 2021				Remainder of 2021	$	63,345
2022	2022	60,367		2022	68,510
2023	2023	42,876		2023	52,306
2024	2024	25,533		2024	32,023
2025				2025	18,464
Thereafter	Thereafter	45,933		Thereafter	31,575
Total	Total	$	291,099	Total	$	266,223

5.4. Accrued and Deferred Expenses

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


							March 31, 2021		December 31, 2020
		June 30, 2020		December 31, 2019
		(in thousands)							(in thousands)
Accrued university and instructional staff compensation	Accrued university and instructional staff compensation	$	21,402	$	23,419	Accrued university and instructional staff compensation	$	26,255	$	27,371
Accrued marketing costs		26,900		22,055
Accrued transaction, integration and restructuring-related costs*		1,894		4,459
Accrued marketing expenses						Accrued marketing expenses	33,228		24,682
Accrued transaction, integration and restructuring-related expenses						Accrued transaction, integration and restructuring-related expenses	2,733		3,492
Accrued compensation and related benefits						Accrued compensation and related benefits	25,648		52,820
Accounts payable and other accrued expenses	Accounts payable and other accrued expenses	34,345		15,448		Accounts payable and other accrued expenses	43,446		22,309
Total accounts payable and accrued expenses	Total accounts payable and accrued expenses	$	84,541	$	65,381	Total accounts payable and accrued expenses	$	131,310	$	130,674

*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,~~March 31, 2021 and 2020, ~~and 2019,~~ expense related to the Company’s marketing and advertising efforts of its own brand were not material.

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

4. Accrued and Deferred Expenses (Continued)

In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses. ~~Most significantly, under~~Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted in the United States on March 27, 2020, the Company is allowed to defer payment of the employer’s share of Social Security taxes incurred from March 27, 2020 through December 31, 2020. In addition, the CARES Act provides eligible employers with an employee retention tax credit for employees whose services were impacted by COVID-19. The ~~Company currently estimates the~~ amount of payroll taxes subject to deferred payment, net of employee retention tax credits, is approximately ~~$3.9~~$11.3 million. This total deferred amount is payable in equal installments, with 50% due by December 31, 2021 and the remainder due by December 31, 2022.

As of March 31, 2021 and December 31, 2020, the Company had balances of $5.2 million ~~which has been reflected~~and $6.3 million, respectively, of deferred expenses incurred to integrate the software associated with its cloud computing arrangements, within ~~accrued compensation and related benefits~~other assets, non-current on the ~~Company’s~~ condensed consolidated balance ~~sheet as~~sheets. Such expenses are subject to amortization over the remaining contractual term of ~~June 30, 2020.~~the associated cloud computing arrangement, with a useful life of between three to five years. The Company incurred $0.5 million and $0.3 million of such amortization for the three months ended March 31, 2021 and 2020, respectively.

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~~2U, Inc.~~

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

~~(unaudited)~~

6.5. Commitments and Contingencies

Legal Contingencies

The Company is involved in various claims and legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. While the Company does not expect that the ultimate resolution of any existing claims and proceedings (other than the specific 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

On August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaints against the Company, Christopher J. Paucek, the Company’s CEO, and Catherine A. Graham, the Company’s former CFO, in the United States District Court for the Southern District of New York, alleging violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. The district court transferred the cases to the United States District Court for the District of Maryland, consolidated them under docket number 8:19-cv-3455 (D. Md.), and appointed Fiyyaz Pirani as the lead plaintiff in the consolidated action. On July 30, 2020, Mr. Pirani filed a consolidated class action complaint (“CAC”), adding Harsha Mokkarala, the Company’s former Chief Marketing Officer, as a defendant. The CAC also asserts claims under Sections 11, ~~12(A)~~12(a)(2), and 15 of the Securities Act of 1933, as amended, against Mr. Paucek, Ms. Graham, members of the Company’s ~~Board~~board of ~~Directors,~~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~~On October 27, 2020, defendants ~~to file~~filed a motion to ~~dismiss is September 29, 2020.~~dismiss. On December 18, 2020, the plaintiffs filed their opposition brief and on February 9, 2021 the defendants filed a reply brief.

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~~Suits

On April 30, 2020, Richard Theis filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, and the Company’s board of directors in the United States District Court for the Southern District of New York, with docket number 20-cv-3360. The complaint alleges claims for breaches of fiduciary duty, insider sales and misappropriation of information, unjust enrichment, and violations of Section 14(a) of the Exchange Act, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On July 22, 2020, the court entered a joint stipulation

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

5. Commitments and Contingencies (Continued)

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.

On August 21, 2020, Thomas Lucey filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, Harsha Mokkarala, the Company’s former Chief Marketing Officer and the Company’s board of directors in the United States District Court for the District of Maryland, with docket number 1:20-cv-02424-GLR. The complaint alleges claims for breaches of fiduciary duty, insider trading, and contribution for alleged violations of Sections 10(b) and 21D of the Exchange Act, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On September 3, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.

On November 30, 2020, Leo Shumacher filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, Harsha Mokkarala, the Company’s former Chief Marketing Officer, and the Company’s board of directors in the Court of Chancery of the State of Delaware, with docket number 2020-1019-AGB. The complaint alleges claims for breaches of fiduciary duty and unjust enrichment, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On January 6, 2021, the court entered a joint stipulation staying the case pending resolution of the securities class action. 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~~Degree Program Segment require the Company to commit to meet certain staffing and spending investment thresholds related to marketing and sales activities. In addition, certain ~~of the~~ agreements in the ~~Graduate~~Degree Program Segment require the Company to invest up to agreed-upon levels in marketing the programs to achieve specified program performance. The Company believes it is currently in compliance with all such commitments.

~~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~~Degree Program Segment, the Company has made, or is obligated to make, payments to university clients in exchange for contract extensions and various marketing and other rights. As of ~~June 30, 2020,~~March 31, 2021, the future minimum payments due to university clients have not materially changed relative to the amounts provided in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019.~~2020.

Contingent Payments

The Company has entered into agreements with certain of its university clients in the ~~Graduate~~Degree Program Segment ~~under which~~that require 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 into which they relate, and records a liability in other current liabilities on the condensed consolidated balance sheets.

~~The~~As of March 31, 2021, the Company has entered into an agreement to make an additional investment in an education technology company ~~with~~of up to $5.0 million, ~~outstanding,~~ upon demand by the investee.

7.6. Leases

The Company leases facilities under non-cancellable operating leases primarily in the United States, South Africa, the United Kingdom and Canada. The Company’s operating leases have remaining lease terms of between less than one to 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-cancellable lease terms. The future lease payments due under non-cancellable operating lease arrangements contain fixed rent increases over the term of the lease. The Company also leases office equipment under non-cancellable leases. ~~The Company did not have any subleases as~~

Table of ~~June 30, 2020.~~Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

6. Leases (Continued)

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


											Three Months Ended March 31,
		Three Months Ended June 30,						Six Months Ended June 30,							2021	2020
		2020		2019		2020		2019
		(in thousands)														(in thousands)
Operating lease expense	Operating lease expense	$	3,721	$	2,714	$	7,341	$	5,336	Operating lease expense	$	4,282	$	3,620
Short-term lease expense	Short-term lease expense	121		154		234		390		Short-term lease expense	44		113
Variable lease expense	Variable lease expense	1,211		1,091		2,671		2,005		Variable lease expense	1,436		1,460
Sublease income										Sublease income	(54)		0
Total lease expense	Total lease expense	$	5,053	$	3,959	$	10,246	$	7,731	Total lease expense	$	5,708	$	5,193

~~Table of Contents~~

~~2U, Inc.~~

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

~~(unaudited)~~

~~7. Leases (Continued)~~

As of ~~June 30, 2020,~~March 31, 2021, for the Company’s operating leases, the weighted-average remaining lease term was ~~7.6~~7.2 years and the weighted-average discount rate was ~~11.8%~~11.4%. For the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ cash paid for amounts included in the measurement of operating lease liabilities was ~~$8.3~~$4.6 million and ~~$5.9~~$4.1 million, respectively.

The following table presents the maturities of the Company’s operating lease liabilities as of the date ~~indicated.~~indicated, and excludes the impact of future sublease income totaling $0.6 million in aggregate.


		June 30, 2020			March 31, 2021
		(in thousands)			(in thousands)
Remainder of 2020		$	8,834
2021		17,088
Remainder of 2021				Remainder of 2021	$	14,881
2022	2022	16,354		2022	19,019
2023	2023	16,063		2023	18,774
2024	2024	15,603		2024	18,373
2025				2025	14,347
Thereafter	Thereafter	52,166		Thereafter	48,965
Total lease payments	Total lease payments	126,108		Total lease payments	134,359
Less: imputed interest	Less: imputed interest	(44,032)		Less: imputed interest	(43,503)
Total lease liability	Total lease liability	$	82,076	Total lease liability	$	90,856

As of ~~June 30, 2020,~~March 31, 2021, the Company ~~has~~had additional operating leases for facilities that have not yet commenced with future minimum lease payments of approximately ~~$66.3~~$53.3 million. ~~These~~Each of these operating leases will commence during the fiscal ~~years 2020 through~~year ending 2021 ~~with~~and have lease terms of ~~between~~ ~~four~~ toapproximately 12 years.

8.7. Debt

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


							March 31, 2021		December 31, 2020
		June 30, 2020		December 31, 2019
		(in thousands)							(in thousands)
Convertible senior notes	Convertible senior notes	$	380,000	$	—	Convertible senior notes	$	380,000	$	380,000
Senior secured term loan facility		—		250,000
Deferred government grant obligations	Deferred government grant obligations	3,500		3,500		Deferred government grant obligations	3,500		3,500
Other borrowings	Other borrowings	1,798		998		Other borrowings	4,080		1,343
Less: unamortized debt issuance costs		(121,557)		(7,238)
Less: unamortized debt discount and issuance costs						Less: unamortized debt discount and issuance costs	(105,626)		(111,043)
Total debt	Total debt	263,741		247,260		Total debt	281,954		273,800
Less: current portion of long-term debt	Less: current portion of long-term debt	(612)		(640)		Less: current portion of long-term debt	(1,525)		(627)
Total long-term debt	Total long-term debt	$	263,129	$	246,620	Total long-term debt	$	280,429	$	273,173

1613

Table of Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

8.7. 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, other than the 2.25% convertible senior notes due 2025 (the “Notes”), which had an estimated fair value of ~~$565.7~~$570.2 million and $616.6 million as of ~~June 30, 2020.~~March 31, 2021 and December 31, 2020, respectively. 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-~~three months ended March 31, 2021 and ~~six-month periods ended June 30,~~ 2020, including amortization of the debt discount and debt issuance costs, was ~~$5.0 million.~~$7.6 million and 0, respectively. The associated effective interest rate of the Notes for ~~each of~~ the ~~three- and six-month periods~~three months ended ~~June 30, 2020~~March 31, 2021 was approximately ~~10.3%~~11.3%.

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 Company allocated debt issuance costs of $7.2 million and $3.2 million to the debt and equity components, respectively. The excess of the principal amount of the liability component over its carrying amount, orinclusive of debt issuance costs, represents the debt discount, which is amortized to interest expense at an annual effective interest rate over the contractual term of the Notes. As of March 31, 2021 and December 31, 2020, the unamortized debt discount was $105.6 million and $111.0 million, respectively.

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

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

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

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

•if the Company calls such Notes for redemption; and

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

Table of Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Debt (Continued)

The initial conversion rate for the Notes is 35.3773 shares of the Company’s common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $28.27 per share of the Company’s common stock, and is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Upon

~~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. In the event of the Company calling the Notes for redemption or the holders of the Notes electing to convert their Notes, the Company will determine whether to settle in cash, common stock or a combination thereof. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time.

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

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

As of March 31, 2021, the Notes were determined to be convertible between April 1, 2021 and June 30, 2021, based on the satisfaction of the common stock sale price condition.

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

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

Credit Agreement

On June 25, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and certain other lenders party thereto that 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,

Table of Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

7. Debt (Continued)

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~~March 31, 2021, 0 amounts were outstanding under the Credit Agreement.

~~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 provided for a $250 million senior secured term loan facility (the “Term Loan”). On April 23, 2020, the Company repaid its $250 million Term Loan in full, plus accrued interest of $1.3 million. In addition, the Company recognized a loss on debt extinguishment of $11.7 million, consisting of a write-off of previously capitalized deferred financing costs of $9.2 million and a prepayment premium of $2.5 million, and terminated the credit agreement with 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 has a maturity date of June 22, 2027. ~~On July 1, 2020,~~In January 2021, the Company amended its conditional loan agreement with ~~Prince George’s County~~the State of Maryland to ~~extennd~~modify the ~~date on which the Company must comply with~~terms of the employment level ~~thresholds.~~thresholds and extend the maturity date to June 30, 2028. The interest expense related to these loans for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was immaterial. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company’s combined accrued interest balance associated with the deferred government grant obligations was ~~$0.3~~$0.4 million and ~~$0.3~~$0.4 million, respectively.

~~Table of Contents~~

~~2U, Inc.~~

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

~~(unaudited)~~

9.8. 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 six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ 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% and 40%~~ for the three months ended ~~June 30,~~March 31, 2021 and 2020 was approximately 0% and ~~2019,~~2%, respectively. The Company’s ~~effective~~income tax ~~rate was approximately 1% and 28%~~benefit for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 was $2 thousand and ~~2019, respectively. The Company’s tax benefit of $1.4~~$1.1 million, ~~for the six months ended June 30, 2020~~respectively, and 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.~~9. Stockholders’ Equity

Common Stock

As of ~~June 30, 2020,~~March 31, 2021, 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 ~~June 30, 2020,~~March 31, 2021, there were ~~64,300,599~~74,038,208 shares of common stock outstanding, and the Company had reserved a total of ~~26,638,801~~25,788,604 of its authorized shares of common stock for future issuance as follows:


			Shares Reserved for Future Issuance
Outstanding restricted stock units			~~3,534,193~~3,303,857
Outstanding performance restricted stock units			~~1,831,648~~1,638,088
Outstanding stock options			~~4,132,718~~3,706,417
Reserved for convertible senior notes			17,140,242
Total shares of common stock reserved for future issuance			~~26,638,801~~25,788,604

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

Stock-Based Compensation

Table of Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

9. Stockholders’ Equity (Continued)

The Company maintains ~~two~~2 stock-based compensation plans: the Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”) and the 2008 Stock Incentive Plan (the “2008 Plan” and together with the 2014 Plan, the “Stock Plans”). Upon the effective date of the 2014 Plan in January 2014, the Company ceased using the 2008 Plan to grant new equity awards. The shares available for future issuance under the 2014 Plan increased by ~~3,175,011~~3,619,344 and ~~2,896,365~~3,175,011 on January 1, ~~2020~~2021 and ~~2019,~~2020, respectively, pursuant to the automatic share reserve increase provision in the 2014 Plan.

~~The Company also has a 2017 Employee Stock Purchase Plan (the “ESPP”).~~During the six months ended June 30, 2020, an aggregate of 83,573 shares of the Company’s common stock were purchased in accordance with the ESPP. Net proceeds from the issuance of these shares was $1.8 million. As of June 30, 2020, 729,391 shares remained available for purchase under the ESPP.

The following table presents stock-based compensation expense related to the Stock Plans and the ~~ESPP,~~2017 Employee Stock Purchase Plan, contained on the following line items on the Company’s condensed consolidated statements of operations and comprehensive loss for each of the periods indicated.

~~Table of Contents~~

~~2U, Inc.~~

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

~~(unaudited)~~

~~10. Stockholders’ Equity (Continued)~~


											Three Months Ended March 31,
		Three Months Ended June 30,						Six Months Ended June 30,							2021	2020
		2020		2019		2020		2019
		(in thousands)														(in thousands)
Curriculum and teaching	Curriculum and teaching	$	58	$	5	$	191	$	8	Curriculum and teaching	$	16	$	133
Servicing and support	Servicing and support	3,642		1,834		7,570		3,503		Servicing and support	3,849		3,928
Technology and content development	Technology and content development	2,936		1,648		6,105		3,504		Technology and content development	3,274		3,169
Marketing and sales	Marketing and sales	1,853		1,487		5,086		2,743		Marketing and sales	1,501		3,233
General and administrative	General and administrative	12,602		4,993		23,009		9,793		General and administrative	16,307		10,407
Total stock-based compensation expense	Total stock-based compensation expense	$	21,091	$	9,967	$	41,961	$	19,551	Total stock-based compensation expense	$	24,947	$	20,870

Restricted Stock Units

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


		Number of Units	Weighted- Average Grant Date Fair Value per Share			Number of Units	Weighted- Average Grant Date Fair Value per Share
Outstanding balance as of December 31, 2019		2,281,142	$	40.49
Outstanding balance as of December 31, 2020					Outstanding balance as of December 31, 2020	3,010,019	$	29.41
Granted	Granted	1,865,348	20.11		Granted	952,617	40.53
Vested	Vested	(476,317)	52.61		Vested	(534,967)	19.87
Forfeited	Forfeited	(135,980)	32.13		Forfeited	(123,812)	30.48
Outstanding balance as of June 30, 2020		3,534,193	$	28.42
Outstanding balance as of March 31, 2021					Outstanding balance as of March 31, 2021	3,303,857	$	34.12

The total compensation expense related to the unvested RSUs not yet recognized as of March 31, 2021 was $82.8 million, and will be recognized over a weighted-average period of approximately 2.1 years.

Performance Restricted Stock Units

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

During the three months ended March 31, 2021, the PRSU awards granted as part of the Company’s 2020 annual equity award cycle with a performance period that began on January 1, 2020 and ended on December 31, 2020, vested at 200% of target.

Table of Contents

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

9. Stockholders’ Equity (Continued)

The following tables present a summary of (i) the assumptions used for estimating the fair values of the PRSUs subject to market-based vesting conditions and ~~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~~(ii) the Company’s PRSU activity for the period indicated. As of March 31, 2021 and December 31, 2020, there were 0.9 million and 1.3 million outstanding PRSUs for which the performance metrics had not been defined as of each respective date. Accordingly, such awards are not considered granted for accounting purposes as of March 31, 2021 and December 31, 2020, and have been excluded from the tables below.

Number of
Units Weighted-
Average Grant
Date Fair Value per Share
Outstanding balance as of December 31, 2019 1,413,773 $ 28.12
Granted 653,879 22.46
Vested (444) 64.51
Forfeited (235,560) 52.91
Outstanding balance as of June 30, 2020 1,831,648 $ 22.90


	Three Months Ended March 31,
	2021	2020
Risk-free interest rate	0.10% – 0.26%	1.51%
Expected term (years)	1.00 – 3.00	1.00
Expected volatility	85% – 89%	75%
Dividend yield	0%	0%
Weighted-average grant date fair value per share	$61.33	$22.45


	Number of Units	Weighted- Average Grant Date Fair Value per Share
Outstanding balance as of December 31, 2020	1,355,296	$	23.51
Granted	1,577,721	44.73
Vested	(1,192,596)	22.47
Forfeited	(102,333)	45.55
Outstanding balance as of March 31, 2021	1,638,088	$	43.33

The total compensation expense related to the unvested PRSUs not yet recognized as of March 31, 2021 was $50.9 million, and will be recognized over a weighted-average period of approximately 1.2 years.

Stock Options

The Stock Plans provide for the issuance of stock options to ~~employees and certain non-employees.~~eligible participants. Stock options issued under the Stock Plans generally are exercisable for periods not to exceed 10 years and generally vest over four years.

The following table summarizes the assumptions used for estimating the fair value of the stock options granted for the period presented.


			Three Months Ended March 31,
			2020
Risk-free interest rate			1.5%
Expected term (years)			6.04
Expected volatility			64%
Dividend yield			0%
Weighted-average grant date fair value per share			$11.48

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

2118

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~10.~~9. Stockholders’ Equity (Continued)

Number of
Options Weighted-Average
Exercise Price per
Share Weighted-Average Remaining Contractual Term (in years) Aggregate
Intrinsic
Value
(in thousands)
Outstanding balance as of December 31, 2019 4,373,895 $ 34.24 5.88 $ 28,736
Granted 8,597 19.61
Exercised (195,728) 9.32
Forfeited (22,294) 57.38
Expired (31,752) 41.11
Outstanding balance as of June 30, 2020 4,132,718 35.22 5.54 58,683
Exercisable as of June 30, 2020 3,162,499 $ 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.~~


	Number of Options	Weighted-Average Exercise Price per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding balance as of December 31, 2020	3,916,867	$	35.63	5.08	$	59,906
Granted	0	0
Exercised	(181,716)	19.44		2.62
Forfeited	(24,332)	59.85
Expired	(4,402)	61.05
Outstanding balance as of March 31, 2021	3,706,417	36.24		4.76	52,080
Exercisable as of March 31, 2021	3,124,412	$	30.03	4.25	$	51,485

The aggregate intrinsic value of ~~stock~~ options exercised during the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ was ~~$4.4~~$4.8 million and ~~$13.2~~$0.5 million, respectively.

The total ~~unrecognized~~ compensation ~~cost~~expense related to the unvested ~~stock~~ options not yet recognized as of ~~June 30, 2020~~March 31, 2021 was ~~$26.5~~$16.5 million, and will be recognized over a weighted-average period of approximately ~~2.60~~2.2 years.

~~11.~~10. 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 ~~antidilutive,~~anti-dilutive, 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 ~~antidilutive~~anti-dilutive for each of the periods indicated.


		Three and Six Months Ended June 30,				Three Months Ended March 31,
		2020	2019		2021	2020
Stock options	Stock options	4,132,718	4,325,728	Stock options	3,706,417	4,310,566
Restricted stock units	Restricted stock units	3,534,193	1,208,112	Restricted stock units	3,303,857	3,842,941
Performance restricted stock units	Performance restricted stock units	1,831,648	199,636	Performance restricted stock units	1,638,088	1,864,105
Shares related to convertible senior notes	Shares related to convertible senior notes	3,432,837	—	Shares related to convertible senior notes	13,443,374	0
Total antidilutive securities	Total antidilutive securities	12,931,396	5,733,476	Total antidilutive securities	22,091,736	10,017,612

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


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Numerator (in thousands):	Numerator (in thousands):									Numerator (in thousands):
Net loss	Net loss	$	(66,167)	$	(27,972)	$	(126,273)	$	(49,526)	Net loss	$	(45,564)	$	(60,106)
Denominator:	Denominator:									Denominator:
Weighted-average shares of common stock outstanding, basic and diluted	Weighted-average shares of common stock outstanding, basic and diluted	64,075,405		60,516,662		63,850,869		59,334,246		Weighted-average shares of common stock outstanding, basic and diluted	73,676,409		63,626,333
Net loss per share, basic and diluted	Net loss per share, basic and diluted	$	(1.03)	$	(0.46)	$	(1.98)	$	(0.83)	Net loss per share, basic and diluted	$	(0.62)	$	(0.94)

2219

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~12.~~11. Segment and Geographic Information

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

~~Graduate Program Segment~~Significant Customers

For the three months ended ~~June 30,~~March 31, 2021, no university clients accounted for 10% or more of the Company’s consolidated revenue. For the three months ended March 31, 2020, one university client in the Degree Program Segment accounted for 10% or more of the Company’s consolidated revenue, contributing ~~$18.8~~$17.5 million, or approximately 10% of the Company’s consolidated revenue. ~~For the three months ended June 30, 2019,~~

As of March 31, 2021, one university client ~~accounted for 10% or more of~~in the ~~Company’s consolidated revenue, contributing $21.2 million, or approximately 16 % of the Company’s consolidated revenue.~~

For the six months ended June 30, 2020, one university client accounted for 10% or more of the Company’s consolidated revenue, contributing $36.3 million, or approximately 10% of the Company’s consolidated revenue. For the six months ended June 30, 2019, one university client accounted for 10% or more of the Company’s consolidated revenue, contributing $43.8 million, or approximately 17% of the Company’s consolidated revenue.

~~As of June 30, 2020, one university client~~Degree Program Segment accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, ~~contributing $15.2~~with $19.3 million, or approximately ~~21%~~26% of the Company’s consolidated accounts receivable, net balance. As of December 31, ~~2019,~~2020, two university clients in the Degree Program Segment each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, ~~contributing $6.1~~with $5.8 million and ~~$4.9~~$5.2 million, or approximately ~~18%~~12% and ~~15%~~11% of the Company’s consolidated accounts receivable, net balance, respectively.

~~Alternative Credential Segment~~

For the three and six months ended June 30, 2020 and 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 June 30, 2020 and December 31, 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 June 30, 2020, offerings associated with one university client accounted for 10% or more of the segment’s revenue, contributing $9.2 million, or approximately 14% of the segment’s revenue. For the three months ended June 30, 2019, offerings associated with two university clients each accounted for 10% or more of the segment’s revenue, and when combined, accounted for approximately 37% of the segment’s revenue.

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


	Three Months Ended March 31,
	2021			2020

	(dollars in thousands)
Revenue by segment*
Degree Program Segment	$	145,875		$	118,457
Alternative Credential Segment	86,598			57,022
Total revenue	$	232,473		$	175,479

Segment profitability**
Degree Program Segment	$	25,888		$	6,460
Alternative Credential Segment	(12,140)			(10,764)
Total segment profitability	$	13,748		$	(4,304)

Segment profitability margin***
Degree Program Segment	17.7		%	5.5		%
Alternative Credential Segment	(14.0)			(18.9)
Total segment profitability margin	5.9		%	(2.5)		%

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~12.~~11. Segment and Geographic Information (Continued)

Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
(dollars in thousands)
Revenue by segment*
Graduate Program Segment $ 115,685 $ 101,403 $ 234,142 $ 205,577
Alternative Credential Segment 67,002 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 Segment 4.1 % (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-month periods ended March 31, 2021 and 2020.
**						The Company defines segment profitability as net income or net loss, as applicable, before net interest income (expense), foreign currency gains or losses, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some or all of these items may not be applicable in any given reporting period.
***						The Company defines segment profitability margin as segment profitability as a percentage of the respective segment’s revenue.

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


	Three Months Ended March 31,
	2021		2020

	(in thousands)
Net loss	$	(45,564)	$	(60,106)
Adjustments:
Stock-based compensation expense	24,947		20,870
Foreign currency loss	915		2,271
Net interest expense	7,519		4,980
Income tax benefit	(2)		(1,055)
Depreciation and amortization expense	24,987		23,485
Other*	946		5,251
Total adjustments	59,312		55,802
Total segment profitability	$	13,748	$	(4,304)



*						Includes (i) transaction and integration expense of $0.1 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively, (ii) restructuring-related expense of $0.5 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.4 million and $4.2 million for the three months ended March 31, 2021 and 2020, respectively.

*~~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.

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


	March 31, 2021		December 31, 2020

	(in thousands)
Total assets
Degree Program Segment	$	818,523	$	830,706
Alternative Credential Segment	736,990		713,558
Total assets	$	1,555,513	$	1,544,264

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~12.~~11. Segment and Geographic Information (Continued)

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

Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
(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 expense 23,985 14,653 47,470 24,351
Deferred revenue fair value adjustment — 3,352 — 3,352
Transaction and integration costs 359 3,093 1,083 5,024
Restructuring-related costs 196 — 484 —
Stockholder activism costs 1,347 — 5,586 —
Stock-based compensation expense 21,091 9,967 41,961 19,551
Loss on debt extinguishment 11,671 — 11,671 —
Total adjustments 64,080 12,997 119,882 31,345
Total segment profitability $ (2,087) $ (14,975) $ (6,391) $ (18,181)

Trade Accounts Receivable and Contract Liabilities

The following table presents the Company’s ~~total assets by~~trade accounts receivable and contract liabilities in each segment as 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 Segment 672,423 679,643
Total assets $ 1,232,560 $ 1,186,830


	March 31, 2021		December 31, 2020

	(in thousands)
Trade accounts receivable
Degree Program Segment accounts receivable	$	39,572	$	16,424
Degree Program Segment unbilled revenue	10,367		6,072
Alternative Credential Segment accounts receivable	31,906		29,717
Provision for credit losses	(7,101)		(5,936)
Total trade accounts receivable	$	74,744	$	46,277

Contract liabilities
Degree Program Segment deferred revenue	$	25,938	$	1,714
Alternative Credential Segment deferred revenue	82,426		73,779
Total contract liabilities	$	108,364	$	75,493

For the Degree Program Segment, revenue recognized during the three months ended March 31, 2021 and 2020 that was included in the deferred revenue balance at the beginning of each year was $1.7 million and $2.2 million, respectively.

For the Alternative Credential Segment, revenue recognized during the three months ended March 31, 2021 and 2020 that was included in the deferred revenue balance at the beginning of each year was $55.9 million and $34.4 million, respectively.

The amount of financing receivables recorded within other assets on our condensed consolidated balance sheets were $34.7 million and $25.4 million as of March 31, 2021 and December 31, 2020, respectively.

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


	Provision for Credit Losses
	(in thousands)
Balance as of December 31, 2020	$	5,936
Current period provision	2,022
Amounts written off	0
Amounts recovered	(899)
Foreign currency translation adjustments	42
Balance as of March 31, 2021	$	7,101

Contract Acquisition Costs

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2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

~~12.~~11. 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 revenue 27,777 12,123
Alternative Credential Segment accounts receivable 29,158 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 revenue 61,959 46,623
Total contract liabilities $ 77,071 $ 48,833

For the Graduate Program Segment, no revenue recognized during each of the three months ended June 30, 2020 and 2019 was included in the deferred revenue balance at the beginning of each respective year. 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 $2.2 million and $2.4 million, respectively.

For the Alternative Credential Segment, revenue recognized during the three months ended June 30, 2020 and 2019 that was included in the deferred revenue balance at the beginning of each year was $12.2 million and 0, 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~~Degree Program Segment had $0.5 million and $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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

For each of the three-month periods ended March 31, 2021 and 2020, the Company capitalized an immaterial amount contract acquisition costs and recorded an immaterial amount of associated amortization expense in the Degree Program Segment.

Geographical Information

The Company’s non-U.S. revenue is based on the currency of the country in which the university client primarily operates. The Company’s non-U.S. revenue was ~~$17.2~~$23.1 million and ~~$11.1~~$11.3 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, respectively. The Company’s non-U.S. revenue was $30.0 million and $18.9 million for the six months ended June 30, 2020 and 2019,~~ respectively. Substantially all of the Company’s non-U.S. revenue for each of the aforementioned periods was

sourced from the Alternative Credential Segment’s operations outside of the U.S. The Company’s long-lived tangible assets in non-U.S. countries as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 totaled ~~$1.8~~approximately $1.5 million and ~~$2.7~~$1.6 million, respectively.

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~~2U, Inc.~~

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

~~(unaudited)~~

~~13.~~12. Supplemental Cash Flow Information

The Company’s cash interest payments, net of amounts capitalized, were ~~$6.2~~$0.1 million and ~~$1.9~~$4.9 million for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. The Company’s accrued but unpaid capital expenditures were ~~$1.1~~$1.5 million and ~~$1.2~~$1.7 million for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Many factors could cause or contribute to these differences, including those discussed in Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, and our other filings with the Securities and Exchange Commission (the “SEC”). Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

Unless the context otherwise requires, all references to “we,” “us” or “our” refer to 2U, Inc., together with its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, ~~2019,~~2020, which are included in our Annual Report on Form 10-K, filed with the SEC on February ~~28, 2020.~~25, 2021.

Overview

We are a leading ~~provider of education technology~~digital transformation partner for nonprofit colleges and universities. We build, deliver, and support more than ~~435~~500 digital and in-person educational offerings, including graduate degrees, undergraduate degrees, professional certificates, boot camps, and short ~~courses, across the Career Curriculum Continuum.~~courses. Together with our university clients, we have positively transformed the lives of more than ~~245,000~~300,000 students.

Our comprehensive platform of tightly integrated technology and services provides the digital infrastructure that universities ~~need~~rely on to attract, enroll, educate and support students at ~~scale. With~~scale throughout their lives. We believe ongoing learning is critical to career success today. Our broad array of offerings allow our ~~platform, students can pursue their education anytime, anywhere, without quitting their jobs or moving; and~~ university clients ~~can provide broader access~~ to meet student needs throughout their lives — whether they are earning a full degree, reskilling to learn something new or embarking on a new career path. We refer to the spectrum of educational offerings ~~thereby improving outcomes, skills attainment~~that a learner may benefit from during their lives and ~~career prospects for~~careers as the “Career Curriculum Continuum.” Our platform empowers university clients to play a ~~greater number~~central role at each stage of ~~students.~~a student’s learning journey.

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

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

In our Alternative Credential Segment, we provide premium online short courses and technical, skills-based boot camps through relationships with nonprofit colleges and universities. Students enrolled in these offerings are generally seeking to reskill or upskill through shorter duration, lower-priced offerings that are relevant to the needs of industry and society.

COVID-19 Update

~~In March 2020,~~Since the ~~World Health Organization characterized COVID-19 as a pandemic and, as~~onset 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~~experienced increased demand for our ~~business, to provide unique solutions to our~~technology and services from 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~~

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•~~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 2020 we experienced increasing demand from prospective and current university clients as universities planned for the Fall 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~~increased 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 higher demand to have an increasing impact on our results of operations beginning in 2021.

~~While we have observed increasing demand from new and existing university clients and from prospective students during the second quarter of 2020,~~students. However, we cannot estimate the impact of COVID-19 on these demand trends or our business or economic conditions ~~generally.~~generally, and there is no assurance that we will continue to experience current demand and cost of service levels as the COVID-19 pandemic tapers, particularly as vaccinations become widely available. For a discussion of additional risks related to COVID-19, see Part ~~II,~~I, Item ~~1.A.~~1A “Risk Factors” ~~below.~~in our Annual Report on Form 10-K for the year ended December 31, 2020.

Our Business Model and Components of Operating Results

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

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Revenue Drivers

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

Operating Expense

Marketing and Sales

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

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

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

Curriculum and Teaching

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

Servicing and Support

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

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Technology and Content Development

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

General and Administrative

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

Net Interest Income (Expense)

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

~~Loss on Debt Extinguishment~~

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

Other Income (Expense), Net

Other income (expense), net consists primarily ~~consists~~ of foreign currency gains and losses.

Income Taxes

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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 ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~

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

Three Months Ended June 30,
2020 2019 Period-to-Period Change
Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage
(dollars in thousands)
Revenue $ 182,687 100.0 % $ 135,461 100.0 % $ 47,226 34.9 %
Costs and expenses
Curriculum and teaching 26,256 14.4 13,308 9.8 12,948 97.3
Servicing and support 30,294 16.6 23,993 17.7 6,301 26.3
Technology and content development 37,307 20.4 26,043 19.2 11,264 43.2
Marketing and sales 98,341 53.8 89,749 66.3 8,592 9.6
General and administrative 39,554 21.7 28,408 21.0 11,146 39.2
Total costs and expenses 231,752 126.9 181,501 134.0 50,251 27.7
Loss from operations (49,065) (26.9) (46,040) (34.0) (3,025) 6.6
Interest income 154 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), net 570 0.3 (13) 0.0 583 *
Loss before income taxes (66,530) (36.5) (46,663) (34.5) (19,867) 42.6
Income tax benefit 363 0.2 18,691 13.8 (18,328) (98.1)
Net loss $ (66,167) (36.3) % $ (27,972) (20.7) % $ (38,195) 136.5 %

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	Three Months Ended March 31,
	2021				2020				Period-to-Period Change
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage

	(dollars in thousands)
Revenue	$	232,473	100.0	%	$	175,479	100.0	%	$	56,994	32.5	%
Costs and expenses
Curriculum and teaching	33,148		14.3		20,478		11.7		12,670		61.9
Servicing and support	33,184		14.3		30,533		17.4		2,651		8.7
Technology and content development	42,924		18.5		35,510		20.2		7,414		20.9
Marketing and sales	113,237		48.7		99,215		56.5		14,022		14.1
General and administrative	47,112		20.3		43,653		24.9		3,459		7.9
Total costs and expenses	269,605		116.1		229,389		130.7		40,216		17.5
Loss from operations	(37,132)		(16.1)		(53,910)		(30.7)		16,778		31.1
Interest income	362		0.2		513		0.3		(151)		29.5
Interest expense	(7,881)		(3.4)		(5,493)		(3.1)		(2,388)		43.5
Other expense, net	(915)		(0.4)		(2,271)		(1.3)		1,356		59.7
Loss before income taxes	(45,566)		(19.7)		(61,161)		(34.8)		15,595		25.5
Income tax benefit	2		0.0		1,055		0.6		(1,053)		99.8
Net loss	$	(45,564)	(19.7)	%	$	(60,106)	(34.2)	%	$	14,542	24.2	%

*~~Not meaningful for comparative purposes.~~

Revenue. Revenue for the three months ended ~~June 30, 2020~~March 31, 2021 increased ~~$47.2~~$57.0 million, or ~~34.9%~~32.5%, to ~~$182.7~~$232.5 million as compared to ~~$135.5~~$175.5 million in 2019. This increase was driven by a 14.1% increase in 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.

2020. Revenue from our ~~Graduate~~Degree Program Segment increased ~~$14.3~~$27.4 million, or ~~14.1%~~23.1%, primarily due to growth in full course equivalent (“FCE”) enrollments of ~~6,962,~~14,273, or 17.8%, partially offset by a decrease in the average revenue per FCE enrollment, from $2,588 to $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.

31.2%. Revenue from our Alternative Credential Segment increased ~~$32.9~~$29.6 million, or ~~96.7%~~51.9%, primarily due to growth in FCE enrollments of ~~7,773,~~5,937, or ~~61.4%, as well as an increase in the average revenue per FCE enrollment, from $2,955 to $3,279. These increases were primarily due to the addition of 2,149 incremental FCE enrollments from Trilogy.~~39.2%.

Curriculum and Teaching. Curriculum and teaching expense increased ~~$13.0~~$12.6 million, or ~~97.3%~~61.9%, to ~~$26.3~~$33.1 million as compared to ~~$13.3~~$20.5 million in ~~2019.~~2020. This increase was primarily due to ~~a $9.6 million increase in~~higher 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~~higher FCEs in ~~university and instructional staff compensation expense from short courses.~~our Alternative Credential Segment.

Servicing and Support. Servicing and support expense increased ~~$6.3~~$2.7 million, or ~~26.3%~~8.7%, to ~~$30.3~~$33.2 million as compared to ~~$24.0~~$30.5 million in ~~2019.~~2020. This increase was primarily due to a ~~$4.3~~$2.9 million increase in personnel and personnel-related expense to serve a greater number of students and faculty. ~~The remaining~~This 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~~$0.2 million decrease in other student support expenses, particularly travel and related expense due to ~~cost efficiencies and~~ the impact of ~~COVID-19.~~COVID-19 and operating efficiencies.

Technology and Content Development. Technology and content development expense increased ~~$11.3~~$7.4 million, or ~~43.2%~~20.9%, to ~~$37.3~~$42.9 million as compared to ~~$26.0~~$35.5 million in ~~2019.~~2020. 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~~$3.6 million increase in personnel and personnel-related ~~expense. These increases were partially offset by~~expense, a ~~$1.6~~$2.8 million ~~decrease~~increase in ~~travel~~expenses to support our platform and ~~related expense due to cost efficiencies~~software applications, and ~~the impact of COVID-19.~~a $1.2 million increase in depreciation and amortization expense.

Marketing and Sales. Marketing and sales expense increased ~~$8.6~~$14.0 million, or ~~9.6%~~14.1%, to ~~$98.3~~$113.2 million as compared to ~~$89.7~~$99.2 million in ~~2019.~~2020. This increase was primarily due to a ~~$12.1~~$12.2 million increase in marketing expense and ~~sales expense from the addition of Trilogy boot camps. The remaining increase was primarily due to~~ a ~~$1.2~~$1.3 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 COVID-19, and a $2.1 million decrease in personnel and personnel-related ~~expense.~~expense to support our revenue growth.

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General and Administrative. General and administrative expense increased ~~$11.2~~$3.4 million, or ~~39.2%~~7.9%, to ~~$39.6~~$47.1 million as compared to ~~$28.4~~$43.7 million in ~~2019.~~2020. This increase was primarily due to a ~~$12.4~~$4.4 million increase in personnel and personnel-related expense and a ~~$1.5~~$1.2 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.~~professional fees. These increases were partially offset by a ~~$2.7~~$1.9 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 impact of COVID-19.~~other expenses.

Net Interest Income (Expense). Net interest expense was ~~$6.4~~$7.5 million and ~~$0.6~~$5.0 million for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. The net interest expense for the three months ended ~~June 30, 2020~~March 31, 2021 was primarily due to interest incurred on our $380 million aggregate principal amount of 2.25% convertible senior notes due 2025 (the “Notes”) ~~and~~, partially offset by interest earned on our ~~$250 million senior secured term loan facility (“Term Loan”).~~cash balances. The net interest expense for the three months ended ~~June 30, 2019~~March 31, 2020 was primarily due to interest incurred on our ~~Term Loan,~~$250 million senior secured term loan facility, partially offset by interest earned on our cash balances.

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~~Loss on Debt Extinguishment.~~Other Expense, Net. ~~Loss on debt extinguishment~~Other expense, net was ~~$11.7~~$0.9 million ~~and zero~~ for the three months ended ~~June 30, 2020 and 2019, respectively. This increase was due~~March 31, 2021, as compared to ~~the write-off of deferred financing costs and fees paid in connection with the extinguishment of our Term Loan in April 2020.~~

~~Other Income (Expense), Net.~~ ~~Other income (expense), net was $0.6~~$2.3 million ~~and $(13) thousand~~ for the three months ended ~~June 30, 2020 and 2019, respectively.~~March 31, 2020. This ~~change~~decrease was primarily due to ~~fluctuations in~~the remeasurement of foreign currency ~~rates~~transactions impacting our operations in the Alternative Credential Segment.

Income Tax Benefit. For the three months ended ~~June 30,~~March 31, 2021, we recognized an income tax benefit of $2 thousand. For the three months ended March 31, 2020, we recognized aincome tax benefit of ~~$0.4~~$1.1 million, and our effective tax rate was approximately 1%2%. 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 three months ended June 30, 2019, we recognized a tax benefit of $18.7 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.

~~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,
2020 2019 Period-to-Period Change
Amount Percentage of Revenue Amount Percentage of Revenue Amount Percentage
(dollars in thousands)
Revenue $ 358,166 100.0 % $ 257,695 100.0 % $ 100,471 39.0 %
Costs and expenses
Curriculum and teaching 46,734 13.0 20,009 7.8 26,725 133.6
Servicing and support 60,827 17.0 44,167 17.1 16,660 37.7
Technology and content development 72,817 20.3 45,837 17.8 26,980 58.9
Marketing and sales 197,556 55.2 166,710 64.7 30,846 18.5
General and administrative 83,207 23.2 51,431 20.0 31,776 61.8
Total costs and expenses 461,141 128.7 328,154 127.4 132,987 40.5
Loss from operations (102,975) (28.7) (70,459) (27.4) (32,516) 46.1
Interest income 667 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 benefit 1,418 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.

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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), foreign currency gains or losses, 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, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt

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extinguishment, and stock-based compensation expense. Some ~~or all~~ of these items may not be applicable in any given reporting period and they may vary from period to period. Total segment profitability is a non-GAAP ~~measures~~measure when presented outside of the financial statement footnotes. Total segment profitability is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to develop short- and long-term operational plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses in calculating total segment profitability can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that total segment profitability provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

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


											Three Months Ended March 31,
		Three Months Ended June 30,						Six Months Ended June 30,							2021	2020
		2020		2019		2020		2019
		(in thousands)														(in thousands)
Net loss	Net loss	$	(66,167)	$	(27,972)	$	(126,273)	$	(49,526)	Net loss	$	(45,564)	$	(60,106)
Adjustments:	Adjustments:									Adjustments:
Net interest expense (income)		6,364		610		11,344		(1,684)
Foreign currency (gain) loss		(570)		13		1,701		383
Stock-based compensation expense										Stock-based compensation expense	24,947		20,870
Foreign currency loss										Foreign currency loss	915		2,271
Net interest expense										Net interest expense	7,519		4,980
Income tax benefit	Income tax benefit	(363)		(18,691)		(1,418)		(19,632)		Income tax benefit	(2)		(1,055)
Depreciation and amortization expense	Depreciation and amortization expense	23,985		14,653		47,470		24,351		Depreciation and amortization expense	24,987		23,485
Deferred revenue fair value adjustment		—		3,352		—		3,352
Transaction and integration costs		359		3,093		1,083		5,024
Restructuring-related costs		196		—		484		—
Stockholder activism costs		1,347		—		5,586		—
Loss on debt extinguishment		11,671		—		11,671		—
Stock-based compensation expense		21,091		9,967		41,961		19,551
Other*										Other*	946		5,251
Total adjustments	Total adjustments	64,080		12,997		119,882		31,345		Total adjustments	59,312		55,802
Total segment profitability	Total segment profitability	$	(2,087)	$	(14,975)	$	(6,391)	$	(18,181)	Total segment profitability	$	13,748	$	(4,304)

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*						Includes (i) transaction and integration expense of $0.1 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively, (ii) restructuring-related expense of $0.5 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.4 million and $4.2 million for the three months ended March 31, 2021 and 2020, respectively.

Three Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~

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


											Three Months Ended March 31,				Period-to-Period Change
		Three Months Ended June 30,						Period-to-Period Change							2021		2020		Amount	Percentage
		2020		2019		Amount		Percentage
		(dollars in thousands)															(dollars in thousands)
Revenue by segment*	Revenue by segment*									Revenue by segment*
Graduate Program Segment		$	115,685	$	101,403	$	14,282	14.1	%
Degree Program Segment										Degree Program Segment	$	145,875	$	118,457	$	27,418	23.1	%
Alternative Credential Segment	Alternative Credential Segment	67,002		34,058		32,944		96.7		Alternative Credential Segment	86,598		57,022		29,576		51.9
Total revenue	Total revenue	$	182,687	$	135,461	$	47,226	34.9	%	Total revenue	$	232,473	$	175,479	$	56,994	32.5	%

Segment profitability	Segment profitability									Segment profitability
Graduate Program Segment		$	4,703	$	(8,049)	$	12,752	**
Degree Program Segment										Degree Program Segment	$	25,888	$	6,460	$	19,428	300.7	%
Alternative Credential Segment	Alternative Credential Segment	(6,790)		(6,926)		136		(1.9)		Alternative Credential Segment	(12,140)		(10,764)		(1,376)		12.8
Total segment profitability	Total segment profitability	$	(2,087)	$	(14,975)	$	12,888	(86.0)	%	Total segment profitability	$	13,748	$	(4,304)	$	18,052	**



*						Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended March 31, 2021 and 2020.
**						Not meaningful for comparative purposes.

*~~Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended June 30, 2020 and 2019.~~

** Not meaningful for comparative purposes.

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~~Graduate~~Degree Program Segment profitability increased ~~$12.8~~$19.4 million to ~~$4.7~~$25.9 million as compared to ~~$(8.0)~~$6.5 million in ~~2019.~~2020. This increase was primarily due to revenue growth of ~~$14.3~~$27.4 million, ~~a reduced launch schedule, cost control~~operational and marketing efficiency initiatives ~~marketing efficiencies and reduced travel and related expense.~~

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 June 30, 2019 included Trilogy’s results of operations from May 22, 2019, the date of acquisition.

~~Six Months Ended June 30, 2020 and 2019~~

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

Six Months Ended June 30, Period-to-Period Change
2020 2019 Amount Percentage
(dollars in thousands)
Revenue by segment*
Graduate Program Segment $ 234,142 $ 205,577 $ 28,565 13.9 %
Alternative Credential Segment 124,024 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) %

*~~Immaterial amounts of intersegment revenue have been excluded from the above results for the six months ended June 30, 2020 and 2019.~~

** Not meaningful for comparative purposes.

Graduate Program Segment profitability increased $18.5 million to $11.2 million as compared to $(7.3) million in 2019. This increase was primarily due to revenue growth of $28.6 million, a reduced launch schedule, cost control initiatives, marketing efficiencies and reduced travel and related expense.

Alternative Credential Segment profitability decreased ~~$6.7~~$1.4 million, or ~~62%~~12.8%, to ~~$(17.6)~~$(12.1) million as compared to $(10.8) million in ~~2019.~~2020. This decrease was primarily due to ~~the addition of Trilogy’s results of operations since the acquisition date.~~

higher operating expenses.

Liquidity and Capital Resources

As of ~~June 30, 2020,~~March 31, 2021, our principal sources of liquidity were cash and cash equivalents totaling ~~$194.8~~$486.8 million, which were held 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 an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act. The Notes are governed by an indenture (the “Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The Notes bear interest at a rate of 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Notes mature on May 1, 2025, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to November 1, 2024, the Notes are convertible only upon satisfaction of certain conditions, and thereafter at any time until the close of business on the second scheduled trading date immediately before the maturity date. In connection with the Notes, we entered into privately negotiated capped call transactions with a premium cost of approximately $50.5 million. The capped call transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or to offset any cash payments we are required to make in excess of the principal amount of the converted Notes, with such reduction and/or offset subject to the cap. The net proceeds from the issuance of the Notes were $319.0 million after deducting the initial purchasers’ discount, offering expenses and the cost of the capped call transactions. As of March 31, 2021, the Notes were determined to be convertible between April 1, 2021 and June 30, ~~2020,~~2021, based on the ~~Notes are not currently convertible into our~~satisfaction of the common stock ~~and are therefore classified as long-term debt.~~sale price condition. Refer to Note 87 in the “Notes to Condensed

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Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our Notes.

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On June 25, 2020, we entered into a $50 million 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 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. As of ~~June 30, 2020, our borrowing capacity was $50.0 million and~~March 31, 2021, no amounts were outstanding under the Credit Agreement.

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

~~To date, we~~We have financed our operations primarily through payments from university clients and students for our technology and services, ~~the Term Loan, the Notes, and~~ public and private equity ~~financings.~~financings, and the Notes. We believe that our existing cash and cash equivalents, together with cash generated from operations and available borrowing capacity under the Credit Agreement, will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months.

Our operations require us to make capital expenditures for content development, capitalized technology, and property and equipment. During the three months ended March 31, 2021 and 2020, our capital asset additions were $16.5 million and $19.9 million, respectively.

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

Operating Activities

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

Net cash ~~used in~~provided by operating activities for the ~~six~~three months ended ~~June 30, 2020 consisted~~March 31, 2021 was $7.6 million, consisting primarily of ~~our net loss of $126.3 million, adjusted~~adjustments for non-cash items, including ~~$47.5~~$25.0 million of depreciation and amortization expense, ~~$42.0~~$24.9 million of stock-based compensation expense, ~~an $11.7~~$7.7 million ~~loss on the extinguishment~~ of ~~our Term Loan, $7.3~~non-cash interest expense, and $4.3 million of reductions in the carrying amounts of our right-of-use assets, ~~and $5.7 million~~partially offset by our net loss of ~~non-cash interest expense.~~$45.6 million. The net change in operating assets and liabilities of ~~$4.3~~$10.7 million was unfavorable to cash flows from operations primarily due to an increase in accounts receivable of $30.7 million and an increase in prepaid expenses and other assets of $10.9 million, partially offset by a $32.9 million increase in deferred revenue.

Net cash used in operating activities for the three months ended March 31, 2020 was $9.9 million, consisting primarily of our net loss of $60.1 million, adjusted for non-cash items including $23.5 million of depreciation and amortization expense, $20.9 million of stock-based compensation expense, and $3.6 million of reductions in the carrying amounts of our right-of-use assets. The net change in operating assets and liabilities of $1.1 million was favorable to cash flows from operations primarily due to a ~~$28.8 million increase in deferred revenue and a $19.6~~$26.4 million increase in accounts payable and accrued expenses ~~partially offset by an increase in accounts receivable of $39.5 million.~~

~~Net cash used in operating activities for the six months ended June 30, 2019 consisted primarily of our net loss of $49.5 million, adjusted for non-cash items including $24.4 million of depreciation~~ and amortization expense, $19.6 million of stock-based compensation expense, and $5.3 million of reductions in the carrying amounts of our right-of-use-assets. The net change in operating assets and liabilities of $49.1 million was unfavorable to cash flows from operations primarily due to a ~~$25.5~~$21.7 million increase in ~~accounts~~deferred revenue. Accounts receivable ~~a $23.1~~was $75.4 million ~~decrease in other liabilities, a $20.1~~at the end of the quarter, up $41.8 million ~~change in payments to university clients, partially offset by favorable changes in accounts payable and accrued expenses~~from the end of ~~$18.1 million and deferred revenue of $15.8 million.~~2019.

Investing Activities

Net cash used in investing activities for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was ~~$37.4~~$15.1 million, consisting primarily of ~~$32.5~~$14.2 million of additions of amortizable intangible assets and ~~$4.3~~$0.8 million of purchases of property ~~plant~~ and equipment.

Net cash used in investing activities for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 was ~~$408.3~~$19.1 million, consisting primarily of ~~a $387.8~~$15.8 million ~~outflow related to our acquisition~~ of ~~Trilogy, net of cash acquired,~~ additions of amortizable intangible assets ~~of $32.4~~and $2.4 million ~~and~~of purchases of property and ~~equipment of $8.1 million. These outflows were partially offset by a $25.0 million inflow from the maturity of a certificate of deposit investment.~~equipment.

Financing Activities

Net cash ~~provided by~~used in financing activities for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 was ~~$67.9~~$6.3 million, consisting primarily of ~~$319.0~~$12.6 million of ~~proceeds from the issuance of the Notes (net of payments related to the initial purchasers’~~

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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 $240.3 million, consisting primarily of $241.8 million of proceeds, net of issuance costs, from our Term Loan and $2.4 million of proceeds received from the exercise of stock options. These inflows were partially offset by tax withholding payments associated with the settlement of restricted stock units, partially offset by $3.5 million of ~~$2.6 million.~~proceeds received from the exercise of stock options and $2.9 million of proceeds from debt.

Net cash used in financing activities for the three months ended March 31, 2020 was $2.5 million, consisting primarily of the payment of debt issuance costs in connection with the February 2020 amendment of our senior secured term loan facility.

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Off-Balance Sheet Arrangements

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

Critical Accounting Policies

Revenue Recognition, Accounts Receivable and ~~Allowance~~Provision for ~~Doubtful Accounts~~Credit Losses

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

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

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

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

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Contract Acquisition Costs

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

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

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Payments to University Clients

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

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

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

Interest-free financing and tuition payment plans are made available to students enrolling in select boot camps within our Alternative Credential Segment. The financing plans, which are managed and serviced by third-party providers, are designed to assist students who are unable to completely cover tuition costs and are available only after all other student financial assistance and scholarships have been applied. The associated financing receivables generally have payment terms that exceed one year and are recorded on our consolidated balance sheets net of any implied pricing concessions, based on our collections history and market data, and significant financing components. The amount of financing receivables recorded within other assets on our condensed consolidated balance sheets were $34.7 million and $25.4 million as of March 31, 2021 and December 31, 2020, respectively.

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

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

Long-Lived Assets

Amortizable Intangible Assets

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

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

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

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

Evaluation of Long-Lived Assets

We review long-lived assets, which consist of property and equipment, capitalized technology, ~~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~~amounts are grouped by the lowest level of independent cash flows. Recoverability of a long-lived asset is measured by a comparison of the carrying value of an asset or asset group to the future undiscounted net cash flows expected to be generated by that asset or asset group. If such assets are not recoverable, the impairment to be recognized is measured by the amount by which the carrying value of an asset exceeds the estimated fair value (discounted cash flow) of the asset or asset group. Our impairment analysis is based upon cumulative results and forecasted performance.

Goodwill

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%~~Based on our qualitative assessment performed as of October 1, ~~2019,~~2020, the date of our annual goodwill impairment ~~assessment.~~assessment, we concluded that the estimated fair values of our reporting units exceeded their carrying values by no less than 10%. It is possible that future changes in our circumstances, including a potential ~~impact~~impacts from COVID-19, or in the

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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.

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Recent Accounting Pronouncements

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

Key Business and Financial Performance Metrics

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

Full Course Equivalent Enrollments

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

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

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

Three Months Ended
June 30, Six Months Ended
June 30,
2020 2019 2020 2019
Graduate Program Segment
FCE enrollments 46,142 39,180 91,876 78,692
Average revenue per FCE enrollment $ 2,507 $ 2,588 $ 2,548 $ 2,612
Alternative Credential Segment*
FCE enrollments 20,435 12,662 35,576 20,262
Average revenue per FCE enrollment** $ 3,279 $ 2,955 $ 3,486 $ 2,738

*~~Trilogy’s results of operations are included in our results of operations since the acquisition date.~~

** The calculation of 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.


	Three Months Ended March 31,
	2021		2020
Degree Program Segment
FCE enrollments	60,007		45,734
Average revenue per FCE enrollment	$	2,431	$	2,590
Alternative Credential Segment
FCE enrollments	21,078		15,141
Average revenue per FCE enrollment	$	4,108	$	3,766

Of the increase in FCE enrollments in our ~~Graduate~~Degree Program Segment for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, 2,018,~~4,096, or ~~29.0%~~28.7%, and ~~3,276,~~2,880, or 38.0%, respectively, were attributable to degree programs launched during the preceding 12 months. Of the increase in FCE enrollments in our Graduate Program Segment for the six months ended June 30, 2020 and 2019, 4,898, or 37.2%, and 5,928, or 32.3%46.3%, respectively, were attributable to degree programs launched during the preceding 12 months.

Of the increase in FCE enrollments in our Alternative Credential Segment for the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, 4,200,~~4,954, or ~~54.0%~~83.4%, and ~~2,555,~~3,052, or ~~57.5%, respectively, were attributable to offerings launched during the preceding~~

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~~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%~~50.8%, respectively, were attributable to offerings launched during the preceding 12 months.

Adjusted EBITDA (Loss)

We define adjusted EBITDA (loss) as net income or net loss, as applicable, before net interest income (expense), foreign currency gains or losses, 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, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. ~~In the second quarter~~Some of ~~2020, we revised our definition~~these items may not be applicable in any given reporting period and they may vary from period to period.

Table of ~~adjusted EBITDA (loss) to exclude losses on debt extinguishment.~~ContentsWe believe this change is useful to investors because we did not have a loss on debt extinguishment in prior periods, and as a result, excluding the impact of such a loss in this period facilitates a period-to-period comparison of our business.

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

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

Our use of adjusted EBITDA (loss) has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of the limitations are:

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

•adjusted EBITDA (loss) does not reflect (i) changes in, or cash requirements for, our working capital needs;

•~~adjusted EBITDA (loss) does not reflect~~ (ii) the impact of changes in foreign currency exchange rates;

•~~adjusted EBITDA (loss) does not reflect~~ (iii) 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~~ (iv) transaction ~~costs,~~and integration ~~costs,~~costs; (v) restructuring-related ~~costs,~~costs; (vi) impairment ~~charges,~~charges; (vii) stockholder activism ~~costs or~~costs; (viii) certain litigation-related costs; (ix) losses on debt extinguishment;

•~~adjusted EBITDA (loss) does not reflect~~ (x) the impact of deferred revenue fair value adjustments;

•~~adjusted EBITDA (loss) does not reflect the potentially dilutive impact of equity-based compensation;~~

•~~adjusted EBITDA (loss) does not reflect~~ (xi) interest or tax payments that may represent a reduction in ~~cash available~~cash; or (xii) the non-cash expense or the potentially dilutive impact of equity-based compensation, which has been, and we expect will continue to ~~us;~~be, an important part of our compensation plan; and

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

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


											Three Months Ended March 31,
		Three Months Ended June 30,						Six Months Ended June 30,							2021	2020
		2020		2019		2020		2019
		(in thousands)														(in thousands)
Net loss	Net loss	$	(66,167)	$	(27,972)	$	(126,273)	$	(49,526)	Net loss	$	(45,564)	$	(60,106)
Adjustments:	Adjustments:									Adjustments:
Interest expense (income), net		6,364		610		11,344		(1,684)
Foreign currency (gain) loss		(570)		13		1,701		383
Stock-based compensation expense										Stock-based compensation expense	24,947		20,870
Foreign currency loss										Foreign currency loss	915		2,271
Net interest expense										Net interest expense	7,519		4,980
Income tax benefit	Income tax benefit	(363)		(18,691)		(1,418)		(19,632)		Income tax benefit	(2)		(1,055)
Depreciation and amortization expense	Depreciation and amortization expense	23,985		14,653		47,470		24,351		Depreciation and amortization expense	24,987		23,485
Deferred revenue fair value adjustment		—		3,352		—		3,352
Transaction and integration costs		359		3,093		1,083		5,024
Restructuring-related costs		196		—		484		—
Stockholder activism costs		1,347		—		5,586		—
Loss on debt extinguishment		11,671		—		11,671		—
Stock-based compensation expense		21,091		9,967		41,961		19,551
Other*										Other*	946		5,251
Total adjustments	Total adjustments	64,080		12,997		119,882		31,345		Total adjustments	59,312		55,802
Adjusted EBITDA (loss)	Adjusted EBITDA (loss)	$	(2,087)	$	(14,975)	$	(6,391)	$	(18,181)	Adjusted EBITDA (loss)	$	13,748	$	(4,304)



*						Includes (i) transaction and integration expense of $0.1 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively, (ii) restructuring-related expense of $0.5 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.4 million and $4.2 million for the three months ended March 31, 2021 and 2020, respectively.

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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 ~~28, 2020.~~25, 2021.

Foreign Currency Exchange Risk

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

For the three months ended ~~June 30,~~March 31, 2021 and 2020, ~~and 2019, our foreign currency translation adjustment was a gain of $1.4 million and $2.2 million, respectively. For the six months ended June 30, 2020 and 2019,~~ our foreign currency translation adjustment was a loss of ~~$14.7~~$0.8 million and a ~~gain~~loss of ~~$1.9~~$16.1 million, respectively.

For the three months ended ~~June 30,~~March 31, 2021 and 2020, and 2019, we recognized foreign currency exchange gains of $0.6 million and losses of $13.0 thousand, respectively, included on our condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2020 and 2019, we recognized foreign currency exchange losses of ~~$1.7~~$0.9 million and ~~$0.4~~$2.3 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss.

The foreign exchange rate volatility of the trailing 12 months ended ~~June 30, 2020~~March 31, 2021 was 13% and 9%7% for the South African rand and British pound, respectively. The foreign exchange rate volatility of the trailing 12 months ended ~~June 30, 2019~~March 31, 2020 was ~~13%~~11% and 6%9% for the South African rand and British pound, respectively. A 10% fluctuation of foreign currency exchange rates would have had an immaterial effect on our results of operations and cash flows for all periods presented. The fluctuations of currencies in which we conduct business can both increase and decrease our overall revenue and expenses for any given fiscal period. Such volatility, even when it increases our revenue or decreases our expense, impacts our ability to accurately predict our future results and earnings.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of ~~June 30, 2020~~March 31, 2021 at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

We made no changes in internal control over financial reporting during the three months ended ~~June 30, 2020~~March 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial ~~reporting, other than changes in our control environment to integrate the business we acquired in the Trilogy acquisition.~~reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~We are involved~~The information required by this Item is incorporated herein by reference to Note 5 in ~~various claims and legal proceedings arising~~“Notes to Condensed Consolidated Financial Statements” included 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~~

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, alleging violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, based upon allegedly false and misleading statements regarding 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~~Part I, Item 1 of this ~~matter is not presently determinable.~~

~~Stockholder Derivative Suit~~

~~On April 30, 2020, Richard Theis filed a stockholder derivative complaint purportedly~~Quarterly Report 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.

Form 10-Q.

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” ofin our Annual Report on Form 10-K for the year ended December 31, ~~2019 are amended and supplemented by~~2020, which was filed with the ~~risk factors provided below, which supersede and replace any similarly titled risk factors.~~SEC on February 25, 2021, remain current in all material respects. 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.

~~The global coronavirus outbreak could harm our business, results of operations, and financial condition.~~

In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious outbreak, which has continued to spread, and the related 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.

~~Table of Contents~~

~~This outbreak, as well as intensified measures undertaken to contain the spread of COVID-19, could~~ ~~cause disruptions and severely impact our business, including, but not limited to:~~

•~~causing one or more of our clients to file for bankruptcy protection or shut down;~~

•reducing student demand for our degree programs, short courses and boot 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 prospective clients’ desire to launch new educational offerings with us;~~

•~~negatively impacting collections of accounts receivable;~~

•~~negatively impacting our ability to facilitate in-program placements for students in clinical graduate programs; and~~

•~~harming our business, results of operations and financial condition.~~

We cannot predict with any certainty whether and to what degree the disruption caused by the COVID-19 pandemic and reactions thereto will continue, and we expect to face 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 disruption or failures of our platform and the adoption by colleges and universities of 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 its effects on our business, results of operations or financial condition at this time, but such effects may be 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 June 30, 2020, we had approximately $385.3 million of indebtedness on a consolidated basis. 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.

~~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;

•~~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.

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In addition, any variable rate indebtedness under the revolving credit facility may use the 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.

~~Despite current indebtedness levels, 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 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

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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.

We may be 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 other indebtedness may limit our ability to repurchase the Notes or pay cash upon their conversion.

Holders of the Notes may, subject to certain exceptions, require us to repurchase their Notes following a “fundamental change” (as defined in the Indenture) at a cash repurchase price generally equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid 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 the 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 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 a “change of control” is an event of default resulting in acceleration of all indebtedness thereunder, could increase the cost of acquiring 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 Other Options~~ (“ASC 470-20”). Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible 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 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 record a greater amount of non-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 the instrument’s coupon interest rate, which could adversely affect our reported or future financial results or the trading price of our common 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

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the extent 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 elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of 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 instead require application of the “if-converted” method. Under that method, if it is adopted, diluted earnings per share would generally be calculated assuming that all the Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected.

~~The capped call transactions may affect the value of our common 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 also 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 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 number 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 tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.

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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.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit
Number Description Form File No. Exhibit
Number Filing Date Filed/Furnished Herewith
3.1
Amended and Restated Certificate of Incorporation of the Registrant.
8-K 001-36376 3.1 April 4, 2014
3.2
Amended and Restated Bylaws of the Registrant.
8-K 001-36376 3.2 April 4, 2014
4.1
Indenture, dated as of April 23, 2020, between 2U, Inc. and Wilmington Trust, National Association.
8-K 001-36376 4.1 April 27, 2020 X
4.2
Form of 2.25% Convertible Senior Note due May 1, 2025 (included as Exhibit A to Exhibit 4.1).
8-K 001-36376 4.1 April 27, 2020 X
10.1
Base Call Option Confirmation, dated as of April 20, 2020, between 2U, Inc. and Citibank, N.A.
8-K 001-36376 10.1 April 27, 2020 X
10.2
Base Call Option Confirmation, dated as of April 20, 2020, between 2U, Inc. and Morgan Stanley & Co. LLC.
8-K 001-36376 10.2 April 27, 2020 X
10.3
Base Call Option Confirmation, dated as of April 20, 2020, between 2U, Inc. and Credit Suisse Capital LLC.
8-K 001-36376 10.3 April 27, 2020 X
10.4
Additional Call Option Confirmation, dated as of April 29, 2020, between 2U, Inc. and Citibank, N.A.
8-K 001-36376 10.1 May 1, 2020 X
10.5
Additional Call Option Confirmation, dated as of April 29, 2020, between 2U, Inc. and Morgan Stanley & Co. LLC.
8-K 001-36376 10.2 May 1, 2020 X
10.6
Additional Call Option Confirmation, dated as of April 29, 2020, between 2U, Inc. and Credit Suisse Capital LLC.
8-K 001-36376 10.3 May 1, 2020 X
10.7*
Credit Agreement, dated as of June 25, 2020, between 2U, Inc. and Morgan Stanley Senior Funding, Inc.
X
10.8†
Summary of Non-Employee Director Compensation.
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

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Exhibit
Number

Description

Form

File No.

Exhibit
Number

Filing Date

Filed/Furnished Herewith

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

8-K

001-36376

3.1

April 4, 2014

3.2

Amended and Restated Bylaws of the Registrant.

8-K

001-36376

3.2

April 4, 2014

10.1†

Form of Restricted Stock Unit Award Agreement under Amended and Restated 2014 Equity Incentive Plan.

10.2†*

Form of Performance Stock Unit Award Agreement under Amended and Restated 2014 Equity Incentive Plan.

31.1

Certification of Chief Executive Officer of 2U, Inc. pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer of 2U, Inc. pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer of 2U, Inc. in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer of 2U, Inc. in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

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

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

104

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

~~101.DEF~~†

~~XBRL Taxonomy Extension Definition Linkbase Document.~~

XIndicates management contract or compensatory plan.

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document.~~

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation Linkbase Document.~~

~~104~~*

~~Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)~~Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv).

X The registrant hereby undertakes to supplementally furnish to the Securities and Exchange Commission copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

*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.~~

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	2U, Inc.

~~July 31, 2020~~April 28, 2021	By:	/s/ Christopher J. Paucek
		Christopher J. Paucek
		Chief Executive Officer

~~July 31, 2020~~April 28, 2021	By:	/s/ Paul S. Lalljie
		Paul S. Lalljie
		Chief Financial Officer

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	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)


	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


	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, 2019	4,373,895	$	34.24	5.88	$	28,736
Granted	8,597	19.61
Exercised	(195,728)	9.32
Forfeited	(22,294)	57.38
Expired	(31,752)	41.11
Outstanding balance as of June 30, 2020	4,132,718	35.22		5.54	58,683
Exercisable as of June 30, 2020	3,162,499	$	25.87	4.72	$	57,663