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2U, Inc. - Quarter Report: 2022 September (Form 10-Q)

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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 September 30, 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 November 3, 2022, there were 78,204,895 shares of the registrant’s common stock, par value $0.001 per share, outstanding.


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TABLE OF CONTENTS
Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2022 and 2021
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2022 and 2021
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2022 and 2021

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
trends in the higher education market and the market for online education, and expectations for growth in those markets;
the acceptance, adoption and growth of online learning by colleges and universities, faculty, students, employers, accreditors and state and federal licensing bodies;
the impact of competition on our industry and innovations by competitors;
our ability to comply with evolving regulations and legal obligations related to data privacy, data protection and information security;
our expectations about the potential benefits of our cloud-based software-as-a-service technology and technology-enabled services to university clients and students;
our dependence on third parties to provide certain technological services or components used in our platform;
our expectations about the predictability, visibility and recurring nature of our business model;
our ability to meet the anticipated launch dates of our degree programs, 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;
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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 timing, structure and expected impact of our 2022 Strategic Realignment Plan and the estimated savings and amounts expected to be incurred in connection therewith;
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.
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PART I.  FINANCIAL INFORMATION
 
Item 1.    Financial Statements

2U, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
 September 30,
2022
December 31,
2021
 (unaudited) 
Assets  
Current assets  
Cash and cash equivalents$170,165 $232,932 
Restricted cash14,985 16,977 
Accounts receivable, net97,164 67,287 
Other receivables, net31,009 29,439 
Prepaid expenses and other assets81,538 47,217 
Total current assets394,861 393,852 
Other receivables, net, non-current21,007 21,568 
Property and equipment, net45,513 48,650 
Right-of-use assets74,175 76,841 
Goodwill732,586 834,539 
Intangible assets, net569,408 665,523 
Other assets, non-current72,006 68,033 
Total assets$1,909,556 $2,109,006 
Liabilities and stockholders’ equity  
Current liabilities  
Accounts payable and accrued expenses$133,385 $164,723 
Deferred revenue127,597 91,926 
Lease liability13,286 13,985 
Accrued restructuring liability13,551 1,735 
Other current liabilities95,252 61,138 
Total current liabilities383,071 333,507 
Long-term debt928,197 845,316 
Deferred tax liabilities, net359 1,726 
Lease liability, non-current102,221 98,666 
Other liabilities, non-current1,792 636 
Total liabilities1,415,640 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, 77,845,436 shares issued and outstanding as of September 30, 2022; 75,754,663 shares issued and outstanding as of December 31, 2021
78 76 
Additional paid-in capital1,683,860 1,735,628 
Accumulated deficit(1,168,129)(890,638)
Accumulated other comprehensive loss(21,893)(15,911)
Total stockholders’ equity493,916 829,155 
Total liabilities and stockholders’ equity$1,909,556 $2,109,006 
See accompanying notes to condensed consolidated financial statements.
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2U, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited, in thousands, except share and per share amounts)

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
Revenue$232,238 $232,376 $727,031 $702,058 
Costs and expenses
Curriculum and teaching31,558 30,869 96,933 98,805 
Servicing and support36,110 33,898 112,795 101,947 
Technology and content development43,976 43,106 140,649 128,539 
Marketing and sales94,311 118,300 341,643 346,181 
General and administrative39,388 44,341 131,146 137,128 
Restructuring charges11,632 5,395 29,172 7,214 
Impairment charges79,509 — 138,291 — 
Total costs and expenses336,484 275,909 990,629 819,814 
Loss from operations(104,246)(43,533)(263,598)(117,756)
Interest income269 474 767 1,188 
Interest expense(15,913)(16,945)(43,709)(33,014)
Loss on debt extinguishment— — — (1,101)
Other income (expense), net(1,845)(425)(4,242)22,730 
Loss before income taxes(121,735)(60,429)(310,782)(127,953)
Income tax benefit59 319 474 448 
Net loss$(121,676)$(60,110)$(310,308)$(127,505)
Net loss per share, basic and diluted$(1.57)$(0.80)$(4.03)$(1.72)
Weighted-average shares of common stock outstanding, basic and diluted
77,692,911 74,691,521 77,013,180 74,266,999 
Other comprehensive income (loss)  
Foreign currency translation adjustments, net of tax of $0 for all periods presented
(5,637)(4,268)(5,982)(2,096)
Comprehensive loss$(127,313)$(64,378)$(316,290)$(129,601)
 
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 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 (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 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings464,984 — (822)— — (822)
Exercise of stock options2,278 — 17 — — 17 
Issuance of common stock in connection with employee stock purchase plan136,039 — 1,282 — — 1,282 
Stock-based compensation expense— — 22,349 — — 22,349 
Net loss— — — (62,852)— (62,852)
Foreign currency translation adjustment— — — — (7,674)(7,674)
Balance, June 30, 202277,219,835 $77 $1,668,282 $(1,046,453)$(16,256)$605,650 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings595,369 (580)— — (579)
Exercise of stock options30,232 — 191 — — 191 
Stock-based compensation expense— — 15,967 — — 15,967 
Net loss— — — (121,676)— (121,676)
Foreign currency translation adjustment— — — — (5,637)(5,637)
Balance, September 30, 202277,845,436 $78 $1,683,860 $(1,168,129)$(21,893)$493,916 

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 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.
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2U, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)
Nine Months Ended September 30,
 20222021
Cash flows from operating activities  
Net loss$(310,308)$(127,505)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense9,929 28,278 
Depreciation and amortization expense95,070 77,577 
Stock-based compensation expense62,740 74,745 
Non-cash lease expense16,507 13,518 
Restructuring9,523 4,845 
Provision for credit losses6,129 5,712 
Loss on debt extinguishment— 1,101 
Gain on sale of investment— (27,762)
Impairment charges138,291 — 
Other4,660 2,100 
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net(36,253)(54,689)
Other receivables, net(2,867)(24,598)
Prepaid expenses and other assets1,973 (6,639)
Accounts payable and accrued expenses(12,964)24,249 
Deferred revenue43,252 21,960 
Other liabilities, net(27,124)(16,028)
Net cash used in operating activities(1,442)(3,136)
Cash flows from investing activities  
Purchase of a business, net of cash acquired5,010 — 
Additions of amortizable intangible assets(50,155)(45,179)
Purchases of property and equipment(8,777)(5,397)
Purchase of investment— (1,000)
Proceeds from sale of investment— 38,762 
Advances made to university clients(310)— 
Advances repaid by university clients200 200 
Other(17)56 
Net cash used in investing activities(54,049)(12,558)
Cash flows from financing activities  
Proceeds from debt530 469,595 
Payments on debt(5,313)(2,203)
Payment of debt issuance costs— (10,259)
Tax withholding payments associated with settlement of restricted stock units(2,320)(14,543)
Proceeds from exercise of stock options1,083 6,101 
Proceeds from employee stock purchase plan share purchases1,282 1,773 
Net cash (used in) provided by financing activities(4,738)450,464 
Effect of exchange rate changes on cash(4,530)(2,312)
Net (decrease) increase in cash, cash equivalents and restricted cash(64,759)432,458 
Cash, cash equivalents and restricted cash, beginning of period249,909 518,866 
Cash, cash equivalents and restricted cash, end of period$185,150 $951,324 

See accompanying notes to condensed consolidated financial statements.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1.    Organization
2U, Inc. (together with its subsidiaries, the “Company”) is 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 46 million registered learners. Refer to Note 3 for further information about the edX Acquisition.
The Company 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. edX is the primary brand for the Company’s products and services and edx.org operates as its global online learning marketplace.
The Company is 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 premium online open courses, 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 and nine months ended September 30, 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 $24.6 million from changes in prepaid
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


expenses 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 consolidated statements of cash flows to conform to current period presentation. These reclassifications had no impact on previously reported operating, financing, or financing cash flows.
The Company has reclassified prior period amounts in the condensed consolidated balance sheet and condensed consolidated statement of operations to conform to the current period’s presentation restructuring charges. The Company reclassified $1.7 million from accounts payable and accrued liabilities to accrued restructuring liability. In addition, the Company reclassified $5.4 million and $7.2 million from general and administrative expense to restructuring charges for the three and nine months ended September 30, 2021, respectively.
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 the Company’s convertible senior notes, each approximated their fair values as of September 30, 2022 and December 31, 2021. Refer to Note 9 for more information regarding the Company’s convertible senior notes.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


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.
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 Assessments
During both the first and third quarter of 2022, the Company experienced a significant decline in its market capitalization. Management deemed these declines triggering events related to the Company’s goodwill and indefinite-lived intangible asset. As a result, the Company performed interim impairment assessments as of March 1, 2022 and September 30, 2022.
For each of the interim impairment assessments, 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
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


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 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.
For the interim impairment assessment performed as of March 1, 2022, management 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 value. 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 on the Company’s condensed consolidated statements of operations. The estimated fair value of each of the remaining reporting units exceeded their respective carrying value by approximately 10% or more.
For the interim impairment assessment performed as of September 30, 2022, management determined the carrying value for two 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 value. As a result, during the three months ended September 30, 2022, the Company recorded impairment charges of $50.2 million and $29.3 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 on the Company’s condensed consolidated statements of operations. The estimated fair value of each of the remaining reporting units exceeded their respective carrying value by approximately 10% or more.
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
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


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 does not expect the adoption of this standard to have a material impact on its consolidated financial statements and related disclosures.
In March 2022, the FASB issued ASU No 2022-02, Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted ASU 2016-13 and enhances the disclosure requirements for certain loan refinancings when borrowers are experiencing financial difficulty. In addition, the ASU requires the disclosure of current-period gross write-offs for financing receivables by year of origination in the vintage disclosures. This ASU is effective for fiscal years beginning after December 15, 2022. The Company is evaluating the impact of the new guidance on its disclosures but does not expect there to be a material impact on its consolidated financial statements.
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 nine months ended September 30, 2022, the Company recorded working capital adjustments of $5.0 million, reducing the preliminary purchase price to $768.0 million. In addition, the Company adjusted its preliminary valuation of acquired assets and assumed liabilities based upon new information that was received pertaining to acquisition date fair values.
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.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


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 nine months ended September 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 assets13,098 
Property and equipment, net529 
Right-of-use assets2,355 
Other assets, non-current572 
Accounts payable and accrued expenses(10,057)
Deferred revenue(17,000)
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 407,050 
 $768,009 

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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 September 30, 2022
 (in thousands)
Degree Program Segment
Gross goodwill$— $198,378 $(5,519)$— $— $192,859 
Accumulated impairments— — — — — — 
Net goodwill— 198,378 (5,519)— — 192,859 
Alternative Credential Segment
Gross goodwill$481,366 $225,174 $(10,983)$— $(6,460)$689,097 
Accumulated impairments(70,379)— — (78,991)— (149,370)
Net goodwill410,987 225,174 (10,983)(78,991)(6,460)539,727 
Unallocated goodwill$423,552 $(423,552)$— $— $— $— 
Total
Gross goodwill$904,918 $— $(16,502)$— $(6,460)$881,956 
Accumulated impairments(70,379)— — (78,991)— (149,370)
Net goodwill$834,539 $— $(16,502)$(78,991)$(6,460)$732,586 
During the first quarter of 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 nine months ended September 30, 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 $11.5 million, and goodwill impairment charges of $79.0 million. Refer to Note 2 for further information about the goodwill impairment charges.


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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.
  September 30, 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
$218,666 $(125,222)$93,444 $199,766 $(112,357)$87,409 
Capitalized content development
4-5
262,418 (163,907)98,511 243,687 (125,599)118,088 
University client relationships
9-10
209,016 (49,595)159,421 211,680 (34,995)176,685 
Enterprise client relationships1014,300 (1,251)13,049 14,300 (179)14,121 
Trade names and domain names
5-10
29,128 (19,845)9,283 27,161 (12,941)14,220 
Total definite-lived intangible assets$733,528 $(359,820)$373,708 $696,594 $(286,071)$410,523 
  September 30, 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 $(59,300)$195,700 $255,000 $— $255,000 
Total indefinite-lived intangible assets$255,000 $(59,300)$195,700 $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. During the three months ended September 30, 2022, the Company recorded a $29.3 million impairment charge related to its indefinite-lived intangible asset. Refer to Note 2 for further information about these impairment charges.
The amounts presented in the table above include $50.2 million and $46.3 million of in-process capitalized technology and content development as of September 30, 2022 and December 31, 2021, respectively.
The Company recorded amortization expense related to amortizable intangible assets of $26.6 million and $23.2 million for the three months ended September 30, 2022 and 2021, respectively. The Company recorded amortization expense related to amortizable intangible assets of $86.5 million and $68.0 million for the nine months ended September 30, 2022 and 2021, respectively.

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


The following table presents the estimated future amortization expense of the Company’s amortizable intangible assets placed in service as of September 30, 2022.
Future Amortization Expense
(in thousands)
Remainder of 2022$25,345 
202383,559 
202463,330 
202542,680 
202629,048 
Thereafter79,520 
Total$323,482 

5.    Other Balance Sheet Details
Prepaid expenses and other assets
As of September 30, 2022 and December 31, 2021, the Company had balances of $24.0 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 September 30, 2022 and December 31, 2021, the Company had balances of $8.9 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 $1.2 million and $0.7 million of such amortization for the three months ended September 30, 2022 and 2021, respectively. The Company incurred $1.9 million and $1.8 million of such amortization for the nine months ended September 30, 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.
September 30, 2022December 31, 2021
(in thousands)
Accrued university and instructional staff compensation$27,420 $36,806 
Accrued marketing expenses21,649 26,469 
Accrued transaction and integration expenses718 4,072 
Accrued compensation and related benefits26,409 49,143 
Accounts payable and other accrued expenses57,189 48,233 
Total accounts payable and accrued expenses$133,385 $164,723 
For each of the three and nine months ended September 30, 2022 and 2021, expenses related to the Company’s marketing and advertising efforts of its own brands were not material.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Other Current Liabilities
As of September 30, 2022 and December 31, 2021, the Company had balances of $18.6 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 September 30, 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.
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 and current Chief Revenue 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. On June 2, 2022, Plaintiffs filed a motion for preliminary approval of the class action settlement and accompanying documents. On June 23, 2022, the Court entered an order preliminarily approving the settlement. The final approval hearing is set for December 9, 2022. The settlement payment is being funded by the Company's insurers. The $37.0 million 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
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

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, which stay the court extended on multiple occasions to allow the parties to discuss settlement. The most recent stay concluded on September 23, 2022. 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 current Chief Revenue 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, which stay the court extended on multiple occasions to allow the parties to discuss settlement. The most recent stay concluded on September 22, 2022. 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 current Chief Revenue 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, which stay the court extended on multiple occasions to allow the parties to discuss settlement. The most recent stay concluded on September 23, 2022. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.
On September 14, 2022, Daniel Sebagh filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, our CEO, Catherine A. Graham, our former CFO, James Kenigsberg, our CTO, and our board of directors in the United States District Court for the District of Delaware, with docket number 1:22-cv-01205-UNA. The complaint alleges claims for breaches of fiduciary duty, unjust enrichment, waste of corporate assets, insider trading and alleged violations of Section 14(a) of the Exchange Act based upon allegedly false and misleading statements regarding our company’s business prospects and financial projections. 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, 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.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

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.    Restructuring Charges
2022 Strategic Realignment Plan
During the second quarter of 2022, the Company began implementing a plan to accelerate its transition to a platform company (the “2022 Strategic Realignment Plan”). The plan is designed to reorient the Company around a single platform allowing it to pursue a portfolio-based marketing strategy that drives traffic to the edX marketplace. As part of the plan, the Company has simplified its executive structure to reduce silos, reduced employee headcount, rationalized its real estate footprint and implemented steps to optimize marketing spend.
During the third quarter of 2022, the Company completed the planned headcount reductions and consolidated its in-person operations to its offices in Lanham, Maryland and Cape Town, South Africa.
The Company anticipates that it will incur aggregate restructuring charges associated with the 2022 Strategic Realignment Plan of approximately $35 million to $40 million. The Company recorded $11.3 million and $27.0 million in restructuring charges related to the 2022 Strategic Realignment Plan for each of the three and nine months ended September 30, 2022, respectively. The majority of the estimated remaining restructuring charges relate to leased facilities and will be recognized as expense over the remaining lease terms, ranging from 1 to 9 years.
The following table presents restructuring charges by reportable segment on the Company’s condensed consolidated statements of operations for the periods indicated.
Three Months Ended
September 30, 2022
Nine Months Ended
September 30, 2022
 Degree Program SegmentAlternative Credential SegmentDegree Program SegmentAlternative Credential Segment
2022 Strategic Realignment Plan
Severance and severance-related costs$— $— $8,772 $6,431 
Lease and lease-related charges*8,972 298 8,972 298 
Professional and other fees relating to restructuring activities961 20 1,515 20 
Other**— 1,008 — 1,008 
9,933 1,326 19,259 7,757 
Other restructuring charges***362 11 1,977 179 
Total restructuring charges
$10,295 $1,337 $21,236 $7,936 
*
For the three and nine months ended September 30, 2022, includes $8.5 million of accelerated amortization of right-of-use assets and accelerated depreciation of leasehold improvements related to updates to the estimated useful lives of certain leased facilities and $0.8 million in rent expense associated with these facilities, including amortization of the right-of-use asset and accretion of the operating lease liability, sublease income, and other variable lease costs. The liabilities associated with these leases continue to be presented within lease liability and lease liability, non-current on the Company’s condensed consolidated balance sheets.
**Includes the acceleration of certain technology and content development costs.
***
Includes severance and severance-related costs and lease-related charges.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

The Company recorded restructuring charges of $5.4 million and $7.2 million for the three and nine months ended September 30, 2021, respectively.
Summary of Accrued Restructuring Liability
The following table presents the additions and adjustments to the accrued restructuring liability on the Company’s condensed consolidated balance sheets for the periods indicated.
 Balance as of December 31, 2021Additional CostsCash PaymentsBalance as of September 30, 2022
 (in thousands)
2022 Strategic Realignment Plan
Severance and severance-related costs$— $14,542 $(3,885)$10,657 
Professional and other fees relating to restructuring activities— 1,820 — 1,820 
Lease and lease-related charges— 212 — 212 
Other severance and severance-related costs1,735 728 (1,601)862 
Total restructuring$1,735 $17,302 $(5,486)$13,551 

8.    Leases
The Company leases facilities under non-cancellable operating leases primarily in the United States, South Africa, and the United Kingdom. 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.
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 September 30, 2022, the subleases were classified as operating leases and each had a remaining term of 1.1 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 September 30, 2022, this sublease was classified as an operating lease and had a remaining term of 2.2 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.
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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
September 30,
Nine Months Ended
September 30,
2022202120222021
(in thousands)
Operating lease expense$5,099 $4,897 $16,471 $13,524 
Short-term lease expense139 66 407 120 
Variable lease expense1,811 1,713 5,180 4,742 
Sublease income(427)(155)(883)(265)
Total lease expense$6,622 $6,521 $21,175 $18,121 
As of September 30, 2022, for the Company’s operating leases, the weighted-average remaining lease term was 7.1 years and the weighted-average discount rate was 10.7%. For the nine months ended September 30, 2022 and 2021, cash paid for amounts included in the measurement of operating lease liabilities was $18.8 million and $16.5 million, respectively. For each of the nine months ended September 30, 2022 and 2021, lease liabilities arising from obtaining right-of use assets were $15.5 million and $28.7 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 $3.5 million in aggregate.
September 30, 2022
(in thousands)
Remainder of 2022$5,769 
202324,388 
202424,349 
202520,577 
202621,136 
Thereafter72,212 
Total lease payments168,431 
Less: imputed interest(52,924)
Total lease liability$115,507 


22

Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
9.    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, 2022December 31, 2021
(in thousands)
Term loan facilities$568,060 $572,374 
Convertible senior notes380,000 380,000 
Deferred government grant obligations3,500 3,500 
Other borrowings3,950 4,423 
Less: unamortized debt discount and issuance costs(19,768)(107,777)
Total debt935,742 852,520 
Less: current portion of long-term debt(7,545)(7,204)
Total long-term debt$928,197 $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 $283.5 million and $403.3 million as of September 30, 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 each of the three and nine months ended September 30, 2022 was approximately 9.00%. The associated interest expense was approximately $13.2 million and $35.4 million for the three and nine months ended September 30, 2022, 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.
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Table of Contents
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.
24

Table of Contents
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:
September 30, 2022December 31, 2021
(in thousands)
Principal$380,000 $380,000 
Unamortized debt discount for conversion option— (83,609)
Unamortized issuance costs(5,419)(5,104)
Net carrying amount$374,581 $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 September 30, 2022 and 2021 was $2.7 million and $7.8 million, respectively. The interest expense related to the Notes for the nine months ended September 30, 2022 and 2021 was $8.0 million and $23.0 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 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 September 30, 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”
25

Table of Contents
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 September 30, 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 and nine months ended September 30, 2022 and 2021 was immaterial. As of September 30, 2022 and December 31, 2021, the Company’s combined accrued interest balance associated with the deferred government grant obligations was $0.6 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 September 30, 2022, the Company has entered into standby letters of credit totaling $14.2 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.
26

Table of Contents
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:
September 30, 2022
(in thousands)
Remainder of 2022$1,438 
20235,753 
2024560,869 
2025380,000 
2026— 
Thereafter*3,500 
Total future principal payments$951,560 
*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.
10.    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, 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 and nine months ended September 30, 2022 and 2021 was less than 1%. The Company’s income tax benefit for the three months ended September 30, 2022 and 2021 was $0.1 million and $0.3 million, respectively. The Company’s income tax benefit for the nine months ended September 30, 2022 and 2021 was $0.5 million and $0.4 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.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Currently, the Company does not expect this legislation will have a material impact on its consolidated financial statements.

11.    Stockholders’ Equity
Common Stock
As of September 30, 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 September 30, 2022, there
27

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


were 77,845,436 shares of common stock outstanding, and the Company had reserved a total of 29,411,807 of its authorized shares of common stock for future issuance as follows:
Shares Reserved for Future Issuance
Outstanding restricted stock units4,594,782 
Outstanding performance restricted stock units2,248,104 
Outstanding stock options5,428,679 
Reserved for convertible senior notes17,140,242 
Total shares of common stock reserved for future issuance29,411,807 
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 September 30, 2022, 379,670 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.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
 (in thousands)
Curriculum and teaching$59 $18 $155 $51 
Servicing and support3,061 3,856 11,741 11,669 
Technology and content development1,288 3,334 7,785 9,703 
Marketing and sales1,013 1,811 4,861 4,984 
General and administrative10,546 16,003 38,198 48,338 
Total stock-based compensation expense$15,967 $25,022 $62,740 $74,745 
28

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


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 
Granted4,464,951 10.67 
Vested(1,715,633)25.77 
Forfeited(767,599)18.29 
Outstanding balance as of September 30, 20224,594,782 $16.05 
The total compensation expense related to the unvested RSUs not yet recognized as of September 30, 2022 was $49.4 million, and will be recognized over a weighted-average period of approximately 1.8 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 September 30, 2022 and December 31, 2021, there were 1.1 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 September 30, 2022 and December 31, 2021, and have been excluded from the tables below. No PRSUs were granted during each of the three months ended September 30, 2022 and 2021.
 Nine Months Ended
September 30,
 20222021
Risk-free interest rate
0.39% – 1.88%
0.10% – 0.26%
Expected term (years)
1.00 – 3.00
1.00 – 3.00
Expected volatility
49% – 97%
85% – 89%
Dividend yield0%0%
Weighted-average grant date fair value per share$18.67$61.33

29

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


 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(12,597)40.78 
Forfeited(942,223)44.28 
Outstanding balance as of September 30, 20222,248,104 $21.45 
The total compensation expense related to the unvested PRSUs not yet recognized as of September 30, 2022 was $15.8 million, and will be recognized over a weighted-average period of approximately 1.3 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 nine months ended September 30, 2021.
 Three Months Ended
September 30, 2022
Nine Months Ended
September 30, 2022
Risk-free interest rate
 3.0%
1.9% - 3.0%
Expected term (years)
5.78
5.63 - 5.78
Expected volatility
79%
75% - 79%
Dividend yield0%0%
Weighted-average grant date fair value per share$7.78$7.02
The following table presents a summary of the Company’s stock option activity for the period indicated.
 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, 20213,477,439 $36.13 3.87$16,246 
Granted3,149,620 10.78 7.50
Exercised(316,965)3.42 0.10
Forfeited(585,842)13.13 
Expired(295,573)43.25 
Outstanding balance as of September 30, 20225,428,679 25.43 5.9597 
Exercisable as of September 30, 20223,174,670 $33.11 3.67$97 
The aggregate intrinsic value of options exercised during the nine months ended September 30, 2022 and 2021 was $3.2 million and $6.3 million, respectively.
The total compensation expense related to the unvested options not yet recognized as of September 30, 2022 was $17.5 million, and will be recognized over a weighted-average period of approximately 2.2 years.

30

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


12.    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,
 20222021
Stock options5,428,679 3,538,522 
Restricted stock units4,594,782 2,681,579 
Performance restricted stock units2,248,104 1,558,149 
Shares related to convertible senior notes13,443,374 13,443,374 
Total antidilutive securities25,714,939 21,221,624 
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,
 2022202120222021
Numerator (in thousands):  
Net loss$(121,676)$(60,110)$(310,308)$(127,505)
Denominator:  
Weighted-average shares of common stock outstanding, basic and diluted
77,692,911 74,691,521 77,013,180 74,266,999 
Net loss per share, basic and diluted$(1.57)$(0.80)$(4.03)$(1.72)
13.    Segment and Geographic Information
The Company has two 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 executive education programs and technical skills-based boot camps provided through relationships with nonprofit colleges and universities.
Significant Customers
For the three and nine months ended September 30, 2022 and September 30, 2021, no university clients accounted for 10% or more of the Company’s consolidated revenue.
As of September 30, 2022, no university clients in the Degree Program Segment accounted for 10% or more of the Company’s consolidated accounts receivable, net balance. As of December 31, 2021, two university clients in the Degree Program Segment each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, with $9.8 million and $8.8 million, or approximately 14% and 13% of the Company’s consolidated accounts receivable, net balance, respectively.
31

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


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,
 2022202120222021
 (dollars in thousands)
Revenue by segment*  
Degree Program Segment$137,242 $147,795 $434,499 $439,884 
Alternative Credential Segment94,996 84,581 292,532 262,174 
Total revenue$232,238 $232,376 $727,031 $702,058 
Segment profitability**  
Degree Program Segment$44,907 $32,925 $120,264 $86,786 
Alternative Credential Segment(12,389)(18,185)(53,564)(41,186)
Total segment profitability$32,518 $14,740 $66,700 $45,600 
Segment profitability margin***  
Degree Program Segment32.7 %22.3 %27.7 %19.7 %
Alternative Credential Segment(13.0)(21.5)(18.3)(15.7)
Total segment profitability margin14.0 %6.4 %9.2 %6.5 %
*
The Company has excluded immaterial amounts of intersegment revenues from each of the three and nine months ended September 30, 2022 and 2021.
**
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.

32

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


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,
 2022202120222021
 (in thousands)(in thousands)
Net loss$(121,676)$(60,110)$(310,308)$(127,505)
Adjustments:
Stock-based compensation expense15,967 25,022 62,740 74,745 
Other (income) expense, net1,845 425 4,242 (22,730)
Net interest expense15,644 16,471 42,942 31,826 
Income tax benefit(59)(319)(474)(448)
Depreciation and amortization expense29,313 26,168 95,070 77,577 
Impairment charges79,509 — 138,291 — 
Loss on debt extinguishment— — — 1,101 
Restructuring charges11,632 5,395 29,172 7,214 
Other*343 1,688 5,025 3,820 
Total adjustments154,194 74,850 377,008 173,105 
Total segment profitability$32,518 $14,740 $66,700 $45,600 
*
Includes (i) transaction and integration expense of $0.0 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $3.4 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively, and (ii) stockholder activism and litigation-related (recoveries) expense of $0.3 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $1.6 million and $1.2 million for the nine months ended September 30, 2022 and 2021, respectively.
The following table presents the Company’s total assets by segment as of each of the dates indicated.
 September 30,
2022
December 31,
2021
 (in thousands)
Total assets  
Degree Program Segment
$518,292 $546,572 
Alternative Credential Segment1,391,264 1,562,434 
Total assets$1,909,556 $2,109,006 
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 $24.5 million and $24.7 million for the three months ended September 30, 2022 and 2021, respectively. The Company’s non-U.S. revenue was $79.8 million and $74.1 million for the nine months ended September 30, 2022 and 2021, 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, 2022 and December 31, 2021 totaled approximately $3.1 million and $3.3 million, respectively.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


14.    Receivables and Contract Liabilities
Trade Accounts Receivable
The Company’s trade accounts receivable balances relate to amounts due from students or customers occurring in the normal course of business. Trade accounts 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 following table presents the Company’s trade accounts receivable in each segment as of each of the dates indicated.
 September 30,
2022
December 31,
2021
 (in thousands)
Degree Program Segment accounts receivable
$33,985 $31,762 
Degree Program Segment unbilled revenue32,127 4,440 
Alternative Credential Segment accounts receivable47,364 42,771 
Total113,476 78,973 
Less: Provision for credit losses(16,312)(11,686)
Trade accounts receivable, net$97,164 $67,287 
The following table presents the change in provision for credit losses for trade accounts receivable on the Company’s condensed consolidated balance sheets for the period indicated.
Provision for Credit Losses
(in thousands)
Balance as of December 31, 2021$11,686 
Current period provision5,097 
Foreign currency translation adjustments(70)
Other (401)
Balance as of September 30, 2022$16,312 
Other Receivables
The Company’s other receivables are comprised of amounts due under tuition payment plans with extended payment terms from students enrolled in certain 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 range from 12 to 42 months 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. The following table presents the components of the Company’s other receivables, net, as of each of the dates indicated.
September 30,
2022
December 31,
2021
(in thousands)
Other receivables, amortized cost$54,379 $52,428 
Less: Provision for credit losses(2,363)(1,421)
Other receivables, net$52,016 $51,007 
Other receivables, net, current$31,009 $29,439 
Other receivables, net, non-current$21,007 $21,568 
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


The following table presents the change in provision for credit losses for other receivables on the Company’s condensed consolidated balance sheets for the period indicated.
Provision for Credit Losses
(in thousands)
Balance as of December 31, 2021$1,421 
Current period provision1,031 
Other(89)
Balance as of September 30, 2022$2,363 
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, 2022, 87% of other receivables, net due under extended payment plans were current.
At the time of origination, the Company categorizes its other receivables using a credit quality indicator based on the credit tier rankings obtained from the third-party providers that manage and service the payment plans. The third-party providers utilize credit rating agency data to determine the credit tier rankings. The Company monitors the collectability of its other receivables on an ongoing basis. The adequacy of the allowance for credit losses is determined through analysis of multiple factors, including industry trends, portfolio performance, and delinquency rates. The following tables present other receivables, at amortized cost including interest accretion, by credit quality indicator and year of origination, as of the dates indicated.
September 30, 2022
Year of Origination
 20222021202020192018Total
(in thousands)
Credit Quality Tier
High$14,559 $5,256 $11 $20 $115 $19,961 
Mid13,938 5,640 517 1,356 392 21,843 
Low5,399 3,774 1,142 1,930 330 12,575 
Total$33,896 $14,670 $1,670 $3,306 $837 $54,379 

December 31, 2021
Year of Origination
 2021202020192018Total
(in thousands)
Credit Quality Tier
High$18,466 $1,635 $24 $115 $20,240 
Mid14,352 2,992 1,312 392 19,048 
Low8,135 2,802 1,873 330 13,140 
Total$40,953 $7,429 $3,209 $837 $52,428 
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Contract Liabilities
The Company’s deferred revenue represents contract liabilities. The Company generally receives 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 the Company’s obligations are otherwise met, at which time revenue is recognized. The following table presents the Company’s contract liabilities in each segment as of each of the dates indicated.
 September 30,
2022
December 31,
2021
 (in thousands)
Degree Program Segment deferred revenue
$31,102 $3,462 
Alternative Credential Segment deferred revenue96,495 88,464 
Total contract liabilities$127,597 $91,926 
For the Degree Program Segment, during the three months ended September 30, 2022 and 2021 the Company recognized $0.1 million and no 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, 2022 and 2021 that was included in the deferred revenue balance that existed at the end of each preceding year was $1.5 million and $1.7 million, respectively.
For the Alternative Credential Segment, during the three months ended September 30, 2022 and 2021 the Company recognized $7.3 million and no 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, 2022 and 2021 that was included in the deferred revenue balance that existed at the end of each preceding year was $73.8 million and $71.9 million, respectively.
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, 2022 and December 31, 2021, respectively. For each of the nine months ended September 30, 2022 and 2021, the Company capitalized an immaterial amount of contract acquisition costs and recorded an immaterial amount of associated amortization expense in the Degree Program Segment.
15.    Supplemental Cash Flow Information
The Company’s cash interest payments, net of amounts capitalized, were $35.2 million and $4.5 million for the nine months ended September 30, 2022 and 2021, respectively. The Company’s accrued but unpaid capital expenditures were $2.8 million and $4.3 million for the nine months ended September 30, 2022 and 2021, respectively.
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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021. 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, 2021, 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, 2021, which are included in our Annual Report on Form 10-K, filed with the SEC on March 1, 2022.
Overview
We are a leading online education platform company. Our mission is to expand access to high-quality educational opportunities that unlock human potential. In November 2021, we acquired substantially all of the assets of edX Inc. (the “edX Acquisition”), including the edX brand, website and marketplace. As a result of the edX Acquisition, we expanded our 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 46 million registered learners.
We serve more than 230 top-ranked global universities and other leading institutions, and offer 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.
We are positioned as one of the world’s most comprehensive free-to-degree online learning platforms. We believe our platform and robust consumer marketplace provide our 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.
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 open courses, executive education programs, technical, skills-based boot camps and micro-credential programs at the undergraduate and graduate levels through relationships with nonprofit colleges and universities and other leading institutions. Students enrolled in these offerings are generally seeking to reskill or upskill for career advancement or personal development through shorter duration, lower-priced offerings.
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Recent Developments
During the second quarter of 2022, we accelerated our planned transition to a platform company (the “2022 Strategic Realignment Plan”). This acceleration reflected our increasing confidence in our platform strategy combined with the macroeconomic environment that continued to be challenging. The plan is designed to reorient the company around a single platform allowing us to pursue a portfolio-based marketing strategy that drives traffic to the edX marketplace. As part of the plan, we have simplified our executive structure to reduce silos, reduced employee headcount, rationalized our real estate footprint and implemented steps to optimize marketing spend.
During the third quarter, we completed the planned headcount reduction and consolidated our in-person operations to our offices in Lanham, Maryland and Cape Town, South Africa. We expect to generate marketing efficiency and approximately $70 million in annualized cost savings, primarily due to savings associated with headcount reduction and reduced real estate costs. We anticipate that we will incur aggregate restructuring charges associated with the 2022 Strategic Realignment Plan of approximately $35 million to $40 million. We recorded $11.3 million and $27.0 million in restructuring charges related to the 2022 Strategic Realignment Plan for the three and nine months ended September 30, 2022, respectively. The majority of the estimated remaining restructuring charges relate to leased facilities, and will be recognized as expense over the remaining lease terms ranging from 1 to 9 years.
COVID-19 Update
The COVID-19 pandemic continues to have widespread impacts on society and the global economy. Our focus remains on ensuring the health and safety of our employees and clients, while ensuring the continuity of our business. We have adapted our business practices to allow our global workforce to continue to work from home on a voluntary basis. In addition, many of our in-person offerings and other campus-based experiences are offered in a virtual format, including the field placement components in certain of our clinical graduate programs. Our course production capabilities allow faculty to record studio-quality asynchronous content remotely.
We continue to closely monitor the impact of the COVID-19 pandemic on our business. The pandemic initially accelerated the need for online learning and training, but has also created new and different demand dynamics in the market. At the beginning of the pandemic, we experienced increased demand from new and existing university clients and students as universities moved classes online. As the pandemic continues, we have seen some of these pandemic-related trends subside in certain areas of our business. We have experienced fluctuations in our student retention rates, student enrollments and in our marketing costs. In addition, during the past year, competition for talent has increased, resulting in higher voluntary employee turnover and additional costs to attract and retain employees.
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, including the potential impact of variants of the virus, 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.”
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 executive education programs, boot camps, and premium online open courses. 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
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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 executive education 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 executive education 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.
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.
Restructuring charges
Restructuring charges consist of severance and severance-related costs, costs associated with the exit of facilities, and costs associated with professional services.
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.
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. On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Currently, we do not believe this legislation will have a material impact on our consolidated financial statements.

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Results of Operations
Consolidated Operating Results
Comparison of Three Months Ended September 30, 2022 and 2021
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,
 20222021Period-to-Period Change
 AmountPercentage of RevenueAmountPercentage of RevenueAmountPercentage
(dollars in thousands)
Revenue$232,238 100.0 %$232,376 100.0 %$(138)0.1 %
Costs and expenses
Curriculum and teaching31,558 13.6 30,869 13.3 689 2.2 
Servicing and support36,110 15.5 33,898 14.6 2,212 6.5 
Technology and content development
43,976 18.9 43,106 18.6 870 2.0 
Marketing and sales94,311 40.6 118,300 50.9 (23,989)20.3 
General and administrative39,388 17.0 44,341 19.1 (4,953)11.2 
Restructuring charges11,632 5.0 5,395 2.3 6,237 115.6 
Impairment charges79,509 34.2 — — 79,509 *
Total costs and expenses336,484 144.8 275,909 118.8 60,575 22.0 
Loss from operations(104,246)(44.8)(43,533)(18.8)(60,713)139.5 
Interest income269 0.1 474 0.2 (205)43.1 
Interest expense(15,913)(6.9)(16,945)(7.3)1,032 6.1 
Other income (expense), net(1,845)(0.8)(425)(0.2)(1,420)333.4 
Loss before income taxes(121,735)(52.4)(60,429)(26.1)(61,306)101.4 
Income tax benefit59 0.0 319 0.1 (260)81.3 
Net loss$(121,676)(52.4)%$(60,110)(26.0)%$(61,566)102.4 %
*
Not meaningful for comparative purposes.
Revenue. Revenue for the three months ended September 30, 2022 decreased $0.1 million, or 0.1%, to $232.2 million as compared to $232.4 million in 2021. Revenue for the three months ended September 30, 2022 includes $9.3 million of revenue from legacy edX offerings. The remaining change was due to a $13.9 million decrease in revenue from our Degree Program Segment, partially offset by a $4.5 million increase in revenue from our Alternative Credential Segment.
In the Degree Program Segment, average revenue per FCE enrollment decreased from $2,555 to $2,404, or 5.9%, and FCE enrollments decreased by 750, or 1.3%. In the Alternative Credential Segment, FCE enrollments increased by 2,954, or 14.6%, and average revenue per FCE enrollment decreased from $4,193 to $3,850, or 8.2%.
Curriculum and Teaching. Curriculum and teaching expense for the three months ended September 30, 2022 was $31.6 million, which was comparable to the three months ended September 30, 2021.
Servicing and Support. Servicing and support expense increased $2.2 million, or 6.5%, to $36.1 million as compared to $33.9 million in 2021. The 2022 expense includes $2.5 million of operating expense from edX.
Technology and Content Development. Technology and content development expense increased $0.9 million, or 2.0%, to $44.0 million as compared to $43.1 million in 2021. The 2022 expense includes $5.0 million of operating expense from edX. The remaining change was primarily due to a $1.8 million decrease in personnel and personnel-related expense and a $1.8 million decrease in depreciation and amortization expense. These decreases were partially offset by a $1.2 million increase in expenses to support our platform and software applications.
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Marketing and Sales. Marketing and sales expense decreased $24.0 million, or 20.3%, to $94.3 million as compared to $118.3 million in 2021. The 2022 expense includes $7.4 million of operating expense from edX. The remaining change was primarily due to a $28.6 million decrease in marketing expense from the implementation of a more efficient marketing framework in connection with the 2022 Strategic Realignment Plan and a $3.5 million decrease in personnel and personnel-related expense.
General and Administrative. General and administrative expense decreased $5.0 million, or 11.2%, to $39.4 million as compared to $44.3 million in 2021. The 2022 expense includes $1.7 million of operating expense from edX. The remaining change was primarily due to a $4.5 million decrease in personnel and personnel-related expense and a $1.3 million decrease in professional fees.
Impairment Charges. In the third quarter of 2022, we recorded impairment charges of $50.2 million and $29.3 million to goodwill and the indefinite-lived intangible asset, respectively.
Restructuring Charges. Restructuring charges increased $6.2 million, or 115.6%, to $11.6 million as compared to $5.4 million in 2021. Restructuring charges for the three months ended September 30, 2022 include $9.3 million in lease and facility exit costs, $1.0 million in acceleration of certain technology and content development costs, and $1.0 million in professional and other fees relating to restructuring activities, each in connection with the 2022 Strategic Realignment Plan. Restructuring charges for the three months ended September 30, 2021 include $5.3 million in lease and facility exit costs.
Net Interest Income (Expense). Net interest expense decreased $0.8 million, or 5.0%, to $15.6 million as compared to $16.5 million in 2021. This decrease was primarily due to a $5.1 million decrease in interest expense due to the adoption of ASU 2020-06, which eliminated the amortization of the debt discount previously associated with the Notes. This decrease was partially offset by a $4.4 million increase in interest expense incurred under our term loan facility.
Other Income (Expense), Net. Other expense, net was $1.8 million for the three months ended September 30, 2022, as compared to other expense, net of $0.4 million for the three months ended September 30, 2021. 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, 2022, we recognized an income tax benefit of $0.1 million, and our effective tax rate was less than 1%. For the three months ended September 30, 2021, we recognized an income tax benefit of $0.3 million, and our effective tax rate was approximately 1%. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

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Comparison of Nine Months Ended September 30, 2022 and 2021
The following table presents selected condensed consolidated statement of operations and comprehensive loss data for each of the periods indicated.
Nine Months Ended September 30,
 20222021Period-to-Period Change
 AmountPercentage of RevenueAmountPercentage of RevenueAmountPercentage
(dollars in thousands)
Revenue$727,031 100.0 %$702,058 100.0 %$24,973 3.6 %
Costs and expenses
Curriculum and teaching96,933 13.3 98,805 14.1 (1,872)1.9 
Servicing and support112,795 15.5 101,947 14.5 10,848 10.6 
Technology and content development
140,649 19.3 128,539 18.3 12,110 9.4 
Marketing and sales341,643 47.0 346,181 49.3 (4,538)1.3 
General and administrative131,146 18.0 137,128 19.5 (5,982)4.4 
Restructuring charges29,172 4.0 7,214 1.0 21,958 304.4 
Impairment charges138,291 19.0 — — 138,291 *
Total costs and expenses990,629 136.1 819,814 116.7 170,815 20.8 
Loss from operations(263,598)(36.1)(117,756)(16.7)(145,842)123.9 
Interest income767 0.1 1,188 0.2 (421)35.4 
Interest expense(43,709)(6.0)(33,014)(4.7)(10,695)32.4 
Loss on debt extinguishment— 0.0 (1,101)(0.2)1,101 *
Other income (expense), net(4,242)(0.6)22,730 3.2 (26,972)118.7 
Loss before income taxes(310,782)(42.6)(127,953)(18.2)(182,829)142.9 
Income tax benefit474 0.1 448 0.1 26 5.9 
Net loss$(310,308)(42.5)%$(127,505)(18.1)%$(182,803)143.4 %
*
Not meaningful for comparative purposes.
Revenue. Revenue for the nine months ended September 30, 2022 increased $25.0 million, or 3.6%, to $727.0 million as compared to $702.1 million in 2021. Revenue for the nine months ended September 30, 2022 includes $30.2 million of revenue from legacy edX offerings. The remaining change was due to a $14.3 million decrease in revenue from our Degree Program Segment, partially offset by a $9.0 million increase in revenue from our Alternative Credential Segment.
In the Degree Program Segment, average revenue per FCE enrollment decreased from $2,467 to $2,414, or 2.1% and FCE enrollments increased by 1,726, or 1.0%. In the Alternative Credential Segment, FCE enrollments increased by 4,304, or 6.6% and average revenue per FCE enrollment decreased from $4,038 to $3,917, or 3.0%.
Curriculum and Teaching. Curriculum and teaching expense decreased $1.9 million, or 1.9%, to $96.9 million as compared to $98.8 million in 2021. This decrease was primarily due to lower expense related to university clients resulting from lower revenue in certain offerings in our Alternative Credential Segment.
Servicing and Support. Servicing and support expense increased $10.8 million, or 10.6%, to $112.8 million as compared to $101.9 million in 2021. The 2022 expense includes $8.2 million of operating expense from edX. The remaining increase was primarily due to a $3.0 million increase in other student support costs.
Technology and Content Development. Technology and content development expense increased $12.1 million, or 9.4%, to $140.6 million as compared to $128.5 million in 2021. The 2022 expense includes $14.9 million of operating expense from edX. The remaining change was primarily due to a $4.3 million decrease in personnel and personnel-related expense, partially offset by a $2.0 million increase in expenses to support our platform and software applications.
Marketing and Sales. Marketing and sales expense decreased $4.5 million, or 1.3%, to $341.6 million as compared to $346.2 million in 2021. The 2022 expense includes $22.7 million of operating expense from edX. The remaining change was
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primarily due to a $24.5 million decrease in marketing expense from the implementation of a more efficient marketing framework in connection with the 2022 Strategic Realignment Plan, and a $7.5 million decrease in personnel and personnel-related expense. These decreases were partially offset by a $3.8 million increase in depreciation and amortization expense.
General and Administrative. General and administrative expense decreased $6.0 million, or 4.4%, to $131.1 million as compared to $137.1 million in 2021. The 2022 expense includes $6.1 million of operating expense from edX. The remaining change was primarily due to a $12.3 million decrease in personnel and personnel-related expense and a $2.5 million decrease in professional fees. These decreases were partially offset by a $2.0 million increase in other expenses.
Impairment Charges. In the first quarter of 2022, we recorded impairment charges of $28.8 million and $30.0 million to goodwill and the indefinite-lived intangible asset, respectively. In the third quarter of 2022, we recorded impairment charges of $50.2 million and $29.3 million to goodwill and the indefinite-lived intangible asset, respectively.
Restructuring Charges. Restructuring charges increased $22.0 million, or 304.4%, to $29.2 million as compared to $7.2 million in 2021. Restructuring charges for the nine months ended September 30, 2022 include $15.2 million in severance and severance-related expense, $9.3 million in lease and facility exit costs, $1.5 million in professional and other fees relating to restructuring activities, and $1.0 million in acceleration of certain technology and content development costs, each in connection with the 2022 Strategic Realignment Plan, and $2.2 million in other restructuring charges. Restructuring charges for the nine months ended September 30, 2021 include $5.9 million in lease and facility exit costs and $1.2 million in severance and severance-related expense.
Net Interest Income (Expense). Net interest expense increased $11.1 million, or 34.9%, to $42.9 million as compared to $31.8 million in 2021. This increase was primarily due to a $26.1 million increase in interest expense incurred under our term loan facility. This increase was partially offset by a $15.0 million decrease in interest expense due to the adoption of ASU 2020-06, which eliminated the amortization of the debt discount previously associated with the Notes.
Loss on Debt Extinguishment. 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.
Other Income (Expense), Net. Other expense, net was $4.2 million for the nine months ended September 30, 2022, as compared to other income, net of $22.7 million for the nine months ended September 30, 2021. This change was primarily due to the gain recognized in connection with the sale of our investment in an education technology company during the nine months ended September 30, 2021.
Income Tax Benefit. For the nine months ended September 30, 2022, we recognized an income tax benefit of $0.5 million, and our effective tax rate was less than 1%. For the nine months ended September 30, 2021, we recognized an income tax benefit of $0.4 million, and our effective tax rate was less than 1%. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.
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Business Segment Operating Results
We define segment profitability as net income or net loss, as applicable, before net interest income (expense), other income (expense), net, taxes, depreciation and amortization expense, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, stockholder activism costs, certain litigation-related costs, consisting of fees for certain non-ordinary course litigation and other proceedings, impairment charges, losses on debt extinguishment, and stock-based compensation expense. Some of these items may not be applicable in any given reporting period and they may vary from period to period. Total segment profitability is a non-GAAP measure when presented outside of the financial statement footnotes. Total segment profitability is a key measure used by our management and board of directors to understand and evaluate our operating performance and trends, to develop short- and long-term operational plans and to compare our performance against that of other peer companies using similar measures. In particular, the exclusion of certain expenses in calculating total segment profitability can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that total segment profitability provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
The following table presents a reconciliation of total segment profitability to net loss for each of the periods indicated.
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2022202120222021
 (in thousands)
Net loss$(121,676)$(60,110)$(310,308)$(127,505)
Adjustments:
Stock-based compensation expense15,967 25,022 62,740 74,745 
Other (income) expense, net1,845 425 4,242 (22,730)
Net interest expense15,644 16,471 42,942 31,826 
Income tax expense (benefit)(59)(319)(474)(448)
Depreciation and amortization expense29,313 26,168 95,070 77,577 
Loss on debt extinguishment— — — 1,101 
Impairment charges79,509 — 138,291 — 
Restructuring charges11,632 5,395 29,172 7,214 
Other*343 1,688 5,025 3,820 
Total adjustments154,194 74,850 377,008 173,105 
Total segment profitability$32,518 $14,740 $66,700 $45,600 
*
Includes (i) transaction and integration expense of $0.0 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $3.4 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively, and (ii) stockholder activism and litigation-related (recoveries) expense of $0.3 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $1.6 million and $1.2 million for the nine months ended September 30, 2022 and 2021, respectively.
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Three Months Ended September 30, 2022 and 2021
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
 20222021AmountPercentage
 (dollars in thousands)
Revenue by segment*    
Degree Program Segment
$137,242 $147,795 $(10,553)(7.1)%
Alternative Credential Segment94,996 84,581 10,415 12.3 
Total revenue$232,238 $232,376 $(138)0.1 %
Segment profitability    
Degree Program Segment
$44,907 $32,925 $11,982 36.3 %
Alternative Credential Segment(12,389)(18,185)5,796 31.9 
Total segment profitability$32,518 $14,740 $17,778 120.3 %
*
Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended September 30, 2022 and 2021.
Degree Program Segment profitability increased $12.0 million, or 36.3%, to $44.9 million as compared to $32.9 million in 2021. This increase was primarily due to operational efficiency initiatives and the implementation of the 2022 Strategic Realignment Plan.
Alternative Credential Segment profitability increased $5.8 million, or 31.9%, to $(12.4) million as compared to $(18.2) million in 2021. This increase was primarily due to revenue growth of $10.4 million, including $5.9 million from the addition of edX offerings, partially offset by higher operating expenses, including $16.3 million of operating expense from edX. This $16.3 million increase was partially offset by lower operating expenses primarily due to the implementation of the 2022 Strategic Realignment Plan.
Nine Months Ended September 30, 2022 and 2021
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
 20222021AmountPercentage
 (dollars in thousands)
Revenue by segment*    
Degree Program Segment
$434,499 $439,884 $(5,385)(1.2)%
Alternative Credential Segment292,532 262,174 30,358 11.6 
Total revenue$727,031 $702,058 $24,973 3.6 %
Segment profitability    
Degree Program Segment
$120,264 $86,786 $33,478 38.6 %
Alternative Credential Segment(53,564)(41,186)(12,378)(30.1)
Total segment profitability$66,700 $45,600 $21,100 46.2 %
*
Immaterial amounts of intersegment revenue have been excluded from the above results for the nine months ended September 30, 2022 and 2021.
Degree Program Segment profitability increased $33.5 million, or 38.6%, to $120.3 million as compared to $86.8 million in 2021. This increase was primarily due to operational efficiency initiatives and the implementation of the 2022 Strategic Realignment Plan, partially offset by a decline in revenue of $5.4 million.
Alternative Credential Segment profitability decreased $12.4 million, or 30.1%, to $(53.6) million as compared to $(41.2) million in 2021. This decrease was primarily due to higher operating expenses, including $50.7 million of operating
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expense from edX, partially offset by revenue growth of $30.4 million, including $21.3 million from the addition of edX offerings.
Liquidity and Capital Resources
As of September 30, 2022, our principal sources of liquidity were cash and cash equivalents totaling $170.2 million, which were held for working capital and general corporate purposes.
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, 2022, the conditions allowing holders of the Notes to convert had not been met and we have the right under the Indenture to determine the method of settlement at the time of conversion, and the Notes, therefore, are classified as a non-current on the condensed consolidated balance sheets. Refer to Note 9 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.
On April 23, 2020, we repaid our $250 million senior secured term loan facility in full (including interest and prepayment premium) and terminated our credit agreement with Owl Rock Capital Corporation. In connection with the extinguishment of our $250 million senior secured term loan facility, we recognized a charge of approximately $11.7 million in the second quarter of 2020.
On June 25, 2020, we entered into a $50 million 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. In connection with entering into the Term Loan Agreement (as defined below) in June 2021, we terminated our $50 million credit agreement with Morgan Stanley Senior Funding, Inc. Refer to Note 9 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.
On August 6, 2020, we sold 6,800,000 shares of our common stock to the public. We received net proceeds of $299.8 million, which we use for working capital and other 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. Loans under this facility 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. We used the proceeds of the Term Loan Facilities to fund a portion of the edX Acquisition and to pay related costs, fees and expenses. On November 4, 2021, we entered into a First Amendment to Term Loan Credit and Guaranty Agreement and a Joinder Agreement, which amended the Term Loan Agreement (collectively, the “Amended Term Loan Facility”) primarily to provide for an incremental facility to us in an original principal amount of $100 million. The proceeds of the Amended Term Loan Facility may be used for general corporate purposes. Refer to Note 9 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 Amended Term Loan Facility.
We have financed our operations primarily through payments from university clients and students for our technology and services, the Amended Term Loan Facility, the Notes, and public and private equity financings. We believe that our existing cash and cash equivalents, together with cash generated from operations and available borrowing capacity under the Amended Term Loan Facility, will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. We regularly evaluate our liquidity position, debt obligations, maturity schedule and anticipated cash needs, and may consider capital raising, refinancing and other market opportunities that may be available to us. We are currently evaluating options to opportunistically refinance our term loan in the short- to medium-term.
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Our operations require us to make capital expenditures for content development, capitalized technology, and property and equipment and to service our debt. During the nine months ended September 30, 2022 and 2021, our capital asset additions were $61.8 million and $54.9 million, respectively.
We or our affiliates may, at any time and from time to time, seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands).
 Nine Months Ended
September 30,
 20222021
Net cash used in operating activities$(1,442)$(3,136)
Net cash used in investing activities(54,049)(12,558)
Net cash (used in) provided by financing activities(4,738)450,464 
Effect of exchange rate changes on cash(4,530)(2,312)
Net (decrease) increase in cash, cash equivalents and restricted cash$(64,759)$432,458 
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, adjusted for non-cash expense items such as depreciation and amortization expense, stock-based compensation expense and gain on sale of investment.
The following sections set forth the components of our $1.4 million of cash used in operating activities during the nine months ended September 30, 2022.
Net income (loss) (adjusted for non-cash charges)
The following table sets forth our net loss (adjusted for non-cash charges) during the nine months ended September 30, 2022 (in thousands):
Net loss$(310,308)
Non-cash interest expense9,929 
Depreciation and amortization expense95,070 
Stock-based compensation expense62,740 
Non-cash lease expense16,507 
Provision for credit losses6,129 
Impairment charges138,291 
Restructuring9,523 
Other4,660 
Net income (adjusted for non-cash charges)$32,541 
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Changes in operating assets and liabilities, net of assets and liabilities acquired
The following table sets forth the net cash used in changes in operating assets and liabilities during the nine months ended September 30, 2022 (in thousands):
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Cash used in accounts receivable, net and other receivables, net$(39,120)
Cash used in prepaid expenses, other assets, and other liabilities, net(25,151)
Cash used in accounts payable and accrued expenses(12,964)
Cash provided by deferred revenue43,252 
Net cash used in changes in operating assets and liabilities$(33,983)
From December 31, 2021 to September 30, 2022:
Accounts receivable, net and other receivables, net increased $39.1 million and deferred revenue increased $43.3 million. These increases were primarily due to the timing of our Degree Program Segment clients’ academic terms.
Accounts payable and accrued expenses decreased $13.0 million, primarily due to a decrease in accrued compensation and related benefits.
Other liabilities decreased $27.1 million, primarily due to a decrease in our lease liability and payments made to university clients in certain of our alternative credential offerings.
Investing Activities
Our investing activities primarily consist of strategic acquisitions, divestitures and purchases of property and equipment to support the overall growth of our business. We expect our investing cash flows to be affected by the timing of payments we make for capital expenditures and the strategic acquisition or other growth opportunities we decide to pursue.
During the nine months ended September 30, 2022, net cash used in investing activities was $54.0 million. This use of cash was driven by cash outflows of $50.2 million for the addition of amortizable intangible assets and $8.8 million for purchases of property and equipment, partially offset by a purchase price adjustment related to a change in net working capital which reduced the preliminary purchase price of the edX Acquisition by $5.0 million.
Financing Activities
Our financing activities primarily consist of long-term debt borrowings, the repayment of principal on long-term debt, tax withholding payments associated with the settlement of restricted stock units, and cash proceeds from the exercise of stock options.
During the nine months ended September 30, 2022, net cash used in financing activities was $4.7 million. This use of cash was driven by cash outflows of $5.3 million for quarterly amortization payments on our Amended Term Loan Facility and $2.3 million for tax withholding payments associated with the settlement of restricted stock units, partially offset by a cash inflow of $2.4 million from cash proceeds received from employee stock purchase plan share purchases and the exercise of stock options.
Critical Accounting Policies and Estimates
Revenue Recognition, Receivables 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.
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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 executive education programs and boot camps. Our executive education programs run between two and 16 weeks, while our boot camps run between 12 and 24 weeks. In this segment, our contracts with students include the delivery of the educational and related student support services and are treated as either a single performance obligation or multiple performance obligations, depending upon the offering being delivered. All performance obligations are satisfied ratably over the same presentation period, which is defined as the period beginning on the first day of the course through the last. We recognize the proceeds received, net of any applicable pricing concessions, from the students enrolled and share contractually specified amounts received from students 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.
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, other receivables, 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
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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.
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.
Other receivables, net are comprised of amounts due under tuition payment plans with extended payment terms from students enrolled in certain of our alternative credential offerings. 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.
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.
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. 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 our condensed consolidated financial statements from the acquisition date.
The purchase price allocation process requires management to make significant estimates and assumptions, especially with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions, and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. Unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions, estimates or actual results.
On November 16, 2021, we completed the edX Acquisition for a preliminary purchase price of $773 million. Refer to Note 3 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this transaction.
Long-Lived Assets
Amortizable Intangible Assets
Acquired Definite-lived Intangible Assets. We capitalize purchased definite-lived 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 condensed 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 and Other Indefinite-lived Intangible Assets
We review 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
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.
Changes in these estimates and assumptions could materially affect the determination of fair value and the goodwill impairment test result. As of September 30, 2022 and December 31, 2021, the goodwill balance was $732.6 million and $834.5
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million, respectively, and the indefinite-lived intangible asset balance was $195.7 million and $255.0 million, respectively. Refer to Note 4 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding this transaction and for more information regarding goodwill and our indefinite-lived intangible asset.
Other Indefinite-lived Intangible Assets
Our indefinite-lived intangible asset was acquired in November 2021 and represents the established edX trade name.
Interim Impairment Assessment
During both the first and third quarter of 2022, we experienced a significant decline in our market capitalization. Management deemed these declines triggering events related to our goodwill and indefinite-lived intangible asset. As a result, we performed interim impairment assessments as of March 1, 2022 and September 30, 2022.
For each of the interim impairment assessments, we 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. 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.
For the interim impairment assessment performed as of March 1, 2022, we determined the carrying value for one of our reporting units within our Alternative Credential Segment and the carrying value of our indefinite-lived intangible asset exceeded their respective estimated fair value. As a result, during the three months ended March 31, 2022, we recorded impairment charges of $28.8 million and $30.0 million to goodwill and the indefinite-lived intangible asset, respectively. These charges are included within operating expense on our condensed consolidated statements of operations. The estimated fair values of the remaining reporting units exceeded their respective carrying values by approximately 10% or more.
For the interim impairment assessment performed as of September 30, 2022, we determined the carrying value for two of the reporting units within our Alternative Credential Segment and the carrying value of an indefinite-lived intangible asset exceeded their respective estimated fair value. As a result, during the three months ended September 30, 2022, we recorded impairment charges of $50.2 million and $29.3 million to goodwill and the indefinite-lived intangible asset, respectively, both within our Alternative Credential Segment. These charges are included within operating expense on our condensed consolidated statements of operations. The estimated fair value of each of the remaining reporting units exceeded their respective carrying value by approximately 10% or more.
Changes in the estimates and assumptions used to estimate fair value could materially affect the determination of fair value and the impairment test result. For one of the reporting units within the Alternative Credential Segment, which had a goodwill balance of $97.5 million as of September 30, 2022, we recorded goodwill impairment charges of $43.0 million and $71.8 million for the three and nine months ended September 30, 2022, respectively. For the impairment analysis performed as of September 30, 2022, a 1% increase or decrease to the discount rate, in isolation, would result in a $40.3 million decrease or a $53.5 million increase to the estimated fair value of the reporting unit, respectively, and a 1% decrease or increase to the terminal growth rate, in isolation, would result a $27.6 million decrease or a $36.6 million increase to the estimated fair value of the reporting unit, respectively.
For the other reporting unit within the Alternative Credential Segment, which had a goodwill balance of $56.4 million as of September 30, 2022, we recorded goodwill impairment charges of $7.2 million for each of the three and nine months ended September 30, 2022. For the impairment analysis performed as of September 30, 2022, a 1% increase or decrease to the discount rate, in isolation, would result in a $5.2 million decrease or a $6.7 million increase to the estimated fair value of the reporting unit, respectively, and a 1% decrease or increase to the terminal growth rate, in isolation, would result a $3.1 million decrease or a $3.9 million increase to the estimated fair value of the reporting unit, respectively.
For the indefinite-lived intangible asset within the Alternative Credential Segment, we recorded impairment charges of $29.3 million and $59.3 million for the three and nine months ended September 30, 2022, respectively. For the impairment analysis performed as of September 30, 2022, a 1% increase or decrease to the discount rate, in isolation, would result in a $51.6 million decrease or a $66.3 million increase to the estimated fair value of the reporting unit, respectively.
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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, executive education programs, and boot camps, as applicable, and varying tuition levels, among other factors.
For the Degree Program Segment, FCE enrollments and average revenue per FCE enrollment include enrollments and revenue from edX bachelor’s and master’s degree offerings. For the Alternative Credential Segment, FCE enrollments and average revenue per FCE enrollment exclude enrollments and revenue from edX offerings due to the large number of learners taking free or low-cost courses. We believe excluding the impact of these enrollments and revenue is useful to investors because it facilitates a period-to-period comparison.
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,
 2022202120222021
Degree Program Segment*
  
FCE enrollments57,092 57,842 180,004 178,278 
Average revenue per FCE enrollment$2,404 $2,555 $2,414 $2,467 
Alternative Credential Segment**  
FCE enrollments23,128 20,174 69,235 64,931 
Average revenue per FCE enrollment$3,850 $4,193 $3,917 $4,038 
*
FCE enrollments and average revenue per FCE include enrollments in edX degree offerings and revenue from these offerings of $3.4 million and zero for the three months ended September 30, 2022 and 2021, respectively, and $8.9 million and zero for the nine months ended September 30, 2022 and 2021, respectively.
**
FCE enrollments and average revenue per FCE exclude the impact of enrollments in edX offerings and the related revenue of $5.9 million and zero for the three months ended September 30, 2022 and 2021, respectively, and $21.3 million and zero for the nine months ended September 30, 2022 and 2021, respectively.
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
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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.
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,
 2022202120222021
 (in thousands)(in thousands)
Net loss$(121,676)$(60,110)$(310,308)$(127,505)
Adjustments:
Stock-based compensation expense15,967 25,022 62,740 74,745 
Other (income) expense, net1,845 425 4,242 (22,730)
Net interest expense15,644 16,471 42,942 31,826 
Income tax benefit(59)(319)(474)(448)
Depreciation and amortization expense29,313 26,168 95,070 77,577 
Loss on debt extinguishment— — — 1,101 
Impairment charges79,509 — 138,291 — 
Restructuring charges11,632 5,395 29,172 7,214 
Other*343 1,688 5,025 3,820 
Total adjustments154,194 74,850 377,008 173,105 
Adjusted EBITDA$32,518 $14,740 $66,700 $45,600 
*
Includes (i) transaction and integration expense of $0.0 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $3.4 million and $2.6 million for the nine months ended September 30, 2022 and 2021, respectively, and (ii) stockholder activism and litigation-related (recoveries) expense of $0.3 million and $0.8 million for the three months ended September 30, 2022 and 2021, respectively, and $1.6 million and $1.2 million for the nine months ended September 30, 2022 and 2021, 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 March 1, 2022.
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, 2022 and 2021, our foreign currency translation adjustment losses were $5.6 million and $4.3 million, respectively. For the nine months ended September 30, 2022 and 2021, our foreign currency translation adjustment losses were $6.0 million and $2.1 million, respectively.
For the three months ended September 30, 2022 and 2021, we recognized foreign currency exchange losses of $1.8 million and $0.3 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss. For the nine months ended September 30, 2022 and 2021, we recognized foreign currency exchange losses of $4.6 million and $2.1 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, 2022 was 11% and 7% for the South African rand and British pound, respectively. 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. 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.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations for the nine months ended September 30, 2022 and 2021, however, our business could be affected by inflation in the future. As inflation has accelerated in the U.S. and globally, we continue to monitor all inflation-driven costs, regardless of where they are incurred. If our costs were to become subject to significant inflationary pressures, the price increases implemented by our university clients and our own pricing strategies might not fully offset the higher costs, which could harm our business, financial condition and results of operations.
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, 2022 at a reasonable assurance level. The scope of management’s assessment of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022 includes all of the Company’s consolidated operations except for, as permitted by SEC guidance for newly acquired businesses, those disclosure controls and procedures of edX that are subsumed by internal control over financial reporting. We acquired edX on November 16, 2021 and their results of operations are included in our financial statements effective with the fourth quarter of 2021. As of September 30, 2022, the assets acquired in the edX acquisition constituted approximately 4% of the Company’s consolidated assets and revenues constituted approximately 3% of the Company’s revenues for each of the three and nine months ended September 30, 2022. Based on this evaluation, management concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022.
Changes in Internal Control Over Financial Reporting
As part of our ongoing integration activities related to the edX Acquisition, we continue to implement our controls and procedures and augment our controls to reflect the risks inherent in the acquisition. Throughout the integration process, we monitor these efforts and take corrective action as needed to reinforce the application of our controls and procedures. Other than the foregoing, we made no changes in internal control over financial reporting during the three months ended September 30, 2022 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 6 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
You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 1, 2022. 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. In addition, certain risks to our business from the impact of the impairment of certain intangible assets and goodwill are set forth below.
The impairment of intangible assets and goodwill arising from our acquisitions could continue to negatively impact and affect our net income and shareholders’ equity
When we acquire a business, a substantial portion of the purchase price of the acquisition may be allocated to goodwill and other indefinite-lived intangible assets. We review goodwill and other indefinite-lived intangible assets for impairment annually, 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. During the three months ended March 31, 2022, we recorded impairment charges of $28.8 million and $30.0 million to goodwill and the indefinite-lived intangible asset, respectively. During the three months ended September 30, 2022, we recorded impairment charges of $50.2 million and $29.3 million to goodwill and the indefinite-lived intangible asset, respectively.

Future declines in the results of our acquisitions and other factors could cause us to record an impairment of all or a portion of the relevant goodwill in the future. We may not be able to achieve our business targets for businesses we previously acquired or will acquire in the future, which could result in our incurring additional goodwill and other intangible assets impairment charges. Further declines in our market capitalization increase the risk that we may be required to perform another impairment analysis, which could result in an impairment of up to the entire balance of our goodwill and other intangible assets based on the quantitative assessment performed.
Implementation of our 2022 Strategic Realignment Plan may not be successful, which could affect our ability to increase our profitability.
On July 28, 2022, we announced a plan to accelerate our transition to a platform company (the “2022 Strategic Realignment Plan”). The plan is designed to reorient the company around a single platform allowing us to pursue a portfolio-based marketing strategy that drives traffic to the edX marketplace. As part of the plan, the Company expects to optimize marketing spend, simplify the current executive structure to reduce silos, reduce employee headcount, and rationalize its real estate footprint. We expect to record in the aggregate approximately $35 million to $40 million in restructuring charges associated with the 2022 Strategic Realignment Plan. A significant portion of these charges will result in future cash expenditures. The plan is expected to be substantially completed by December 31, 2022 with cash expenditures relating to the employee headcount reduction continuing through the first quarter of 2024 and cash expenditures related to real estate continuing through the duration of lease terms ranging from 1 to 9 years. Although we believe that the 2022 Strategic Realignment Plan will reduce overhead costs, enhance operational efficiency, and result in improved profitability, we cannot guarantee that the 2022 Strategic Realignment Plan will achieve or sustain the expected benefits, or that the benefits, even if achieved, will be adequate to meet our long-term profitability and operational expectations. Risks associated with the impact of the 2022 Strategic Realignment Plan also include additional unexpected costs and negative impacts on our cash flows from operations and liquidity, employee attrition beyond our intended reductions and adverse effects on employee morale, diversion of management attention, adverse effects to our reputation as an employer, which could make it more difficult for us to hire and retain employees in the future, and potential failure or delays to meet operational and growth targets due to the loss of qualified employees and the potential negative impact on our reputation among our university partners. If we do not realize the expected benefits or synergies of the 2022 Strategic Realignment Plan, our business, financial condition, cash flows and results of operations could be negatively impacted.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities
None.
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(b) Use of Proceeds from Public Offerings of Common Stock
None.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 3.    Defaults Upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
None.
Item 5.    Other Information
None.
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Item 6.    Exhibits
Exhibit
Number
DescriptionFormFile No.Exhibit
Number
Filing DateFiled/Furnished Herewith
8-K001-363763.1June 10, 2022 
8-K001-363763.2June 10, 2022 
8-K001-3637610.1July 28, 2022
    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 7, 2022By:/s/ Christopher J. Paucek
  Christopher J. Paucek
  Chief Executive Officer
   
November 7, 2022By:/s/ Paul S. Lalljie
  Paul S. Lalljie
  Chief Financial Officer
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