10-Q 1 twou-20220331.htm 10-Q twou-20220331
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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 March 31, 2022

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)
Delaware
26-2335939
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
7900 Harkins Road
Lanham,
MD
20706
(Address of 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 filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No
As of May 6, 2022, there were 77,071,511 shares of the registrant’s common stock, par value $0.001 per share, outstanding.


TABLE OF CONTENTS
Condensed Consolidated Balance Sheets as of March 31, 2022 (unaudited) and December 31, 2021
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three months ended March 31, 2022 and 2021
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2022 and 2021
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2022 and 2021

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

the impact of the significant decline in the market price of our common stock, including the impairment of goodwill and indefinite-lived intangible assets;
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, 2021, as amended and supplemented by Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. In this Quarterly Report on Form 10-Q, the terms “2U,” “our company,” “we,” “us,” and “our” refer to 2U, Inc. and its subsidiaries, unless the context indicates otherwise.
3

PART I.  FINANCIAL INFORMATION
 
Item 1.    Financial Statements

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

 March 31,
2022
December 31,
2021
 (unaudited) 
Assets  
Current assets  
Cash and cash equivalents$216,620 $232,932 
Restricted cash16,977 16,977 
Accounts receivable, net77,945 67,287 
Other receivables, net29,767 29,439 
Prepaid expenses and other assets87,452 47,217 
Total current assets428,761 393,852 
Other receivables, net, non-current21,296 21,568 
Property and equipment, net49,610 48,650 
Right-of-use assets75,107 76,841 
Goodwill804,580 834,539 
Intangible assets, net624,413 665,523 
Other assets, non-current69,178 68,033 
Total assets$2,072,945 $2,109,006 
Liabilities and stockholders’ equity  
Current liabilities  
Accounts payable and accrued expenses$157,926 $166,458 
Deferred revenue121,217 91,926 
Lease liability12,847 13,985 
Other current liabilities100,225 61,138 
Total current liabilities392,215 333,507 
Long-term debt927,264 845,316 
Deferred tax liabilities, net1,675 1,726 
Lease liability, non-current97,802 98,666 
Other liabilities, non-current639 636 
Total liabilities1,419,595 1,279,851 
Commitments and contingencies (Note 6)
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued
  
Common stock, $0.001 par value, 200,000,000 shares authorized, 76,616,534 shares issued and outstanding as of March 31, 2022; 75,754,663 shares issued and outstanding as of December 31, 2021
77 76 
Additional paid-in capital1,645,456 1,735,628 
Accumulated deficit(983,601)(890,638)
Accumulated other comprehensive loss(8,582)(15,911)
Total stockholders’ equity653,350 829,155 
Total liabilities and stockholders’ equity$2,072,945 $2,109,006 
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
March 31,
 20222021
Revenue$253,329 $232,473 
Costs and expenses
Curriculum and teaching33,230 33,148 
Servicing and support39,624 33,184 
Technology and content development51,057 42,924 
Marketing and sales130,982 113,237 
General and administrative51,022 47,112 
Impairment charges58,782  
Total costs and expenses364,697 269,605 
Loss from operations(111,368)(37,132)
Interest income257 362 
Interest expense(13,890)(7,881)
Other expense, net(1,030)(915)
Loss before income taxes(126,031)(45,566)
Income tax benefit251 2 
Net loss$(125,780)$(45,564)
Net loss per share, basic and diluted$(1.65)$(0.62)
Weighted-average shares of common stock outstanding, basic and diluted
76,271,855 73,676,409 
Other comprehensive income (loss)  
Foreign currency translation adjustments, net of tax of $0 for all periods presented
7,329 (805)
Comprehensive loss$(118,451)$(46,369)
 
See accompanying notes to condensed consolidated financial statements.
5

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 Loss
Total
Stockholders’
Equity
 SharesAmount
Balance, December 31, 202175,754,663 $76 $1,735,628 $(890,638)$(15,911)$829,155 
Cumulative effect of adoption of ASU No. 2020-06, net of taxes— — (114,551)32,817 — (81,734)
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings577,416 1 (920)— — (919)
Exercise of stock options284,455 — 875 — — 875 
Stock-based compensation expense— — 24,424 — — 24,424 
Net loss— — — (125,780)— (125,780)
Foreign currency translation adjustment— — — — 7,329 7,329 
Balance, March 31, 202276,616,534 $77 $1,645,456 $(983,601)$(8,582)$653,350 


 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive 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 2 (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 

See accompanying notes to condensed consolidated financial statements.
6

2U, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Three Months Ended March 31,
 20222021
Cash flows from operating activities  
Net loss$(125,780)$(45,564)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Non-cash interest expense4,254 7,693 
Depreciation and amortization expense34,415 24,987 
Stock-based compensation expense24,424 24,947 
Non-cash lease expense5,750 4,291 
Provision for credit losses2,350 2,022 
Impairment charges58,782  
Other1,378 930 
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net(12,012)(30,698)
Other receivables, net(1,206)(8,602)
Prepaid expenses and other assets(1,419)95 
Accounts payable and accrued expenses(11,944)(660)
Deferred revenue29,614 32,850 
Other liabilities, net(8,672)(4,664)
Net cash (used in) provided by operating activities(66)7,627 
Cash flows from investing activities  
Purchase of a business, net of cash acquired4,960  
Additions of amortizable intangible assets(17,487)(14,219)
Purchases of property and equipment(1,769)(838)
Net cash used in investing activities(14,296)(15,057)
Cash flows from financing activities  
Proceeds from debt33 2,908 
Payments on debt(1,903)(176)
Tax withholding payments associated with settlement of restricted stock units(919)(12,613)
Proceeds from exercise of stock options875 3,533 
Net cash used in financing activities(1,914)(6,348)
Effect of exchange rate changes on cash(36)(32)
Net decrease in cash, cash equivalents and restricted cash(16,312)(13,810)
Cash, cash equivalents and restricted cash, beginning of period249,909 518,866 
Cash, cash equivalents and restricted cash, end of period$233,597 $505,056 
See accompanying notes to condensed consolidated financial statements.
7

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


1.    Organization
2U, Inc. (together with its subsidiaries, the “Company”) is an online education platform company. The Company’s mission is to expand access to high-quality educational opportunities that unlock human potential.
On November 16, 2021, the Company completed the acquisition of edX (the “edX Acquisition”), including the edX brand, website, and marketplace. As a result of the edX Acquisition, the Company expanded its digital education offerings to include open courses and micro-credential offerings at the undergraduate and graduate levels and added an education consumer marketplace, edx.org, with over 44 million registered learners.
Following the completion of the edX Acquisition, the Company now serves more than 230 top-ranked global universities and other leading institutions, and offers more than 4,000 high-quality online learning opportunities, including open courses, executive education offerings, boot camps, micro-credentials, professional certificates as well as undergraduate and graduate degree programs. The Company expects edX to be the primary brand for its products and services and that edx.org will operate as its global online learning marketplace. Refer to Note 3 for further information about the edX Acquisition.
With the edX Acquisition, the Company is now positioned as one of the world’s most comprehensive free-to-degree online learning platforms. The Company believes its platform and robust consumer marketplace provide clients with the digital infrastructure to launch world-class online education offerings and allow students to easily access high-quality, job-relevant education offerings without the barriers of cost or location.
The Company has two 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 online executive education programs and technical, skills-based boot camps through relationships with nonprofit colleges and universities. Students enrolled in these offerings are generally seeking to reskill or upskill through shorter duration, lower-priced offerings that are relevant to the needs of industry and society.
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 months ended March 31, 2022 and 2021 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet data as of December 31, 2021 was derived from the audited financial statements, but does not include all disclosures required by U.S. GAAP on an annual reporting basis.
Reclassifications
The Company has reclassified prior period amounts in the condensed consolidated statements of cash flows to conform to the current period’s presentation of other receivables. The Company reclassified $8.6 million from changes in prepaid expenses
8

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


and other assets to changes in other receivables. This reclassification had no impact on the previously reported operating cash flows. The Company has reclassified certain other prior period amounts in the consolidation statements of cash flows to conform to current period presentation. These reclassifications had no impact on previously reported operating, financing, or financing cash flows.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Significant items subject to such estimates include, but are not limited to, the measurement of provisions for credit losses, implied price concessions, acquired intangible assets, the recoverability of goodwill and indefinite-lived intangible assets, deferred tax assets, and the fair value of the convertible senior notes. Due to the inherent uncertainty involved in making estimates, particularly in light of the COVID-19 pandemic, actual results reported in future periods may be affected by changes in those estimates. The Company evaluates its estimates and assumptions on an ongoing basis.
Fair Value Measurements
The carrying amounts of certain assets and liabilities, including cash and cash equivalents, receivables, advances to university clients, accounts payable and accrued expenses and other current liabilities, approximate their respective fair values due to their short-term nature.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous, market for the specific asset or liability.
U.S. GAAP provides for a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges. The Company remeasures non-financial assets such as goodwill, intangible assets and other long-lived assets at fair value when there is an indicator of impairment, and records them at fair value only when recognizing an impairment loss. The fair value hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. Refer to Note 4 for further discussion of assets measured at fair value on a nonrecurring basis. The three tiers are defined as follows:
Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
Level 2—Observable inputs, other than quoted prices in active markets, that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.
The Company has financial instruments, including cash deposits, receivables, accounts payable and debt. The carrying values for such financial instruments, other than than the Company’s convertible senior notes, each approximated their fair values as of March 31, 2022 and December 31, 2021. Refer to Note 8 for more information regarding the Company’s convertible senior notes.
Business Combinations
The purchase price of an acquisition is allocated to the assets acquired, including intangible assets, and liabilities assumed, based on their respective fair values at the acquisition date. Acquisition-related costs are expensed as incurred. The excess of the cost of an acquired entity, net of the amounts assigned to the assets acquired and liabilities assumed, is recognized as goodwill. The net assets and results of operations of an acquired entity are included on the Company’s condensed consolidated financial statements from the acquisition date.
9

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


Goodwill and Other Indefinite-lived Intangible Assets
The Company reviews goodwill and other indefinite-lived intangible assets for impairment annually, as of October 1, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or an indefinite-lived asset below its carrying value.
Goodwill
Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company’s goodwill balance relates to its acquisitions of GetSmarter in July 2017, Trilogy in May 2019 and edX in November 2021. The Company tests goodwill at the reporting unit level, which is an operating segment or one level below an operating segment. The Company initially assesses qualitative factors to determine if it is necessary to perform a quantitative goodwill impairment review. The Company reviews goodwill for impairment using a quantitative approach if it decides to bypass the qualitative assessment or determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value based on a qualitative assessment. Upon completion of a quantitative assessment, the Company may be required to recognize an impairment based on the difference between the carrying value and the fair value of the reporting unit.
The Company determines the fair value of a reporting unit by utilizing a weighted combination of the income-based and market-based approaches.
The income-based approach requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies, discount rates, terminal growth rates, and forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, the Company considers each reporting unit’s historical results and current operating trends, revenue, profitability, cash flow results and forecasts, and industry trends. These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, market capitalization, the continued efforts of competitors to gain market share and prospective student enrollment patterns.
In addition, the value of a reporting unit using the market-based approach is estimated by comparing the reporting unit to other publicly traded companies and/or to publicly-disclosed business mergers and acquisitions in similar lines of business. The value of a reporting unit is based on pricing multiples of certain financial parameters observed in the comparable companies. The Company also makes estimates and assumptions for market values to determine a reporting unit’s estimated fair value.
Other Indefinite-lived Intangible Assets
The Company’s indefinite-lived intangible asset was acquired in November 2021 and represents the established edX trade name.
Interim Impairment Assessment
During the first quarter of 2022, the Company experienced a significant decline in its market capitalization, which management deemed a triggering event related to goodwill and its indefinite-lived intangible asset. As a result, the Company performed an interim impairment assessment as of March 1, 2022 and determined the carrying value for one of the reporting units within the Company’s Alternative Credential Segment and the carrying value of an indefinite-lived intangible asset exceeded their respective estimated fair values. As a result, during the three months ended March 31, 2022, the Company recorded impairment charges of $28.8 million and $30.0 million to goodwill and the indefinite-lived intangible asset, respectively, both within the Company’s Alternative Credential Segment. These charges are included within operating expense within the Company’s condensed consolidated statements of operations. The estimated fair values of the remaining reporting units exceeded their respective carrying values by approximately 10% or more.
The Company utilized a weighted combination of the income-based approach and market-based approach to determine the fair value of each reporting unit and the income-based approach to determine the fair value of its long-lived intangible asset. Key assumptions used in the income-based approach included forecasts of revenue, operating income, depreciation and amortization expense, capital expenditures and future working capital requirements, terminal growth rates, and discount rates based upon each respective reporting unit’s or indefinite-lived intangible asset’s weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that were not observable to active markets, which would be deemed “Level 3” fair value measurements, as defined in the Fair Value
10

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


Measurements section above. Key assumptions used in the market-based approach included the selection of appropriate peer group companies. Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value and the impairment test result.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts indexed to and potentially settled in an entity’s own equity. The new guidance eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. As a result, in more cases, convertible debt will be accounted for as a single instrument. The guidance also removes certain conditions for equity classification related to contracts in an entity’s own equity and requires the application of the if-converted method for calculating diluted earnings per share. This ASU is effective for fiscal years beginning after December 15, 2021.
The Company adopted this ASU on a modified retrospective basis in the first quarter of 2022, effective as of January 1, 2022. As a result of the adoption, long-term debt increased $81.7 million, additional paid-in capital decreased $114.6 million, deferred tax liabilities decreased $22.1 million, and the Company recorded a cumulative-effect adjustment to opening accumulated deficit of $32.8 million. Adoption of this ASU requires the use of the if-converted method for all convertible notes in the diluted net income (loss) per share calculation and the inclusion of the effect of potential share settlement of the convertible notes, if the effective is more dilutive. There was no impact to the number of potentially dilutive shares as a result of the adoption. Adoption of this standard did not have a material impact on the Company’s liquidity or cash flows.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU is intended to provide optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, to ease the potential accounting and financial reporting burden associated with the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU may be applied as of the beginning of any interim period that includes its effective date (i.e., March 12, 2020) through December 31, 2022. The Company will adopt this standard when LIBOR is discontinued and does not expect the adoption of this standard to have a material impact on its consolidated financial statements and related disclosures.
In November 2021, the FASB issued ASU No. 2021-10, Disclosures by Business Entities about Government Assistance. This ASU requires entities to disclose information about certain government assistance they receive, including the nature of the transactions and the related accounting policy, the line items on the balance sheet and statement of operations that are affected and the amounts applicable to each financial statement line item, and significant terms and conditions of the transactions. The ASU is effective for fiscal years beginning after December 15, 2021 and the disclosure requirements are for annual periods only. The guidance under this ASU will be effective for the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2022. The Company is currently evaluating the impact of this guidance on the disclosures in its consolidated financial statements.

11


3.    Business Combination
On November 16, 2021, pursuant to the Membership Interest Purchase Agreement, dated June 28, 2021 (the “Purchase Agreement”), by and among the Company, edX Inc., a Massachusetts nonprofit corporation (“edX Inc.”) and edX LLC (f/k/a Circuit Sub LLC), a Delaware limited liability company and a wholly owned subsidiary of edX Inc. (“edX”), edX Inc. contributed substantially all of its assets to edX and the Company acquired 100% of the outstanding membership interests of edX (the “edX Acquisition”) including the edX brand, website, and marketplace.
The total preliminary purchase price was $773.0 million in cash consideration, of which $23.0 million was distributed to an escrow account to satisfy indemnification claims and purchase price adjustments, as applicable. During the three months ended March 31, 2022, the Company recorded working capital adjustments of $5.0 million, reducing the preliminary purchase price to $768.1 million.
The transaction was accounted for under the acquisition method of accounting and revenue. Under the acquisition method of accounting, the total preliminary purchase price was allocated to edX’s net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of November 16, 2021. The allocation of the preliminary purchase price is pending the finalization of the fair value of acquired deferred revenue and other liabilities, deferred income tax assets and liabilities, and assumed non-income tax liabilities.
The following table summarizes the preliminary purchase price allocation based on the estimated fair value of the assets acquired and liabilities assumed and reflects the measurement period adjustments recorded during the three months ended March 30, 2022:
 Estimated
Useful Life (in years)
Purchase Price
Allocation
  (in thousands)
Cash and cash equivalents $11,901 
Accounts receivable6,608 
Prepaid expenses and other assets13,479 
Property and equipment, net529 
Right-of-use assets2,355 
Other assets, non-current572 
Accounts payable and accrued expenses(16,852)
Deferred revenue(20,567)
Lease liability(2,512)
Other liabilities(33,235)
Intangible assets: 
Developed technology315,400 
University client relationships10104,000 
Enterprise client relationships1014,300 
Trade namesindefinite255,000 
Goodwill 417,081 
 $768,059 
12


The Company’s unaudited pro forma combined financial information below is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the business combination occurred as of the date indicated or what the results would be for any future periods. The following table presents the Company’s unaudited pro forma combined revenue, pro forma combined net loss and pro forma combined net loss per share for the three months ended March 31, 2021, as if the acquisition of edX had occurred on January 1, 2020.
Three Months Ended
March 31, 2021
(in thousands)
Pro forma revenue$245,819 
Pro forma net loss$(74,262)
Pro forma net loss per share, basic and diluted$(1.01)
13

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


4.    Goodwill and 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.
 Balance as of December 31, 2021AllocationsAdjustmentsImpairment ChargesForeign Currency Translation AdjustmentsBalance as of March 31, 2022
 (in thousands)
Degree Program Segment
Gross goodwill$ $198,378 $(766)$— $ $197,612 
Accumulated impairments — —  —  
Net goodwill 198,378 (766)  197,612 
Alternative Credential Segment
Gross goodwill$481,366 $225,174 $(5,704)$— $5,293 $706,129 
Accumulated impairments(70,379)— — (28,782)— (99,161)
Net goodwill410,987 225,174 (5,704)(28,782)5,293 606,968 
Unallocated goodwill$423,552 $(423,552)$ $ $ $ 
Total
Gross goodwill$904,918 $ $(6,470)$— $5,293 $903,741 
Accumulated impairments(70,379)— — (28,782)— (99,161)
Net goodwill$834,539 $ $(6,470)$(28,782)$5,293 $804,580 
During the three months ended March 31, 2022, the Company completed the allocation of the preliminary goodwill balance resulting from the edX Acquisition to the Company’s reporting units. The goodwill was assigned to the reporting units that are expected to drive synergies from the acquisition, which is each of the Company’s four reporting units. In addition, during the three months ended March 31, 2022, the Company recorded working capital adjustments of $5.0 million, adjustments to the preliminary valuation of acquired assets and assumed liabilities of edX of $1.5 million, and a goodwill impairment charge of $28.8 million. Refer to Note 2 for further information about the goodwill impairment charge.


14

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


The following tables present the components of intangible assets, net on the Company’s condensed consolidated balance sheets as of each of the dates indicated.
  March 31, 2022December 31, 2021
 Estimated
Average Useful
Life (in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
 (in thousands)
Definite-lived intangible assets
Capitalized technology
3-5
$205,197 $(113,359)$91,838 $199,766 $(112,357)$87,409 
Capitalized content development
4-5
251,873 (142,310)109,563 243,687 (125,599)118,088 
University client relationships
9-10
213,726 (41,415)172,311 211,680 (34,995)176,685 
Enterprise client relationships1014,300 (537)13,763 14,300 (179)14,121 
Trade names and domain names
5-10
28,939 (17,001)11,938 27,161 (12,941)14,220 
Total definite-lived intangible assets$714,035 $(314,622)$399,413 $696,594 $(286,071)$410,523 
  March 31, 2022December 31, 2021
 Gross
Carrying
Amount
Accumulated
Impairments*
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Impairments
Net
Carrying
Amount
 (in thousands)
Indefinite-lived intangible assets
Trade names$255,000 $(30,000)$225,000 $255,000 $— $255,000 
Total indefinite-lived intangible assets$255,000 $(30,000)$225,000 $255,000 $— $255,000 
*
During the three months ended March 31, 2022, the Company recorded a $30.0 million impairment charge related to its indefinite-lived intangible asset. Refer to Note 2 for further information about this impairment charge.
The amounts presented in the table above include $43.8 million and $46.3 million of in-process capitalized technology and content development as of March 31, 2022 and December 31, 2021, respectively.
The Company recorded amortization expense related to amortizable intangible assets of $31.4 million and $21.6 million for the three months ended March 31, 2022 and 2021, respectively.
The following table presents the estimated future amortization expense of the Company’s amortizable intangible assets placed in service as of March 31, 2022.
Future Amortization Expense
(in thousands)
Remainder of 2022$75,111 
202377,193 
202458,780 
202538,686 
202627,560 
Thereafter78,312 
Total$355,642 

15

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


5.    Other Balance Sheet Details
Prepaid expenses and other assets
As of March 31, 2022 and December 31, 2021, the Company had balances of $25.7 million and $23.0 million, respectively, of prepaid assets within prepaid expenses and other assets on the condensed consolidated balance sheets.
Other Assets, Non-current
As of March 31, 2022 and December 31, 2021, the Company had balances of $7.8 million and $7.0 million, respectively, of deferred expenses incurred to integrate the software associated with its cloud computing arrangements, within other assets, non-current on the condensed consolidated balance sheets. Such expenses are subject to amortization over the remaining contractual term of the associated cloud computing arrangement, with a useful life of between three to five years. The Company incurred $0.7 million and $0.5 million of such amortization for the three months ended March 31, 2022 and 2021, respectively.
Accounts Payable and Accrued Expenses
The following table presents the components of accounts payable and accrued expenses on the Company’s condensed consolidated balance sheets as of each of the dates indicated.
March 31, 2022December 31, 2021
(in thousands)
Accrued university and instructional staff compensation$37,280 $36,806 
Accrued marketing expenses29,291 26,469 
Accrued transaction, integration and restructuring-related expenses6,812 4,072 
Accrued compensation and related benefits25,020 49,143 
Accounts payable and other accrued expenses59,523 49,968 
Total accounts payable and accrued expenses$157,926 $166,458 
For the three months ended March 31, 2022 and 2021, expense related to the Company’s marketing and advertising efforts of its own brand were not material.
Other Current Liabilities
As of March 31, 2022 and December 31, 2021, the Company had balances of $22.4 million and $21.9 million, respectively, within other current liabilities on the condensed consolidated balance sheets, which represents proceeds received from students enrolled in certain of the Company’s alternative credential offerings that are payable to an associated university client.
In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses. Under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted in the United States on March 27, 2020, the Company is allowed to defer payment of the employer’s share of Social Security taxes incurred from March 27, 2020 through December 31, 2020. In addition, the CARES Act provides eligible employers with an employee retention tax credit for employees whose services were impacted by COVID-19. As of March 31, 2022, the amount of payroll taxes subject to deferred payment, net of employee retention tax credits of $0.5 million, was approximately $5.0 million. The balance is recorded within other current liabilities on the condensed consolidated balance sheets.

16

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

6.    Commitments and Contingencies
Legal Contingencies
The Company is involved in various claims and legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. While the Company does not expect that the ultimate resolution of any existing claims and proceedings (other than the specific matters described below, if decided adversely), individually or in the aggregate, will have a material adverse effect on its financial position, an unfavorable outcome in some or all of these proceedings could have a material adverse impact on the results of operations or cash flows for a particular period. This assessment is based on the Company’s current understanding of relevant facts and circumstances. With respect to current legal proceedings, the Company does not believe it is probable a material loss exceeding amounts already recognized has been incurred as of the date of the balance sheets presented herein. As such, the Company’s view of these matters is subject to inherent uncertainties and may change in the future.
In re 2U, Inc., Securities Class Action
On August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaints against the Company, Christopher J. Paucek, the Company’s CEO, and Catherine A. Graham, the Company’s former CFO, in the United States District Court for the Southern District of New York, alleging violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. The district court transferred the cases to the United States District Court for the District of Maryland, consolidated them under docket number 8:19-cv-3455 (D. Md.), and appointed Fiyyaz Pirani as the lead plaintiff in the consolidated action. On July 30, 2020, Mr. Pirani filed a consolidated class action complaint (“CAC”), adding Harsha Mokkarala, the Company’s former Chief Marketing Officer, as a defendant. The CAC also asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, against Mr. Paucek, Ms. Graham, members of the Company’s board of directors, and the Company’s underwriters, based on allegations related to the Company’s secondary stock offering on May 23, 2018. The proposed class consists of all persons who acquired the Company’s securities between February 26, 2018 and July 30, 2019. On October 27, 2020, defendants filed a motion to dismiss. On August 5, 2021, the court largely denied the defendants’ motion to dismiss. On February 18, 2022, the court stayed discovery until April 19, 2022, pending mediation. On April 28, 2022, the parties informed the court that they had reached a settlement in principle. The settlement is confidential and is subject to court approval. The settlement payment is expected to be fully funded by the Company's insurers. The payable under the proposed settlement and the related insurance proceeds are recorded within other current liabilities and prepaid expenses and other assets, respectively, on the condensed consolidated balance sheets.
Stockholder Derivative Suits
On April 30, 2020, Richard Theis filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, and the Company’s board of directors in the United States District Court for the Southern District of New York, with docket number 20-cv-3360. The complaint alleges claims for breaches of fiduciary duty, insider sales and misappropriation of information, unjust enrichment, and violations of Section 14(a) of the Exchange Act, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On July 22, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. On March 8, 2022, the court entered a joint stipulation staying the case for sixty days. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.
On August 21, 2020, Thomas Lucey filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, Harsha Mokkarala, the Company’s former Chief Marketing Officer and the Company’s board of directors in the United States District Court for the District of Maryland, with docket number 1:20-cv-02424-GLR. The complaint alleges claims for breaches of fiduciary duty, insider trading, and contribution for alleged violations of Sections 10(b) and 21D of the Exchange Act, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On September 3, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. On March 8, 2022, the court entered a joint stipulation staying the case for sixty days. 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
17

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

Mokkarala, the Company’s former Chief Marketing Officer, and the Company’s board of directors in the Court of Chancery of the State of Delaware, with docket number 2020-1019-AGB. The complaint alleges claims for breaches of fiduciary duty and unjust enrichment, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On January 6, 2021, the court entered a joint stipulation staying the case pending resolution of the securities class action. On March 8, 2022, the court entered a joint stipulation staying the case for sixty days. 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 March 31, 2022, the future minimum payments due to university clients have not materially changed relative to the amounts provided in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Contingent Payments
The Company has entered into agreements with certain of its university clients in the Degree Program Segment that require the Company to make future minimum payments in the event that certain program metrics are not achieved on an annual basis. The Company recognizes any estimated contingent payments under these agreements as contra revenue over the period to which they relate, and records a liability in other current liabilities on the condensed consolidated balance sheets.
In the first quarter of 2019, the Company entered into an agreement to make investments in an education technology company of up to $15.0 million, upon demand by the investee. During the second quarter of 2021, the Company sold its investment in this education technology company and was released from any further obligation to make additional investments.
7.    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.
In October 2020, the Company entered into an agreement with an unrelated party to sublease a portion of the Company’s office space in the United States. In October 2021, the Company entered into an agreement with the same party to sublease additional office space in the same facility. The agreements are coterminous. As of March 31, 2022, the subleases were classified as operating leases and each had a remaining term of 1.6 years, with scheduled annual rent increases and no option to extend or renew the sublease term. Sublease income is recognized on a straight-line basis over the term of the subleases as a reduction to expense incurred by the Company under the associated head lease.
In August 2021, the Company entered into an agreement with an unrelated party to sublease a portion of the Company’s office space in Denver, Colorado, as part of its overall real estate management strategy. As of March 31, 2022, this sublease was classified as an operating lease and had a remaining term of 2.7 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.
18

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


The following table presents the components of lease expense on the Company’s condensed consolidated statements of operations and comprehensive loss for each of the periods indicated.
Three Months Ended
March 31,
20222021
(in thousands)
Operating lease expense$5,761 $4,282 
Short-term lease expense111 44 
Variable lease expense1,823 1,436 
Sublease income(228)(54)
Total lease expense$7,467 $5,708 
As of March 31, 2022, for the Company’s operating leases, the weighted-average remaining lease term was 7.7 years and the weighted-average discount rate was 11.3%. For the three months ended March 31, 2022 and 2021, cash paid for amounts included in the measurement of operating lease liabilities was $6.6 million and $4.6 million, respectively. There were no lease liabilities arising from obtaining right-of-use assets during each of the three months ended March 31, 2022 and 2021.
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 $4.2 million in aggregate.
March 31, 2022
(in thousands)
Remainder of 2022$17,848 
202322,069 
202421,834 
202518,035 
202618,569 
Thereafter72,679 
Total lease payments171,034 
Less: imputed interest(60,385)
Total lease liability$110,649 
As of March 31, 2022, the Company had additional operating leases for facilities that have not yet commenced with future minimum lease payments of approximately $19.3 million. Each of these operating leases will commence during the fiscal year ending 2022 and have lease terms of approximately 6 to 8 years.

8.    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.
19

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


March 31, 2022December 31, 2021
(in thousands)
Term loan facilities$570,936 $572,374 
Convertible senior notes380,000 380,000 
Deferred government grant obligations3,500 3,500 
Other borrowings3,991 4,423 
Less: unamortized debt discount and issuance costs(23,956)(107,777)
Total debt934,471 852,520 
Less: current portion of long-term debt(7,207)(7,204)
Total long-term debt$927,264 $845,316 
The Company believes the carrying value of its long-term debt approximates the fair value of the debt as the terms and interest rates approximate the market rates, other than the 2.25% convertible senior notes due 2025 (the “Notes”), which had an estimated fair value of $315.5 million and $403.3 million as of March 31, 2022 and December 31, 2021, respectively. Each of the Company’s long-term debt instruments were classified as Level 2 within the fair value hierarchy.
Term Loan Credit and Guaranty Agreement
The Company entered into a Term Loan Credit and Guaranty Agreement, dated June 28, 2021 (the “Term Loan Agreement”), among the Company, as borrower, the subsidiaries of the Company party thereto, as guarantors, the lenders party thereto, and Alter Domus (US) LLC as administrative agent and collateral agent. Pursuant to the Term Loan Agreement, the lenders thereunder made term loans to the Company on June 29, 2021 (the “Funding Date”) in the aggregate principal amount of $475 million (the “Term Loan Facilities”). The Term Loan Facilities have an initial maturity date of December 28, 2024 (the “Maturity Date”). Commencing on the Funding Date, loans under the Term Loan Facilities will bear interest at a per annum rate equal to a base rate or adjusted Eurodollar rate, as applicable, plus the applicable margin of 4.75% in the case of the base rate loans and 5.75% in the case of the Eurodollar loans. The Term Loan Agreement requires the Company to make quarterly principal repayments equal to 0.25% of the $475 million aggregate principal amount, beginning September 2021. If the loans under the Term Loan Facilities are prepaid prior to the second anniversary, subject to certain customary exceptions, the Company shall pay the Applicable Premium (as defined in the Term Loan Agreement) on the amount of the loans so prepaid.
On November 4, 2021, the Company entered into a First Amendment to Term Loan Credit and Guaranty Agreement and a Joinder Agreement, which amended the Term Loan Agreement (collectively, the “Amended Term Loan Facility”) primarily to provide for an incremental facility to the Company in an original principal amount of $100 million. The Company 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.
The associated effective interest rate of the Amended Term Loan Facility for the three months ended March 31, 2022 was approximately 8.00%, and the associated interest expense was approximately $11.1 million.
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.
20

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


The Term Loan Agreement contains customary affirmative covenants, including, among others, the provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters. The Term Loan Agreement contains customary negative covenants, including, among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchases of equity interests in the Company and entering into affiliate transactions and asset sales. The Term Loan Agreement contains a financial covenant that requires the Company to maintain minimum Recurring Revenues (as defined in the Term Loan Agreement) as of the last day of any period of four consecutive fiscal quarters of the Company commencing with fiscal quarter ending September 30, 2021 through the Maturity Date. The Term Loan Agreement also provides for customary events of default, including, among others: non-payment of obligations; bankruptcy or insolvency event; failure to comply with covenants; breach of representations or warranties; defaults on other material indebtedness; impairment of any lien on any material portion of the Collateral (as defined in the Term Loan Agreement); failure of any material provision of the Term Loan Agreement or any guaranty to remain in full force and effect; a change of control of the Company; and material judgment defaults. The occurrence of an event of default could result in the acceleration of obligations under the Term Loan Agreement.
If an event of default under the Term Loan Agreement occurs and is continuing, then, at the request (or with the consent) of the lenders holding a majority of the commitments and loans under the Term Loan Agreement, upon notice by the administrative agent to the borrowers, the obligations under the Term Loan Agreement shall become immediately due and payable. In addition, if the Credit Parties become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Term Loan Agreement will automatically become immediately due and payable.
Credit Agreement
On June 25, 2020, the Company entered into a credit agreement (the “Credit Agreement”) with Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, and certain other lenders party thereto that provided for $50 million in revolving loans (the “Loans”). The Credit Agreement allowed for incremental borrowings from time to time in an aggregate amount for all such incremental amounts not to exceed (i) the lesser of (x) $50 million and (y) an amount such that the aggregate principal amount of the lenders’ commitments under the revolving credit facility does not exceed $100 million, plus (ii) certain specified prepayments of indebtedness, plus (iii) an unlimited amount subject to satisfaction of a leverage ratio based compliance test.
The Loans bore interest, at the Company’s option, at variable rates based on (i) a customary base rate plus an applicable margin of 2.75% or (ii) an adjusted LIBOR rate (with a floor of 0.00%) for the interest period relevant to such borrowing plus an applicable margin of 3.75%. In connection with entering into the Term Loan Agreement in June 2021, the Company terminated the Credit Agreement and recognized a loss on debt extinguishment of $1.1 million in connection with the write-off of previously capitalized deferred financing costs and associated fees.
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 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.
21

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


The net carrying amount of the Notes consists of the following as of each of the dates indicated:
March 31, 2022December 31, 2021
(in thousands)
Principal$380,000 $380,000 
Unamortized debt discount for conversion option (83,609)
Unamortized issuance costs(6,459)(5,104)
Net carrying amount$373,541 $291,287 
Issuance costs are being amortized to interest expense over the contractual term of the Notes. Subsequent to the adoption of ASU 2020-06, the effective interest rate used to amortize the issuance costs was 2.9%. The interest expense related to the Notes for the three months ended March 31, 2022 and 2021 was $2.7 million and $7.6 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 five 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.
The initial conversion rate for the Notes is 35.3773 shares of the Company’s common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $28.27 per share of the Company’s common stock, and is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Upon conversion, the Company will pay or deliver, as applicable, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. In the event of the Company calling the Notes for redemption or the holders of the Notes electing to convert their Notes, the Company will determine whether to settle in cash, common stock or a combination thereof. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time. As of March 31, 2022, the if-converted value of the Notes did not exceed the principal amount.
In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the Notes may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
The Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after May 5, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice, and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a “make-whole fundamental change”
22

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


with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if such Note is converted after it is called for redemption. No sinking fund is provided for the Notes.
As of March 31, 2022, the conditions allowing holders of the Notes to convert had not been met and the Company has the right under the Indenture to determine the method of settlement at the time of conversion. Therefore, the Notes are classified as non-current on the condensed consolidated balance sheets.
In connection with the Notes, the Company entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain counterparties. The Capped Call Transactions are generally expected to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the Capped Call Transactions. The cap price of the Capped Call Transactions is initially $44.34 per share. The cost of the Capped Call Transactions was approximately $50.5 million.
In April 2020, the Company used a portion of the proceeds from the sale of the Notes to repay in full all amounts outstanding, and discharge all obligations in respect of, the $250 million senior secured term loan facility. The Company intends to use the remaining net proceeds from the sale of the Notes for working capital or other general corporate purposes, which may include capital expenditures, potential acquisitions and strategic transactions.
Deferred Government Grant Obligations
Government grants awarded to the Company in the form of forgivable loans are recorded within long-term debt on the Company’s condensed consolidated balance sheets until all contingencies are resolved and the grants are determined to be realized. The Company has a total of two outstanding conditional loan agreements with Prince George’s County, Maryland and the State of Maryland for an aggregate amount of $3.5 million, each bearing an interest rate of 3% per annum. These agreements are conditional loan obligations that may be forgiven, provided that the Company attains certain conditions related to employment levels at 2U’s Lanham, Maryland headquarters.
In July 2020, the Company amended its conditional loan agreement with Prince George’s County to modify the terms of the employment level thresholds. The conditional loan with Prince George’s County has a maturity date of June 22, 2027.
In January 2021, the Company amended its conditional loan agreement with the State of Maryland to modify the terms of the employment level thresholds and extend the maturity date to June 30, 2028. The interest expense related to these loans for the three months ended March 31, 2022 and 2021 was immaterial. As of March 31, 2022 and December 31, 2021, the Company’s combined accrued interest balance associated with the deferred government grant obligations was $0.5 million and $0.5 million, respectively.
Letters of Credit
Certain of the Company’s operating lease agreements entered into require security deposits in the form of cash or an unconditional, irrevocable letter of credit. As of March 31, 2022, the Company has entered into standby letters of credit totaling $16.2 million as security deposits for the applicable leased facilities and in connection with the deferred government grant obligations.
The Company maintains restricted cash as collateral for standby letters of credit for the Company’s leased facilities and in connection with the deferred government grant obligations.
23

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


Future Principal Payments
Future principal payments under the Amended Term Loan Facility, the Notes, and the government grants, as of the date indicated are as follows:
March 31, 2022
(in thousands)
Remainder of 2022$4,314 
20235,753 
2024560,869 
2025380,000 
2026 
Thereafter*3,500 
Total future principal payments$954,436 
*Amounts represent conditional loan obligations that may be forgiven, provided that the Company attains certain conditions related to employment levels at 2U’s Lanham, Maryland headquarters.

24

2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
9.    Income Taxes
The Company’s income tax provisions for all periods consist of federal, state and foreign income taxes. The income tax provisions for the three months ended March 31, 2022 and 2021 were based on estimated full-year effective tax rates, including the mix of income for the period between higher-taxed and lower-taxed jurisdictions, after giving effect to significant items related specifically to the interim periods, and loss-making entities for which it is not more likely than not that a tax benefit will be realized.
The Company’s effective tax rate for each of the three months ended March 31, 2022 and 2021 was less than 1%. The Company’s income tax benefit for the three months ended March 31, 2022 and 2021 was $0.3 million and less than $0.1 million, respectively. The income tax benefit is related to losses generated by operations and the amortization of acquired intangibles in the Alternative Credential Segment that are expected to be realized through future reversing taxable temporary differences. To date, the Company has not been required to pay U.S. federal income taxes because of current and accumulated net operating losses.
10.    Stockholders’ Equity
Common Stock
As of March 31, 2022, the Company was authorized to issue 205,000,000 total shares of capital stock, consisting of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of March 31, 2022, there were 76,616,534 shares of common stock outstanding, and the Company had reserved a total of 31,459,931 of its authorized shares of common stock for future issuance as follows:
Shares Reserved for Future Issuance
Outstanding restricted stock units5,711,313 
Outstanding performance restricted stock units2,547,247 
Outstanding stock options6,061,129 
Reserved for convertible senior notes17,140,242 
Total shares of common stock reserved for future issuance31,459,931 
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 uses for working capital and other general corporate purposes, which may include capital expenditures, potential acquisitions, growth opportunities and strategic transactions.
Stock-Based Compensation
The Company maintains two 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 3,782,719 and 3,619,344 on January 1, 2022 and 2021, respectively, pursuant to the automatic share reserve increase provision in the 2014 Plan.
The Company also has a 2017 Employee Stock Purchase Plan (the “ESPP”). As of March 31, 2022, 515,709 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.
25

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


 Three Months Ended
March 31,
 20222021
 (in thousands)
Curriculum and teaching$47 $16 
Servicing and support4,359 3,849 
Technology and content development3,862 3,274 
Marketing and sales2,126 1,501 
General and administrative14,030 16,307 
Total stock-based compensation expense$24,424 $24,947 
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, 20212,613,063 $32.29 
Granted3,724,441 10.77 
Vested(558,253)23.12 
Forfeited(67,938)31.36 
Outstanding balance as of March 31, 20225,711,313 $19.16 
The total compensation expense related to the unvested RSUs not yet recognized as of March 31, 2022 was $81.0 million, and will be recognized over a weighted-average period of approximately 2.3 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 2022, the PRSU awards granted as part of the Company’s 2020 annual equity award cycle with a performance period that began on January 1, 2021 and ended on December 31, 2021, which were subject to market-based vesting conditions, did not achieve the market-based targets for the second performance period, and 0% of the granted quantities vested. The PRSU awards granted as part of the Company’s 2021 annual equity award cycle with a performance period that began on January 1, 2021 and ended on December 31, 2021, which were subject to internal financial performance-based vesting targets, were earned at 112.7% of target.
The following tables present a summary of (i) the assumptions used for estimating the fair values of the PRSUs subject to market-based vesting conditions and (ii) the Company’s PRSU activity for the period indicated. As of March 31, 2022 and December 31, 2021, there were 1.3 million and 1.0 million outstanding PRSUs for which the performance metrics had not been defined as of each respective date. Accordingly, such awards are not considered granted for accounting purposes as of March 31, 2022 and December 31, 2021, and have been excluded from the tables below.
26

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


 Three Months Ended
March 31,
 20222021
Risk-free interest rate
0.39% – 1.88%
0.10% – 0.26%
Expected term (years)
1.003.00
1.003.00
Expected volatility
49% – 97%
85% – 89%
Dividend yield0%0%
Weighted-average grant date fair value per share$18.67$61.33

 Number of
Units
Weighted-
Average Grant
Date Fair Value per Share
Outstanding balance as of December 31, 20211,121,277 $48.62 
Granted2,081,647 16.63 
Vested  
Forfeited(655,677)54.30 
Outstanding balance as of March 31, 20222,547,247 $21.49 
The total compensation expense related to the unvested PRSUs not yet recognized as of March 31, 2022 was $37.1 million, and will be recognized over a weighted-average period of approximately 1.6 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 a three- or four-year period.
The following table summarizes the assumptions used for estimating the fair value of the stock options granted for the period presented. No stock options were granted during the three months ended March 31, 2021.
 Three Months Ended
March 31, 2022
Risk-free interest rate1.9%
Expected term (years)5.72
Expected volatility75%
Dividend yield0%
Weighted-average grant date fair value per share$6.99
27

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


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