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TWOU 2U

Filed: 9 Nov 21, 4:04pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021

or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 001-36376

2U, INC.
(Exact name of registrant as specified in its charter)
Delaware26-2335939
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
7900 Harkins RoadLanham,MD20706
(Address of Principal Executive Offices)(Zip Code)
(301) 892-4350
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.001 par value per shareTWOUThe Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No
As of November 5, 2021, there were 75,372,101 shares of the registrant’s common stock, par value $0.001 per share, outstanding.


TABLE OF CONTENTS
Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2021 and 2020
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2021 and 2020
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2021 and 2020

1

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 consummate the edX Acquisition (as defined below) and realize the anticipated benefits of the edX Acquisition;
our ability to successfully integrate the operations of our acquisitions, including the pending edX Acquisition, to achieve the expected benefits of our acquisitions and manage, expand and grow the combined company;
our ability to refinance our indebtedness on attractive terms, if at all, to better align with our focus on profitability;
our ability to service our substantial indebtedness and comply with the covenants and conversion obligations contained in the Indenture (as defined below) governing our Notes (as defined below) and the Term Loan Agreement (as defined below) governing our Term Loan Facilities (as defined below);
our ability to generate sufficient future operating cash flows from recent acquisitions to ensure related goodwill is not impaired;
our ability to execute our growth strategy in the international, undergraduate and non-degree alternative markets;
our ability to continue to recruit prospective students for our offerings;
our ability to maintain or increase student retention rates in our degree programs;
our ability to attract, hire and retain qualified employees;
our expectations about the scalability of our cloud-based platform;
potential changes in regulations applicable to us or our university clients;
our expectations regarding the amount of time our cash balances and other available financial resources will be sufficient to fund our operations;
2

the impact and cost of stockholder activism;
the impact of any natural disasters or public health emergencies, such as the coronavirus disease 2019 (“COVID-19”) pandemic;
our expectations regarding the effect of the capped call transactions and regarding actions of the option counterparties and/or their respective affiliates; and
other factors beyond our control.
You should refer to the risks described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, as amended and supplemented by Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. In this Quarterly Report on Form 10-Q, the terms “2U,” “our company,” “we,” “us,” and “our” refer to 2U, Inc. and its subsidiaries, unless the context indicates otherwise.
3

PART I.  FINANCIAL INFORMATION
 
Item 1.    Financial Statements

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

 September 30,
2021
December 31,
2020
 (unaudited) 
Assets  
Current assets  
Cash and cash equivalents$934,348 $500,629 
Restricted cash16,976 18,237 
Accounts receivable, net95,390 46,663 
Prepaid expenses and other assets68,388 39,353 
Total current assets1,115,102 604,882 
Property and equipment, net48,006 52,734 
Right-of-use assets77,940 60,785 
Goodwill414,004 415,830 
Amortizable intangible assets, net291,427 312,770 
Other assets, non-current87,003 97,263 
Total assets$2,033,482 $1,544,264 
Liabilities and stockholders’ equity  
Current liabilities  
Accounts payable and accrued expenses$155,116 $130,674 
Deferred revenue96,984 75,493 
Lease liability11,243 10,024 
Other current liabilities37,033 21,178 
Total current liabilities300,376 237,369 
Long-term debt742,769 273,173 
Deferred tax liabilities, net1,295 2,810 
Lease liability, non-current103,024 83,228 
Other liabilities, non-current6,553 6,694 
Total liabilities1,154,017 603,274 
Commitments and contingencies (Note 5)00
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued— — 
Common stock, $0.001 par value, 200,000,000 shares authorized, 74,749,601 shares issued and outstanding as of September 30, 2021; 72,451,521 shares issued and outstanding as of December 31, 202075 72 
Additional paid-in capital1,714,647 1,646,574 
Accumulated deficit(823,377)(695,872)
Accumulated other comprehensive loss(11,880)(9,784)
Total stockholders’ equity879,465 940,990 
Total liabilities and stockholders’ equity$2,033,482 $1,544,264 

See accompanying notes to condensed consolidated financial statements.
4

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

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
Revenue$232,376 $201,073 $702,058 $559,239 
Costs and expenses
Curriculum and teaching30,869 30,153 98,805 76,887 
Servicing and support33,898 32,536 101,947 93,363 
Technology and content development43,106 40,223 128,539 113,040 
Marketing and sales118,300 100,068 346,181 297,624 
General and administrative49,736 44,000 144,342 127,207 
Total costs and expenses275,909 246,980 819,814 708,121 
Loss from operations(43,533)(45,907)(117,756)(148,882)
Interest income474 713 1,188 1,380 
Interest expense(16,945)(7,564)(33,014)(19,575)
Loss on debt extinguishment— — (1,101)(11,671)
Other income (expense), net(425)42 22,730 (1,659)
Loss before income taxes(60,429)(52,716)(127,953)(180,407)
Income tax benefit319 162 448 1,580 
Net loss$(60,110)$(52,554)$(127,505)$(178,827)
Net loss per share, basic and diluted$(0.80)$(0.77)$(1.72)$(2.69)
Weighted-average shares of common stock outstanding, basic and diluted74,691,521 68,580,439 74,266,999 66,368,686 
Other comprehensive income (loss)  
Foreign currency translation adjustments, net of tax of $0 for all periods presented(4,268)1,667 (2,096)(13,044)
Comprehensive loss$(64,378)$(50,887)$(129,601)$(191,871)
 
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 StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income (Loss)
Total
Stockholders’
Equity
 SharesAmount
Balance, December 31, 202072,451,521 $72 $1,646,574 $(695,872)$(9,784)$940,990 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings1,404,971 (12,615)— — (12,613)
Exercise of stock options181,716 — 3,533 — — 3,533 
Stock-based compensation expense— — 24,947 — — 24,947 
Net loss— — — (45,564)— (45,564)
Foreign currency translation adjustment— — — — (805)(805)
Balance, March 31, 202174,038,208 $74 $1,662,439 $(741,436)$(10,589)$910,488 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings390,976 (1,502)— — (1,501)
Exercise of stock options28,263 — 737 — — 737 
Issuance of common stock in connection with employee stock purchase plan50,406 — 1,773 — — 1,773 
Stock-based compensation expense— — 24,776 — — 24,776 
Net loss— — — (21,831)— (21,831)
Foreign currency translation adjustment— — — — 2,977 2,977 
Balance, June 30, 202174,507,853 $75 $1,688,223 $(763,267)$(7,612)$917,419 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings171,486 — (429)— — (429)
Exercise of stock options70,262 — 1,831 — — 1,831 
Stock-based compensation expense— — 25,022 — — 25,022 
Net loss— — — (60,110)— (60,110)
Foreign currency translation adjustment— — — — (4,268)(4,268)
Balance, September 30, 202174,749,601 $75 $1,714,647 $(823,377)$(11,880)$879,465 

See accompanying notes to condensed consolidated financial statements.
6

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

 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income (Loss)
Total
Stockholders’
Equity
 SharesAmount
Balance, December 31, 201963,569,109 $63 $1,197,379 $(479,388)$(6,804)$711,250 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings96,683 (1)— — — 
Exercise of stock options37,275 — 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, 202063,703,067 $64 $1,218,632 $(539,494)$(22,919)$656,283 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings355,506 — (463)— — (463)
Exercise of stock options158,453 — 1,441 — — 1,441 
Issuance of common stock in connection with employee stock purchase plan83,573 — 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, 202064,300,599 $64 $1,306,483 $(605,661)$(21,515)$679,371 
Issuance of common stock in connection with a public offering of common stock, net of offering costs6,800,000 299,789 — — 299,796 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings112,460 — (6)— — (6)
Exercise of stock options81,647 — 1,298 — — 1,298 
Stock-based compensation expense— — 22,001 — — 22,001 
Net loss— — — (52,554)— (52,554)
Foreign currency translation adjustment— — — — 1,667 1,667 
Balance, September 30, 202071,294,706 $71 $1,629,565 $(658,215)$(19,848)$951,573 

See accompanying notes to condensed consolidated financial statements.
7

2U, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Nine Months Ended September 30,
 20212020
Cash flows from operating activities  
Net loss$(127,505)$(178,827)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense28,278 13,161 
Depreciation and amortization expense77,577 71,406 
Stock-based compensation expense74,745 63,962 
Non-cash lease expense13,518 11,181 
Loss on sublease4,845 — 
Provision for credit losses5,712 2,703 
Loss on debt extinguishment1,101 11,671 
Gain on sale of investment(27,762)— 
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net(54,689)(65,095)
Prepaid expenses and other assets(31,237)(14,982)
Accounts payable and accrued expenses24,249 38,018 
Deferred revenue21,960 43,138 
Other liabilities, net(16,028)(5,680)
Other2,100 2,486 
Net cash used in operating activities(3,136)(6,858)
Cash flows from investing activities  
Purchase of a business, net of cash acquired— (949)
Additions of amortizable intangible assets(45,179)(46,750)
Purchases of property and equipment(5,397)(5,516)
Purchase of investment(1,000)— 
Proceeds from sale of investment38,762 — 
Advances repaid by university clients200 925 
Other56 — 
Net cash used in investing activities(12,558)(52,290)
Cash flows from financing activities  
Proceeds from issuance of common stock, net of offering costs— 299,796 
Proceeds from debt469,595 371,681 
Payments on debt(2,203)(250,479)
Purchases of capped calls in connection with issuance of convertible senior notes— (50,540)
Prepayment premium on extinguishment of senior secured term loan facility— (2,528)
Payment of debt issuance costs(10,259)(3,419)
Tax withholding payments associated with settlement of restricted stock units(14,543)(470)
Proceeds from exercise of stock options6,101 3,123 
Proceeds from employee stock purchase plan share purchases1,773 1,771 
Net cash provided by financing activities450,464 368,935 
Effect of exchange rate changes on cash(2,312)(92)
Net increase in cash, cash equivalents and restricted cash432,458 309,695 
Cash, cash equivalents and restricted cash, beginning of period518,866 189,869 
Cash, cash equivalents and restricted cash, end of period$951,324 $499,564 
See accompanying notes to condensed consolidated financial statements.
8

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


1.    Organization
2U, Inc. (together with its subsidiaries, the “Company”) is a leading digital transformation partner for nonprofit colleges and universities. The Company builds, delivers, and supports more than 550 digital and in-person educational offerings, including graduate degrees, undergraduate degrees, professional certificates, boot camps, and short courses, across the Career Curriculum Continuum.
The Company has 2 reportable segments: the Degree Program Segment and the Alternative Credential Segment. The Company’s Degree Program Segment provides the technology and services to nonprofit colleges and universities to enable the online delivery of degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate degree of the same quality they would receive on campus. The Company’s Alternative Credential Segment provides premium online short courses and technical, skills-based boot camps through relationships with nonprofit colleges and universities. Students enrolled in these offerings are generally seeking to reskill or upskill through shorter duration, lower-priced offerings that are relevant to the needs of industry and society.
On June 28, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with edX Inc., a Massachusetts nonprofit corporation (“edX”) and Circuit Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of edX (“edX Sub”), pursuant to which the Company agreed to acquire edX Sub (the “edX Acquisition”).
Pursuant to the Purchase Agreement, edX will contribute substantially all of its assets to edX Sub effective immediately prior to the closing (the “Contribution”), and the Company will purchase from edX 100% of the outstanding membership interests of edX Sub (the “Membership Interests”). The purchase price for the Membership Interests will be $800 million, subject to customary adjustments based on, among other things, the amount of cash, debt, transaction expenses and working capital of edX and edX Sub at the closing date.
The Purchase Agreement contains customary representations, warranties and covenants by edX Sub, the Company, and edX. The completion of the transaction is subject to receipt of required regulatory and governmental approvals, including the expiration or termination of the waiting period applicable to the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”), and certain other customary closing conditions. The applicable waiting period under the HSR Act expired on August 12, 2021 and the other required governmental approvals were obtained in early November 2021. The transaction does not require approval of the Company’s stockholders and is not subject to any financing contingency.
The Purchase Agreement may be terminated under certain circumstances, including by the Company or edX if the transaction has not been completed by June 28, 2022. The Company currently anticipates that the edX Acquisition will be completed before the end of 2021.
2.    Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements, which include the assets, liabilities, results of operations and cash flows of the Company have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (the “SEC”). As permitted under such rules, certain notes and other financial information normally required by U.S. GAAP have been condensed or omitted. The Company believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and nine months ended September 30, 2021 and 2020 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. All significant intercompany accounts and transactions have been eliminated in consolidation.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2.    Significant Accounting Policies (Continued)
The condensed consolidated balance sheet data as of December 31, 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 include, but are not limited to, the measurement of provisions for credit losses, acquired intangible assets, the recoverability of goodwill, deferred tax assets, and the fair value of the convertible senior notes. Due to the inherent uncertainty involved in making estimates, particularly in light of the COVID-19 pandemic, actual results reported in future periods may be affected by changes in those estimates. The Company evaluates its estimates and assumptions on an ongoing basis.
Recent Accounting Pronouncements
In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-10, Codification Improvements. The amendments in this ASU affect a wide variety of topics in the Accounting Standards Codification (“ASC”) by either clarifying the codification or correcting unintended application of guidance. The amendments do not change U.S. GAAP and, therefore, are not expected to result in a significant change in current accounting practice. The Company adopted this ASU on January 1, 2021. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts indexed to and potentially settled in an entity’s own equity. The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. As a result, in more cases, convertible debt will be accounted for as a single instrument. The guidance also removes certain conditions for equity classification related to contracts in an entity’s own equity and requires the application of the if-converted method for calculating diluted earnings per share. This ASU is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is evaluating the impact that this ASU will have on its condensed consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU is intended to provide optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, to ease the potential accounting and financial reporting burden associated with the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU may be applied as of the beginning of any interim period that includes its effective date (i.e., March 12, 2020) through December 31, 2022. The Company will adopt this standard when LIBOR is discontinued and does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements and related disclosures.
In January 2020, 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 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 Company adopted this ASU on January 1, 2021. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2.    Significant Accounting Policies (Continued)
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 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 Company adopted this ASU on January 1, 2021. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.
3.    Goodwill and Amortizable Intangible Assets
The following table presents the changes in the carrying amount of goodwill by reportable segment on the Company’s condensed consolidated balance sheets for the periods indicated.
Degree
Program Segment
Alternative
Credential Segment
Total
 (in thousands)
Balance as of December 31, 2020$— $415,830 $415,830 
Foreign currency translation adjustments— (1,826)(1,826)
Balance as of September 30, 2021$— $414,004 $414,004 
The carrying amount of goodwill in the Alternative Credential Segment included accumulated impairment charges of $70.4 million as of both September 30, 2021 and December 31, 2020.
The following table presents the components of amortizable intangible assets, net on the Company’s condensed consolidated balance sheets as of each of the dates indicated.
  September 30, 2021December 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 technology3-5$180,071 $(103,163)$76,908 $165,254 $(75,822)$89,432 
Capitalized content development4-5235,268 (113,111)122,157 208,170 (88,168)120,002 
University client relationships9-10108,816 (31,475)77,341 109,498 (23,376)86,122 
Trade names and domain names5-1027,193 (12,172)15,021 26,697 (9,483)17,214 
Total amortizable intangible assets, net$551,348 $(259,921)$291,427 $509,619 $(196,849)$312,770 
The amounts presented in the table above include $44.5 million and $38.6 million of in-process capitalized technology and content development as of September 30, 2021 and December 31, 2020, respectively.
The Company recorded amortization expense related to amortizable intangible assets of $23.2 million and $20.8 million for the three months ended September 30, 2021 and 2020, respectively. The Company recorded amortization expense related to amortizable intangible assets of $68.0 million and $61.8 million for the nine months ended September 30, 2021 and 2020, respectively.
11

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

3.     Goodwill and Amortizable Intangible Assets (Continued)
The following table presents the estimated future amortization expense of the Company’s amortizable intangible assets placed in service as of September 30, 2021.
Future Amortization Expense
(in thousands)
Remainder of 2021$22,758 
202270,835 
202362,023 
202437,193 
202520,471 
Thereafter32,913 
Total$246,193 

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.
September 30, 2021December 31, 2020
(in thousands)
Accrued university and instructional staff compensation$25,123 $27,371 
Accrued marketing expenses44,701 24,682 
Accrued transaction, integration and restructuring-related expenses3,506 3,492 
Accrued compensation and related benefits40,793 52,820 
Accounts payable and other accrued expenses40,993 22,309 
Total accounts payable and accrued expenses$155,116 $130,674 
For the three and nine months ended September 30, 2021 and 2020, expense related to the Company’s marketing and advertising efforts of its own brand were not material.
In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses. 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 amount of payroll taxes subject to deferred payment, net of employee retention tax credits, is approximately $11.3 million. This total deferred amount is payable in equal installments, with 50% due by December 31, 2021 and the remainder due by December 31, 2022.
As of September 30, 2021 and December 31, 2020, the Company had balances of $6.5 million and $6.3 million, respectively, of deferred expenses incurred to integrate the software associated with its cloud computing arrangements, within other assets, non-current on the condensed consolidated balance sheets. Such expenses are subject to amortization over the remaining contractual term of the associated cloud computing arrangement, with a useful life of between three to five years. The Company incurred $0.7 million and $0.3 million of such amortization for the three months ended September 30, 2021 and 2020, respectively. The Company incurred $1.8 million and $0.9 million of such amortization for the nine months ended September 30, 2021 and 2020, respectively.

12

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

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 matters described below, if decided adversely), individually or in the aggregate, will have a material adverse effect on its financial position, an unfavorable outcome in some or all of these proceedings could have a material adverse impact on the results of operations or cash flows for a particular period. This assessment is based on the Company’s current understanding of relevant facts and circumstances. With respect to current legal proceedings, the Company does not believe it is probable a material loss exceeding amounts already recognized has been incurred as of the date of the balance sheets presented herein. As such, the Company’s view of these matters is subject to inherent uncertainties and may change in the future.
In re 2U, Inc., Securities Class Action
On August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaints against the Company, Christopher J. Paucek, the Company’s CEO, and Catherine A. Graham, the Company’s former CFO, in the United States District Court for the Southern District of New York, alleging violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. The district court transferred the cases to the United States District Court for the District of Maryland, consolidated them under docket number 8:19-cv-3455 (D. Md.), and appointed Fiyyaz Pirani as the lead plaintiff in the consolidated action. On July 30, 2020, Mr. Pirani filed a consolidated class action complaint (“CAC”), adding Harsha Mokkarala, the Company’s former Chief Marketing Officer, as a defendant. The CAC also asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, against Mr. Paucek, Ms. Graham, members of the Company’s board of directors, and the Company’s underwriters, based on allegations related to the Company’s secondary stock offering on May 23, 2018. The proposed class consists of all persons who acquired the Company’s securities between February 26, 2018 and July 30, 2019. On October 27, 2020, defendants filed a motion to dismiss. On August 5, 2021, the court largely denied the defendants’ motion to dismiss, and the remaining claims are proceeding in discovery.
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 Suits
On April 30, 2020, Richard Theis filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, and the Company’s board of directors in the United States District Court for the Southern District of New York, with docket number 20-cv-3360. The complaint alleges claims for breaches of fiduciary duty, insider sales and misappropriation of information, unjust enrichment, and violations of Section 14(a) of the Exchange Act, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On July 22, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. 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
13

2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
5.    Commitments and Contingencies (Continued)
the State of Delaware, with docket number 2020-1019-AGB. The complaint alleges claims for breaches of fiduciary duty and unjust enrichment, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On January 6, 2021, the court entered a joint stipulation staying the case pending resolution of the securities class action. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.
Marketing and Sales Commitments
Certain agreements entered into between the Company and its university clients in the Degree Program Segment require the Company to commit to meet certain staffing and spending investment thresholds related to marketing and sales activities. In addition, certain agreements in the Degree Program Segment require the Company to invest up to agreed-upon levels in marketing the programs to achieve specified program performance. The Company believes it is currently in compliance with all such commitments.
Future Minimum Payments to University Clients
Pursuant to certain of the Company’s contracts in the Degree Program Segment, the Company has made, or is obligated to make, payments to university clients in exchange for contract extensions and various marketing and other rights. As of September 30, 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, 2020.
Contingent Payments
The Company has entered into agreements with certain of its university clients in the Degree Program Segment that require the Company to make future minimum payments in the event that certain program metrics are not achieved on an annual basis. The Company recognizes any estimated contingent payments under these agreements as contra revenue over the period to which they relate, and records a liability in other current liabilities on the condensed consolidated balance sheets.
In the first quarter of 2019, the Company entered into an agreement to make investments in an education technology company of up to $15.0 million, upon demand by the investee. During the second quarter of 2021, the Company sold its investment in this education technology company and was released from any further obligation to make additional investments.
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 12 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. These options to extend the terms of the Company’s operating leases were not deemed to be reasonably certain of exercise as of lease commencement and are therefore not included in the determination of their respective non-cancellable lease terms. The future lease payments due under non-cancellable operating lease arrangements contain fixed rent increases over the term of the lease. The Company also leases office equipment under non-cancellable leases.
The following table presents the components of lease expense on the Company’s condensed consolidated statements of operations and comprehensive loss for each of the periods indicated.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
(in thousands)
Operating lease expense$4,897 $3,848 $13,524 $11,189 
Short-term lease expense66 50 120 284 
Variable lease expense1,713 1,603 4,742 4,274 
Sublease income(155)— (265)— 
Total lease expense$6,521 $5,501 $18,121 $15,747 
14

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

6.    Leases (Continued)
As of September 30, 2021, for the Company’s operating leases, the weighted-average remaining lease term was 8.1 years and the weighted-average discount rate was 11.3%. For the nine months ended September 30, 2021 and 2020, cash paid for amounts included in the measurement of operating lease liabilities was $16.5 million and $12.7 million, respectively.
The following table presents the maturities of the Company’s operating lease liabilities as of the date indicated, and excludes the impact of future sublease income totaling $4.4 million in aggregate.
September 30, 2021
(in thousands)
Remainder of 2021$5,583 
202221,869 
202321,892 
202421,732 
202517,958 
Thereafter91,138 
Total lease payments180,172 
Less: imputed interest(65,905)
Total lease liability$114,267 
As of September 30, 2021, the Company had no additional operating leases that have not yet commenced.
In August 2021, the Company entered into an agreement with an unrelated party to sublease a portion of the Company’s office space in Denver, Colorado, as part of its overall real estate management strategy. As of September 30, 2021, this sublease was classified as an operating lease and had a remaining term of 3.2 years with scheduled annual rent increases and no option to extend or renew the sublease term. Sublease income is recognized on a straight-line basis over the sublease term as a reduction to expense incurred by the Company under the associated master lease. In connection with the execution of this agreement, the Company recognized a non-cash loss on sublease of $4.8 million in the third quarter of 2021.
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.
September 30, 2021December 31, 2020
(in thousands)
Term loan facilities$473,813 $— 
Convertible senior notes380,000 380,000 
Deferred government grant obligations3,500 3,500 
Other borrowings3,254 1,343 
Less: unamortized debt discount and issuance costs(111,689)(111,043)
Total debt748,878 273,800 
Less: current portion of long-term debt(6,109)(627)
Total long-term debt$742,769 $273,173 
The Company believes the carrying value of its long-term debt approximates the fair value of the debt as the terms and interest rates approximate the market rates, other than the 2.25% convertible senior notes due 2025 (the “Notes”), which had an estimated fair value of $528.7 million and $616.6 million as of September 30, 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.

15

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

7.     Debt (Continued)
Term Loan Credit and Guaranty Agreement
The Company entered into a Term Loan Credit and Guaranty Agreement, dated June 28, 2021 (the “Term Loan Agreement”), among the Company, as borrower, the subsidiaries of the Company party thereto, as guarantors, the lenders party thereto, and Alter Domus (US) LLC as administrative agent and collateral agent. Pursuant to the Term Loan Agreement, the lenders thereunder made term loans to the Company on June 29, 2021 (the “Funding Date”) in the aggregate principal amount of $475 million (the “Term Loan Facilities”). The Term Loan Facilities have an initial maturity date of December 28, 2024 (the “Maturity Date”). Commencing on the Funding Date, loans under the Term Loan Facilities will bear interest at a per annum rate equal to a base rate or adjusted Eurodollar rate, as applicable, plus the applicable margin of 4.75% in the case of the base rate loans and 5.75% in the case of the Eurodollar loans. The Term Loan Agreement requires the Company to make quarterly principal repayments equal to 0.25% of the $475 million aggregate principal amount, beginning September 2021. If the loans under the Term Loan Facilities are prepaid prior to the second anniversary, subject to certain customary exceptions, the Company shall pay the Applicable Premium (as defined in the Term Loan Agreement) on the amount of the loans so prepaid. The Company can repay the amount of the loans at par, plus accrued and unpaid interest, if the edX Acquisition does not close. The associated effective interest rate of the Term Loan Facilities for the three- and nine-month periods ended September 30, 2021 was approximately 7.87% and 7.88%, respectively, and the associated interest expense was approximately $9.0 million and $9.3 million, respectively.
The obligations under the Term Loan Agreement are guaranteed by certain of the Company’s subsidiaries (the Company and the guarantors, collectively, the “Credit Parties”). The obligations under the Term Loan Agreement are secured, subject to customary permitted liens and other agreed-upon exceptions, by a perfected security interest in all tangible and intangible assets of the Credit Parties, except for certain customary excluded assets.
The Term Loan Agreement contains customary affirmative covenants, including, among others, the provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters. The Term Loan Agreement contains customary negative covenants, including, among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchases of equity interests in the Company and entering into affiliate transactions and asset sales. The Term Loan Agreement contains a financial covenant that requires the Company to maintain minimum Recurring Revenues (as defined in the Term Loan Agreement) as of the last day of any period of four consecutive fiscal quarters of the Company commencing with fiscal quarter ending September 30, 2021 through the Maturity Date. The Term Loan Agreement also provides for customary events of default, including, among others: non-payment of obligations; bankruptcy or insolvency event; failure to comply with covenants; breach of representations or warranties; defaults on other material indebtedness; impairment of any lien on any material portion of the Collateral (as defined in the Term Loan Agreement); failure of any material provision of the Term Loan Agreement or any guaranty to remain in full force and effect; a change of control of the Company; and material judgment defaults. The occurrence of an event of default could result in the acceleration of obligations under the Term Loan Agreement.
If an event of default under the Term Loan Agreement occurs and is continuing, then, at the request (or with the consent) of the lenders holding a majority of the commitments and loans under the Term Loan Agreement, upon notice by the administrative agent to the borrowers, the obligations under the Term Loan Agreement shall become immediately due and payable. In addition, if the Credit Parties become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Term Loan Agreement will automatically become immediately due and payable.
In connection with entering into the Term Loan Agreement in June 2021, the Company terminated its $50 million credit agreement, dated June 25, 2020, and recognized a loss on debt extinguishment of $1.1 million in connection with the write-off of previously capitalized deferred financing costs and associated fees.
On November 4, 2021, the Company entered into a First Amendment to Term Loan Credit and Guaranty Agreement and a Joinder Agreement, which amended the Term Loan Agreement (collectively, the “Amended Term Loan Facility”) primarily to provide for an incremental facility to the Company in an original principal amount of $100 million. The Company is required to make quarterly principal repayments equal to 0.25% of this original principal amount beginning in December 2021. The proceeds of the Amended Term Loan Facility may be used for general corporate purposes.

16

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

7.     Debt (Continued)
Convertible Senior Notes
In April 2020, the Company issued the Notes in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The net proceeds from the offering of the Notes were approximately $369.6 million after deducting the initial purchasers’ discounts, commissions and offering expenses payable by the Company.
The Notes are governed by an indenture (the “Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The Notes bear interest at a rate of 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Notes will mature on May 1, 2025, unless earlier repurchased, redeemed or converted. The interest expense related to the Notes for the three months ended September 30, 2021 and 2020, including amortization of the debt discount and debt issuance costs, was $7.8 million and $7.3 million, respectively. The interest expense related to the Notes for the nine months ended September 30, 2021 and 2020, including amortization of the debt discount and debt issuance costs, was $23.0 million and $12.3 million, respectively. The associated effective interest rate of the Notes for the three months ended September 30, 2021 and 2020 was approximately 10.9% and 11.2%, respectively. The associated effective interest rate of the Notes for the nine months ended September 30, 2021 and 2020 was approximately 11.1% and 10.8%, respectively.
The Notes are the senior, unsecured obligations of the Company and are equal in right of payment with the Company’s senior unsecured indebtedness, senior in right of payment to the Company’s indebtedness that is expressly subordinated to the Notes, effectively subordinated to the Company’s senior secured indebtedness (including indebtedness under the Term Loan Facilities), to the extent of the value of the collateral securing that indebtedness, and structurally subordinated to all indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The 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, inclusive 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 September 30, 2021 and December 31, 2020, the unamortized debt discount was $94.5 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.
17

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

7.     Debt (Continued)
The initial conversion rate for the Notes is 35.3773 shares of the Company’s common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $28.27 per share of the Company’s common stock, and is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Upon conversion, the Company will pay or deliver, as applicable, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. In the event of the Company calling the Notes for redemption or the holders of the Notes electing to convert their Notes, the Company will determine whether to settle in cash, common stock or a combination thereof. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time.
In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
The Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after May 5, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice, and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a “make-whole fundamental change” with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if such Note is converted after it is called for redemption. No sinking fund is provided for the Notes.
As of September 30, 2021, the Notes are not convertible between October 1, 2021 and December 31, 2021, as the common stock sale price condition was not met.
In connection with the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain counterparties. The Capped Call Transactions are generally expected to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions is initially $44.34 per share. The cost of the Capped Call Transactions was approximately $50.5 million.
In April 2020, the Company used a portion of the proceeds from the sale of the Notes to repay in full all amounts outstanding, and discharge all obligations in respect of, the $250 million senior secured term loan facility. The Company intends to use the remaining net proceeds from the sale of the Notes for working capital or other general corporate purposes, which may include capital expenditures, potential acquisitions and strategic transactions.
Deferred Government Grant Obligations
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 Prince George’s County has a maturity date of June 22, 2027. In January 2021, the Company amended its conditional loan agreement with the State of Maryland to modify the terms of the employment level thresholds and extend the maturity date to June 30, 2028. The interest expense related to these loans for the three and nine months ended September 30, 2021 and 2020 was immaterial. As of September 30, 2021 and December 31, 2020, the Company’s combined accrued interest balance associated with the deferred government grant obligations was $0.5 million and $0.4 million, respectively.

18

2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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 nine months ended September 30, 2021 and 2020 were based on estimated full-year effective tax rates, including the mix of income for the period between higher-taxed and lower-taxed jurisdictions, after giving effect to significant items related specifically to the interim periods, and loss-making entities for which it is not more likely than not that a tax benefit will be realized.
The Company’s effective tax rate for each of the three- and nine-month periods ended September 30, 2021 and 2020 was less than 1%. The Company’s income tax benefit for the nine months ended September 30, 2021 and 2020 was $0.4 million and $1.6 million, 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. To date, the Company has not been required to pay U.S. federal income taxes because of current and accumulated net operating losses.
9.    Stockholders’ Equity
Common Stock
As of September 30, 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 September 30, 2021, there were 74,749,601 shares of common stock outstanding, and the Company had reserved a total of 24,918,492 of its authorized shares of common stock for future issuance as follows:
Shares Reserved for Future Issuance
Outstanding restricted stock units2,681,579 
Outstanding performance restricted stock units1,558,149 
Outstanding stock options3,538,522 
Reserved for convertible senior notes17,140,242 
Total shares of common stock reserved for future issuance24,918,492 
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
The Company maintains 2 stock-based compensation plans: the Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”) and the 2008 Stock Incentive Plan (the “2008 Plan” and together with the 2014 Plan, the “Stock Plans”). Upon the effective date of the 2014 Plan in January 2014, the Company ceased using the 2008 Plan to grant new equity awards. The shares available for future issuance under the 2014 Plan increased by 3,619,344 and 3,175,011 on January 1, 2021 and 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 nine months ended September 30, 2021, an aggregate of 50,406 shares of the Company’s common stock were purchased in accordance with the ESPP. Net proceeds from the issuance of these shares was $1.8 million. As of September 30, 2021, 615,988 shares remained available for purchase under the ESPP.
The following table presents stock-based compensation expense related to the Stock Plans and the ESPP, contained on the following line items on the Company’s condensed consolidated statements of operations and comprehensive loss for each of the periods indicated.
19

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

9.    Stockholders’ Equity (Continued)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
 (in thousands)
Curriculum and teaching$18 $21 $51 $212 
Servicing and support3,856 3,409 11,669 10,979 
Technology and content development3,334 3,059 9,703 9,164 
Marketing and sales1,811 1,618 4,984 6,704 
General and administrative16,003 13,894 48,338 36,903 
Total stock-based compensation expense$25,022 $22,001 $74,745 $63,962 
Restricted Stock Units
The 2014 Plan provides for the issuance of restricted stock units (“RSUs”) to eligible participants. RSUs generally vest over a three- or four-year period. The following table presents a summary of the Company’s RSU activity for the period indicated.
 Number of
Units
Weighted-
Average Grant
Date Fair Value per Share
Outstanding balance as of December 31, 20203,010,019 $29.41 
Granted1,104,174 40.35 
Vested(1,144,918)33.24 
Forfeited(287,696)30.40 
Outstanding balance as of September 30, 20212,681,579 $32.17 
The total compensation expense related to the unvested RSUs not yet recognized as of September 30, 2021 was $62.6 million, and will be recognized over a weighted-average period of approximately 1.5 years.
Performance Restricted Stock Units
The 2014 Plan allows for the grant of performance restricted stock units (“PRSUs”) to eligible participants. The right to earn the PRSUs is subject to achievement of the defined performance metrics and continuous employment service. The performance metrics are defined and approved by the compensation committee of our board of directors. Earned PRSUs may be subject to additional time-based vesting.
During the first quarter of 2021, 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.
The following tables present a summary of (i) the assumptions used for estimating the fair values of the PRSUs subject to market-based vesting conditions and (ii) the Company’s PRSU activity for the period indicated. As of September 30, 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 September 30, 2021 and December 31, 2020, and have been excluded from the tables below.
20

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

9.    Stockholders’ Equity (Continued)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
Risk-free interest rate0.10% – 0.26%1.51%
Expected term (years)1.00 – 3.001.00
Expected volatility85% – 89%75%
Dividend yield0%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, 20201,355,296 $23.51 
Granted1,577,721 44.73 
Vested(1,192,596)22.47 
Forfeited(182,272)41.31 
Outstanding balance as of September 30, 20211,558,149 $43.71 
The total compensation expense related to the unvested PRSUs not yet recognized as of September 30, 2021 was $24.3 million, and will be recognized over a weighted-average period of approximately 0.9 years.
Stock Options
The Stock Plans provide for the issuance of stock options to eligible participants. Stock options issued under the Stock Plans generally are exercisable for periods not to exceed 10 years and generally vest over four years.
The following table summarizes the assumptions used for estimating the fair value of the stock options granted for the period presented.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
Risk-free interest rate1.5%
Expected term (years)6.04
Expected volatility64%
Dividend yield0%
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.
21

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

9.    Stockholders’ Equity (Continued)
 Number of
Options
Weighted-Average
Exercise Price per
Share
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding balance as of December 31, 20203,916,867 $35.63 5.08$59,906 
Granted— 0
Exercised(280,241)21.77 1.80
Forfeited(52,640)54.10 
Expired(45,464)68.56 
Outstanding balance as of September 30, 20213,538,522 36.03 4.3041,267 
Exercisable as of September 30, 20213,144,706 $31.68 3.94$40,938 
The aggregate intrinsic value of options exercised during the nine months ended September 30, 2021 and 2020 was $6.3 million and $6.8 million, respectively.
The total compensation expense related to the unvested options not yet recognized as of September 30, 2021 was $11.5 million, and will be recognized over a weighted-average period of approximately 1.9 years.
10.    Net Loss per Share
Diluted net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive, given the Company’s net loss. The following securities have been excluded from the calculation of weighted-average shares of common stock outstanding because the effect is anti-dilutive for each of the periods indicated.
 Three and Nine Months Ended
September 30,
 20212020
Stock options3,538,522 4,023,741 
Restricted stock units2,681,579 3,431,829 
Performance restricted stock units1,558,149 1,760,164 
Shares related to convertible senior notes13,443,374 3,432,837 
Total antidilutive securities21,221,624 12,648,571 
The following table presents the calculation of the Company’s basic and diluted net loss per share for each of the periods indicated.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
Numerator (in thousands):  
Net loss$(60,110)$(52,554)$(127,505)$(178,827)
Denominator:  
Weighted-average shares of common stock outstanding, basic and diluted74,691,521 68,580,439 74,266,999 66,368,686 
Net loss per share, basic and diluted$(0.80)$(0.77)$(1.72)$(2.69)
22

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

11.    Segment and Geographic Information
The Company has 2 reportable segments: the Degree Program Segment and the Alternative Credential Segment. The Company’s reportable segments are determined based on (i) financial information reviewed by the chief operating decision maker, the Chief Executive Officer (“CEO”), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions. The Company’s Degree Program Segment includes the technology and services provided to nonprofit colleges and universities to enable the online delivery of degree programs. The Company’s Alternative Credential Segment includes the premium online short courses and technical skills-based boot camps provided through relationships with nonprofit colleges and universities.
Significant Customers
For the three months ended September 30, 2021, no university clients accounted for 10% or more of the Company’s consolidated revenue. For the three months ended September 30, 2020, one university client in the Degree Program Segment accounted for 10% or more of the Company’s consolidated revenue, contributing $19.3 million, or approximately 10% of the Company’s consolidated revenue.
For the nine months ended September 30, 2021, no university clients accounted for 10% or more of the Company’s consolidated revenue. For the nine months ended September 30, 2020, one university client in the Degree Program Segment accounted for 10% or more of the Company’s consolidated revenue, contributing $55.5 million, or approximately 10% of the Company’s consolidated revenue.
As of September 30, 2021, one university client in the Degree Program Segment accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, with $14.9 million, or approximately 16% of the Company’s consolidated accounts receivable, net balance. As of December 31, 2020, two university clients in the Degree Program Segment each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, with $5.8 million and $5.2 million, or approximately 12% and 11% of the Company’s consolidated accounts receivable, net balance, respectively.
Segment Performance
The following table presents financial information regarding each of the Company’s reportable segment’s results of operations for each of the periods indicated.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
 (dollars in thousands)
Revenue by segment*  
Degree Program Segment$147,795 $122,036 $439,884 $356,178 
Alternative Credential Segment84,581 79,037 262,174 203,061 
Total revenue$232,376 $201,073 $702,058 $559,239 
Segment profitability**  
Degree Program Segment$32,925 $9,713 $86,786 $20,876 
Alternative Credential Segment(18,185)(6,001)(41,186)(23,555)
Total segment profitability$14,740 $3,712 $45,600 $(2,679)
Segment profitability margin***  
Degree Program Segment22.3 %8.0 %19.7 %5.9 %
Alternative Credential Segment(21.5)(7.6)(15.7)(11.6)
Total segment profitability margin6.4 %1.8 %6.5 %(0.5)%
23

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

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

The following table presents a reconciliation of the Company’s total segment profitability to net loss for each of the periods indicated.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
 (in thousands)
Net loss$(60,110)$(52,554)$(127,505)$(178,827)
Adjustments:
Stock-based compensation expense25,022 22,001 74,745 63,962 
Other (income) expense, net425 (42)(22,730)1,659 
Net interest expense16,471 6,851 31,826 18,195 
Income tax benefit(319)(162)(448)(1,580)
Depreciation and amortization expense26,168 23,936 77,577 71,406 
Loss on debt extinguishment— — 1,101 11,671 
Other*7,083 3,682 11,034 10,835 
Total adjustments74,850 56,266 173,105 176,148 
Total segment profitability$14,740 $3,712 $45,600 $(2,679)
*Includes (i) transaction and integration expense of $0.8 million and $0.4 million for the three months ended September 30, 2021 and 2020, respectively, and $2.6 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively, (ii) restructuring-related expense of $5.4 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively, and $7.2 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.8 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, and $1.2 million and $6.2 million for the nine months ended September 30, 2021 and 2020, respectively.
The following table presents the Company’s total assets by segment as of each of the dates indicated.
 September 30,
2021
December 31,
2020
 (in thousands)
Total assets  
Degree Program Segment$1,303,115 $830,706 
Alternative Credential Segment730,367 713,558 
Total assets$2,033,482 $1,544,264 
24

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

11.    Segment and Geographic Information (Continued)
Geographical Information
The Company’s non-U.S. revenue is based on the currency of the country in which the university client primarily operates. The Company’s non-U.S. revenue was $24.7 million and $19.7 million for the three months ended September 30, 2021 and 2020, respectively. The Company’s non-U.S. revenue was $74.1 million and $49.2 million for the nine months ended September 30, 2021 and 2020, respectively. Substantially all of the Company’s non-U.S. revenue for each of the aforementioned periods was sourced from the Alternative Credential Segment’s operations outside of the U.S. The Company’s long-lived tangible assets in non-U.S. countries as of September 30, 2021 and December 31, 2020 totaled approximately $2.3 million and $1.6 million, respectively.
12.    Receivables and Contract Liabilities
The Company has trade receivables and receivables with extended payment plans. Trade receivable balances relate to students or customers occurring in the normal course of business. Trade receivable balances have a term of less than one year and are included in accounts receivable, net on the Company’s condensed consolidated balance sheets. The receivables with extended payment plans relate to students who take advantage of extended payment plans of the Company’s alternative credential offerings.
These payment plans, which are managed and serviced by third-party providers, are designed to assist students with paying tuition costs after all other student financial assistance and scholarships have been applied. The associated receivables generally have payment terms that exceed one year and are recorded net of any implied pricing concessions, which are determined based on collections history, market data and any time value of money component. There are no fees or origination costs included in these receivables. The carrying value of these receivable balances approximate their fair value and are recorded on the Company’s condensed consolidated balance sheets within other assets.
Trade Accounts Receivable and Contract Liabilities
The following table presents the Company’s trade accounts receivable and contract liabilities in each segment as of each of the dates indicated.
 September 30,
2021
December 31,
2020
 (in thousands)
Trade accounts receivable  
Degree Program Segment accounts receivable$24,927 $16,424 
Degree Program Segment unbilled revenue43,602 6,072 
Alternative Credential Segment accounts receivable37,805 29,717 
Provision for credit losses(10,944)(5,936)
Total trade accounts receivable$95,390 $46,277 
Contract liabilities  
Degree Program Segment deferred revenue$11,224 $1,714 
Alternative Credential Segment deferred revenue85,760 73,779 
Total contract liabilities$96,984 $75,493 
During each of the three-month periods ended September 30, 2021 and 2020, the Company did not recognize any Degree Program Segment revenue related to its deferred revenue balances that existed at the end of each preceding year. Revenue recognized in this segment during the nine months ended September 30, 2021 and 2020 that was included in the deferred revenue balance that existed at the end of each preceding year was $1.7 million and $2.2 million, respectively.
During each of the three-month periods ended September 30, 2021 and 2020, the Company did not recognize any Alternative Credential Segment revenue related to its deferred revenue balances that existed at the end of each preceding year. Revenue recognized in this segment during the nine months ended September 30, 2021 and 2020 that was included in the deferred revenue balance that existed at the end of each preceding year was $71.9 million and $46.6 million, respectively.
25

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

12. Receivables and Contract Liabilities (Continued)
The following table presents the change in provision for credit losses for trade receivables on the Company’s condensed consolidated balance sheets for the period indicated.
Provision for Credit Losses
(in thousands)
Balance as of December 31, 2020$6,115 
Current period provision5,712 
Amounts written off— 
Amounts recovered(877)
Foreign currency translation adjustments(6)
Balance as of September 30, 2021$10,944 
Contract Acquisition Costs
The Degree Program Segment had $0.5 million and $0.5 million of net capitalized contract acquisition costs recorded primarily within other assets, non-current on the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, respectively. For each of the three- and nine-month periods ended September 30, 2021 and 2020, the Company capitalized an immaterial amount of contract acquisition costs and recorded an immaterial amount of associated amortization expense in the Degree Program Segment.
Other Receivables
The following table presents the components of the Company’s receivables with extended payment terms as of each of the dates indicated.
September 30, 2021December 31, 2020
(in thousands)
Receivables, gross$49,993 $25,587 
Less: provision for credit losses(899)(179)
Receivables, net$49,094 $25,408 
Short-term receivables$25,734 $1,076 
The Company considers receivables to be past due when amounts contractually due under the extended payment plans have not been paid. As of September 30, 2021, 94% of outstanding receivables due under extended payment plans were current.
13.    Supplemental Cash Flow Information
The Company’s cash interest payments, net of amounts capitalized, were $4.5 million and $6.3 million for the nine months ended September 30, 2021 and 2020, respectively. The Company’s accrued but unpaid capital expenditures were $4.3 million and $3.1 million for the nine months ended September 30, 2021 and 2020, respectively.
26

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2020. Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Many factors could cause or contribute to these differences, including those discussed in Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2020, and our other filings with the Securities and Exchange Commission (the “SEC”). Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
Unless the context otherwise requires, all references to “we,” “us” or “our” refer to 2U, Inc., together with its subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year ended December 31, 2020, which are included in our Annual Report on Form 10-K, filed with the SEC on February 25, 2021.
Overview
We are a leading digital transformation partner for nonprofit colleges and universities. We build, deliver, and support more than 550 digital and in-person educational offerings, including graduate degrees, undergraduate degrees, professional certificates, boot camps, and short courses. Together with our university clients, we have positively transformed the lives of more than 350,000 students.
Our comprehensive platform of tightly integrated technology and services provides the digital infrastructure that universities rely on to attract, enroll, educate and support students at scale throughout their lives. We believe ongoing learning is critical to career success today. Our broad array of offerings allow our university clients to meet student needs throughout their lives — whether they are earning a full degree, reskilling to learn something new or embarking on a new career path. We refer to the spectrum of educational offerings that a learner may benefit from during their lives and careers as the “Career Curriculum Continuum.” Our platform empowers university clients to play a central role at each stage of a student’s learning journey.
We have two reportable segments: the Degree Program Segment and the Alternative Credential Segment.
In our Degree Program Segment, we provide the technology and services to nonprofit colleges and universities to enable the online delivery of degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate degree of the same quality they would receive on campus.
In our Alternative Credential Segment, we provide premium online short 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.

27

COVID-19 Update
Beginning in the second quarter of 2020, we experienced increased demand from university clients and students as a result of the COVID-19 pandemic. More recently, we have seen some of these pandemic-related trends subside in certain areas of our business. The COVID-19 pandemic has also had an impact on marketing costs from period to period, with costs being lower earlier in the pandemic and increasing particularly in the second half of 2021. In the third quarter of 2021, we also began to observe increased employee turnover and increased competition to attract and retain employees, which may result in increased costs. We cannot estimate the impact of COVID-19 on future demand or cost levels or on our business or economic conditions generally, due to numerous uncertainties, including uncertainties regarding the duration or reemergence of the outbreak in various regions, actions that may be taken by governmental authorities, future fluctuations in demand and cost levels and labor market conditions. For a discussion of additional risks related to COVID-19, see Part I, Item 1A “Risk Factors” 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.
Revenue Drivers
In our Degree Program Segment, we derive substantially all of our revenue from revenue-share arrangements with our university clients under which we receive a contractually specified percentage of the amounts students pay them to enroll in degree programs. In our Alternative Credential Segment, we derive substantially all of our revenue from tuition and fees from students taking our short courses and boot camps. Revenue in each segment is primarily driven by the number of student enrollments in our offerings.
Operating Expense
Marketing and Sales
Our most significant expense relates to marketing and sales activities to attract students to our offerings across both of our segments. This includes the cost of Search Engine Optimization, Search Engine Marketing and Social Media Optimization, as well as personnel and personnel-related expense for our marketing and recruiting teams.
In our Degree Program Segment, our marketing and sales expense in any period generates student enrollments eight months later, on average. We then generate revenue as students progress through their programs, which generally occurs over a two-year period following initial enrollment. Accordingly, our marketing and sales expense in any period is an investment to generate revenue in future periods. Therefore, we do not believe it is meaningful to directly compare current period revenue to current period marketing and sales expense. Further, in this segment we believe that our marketing and sales expense in future periods will generally decline as a percentage of the revenue reported in those same periods as our revenue base from returning students in existing programs increases.
In our Alternative Credential Segment, our marketing and sales expense in any period generates student enrollments as much as 24 weeks later. We then generate revenue as students progress through their courses, which typically occurs over a two- to six-month period following initial enrollment.
Curriculum and Teaching
Curriculum and teaching expense consists primarily of amounts due to universities for licenses to use their brand names and other trademarks in connection with our short course 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 expenses to support our platform, facilitate in-program field placements and student immersions, and assist with compliance requirements.
Technology and Content Development
Technology and content development expense consists primarily of personnel and personnel-related expense associated with the ongoing improvement and maintenance of our platform, as well as hosting and licensing expenses. Technology and content expense also includes the amortization of capitalized technology and content.
28

General and Administrative
General and administrative expense consists primarily of personnel and personnel-related expense for our centralized functions, including executive management, legal, finance, human resources, and other departments that do not provide direct operational services. General and administrative expense also includes professional fees and other corporate expenses.
Net Interest Income (Expense)
Net interest income (expense) consists primarily of interest expense from our long-term debt and interest income from our cash and cash equivalents. Interest expense also includes the amortization of debt issuance costs.
Loss on Debt Extinguishment
Loss on debt extinguishment consists of amounts recorded related to the retirement of our debt obligations.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency gains and losses, gains and losses related to the sale of investments and other non-operating income and expense.
Income Taxes
Our income tax provisions for all periods consist of U.S. federal, state and foreign income taxes. Our effective tax rate for the period is based on a mix of higher-taxed and lower-taxed jurisdictions.
Results of Operations
Consolidated Operating Results
Comparison of Three Months Ended September 30, 2021 and 2020
The following table presents selected condensed consolidated statement of operations and comprehensive loss data for each of the periods indicated.
Three Months Ended September 30,
 20212020Period-to-Period Change
 AmountPercentage of RevenueAmountPercentage of RevenueAmountPercentage
(dollars in thousands)
Revenue$232,376 100.0 %$201,073 100.0 %$31,303 15.6 %
Costs and expenses
Curriculum and teaching30,869 13.3 30,153 15.0 716 2.4 
Servicing and support33,898 14.6 32,536 16.2 1,362 4.2 
Technology and content development43,106 18.6 40,223 20.0 2,883 7.2 
Marketing and sales118,300 50.9 100,068 49.8 18,232 18.2 
General and administrative49,736 21.4 44,000 21.9 5,736 13.0 
Total costs and expenses275,909 118.8 246,980 122.9 28,929 11.7 
Loss from operations(43,533)(18.8)(45,907)(22.9)2,374 5.2 
Interest income474 0.2 713 0.4 (239)33.6 
Interest expense(16,945)(7.3)(7,564)(3.8)(9,381)124.0 
Other income, net(425)(0.2)42 0.0 (467)*
Loss before income taxes(60,429)(26.1)(52,716)(26.3)(7,713)14.6 
Income tax benefit319 0.1 162 0.1 157 96.5 
Net loss$(60,110)(26.0)%$(52,554)(26.2)%$(7,556)14.4 %
*Not meaningful for comparative purposes.
29

Revenue. Revenue for the three months ended September 30, 2021 increased $31.3 million, or 15.6%, to $232.4 million as compared to $201.1 million in 2020. Revenue from our Degree Program Segment increased $25.8 million, or 21.1%, primarily due to growth in full course equivalent (“FCE”) enrollments of 10,000, or 20.9%, and average revenue per FCE enrollment was essentially flat. Revenue from our Alternative Credential Segment increased $5.5 million, or 7.0%, primarily due to a 22.4% increase in average revenue per FCE enrollment, from $3,426 to $4,193, partially offset by a decrease in FCE enrollments of 2,893, or 12.5%.
Curriculum and Teaching. Curriculum and teaching expense increased $0.7 million, or 2.4%, to $30.9 million as compared to $30.2 million in 2020. This increase was primarily due to higher expense related to university clients and instructional staff to support additional offerings in our Alternative Credential Segment.
Servicing and Support. Servicing and support expense increased $1.4 million, or 4.2%, to $33.9 million as compared to $32.5 million in 2020. This increase was primarily due to a $0.7 million increase in personnel and personnel-related expense and a $0.4 million increase in student support costs to serve a greater number of students.
Technology and Content Development. Technology and content development expense increased $2.9 million, or 7.2%, to $43.1 million as compared to $40.2 million in 2020. This increase was primarily due to a $2.5 million increase in depreciation and amortization expense and a $1.8 million increase in expenses to support our platform and software applications. These increases were partially offset by a $2.0 million decrease in personnel and personnel-related expense.
Marketing and Sales. Marketing and sales expense increased $18.2 million, or 18.2%, to $118.3 million as compared to $100.1 million in 2020. This increase was primarily due to an $18.1 million increase in marketing expense to support our revenue growth.
General and Administrative. General and administrative expense increased $5.7 million, or 13.0%, to $49.7 million as compared to $44.0 million in 2020. This increase was primarily due to a $2.5 million increase in professional fees, a $1.8 million increase in personnel and personnel-related expense, a $1.8 million increase in restructuring-related expense.
Net Interest Income (Expense). Net interest expense was $16.5 million and $6.9 million for the three months ended September 30, 2021 and 2020, respectively. The net interest expense for the three months ended September 30, 2021 was primarily due to interest incurred on our $475 million term loan facility that was issued in June 2021 and our $380 million aggregate principal amount of 2.25% convertible senior notes due 2025 (the “Notes”). The net interest expense for the three months ended September 30, 2020 was primarily due to interest incurred on our Notes that were issued in April 2020, partially offset by interest earned on our cash balances.
Other Income (Expense), Net. Other income (expense), net was $(0.4) million for the three months ended September 30, 2021, as compared to less than $0.1 million for the three months ended September 30, 2020. This change was primarily due to fluctuations in foreign currency rates impacting our operations in the Alternative Credential Segment.
Income Tax Benefit. For the three months ended September 30, 2021, we recognized an income tax benefit of $0.3 million, and our effective tax rate was less than 1%. For the three months ended September 30, 2020, we recognized income tax benefit of $0.2 million, and our effective tax rate was less than 1%. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

30

Comparison of Nine Months Ended September 30, 2021 and 2020
The following table presents selected condensed consolidated statement of operations data for each of the periods indicated.
Nine Months Ended September 30,
 20212020Period-to-Period Change
 AmountPercentage of RevenueAmountPercentage of RevenueAmountPercentage
(dollars in thousands)
Revenue$702,058 100.0 %$559,239 100.0 %$142,819 25.5 %
Costs and expenses
Curriculum and teaching98,805 14.1 76,887 13.7 21,918 28.5 
Servicing and support101,947 14.5 93,363 16.7 8,584 9.2 
Technology and content development128,539 18.3 113,040 20.2 15,499 13.7 
Marketing and sales346,181 49.3 297,624 53.2 48,557 16.3 
General and administrative144,342 20.6 127,207 22.7 17,135 13.5 
Total costs and expenses819,814 116.8 708,121 126.5 111,693 15.8 
Loss from operations(117,756)(16.8)(148,882)(26.5)31,126 20.9 
Interest income1,188 0.2 1,380 0.2 (192)14.0 
Interest expense(33,014)(4.7)(19,575)(3.5)(13,439)68.6 
Loss on debt extinguishment(1,101)(0.2)(11,671)(2.1)10,570 (90.6)
Other income (expense), net22,730 3.2 (1,659)(0.3)24,389 *
Loss before income taxes(127,953)(18.3)(180,407)(32.2)52,454 29.1 
Income tax benefit448 0.1 1,580 0.3 (1,132)71.7 
Net loss$(127,505)(18.2)%$(178,827)(31.9)%$51,322 28.7 %
*Not meaningful for comparative purposes.
Revenue. Revenue for the nine months ended September 30, 2021 increased $142.8 million, or 25.5%, to $702.1 million as compared to $559.2 million in 2020. Revenue from our Degree Program Segment increased $83.7 million, or 23.5%, primarily due to growth in FCE enrollments of 38,560, or 27.6%, partially offset by a 3.2% decrease in average revenue per FCE enrollment, from $2,549 to $2,467. Revenue from our Alternative Credential Segment increased $59.1 million, or 29.1%, primarily due to a 16.6% increase in average revenue per FCE enrollment, from $3,463 to $4,038, and growth in FCE enrollments of 6,288, or 10.7%.
Curriculum and Teaching. Curriculum and teaching expense increased $21.9 million, or 28.5%, to $98.8 million as compared to $76.9 million in 2020. This increase was primarily due to higher expense related to university and instructional staff to support to higher FCEs in our Alternative Credential Segment.
Servicing and Support. Servicing and support expense increased $8.5 million, or 9.2%, to $101.9 million as compared to $93.4 million in 2020. This increase was primarily due to a $7.8 million increase in personnel and personnel-related expense to serve a greater number of students.
Technology and Content Development. Technology and content development expense increased $15.5 million, or 13.7%, to $128.5 million as compared to $113.0 million in 2020. This increase was primarily due to a $5.8 million increase in depreciation and amortization expense, a $5.7 million increase in expenses to support our platform and software applications, and a $3.9 million increase in personnel and personnel-related expense.
Marketing and Sales. Marketing and sales expense increased $48.6 million, or 16.3%, to $346.2 million as compared to $297.6 million in 2020. This increase was primarily due to a $43.3 million increase in marketing expense and a $4.0 million increase in personnel and personnel-related expense to support our revenue growth.
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General and Administrative. General and administrative expense increased $17.1 million, or 13.5%, to $144.3 million as compared to $127.2 million in 2020. This increase was primarily due to an $8.5 million increase in personnel and personnel-related expense, a $5.0 million increase in professional fees, a $4.1 million increase in restructuring-related expense, a $3.3 million increase in provision for credit losses, and a $1.8 million increase in banking fees. These increases were partially offset by a $4.9 million decrease in stockholder activism and litigation-related expense.
Net Interest Income (Expense). Net interest expense was $31.8 million and $18.2 million for the nine months ended September 30, 2021 and 2020, respectively. The net interest expense for the nine months ended September 30, 2021 was primarily due to interest incurred on our Notes and our $475 million aggregate principal amount of term loan facilities that were issued in June 2021. The net interest expense for the nine months ended September 30, 2020 was primarily due to interest incurred on our Notes that were issued in April 2020 and our $250 million senior secured term loan facility that was extinguished in April 2020.
Loss on Debt Extinguishment. Loss on debt extinguishment was $1.1 million and $11.7 million for the nine months ended September 30, 2021 and 2020, respectively. The loss on debt extinguishment for the nine months ended September 30, 2021 was due to the write-off of deferred financing costs and fees paid in connection with the termination of our $50 million credit agreement in June 2021. The loss on debt extinguishment for the nine months ended September 30, 2020 was due to the write-off of deferred financing costs and fees paid in connection with the extinguishment of our $250 million senior secured term loan facility in April 2020.
Other Income (Expense), Net. Other income (expense), net was $22.7 million and $(1.7) million for the nine months ended September 30, 2021 and 2020, respectively. This increase was primarily due to the gain recognized in connection with the sale of our investment in an education technology company.
Income Tax Benefit. For the nine months ended September 30, 2021, we recognized an income tax benefit of $0.4 million, and our effective tax rate was less than 1%. This income tax benefit was due to net operating losses and the reversal of taxable temporary differences of the acquired intangibles in our Alternative Credential Segment. For the nine months ended September 30, 2020, we recognized an income tax benefit of $1.6 million, and our effective tax rate was less than 1%. This tax benefit was due to net operating losses and the reversal of taxable temporary differences of the acquired intangibles in our Alternative Credential Segment. We expect to continue to recognize an income tax benefit for our Alternative Credential Segment to the extent that this segment continues to generate pre-tax losses while carrying a net deferred tax liability. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.
Business Segment Operating Results
We define segment profitability as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some of these items may not be applicable in any given reporting period and they may vary from period to period. Total segment profitability is a non-GAAP measure when presented outside of the financial statement footnotes. Total segment profitability is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to develop short- and long-term operational plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses in calculating total segment profitability can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that total segment profitability provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

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The following table presents a reconciliation of total segment profitability to net loss for each of the periods indicated.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
 (in thousands)
Net loss$(60,110)$(52,554)$(127,505)$(178,827)
Adjustments:
Stock-based compensation expense25,022 22,001 74,745 63,962 
Other (income) expense, net425 (42)(22,730)1,659 
Net interest expense16,471 6,851 31,826 18,195 
Income tax benefit(319)(162)(448)(1,580)
Depreciation and amortization expense26,168 23,936 77,577 71,406 
Loss on debt extinguishment— — 1,101 11,671 
Other*7,083 3,682 11,034 10,835 
Total adjustments74,850 56,266 173,105 176,148 
Total segment profitability$14,740 $3,712 $45,600 $(2,679)
*Includes (i) transaction and integration expense of $0.8 million and $0.4 million for the three months ended September 30, 2021 and 2020, respectively, and $2.6 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively, (ii) restructuring-related expense of $5.4 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively, and $7.2 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.8 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, and $1.2 million and $6.2 million for the nine months ended September 30, 2021 and 2020, respectively.
Three Months Ended September 30, 2021 and 2020
The following table presents revenue by segment and segment profitability for each of the periods indicated.
Three Months Ended September 30,Period-to-Period Change
 20212020AmountPercentage
 (dollars in thousands)
Revenue by segment*    
Degree Program Segment$147,795 $122,036 $25,759 21.1 %
Alternative Credential Segment84,581 79,037 5,544 7.0 
Total revenue$232,376 $201,073 $31,303 15.6 %
Segment profitability    
Degree Program Segment$32,925 $9,713 $23,212 239.1 %
Alternative Credential Segment(18,185)(6,001)(12,184)(203.1)
Total segment profitability$14,740 $3,712 $11,028 297.3 %
*Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended September 30, 2021 and 2020.
Degree Program Segment profitability increased $23.2 million, or 239.1%, to $32.9 million as compared to $9.7 million in 2020. This increase was primarily due to revenue growth of $25.8 million and operational efficiency initiatives.
Alternative Credential Segment profitability decreased $12.2 million, or 203.1%, to $(18.2) million as compared to $(6.0) million in 2020. This decrease was primarily due to higher operating expenses.

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Nine Months Ended September 30, 2021 and 2020
The following table presents revenue by segment and segment profitability for each of the periods indicated.
Nine Months Ended September 30,Period-to-Period Change
 20212020AmountPercentage
 (dollars in thousands)
Revenue by segment*    
Degree Program Segment$439,884 $356,178 $83,706 23.5 %
Alternative Credential Segment262,174 203,061 59,113 29.1 
Total revenue$702,058 $559,239 $142,819 25.5 %
Segment profitability    
Degree Program Segment$86,786 $20,876 $65,910 315.8 %
Alternative Credential Segment(41,186)(23,555)(17,631)(74.8)
Total segment profitability$45,600 $(2,679)$48,279 **
*Immaterial amounts of intersegment revenue have been excluded from the above results for the nine months ended September 30, 2021 and 2020.
**Not meaningful for comparative purposes.
Degree Program Segment profitability increased $65.9 million, or 315.8%, to $86.8 million as compared to $20.9 million in 2020. This increase was primarily due to revenue growth of $83.7 million and operational efficiency initiatives.
Alternative Credential Segment profitability decreased $17.6 million, or 74.8%, to $(41.2) million as compared to $(23.6) million in 2020. This decrease was primarily due to higher operating expenses.
Liquidity and Capital Resources
As of September 30, 2021, our principal sources of liquidity were cash and cash equivalents totaling $934.3 million, which were held for working capital and general corporate purposes.
In June 2021, we entered into a Term Loan Credit and Guaranty Agreement, dated June 28, 2021 (“the Term Loan Agreement”), with Alter Domus (US) LLC as administrative agent and collateral agent, to make term loans to us in the aggregate principal amount of $475 million (the “Term Loan Facilities”), which have an initial maturity date of December 28, 2024. Refer to Note 7 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our Term Loan Facilities. We intend to use the proceeds of the Term Loan Facilities to fund the edX Acquisition.
In connection with entering into the Term Loan Agreement in June 2021, we terminated our $50 million credit agreement with Morgan Stanley Funding, Inc., dated June 25, 2020. Refer to Note 7 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
In April 2020, we issued the Notes in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act. The Notes are governed by an indenture (the “Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The Notes bear interest at a rate of 2.25% per annum, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Notes mature on May 1, 2025, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Prior to November 1, 2024, the Notes are convertible only upon satisfaction of certain conditions, and thereafter at any time until the close of business on the second scheduled trading date immediately before the maturity date. In connection with the Notes, we entered into privately negotiated capped call transactions with a premium cost of approximately $50.5 million. The capped call transactions are generally expected to reduce the potential dilution to our common stock upon any conversion of the Notes and/or to offset any cash payments we are required to make in excess of the principal amount of the converted Notes, with such reduction and/or offset subject to the cap. The net proceeds from the issuance of the Notes were $319.0 million after deducting the initial purchasers’ discount, offering expenses and the cost of the capped call transactions. As of September 30, 2021, the Notes are not convertible between October 1, 2021 and December 31, 2021, as the common stock sale price condition was not met. Refer to Note 7 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our Notes.
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We have financed our operations primarily through payments from university clients and students for our technology and services, public and private equity financings, the Term Loan Facilities and the Notes. We believe that our existing cash and cash equivalents, together with cash generated from operations and available borrowing capacity under the Term Loan Facilities, 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 nine months ended September 30, 2021 and 2020, our capital asset additions were $54.9 million and $55.3 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 depreciation and amortization expense and stock-based compensation expense.
Net cash used in operating activities for the nine months ended September 30, 2021 was $3.1 million, consisting primarily of our net loss of $127.5 million and a $27.8 million gain recognized in connection with the sale of our investment in an education technology company, adjusted for non-cash items including $77.6 million of depreciation and amortization expense, $74.7 million of stock-based compensation expense, $28.3 million of non-cash interest expense and $13.5 million of reductions in the carrying amounts of our right-of-use assets. The net change in operating assets and liabilities of $53.6 million was unfavorable to cash flows from operations primarily due to an increase in accounts receivable of $54.7 million, an increase in prepaid expenses and other assets of $31.2 million and a decrease in other liabilities, net of $16.0 million, partially offset by a $24.2 million increase in accounts payable and accrued expenses and a $22.0 million increase in deferred revenue.
Net cash used in operating activities for the nine months ended September 30, 2020 was $6.9 million, consisting primarily of our net loss of $178.8 million, adjusted for non-cash items including $71.4 million of depreciation and amortization expense, $64.0 million of stock-based compensation expense, $13.2 million of non-cash interest expense, an $11.7 million loss on the extinguishment of our $250 million senior secured term loan facility and $11.2 million of reductions in the carrying amounts of our right-of-use assets. The net change in operating assets and liabilities of $2.1 million was unfavorable to cash flows from operations primarily due to an increase in accounts receivable of $65.1 million and an increase in prepaid expenses and other assets of $15.0 million, partially offset by a $43.1 million increase in deferred revenue and a $38.0 million increase in accounts payable and accrued expenses.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2021 was $12.6 million, consisting primarily of $45.2 million of additions of amortizable intangible assets and $5.4 million of purchases of property and equipment, partially offset by $38.8 million of proceeds from the sale of our investment in an education technology company.
Net cash used in investing activities for the nine months ended September 30, 2020 was $52.3 million, consisting primarily of $46.8 million of additions of amortizable intangible assets and $5.5 million of purchases of property and equipment.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2021 was $450.5 million, consisting primarily of $469.6 million of proceeds from the issuance of our Term Loan Facilities and $6.1 million of proceeds received from the exercise of stock options, partially offset by $14.5 million of tax withholding payments associated with the settlement of restricted stock units and a $10.3 million payment of debt issuance costs.
Net cash provided by financing activities for the nine months ended September 30, 2020 was $368.9 million, consisting primarily of $319.0 million of proceeds from the issuance of the Notes (net of payments related to the initial purchasers’ discount, offering expenses and the cost of the capped call transactions) and $299.8 million in proceeds received from our public offering of common stock in August 2020. These increases were partially offset by the repayment of $253.0 million of principal, interest and prepayment premium associated with the extinguishment of our $250 million senior secured term loan facility and a $2.5 million payment of debt issuance costs.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
Critical Accounting Policies
Revenue Recognition, Accounts Receivable and Provision for Credit Losses
We generate substantially all of our revenue from contractual arrangements, with either our university clients or students, to provide a comprehensive platform of tightly integrated technology and technology-enabled services that support our offerings.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, we estimate the amount of variable consideration that should be included in the transaction price utilizing the expected value method. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Any estimates, including the effect of the constraint on variable consideration, are evaluated at each reporting period, and if necessary, we adjust our estimate of the overall transaction price. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
Our Degree Program Segment derives revenue primarily from contractually specified percentages of the amounts our university clients receive from their students in 2U-enabled degree programs for tuition and fees, less credit card fees and other specified charges we have agreed to exclude in certain university contracts. Our contracts with university clients in this segment typically have terms of 10 to 15 years and have a single performance obligation, as the promises to provide a platform of tightly integrated technology and services that university clients need to attract, enroll, educate and support students are not distinct within the context of the contracts. The single performance obligation is delivered as the university clients receive and consume benefits, which occurs ratably over a series of academic terms. The amounts received from university clients over the term of the arrangement are variable in nature in that they are dependent upon the number of students that are enrolled in the program within each academic term. These amounts are allocated to and are recognized ratably over the related academic term, defined as the period beginning on the first day of classes through the last. Revenue is recognized net of an allowance, which is established for our expected obligation to refund tuition and fees to university clients.
Our Alternative Credential Segment derives revenue primarily from contracts with students for the tuition and fees paid to enroll in, and progress through, our short courses 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 expenses on our condensed consolidated statements of operations and comprehensive loss. Our contracts with university clients in this segment are typically shorter and less restrictive than our contracts with university clients in our Degree Program Segment.
We do not disclose the value of unsatisfied performance obligations for our Degree Program Segment because the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation. We do not disclose the value of unsatisfied performance obligations for our Alternative Credential Segment because the performance obligations are part of contracts that have original durations of less than one year.
Contract Acquisition Costs
We pay commissions to certain of our employees to obtain contracts with university clients in our Degree Program Segment. These costs are capitalized and recorded on a contract-by-contract basis and amortized using the straight-line method over the expected life, which is generally the length of the contract.
With respect to contract acquisition costs in our Alternative Credential Segment, we have elected to apply the practical expedient in ASC Topic 606 to expense these costs as incurred, as the terms of contracts with students in this segment are less than one year.
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Payments to University Clients
Pursuant to certain of our contracts in the Degree Program Segment, we have made, or are obligated to make, payments to university clients at either the execution of a contract or at the extension of a contract in exchange for various marketing and other rights. Generally, these amounts are capitalized as other assets on our condensed consolidated balance sheets, and amortized as contra revenue over the life of the contract, commencing on the later of when payment is due or when contract revenue recognition begins.
Receivables, Contract Assets and Liabilities
Balance sheet items related to contracts consist of accounts receivable, net and deferred revenue on our condensed consolidated balance sheets. Accounts receivable, net includes trade accounts receivable, which are comprised of billed and unbilled revenue. Our trade accounts receivable balances have terms of less than one year. Accounts receivable, net is stated at amortized cost net of provision for credit losses. Our methodology to measure the provision for credit losses requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include current market conditions, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers. Our estimates are reviewed and revised periodically based on the ongoing evaluation of credit quality indicators. Historically, actual write-offs for uncollectible accounts have not significantly differed from prior estimates.
Tuition payment plans with extended payment terms are made available to students enrolling in select boot camps within our Alternative Credential Segment. These plans, which are managed and serviced by third-party providers, are designed to assist students with covering tuition costs after all other student financial assistance and scholarships have been applied. The associated receivables generally have payment terms that exceed one year and are recorded net of any implied pricing concessions, which are determined based on our collections history, market data and any time value of money component. There are no fees or origination costs included in these receivables.
We recognize unbilled revenue when revenue recognition occurs in advance of billings. Unbilled revenue is recognized in our Degree Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. Our unbilled revenue represents contract assets. Unbilled accounts receivable is recognized in our Alternative Credential Segment once the presentation period commences for amounts to be invoiced to students under installment plans that are paid over the same presentation period.
Deferred revenue represents the excess of amounts billed or received as compared to amounts recognized in revenue on our condensed consolidated statements of operations and comprehensive loss as of the end of the reporting period, and such amounts are reflected as a current liability on our condensed consolidated balance sheets. Our deferred revenue represents contract liabilities. We generally receive payments from Degree Program Segment university clients early in each academic term and from Alternative Credential Segment students, either in full upon registration for the course or in full before the end of the course based on a payment plan, prior to completion of the service period. These payments are recorded as deferred revenue until the services are delivered or until our obligations are otherwise met, at which time revenue is recognized.
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 amounts are amortized using the straight-line method over the estimated useful life of the software, which is generally three to five years.
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Capitalized Content Development. We develop content for each offering on a course-by-course basis in collaboration with university client faculty and industry experts. Depending upon the offering, we may use materials provided by university clients and their faculty, including curricula, case studies, presentations and other reading materials. We are responsible for the creation of materials suitable for delivery through our online learning platform, including all expenses associated with this effort. With respect to the Degree Program Segment, the development of content is part of our single performance obligation and is considered a contract fulfillment cost.
The content development costs that qualify for capitalization are third-party direct costs, such as videography, editing and other services associated with creating digital content. Additionally, we capitalize internal payroll and payroll-related expenses incurred to create and produce videos and other digital content utilized in the university clients’ offerings for delivery via our online learning platform. Capitalization ends when content has been fully developed by both us and the university client, at which time amortization of the capitalized content development begins. The capitalized costs for each offering are recorded on a course-by-course basis and included in amortizable intangible assets, net on our consolidated balance sheets. These amounts are amortized using the straight-line method over the estimated useful life of the respective course, which is generally four to five years. The estimated useful life corresponds with the planned curriculum refresh rate. This refresh rate is consistent with expected curriculum refresh rates as cited by faculty members for similar on-campus offerings.
Evaluation of Long-Lived Assets
We review long-lived assets, which consist of property and equipment, capitalized technology, capitalized content development and acquired finite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. In order to assess the recoverability of the capitalized technology and content development, the amounts are grouped by the lowest level of independent cash flows. Recoverability of a long-lived asset is measured by a comparison of the carrying value of an asset or asset group to the future undiscounted net cash flows expected to be generated by that asset or asset group. If such assets are not recoverable, the impairment to be recognized is measured by the amount by which the carrying value of an asset exceeds the estimated fair value (discounted cash flow) of the asset or asset group. Our impairment analysis is based upon cumulative results and forecasted performance.
Goodwill
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 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.
Based on our qualitative assessment performed as of October 1, 2020, the date of our annual goodwill impairment 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 potential impacts from COVID-19, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, could require us to record additional impairment charges in the future.
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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 Degree Program Segment and Alternative Credential Segment for each of the periods indicated.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
Degree Program Segment  
FCE enrollments57,842 47,842 178,278 139,718 
Average revenue per FCE enrollment$2,555 $2,551 $2,467 $2,549 
Alternative Credential Segment  
FCE enrollments20,174 23,067 64,931 58,643 
Average revenue per FCE enrollment$4,193 $3,426 $4,038 $3,463 
Of the increase in FCE enrollments in our Degree Program Segment for the three months ended September 30, 2021 and 2020, 612, or 6.1%, and 714, or 10.3%, respectively, were attributable to degree programs launched during the preceding 12 months. Of the increase in FCE enrollments in our Degree Program Segment for the nine months ended September 30, 2021 and 2020, 929, or 2.4%, and 2,071, or 10.3%, respectively, were attributable to degree programs launched during the preceding 12 months.
Of the FCE enrollments in our Alternative Credential Segment for the three months ended September 30, 2021 and 2020, 2,783 and 5,671, respectively, were attributable to offerings launched during the preceding 12 months. Of the FCE enrollments in our Alternative Credential Segment for the nine months ended September 30, 2021 and 2020, 7,465 and 9,756, respectively, were attributable to offerings launched during the preceding 12 months.
Adjusted EBITDA (Loss)
We define adjusted EBITDA (loss) as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some of these items may not be applicable in any given reporting period and they may vary from period to period.
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In the second quarter of 2021, we revised our definition of adjusted EBITDA (loss) to exclude other income (expense), net in connection with the recognition of a gain on the sale of our interest in an education technology company. We believe this change is meaningful to investors because we did not have this activity in prior periods, and as a result, excluding the impact of such a gain in 2021 facilitates a period-to-period comparison of our business. Prior to this revision, our definition of adjusted EBITDA excluded foreign currency gains or losses, which comprised the entirety of our other income (expense), net for all prior periods. The revision to the definition of adjusted EBITDA (loss) had no impact on our reported adjusted EBITDA (loss) for each of the three- and nine-month periods ended September 30, 2020.
Adjusted EBITDA (loss) is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to develop short- and long-term operational plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses that are not reflective of our ongoing operating results in calculating adjusted EBITDA (loss) can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that adjusted EBITDA (loss) provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Adjusted EBITDA (loss) is not a measure calculated in accordance with U.S. GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with U.S. GAAP.
Our use of adjusted EBITDA (loss) has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of the limitations are:
although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA (loss) does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA (loss) does not reflect (i) changes in, or cash requirements for, our working capital needs; (ii) the impact of changes in foreign currency exchange rates; (iii) acquisition related gains or losses such as, but not limited to, post-acquisition changes in the value of contingent consideration reflected in operations; (iv) transaction and integration costs; (v) restructuring-related costs; (vi) impairment charges; (vii) stockholder activism costs; (viii) certain litigation-related costs; (ix) losses on debt extinguishment; (x) the impact of deferred revenue fair value adjustments; (xi) interest or tax payments that may represent a reduction in cash; or (xii) the non-cash expense or the potentially dilutive impact of equity-based compensation, which has been, and we expect will continue to be, an important part of our compensation plan; and
other companies, including companies in our industry, may calculate adjusted EBITDA (loss) differently, which reduces its usefulness as a comparative measure.
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Because of these and other limitations, you should consider adjusted EBITDA (loss) alongside other U.S. GAAP-based financial performance measures, including various cash flow metrics, net income (loss) and our other U.S. GAAP results. The following table presents a reconciliation of adjusted EBITDA (loss) to net loss for each of the periods indicated.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2021202020212020
 (in thousands)
Net loss$(60,110)$(52,554)$(127,505)$(178,827)
Adjustments:
Stock-based compensation expense25,022 22,001 74,745 63,962 
Other (income) expense, net425 (42)(22,730)1,659 
Net interest expense16,471 6,851 31,826 18,195 
Income tax benefit(319)(162)(448)(1,580)
Depreciation and amortization expense26,168 23,936 77,577 71,406 
Loss on debt extinguishment— — 1,101 11,671 
Other*7,083 3,682 11,034 10,835 
Total adjustments74,850 56,266 173,105 176,148 
Adjusted EBITDA (loss)$14,740 $3,712 $45,600 $(2,679)
*Includes (i) transaction and integration expense of $0.8 million and $0.4 million for the three months ended September 30, 2021 and 2020, respectively, and $2.6 million and $1.5 million for the nine months ended September 30, 2021 and 2020, respectively, (ii) restructuring-related expense of $5.4 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively, and $7.2 million and $3.2 million for the nine months ended September 30, 2021 and 2020, respectively, and (iii) stockholder activism and litigation-related expense of $0.8 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, and $1.2 million and $6.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to market risk from the information provided in Part II, Item 7A of our Annual Report on Form 10-K, filed with the SEC on February 25, 2021.
Foreign Currency Exchange Risk
We transact material business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Our primary exposures are related to non-U.S. dollar denominated revenue and operating expenses in South Africa and the United Kingdom. Accounts relating to foreign operations are translated into U.S. dollars using prevailing exchange rates at the relevant period end. As a result, we would experience increased revenue and operating expenses in our non-U.S. operations if there were a decline in the value of the U.S. dollar relative to these foreign currencies. Conversely, we would experience decreased revenue and operating expenses in our non-U.S. operations if there were an increase in the value of the U.S. dollar relative to these foreign currencies. Translation adjustments are included as a separate component of stockholders’ equity.
For the three months ended September 30, 2021 and 2020, our foreign currency translation adjustment was a loss of $4.3 million and a gain of $1.7 million, respectively. For the nine months ended September 30, 2021 and 2020, our foreign currency translation adjustment was a loss of $2.1 million and a loss of $13.0 million, respectively.
For the three months ended September 30, 2021 and 2020, we recognized foreign currency exchange losses of $0.3 million and gains of less than $0.1 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2021 and 2020, we recognized foreign currency exchange losses of $2.1 million and $1.7 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss.
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The foreign exchange rate volatility of the trailing 12 months ended September 30, 2021 was 10% and 6% for the South African rand and British pound, respectively. The foreign exchange rate volatility of the trailing 12 months ended September 30, 2020 was 13% and 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.
Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 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 September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
 
Item 1.    Legal Proceedings
The information required by this Item is incorporated herein by reference to Note 5 in “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 1A.    Risk Factors
The risks described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 25, 2021, remain current in all material respects, except for the additional risk factors below. These risks do not identify all risks that we face. Our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.
Risks Related to the Term Loan Agreement
The Term Loan Agreement contains financial covenants that may limit our operational flexibility.
In connection with the Membership Interest Purchase Agreement (the “Purchase Agreement”), we entered into the Term Loan Agreement, which 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 Recurring Revenues (as defined in the Term Loan Agreement) as of the last day of any period of four consecutive fiscal quarters of the Company commencing with fiscal quarter ending September 30, 2021 through the Maturity Date (as defined in the Term Loan Agreement), which may limit our ability to engage in new lines of business, make certain investments, pay dividends, or enter into various transactions.
These covenants may limit the flexibility of our operations, and failure to meet any one of these financial covenants could result in a default under the Term Loan Agreement. If such a default were to occur, the lenders would have the right to terminate their commitments to provide loans under the Term Loan Agreement and declare any and all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, the lenders would have the right to proceed against the collateral in which we granted a first priority security interest to them, which consists of substantially all our assets. If the debt under the Term Loan Agreement were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could immediately materially and adversely affect our business, financial condition, and results of operations.
Risks Related to the edX Acquisition and the Combined Company
The edX Acquisition may not be consummated.
We have entered into a Purchase Agreement with edX Inc. (“edX”) and Circuit Sub LLC (“edX Sub”), pursuant to which we have agreed to acquire edX Sub (the “edX Acquisition”). Completion of the edX Acquisition is subject to a number of risks and uncertainties, and we can provide no assurance that the various closing conditions to the Purchase Agreement will be satisfied.
We may experience difficulties in integrating the operations of edX into our business and in realizing the expected benefits of the edX Acquisition.
The success of the edX Acquisition, if completed, will depend in part on our ability to realize the anticipated business opportunities from combining the operations of edX with our business in an efficient and effective manner. Once the edX Acquisition is completed, we will need to integrate the edX business with our existing business, which is a complex and time-consuming process. It is possible that the integration process could result in material challenges, including, without limitation:
the disruption of each company’s ongoing businesses, including as a result of diverting management’s attention to integration efforts;
tax costs or inefficiencies;
unanticipated issues in integrating operations and systems, including administrative and information technology infrastructure and financial reporting and internal control systems;
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the burden of complying with a wide variety of laws, including additional privacy, marketing and international trade and economic sanctions related laws, some of which did not apply to edX as a non-profit before the closing of the edX Acquisition;
managing a larger combined company;
maintaining employee morale and retaining key management and other employees;
the possibility of faulty assumptions underlying expectations regarding the integration process or expected synergies;
coordinating geographically separate organizations;
increased exposure to foreign currency exchange rates as a result of a more substantial portion of our business being outside the U.S.;
additional regulatory scrutiny focused on edX or the combined company following the edX Acquisition; and
unforeseen expenses associated with the integration of the edX business.
Many of these factors will be outside of the combined company’s control and any one of them could result in delays, increased costs, decreases in revenues and diversion of management’s time and energy, which could adversely affect our ability to achieve the anticipated benefits of the edX Acquisition and could harm our financial performance. If we are unable to successfully or timely integrate the operations of edX with our business, we may be unable to realize the anticipated benefits resulting from the edX Acquisition, and our business, results of operations and financial condition could be materially and adversely affected.
The market price of our common stock may decline as a result of the edX Acquisition.
The market price of our common stock may decline as a result of the edX Acquisition if, among other things, we are unable to achieve the expected growth in revenue, or if the strategic benefits or synergies are not realized or if the transaction costs related to the edX Acquisition are greater than expected. The market price of our common stock also may decline if we do not achieve the perceived benefits of the edX Acquisition as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the edX Acquisition on our financial results is not consistent with the expectations of financial or industry analysts.
We have incurred substantial transaction and integration expenses related to the edX Acquisition and expect to incur additional integration expenses related to edX that could negatively impact our financial results and cash flows.
We have incurred, and expect to continue to incur, a number of non-recurring costs associated the edX Acquisition and associated integration activities. For example, we expect to incur costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the integration process. Any expected efficiencies to offset these costs may not be achieved in the near term, or at all.
The future results of the combined company may be adversely impacted if the combined company does not effectively manage its expanded operations following the completion of the edX Acquisition.
Following the completion of the edX Acquisition, the size of the combined company’s business will increase significantly. Our ability to successfully manage this expanded business will depend, in part, upon management’s ability to design and implement strategic initiatives that address not only the integration of two discrete companies in different geographic locations, but also the increased scale and scope of the combined business with its associated increased costs and complexity. The combined company may not be successful and may not realize the expected operating leverage, synergies and strategic benefits currently anticipated from the edX Acquisition.
edX may underperform relative to our expectations.
edX may not be able to achieve the levels of revenue or earnings or create the operating efficiencies that we expect. edX’s business and financial performance are subject to certain risks and uncertainties, including, among others:
the ability to maintain current enterprise and university clients when their existing contracts expire, including maintaining similar contract periods and other terms, and our ability to acquire new enterprise and university clients;

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the ability to maintain the reputation and brand of edX, including as a result of the edX business ceasing to be operated by a non-profit entity following the closing;
the ability to expand offerings with existing enterprise and university clients;
the ability to increase demand for offerings on the edX platform and our ability to persuade learners to expand beyond the free and audit track offerings available on the edX platform; and
the continued receipt of high-quality content from university partners for deployment to learners.
If edX underperforms relative to our expectations, we may not be able to achieve the levels of revenue, earnings or operating efficiencies that we expect, and our business and operating results may be harmed.
We do not control and may be unable to predict the future course of the Open edX Platform.
Following the closing of the edX Acquisition, many of our offerings may be hosted on the open source learner management platform that is owned by the non-profit entity that will survive the edX Acquisition (the “Open edX Platform”). We do not own the Open edX Platform and we do not control and may be unable to predict the future course of open source technology development of the Open edX Platform, including the ongoing development of open source components used in the Open edX Platform, which could reduce the appeal of our offerings hosted on the Open edX Platform and damage our reputation. If open source software programmers, many of whom we will not employ, or our own internal programmers do not continue to develop and enhance the Open edX Platform, we may be unable to meet student or university requirements.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offerings of Common Stock
None.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 3.    Defaults Upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
None.
Item 5.    Other Information
(a) On November 4, 2021, we entered into (i) a First Amendment to Term Loan Credit and Guaranty Agreement (the “First Amendment”) with certain of our subsidiaries, Alter Domus (US) LLC, as administrative agent, and the lenders party thereto and (ii) a Joinder Agreement (collectively, with the First Amendment, the “Facility Amendments”) with Alter Domus (US) LLC, as administrative agent, and the lenders party thereto. The Facility Amendments amend the Term Loan Agreement primarily to provide for an incremental facility to us in an original principal amount of $100 million, the proceeds of which may be used for general corporate purposes.
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Item 6.    Exhibits
Exhibit
Number
DescriptionFormFile No.Exhibit
Number
Filing DateFiled/Furnished Herewith
8-K001-363763.1April 4, 2014 
8-K001-363763.2April 4, 2014 
X
X
X
    X
    X
            
         X
            
         X
            
101.INS XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.        X
            
101.SCH XBRL Taxonomy Extension Schema Document.        X
            
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.        X
             
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.         X
             
101.LAB XBRL Taxonomy Extension Label Linkbase Document.         X
             
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.         X
104Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).X
Indicates management contract or compensatory plan.
*Portions of this exhibit have been omitted pursuant to Item 601(b) of Regulation S-K. The registrant hereby undertakes to supplementally furnish to the Securities and Exchange Commission copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 2U, Inc.
November 9, 2021By:/s/ Christopher J. Paucek
  Christopher J. Paucek
  Chief Executive Officer
   
November 9, 2021By:/s/ Paul S. Lalljie
  Paul S. Lalljie
  Chief Financial Officer
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