UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2023

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 class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value per share	TWOU	The Nasdaq Global Select Market

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

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

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

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

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

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

As of August 4, 2023, there were 81,419,968 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022		4
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and six months ended June 30, 2023 and 2022		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended June 30, 2023 and 2022		5
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2023 and 2022		8
Notes to Condensed Consolidated Financial Statements (unaudited)		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	58
PART II. OTHER INFORMATION		59
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
Signatures		61

1

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to substantial risks and uncertainties. All statements, other than statements of historical fact, are forward-looking statements. 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;

•our ability to maintain minimum recurring revenues or other financial ratios during required periods through the maturity date of our Second Amended Credit Agreement (as defined below);

•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 offerings;

•our ability to acquire new clients and expand our offerings with existing university clients;

•our ability to successfully integrate the operations of our acquisitions, including our acquisition of edX, 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 Second Amended Credit Agreement (as defined below) governing our term loan facilities;

•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 including expansion internationally and grow our enterprise business;

•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 platform;

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

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

2

•the impact and cost of stockholder activism;

•the potential negative impact of the significant decline in the market price of our common stock, including the impairment of goodwill and indefinite-lived intangible assets;

•the impact of any natural disasters or public health emergencies, such as the coronavirus disease 2019 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, 2022, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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

3

PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements

2U, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	June 30, 2023		December 31, 2022
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	53,301	$	167,518
Restricted cash	13,398		15,060
Accounts receivable, net	87,347		62,826
Other receivables, net	29,685		33,813
Prepaid expenses and other assets	42,131		43,090
Total current assets	225,862		322,307
Other receivables, net, non-current	16,369		14,788
Property and equipment, net	42,691		45,855
Right-of-use assets	67,501		72,361
Goodwill	712,858		734,620
Intangible assets, net	403,440		549,755
Other assets, non-current	69,696		71,173
Total assets	$	1,538,417	$	1,810,859
Liabilities and stockholders’ equity
Current liabilities
Accounts payable and accrued expenses	$	122,010	$	110,020
Deferred revenue	107,189		90,161
Lease liability	14,735		13,909
Accrued restructuring liability	2,424		6,692
Other current liabilities	49,477		58,210
Total current liabilities	295,835		278,992
Long-term debt	856,399		928,564
Deferred tax liabilities, net	315		282
Lease liability, non-current	90,404		99,709
Other liabilities, non-current	1,946		1,796
Total liabilities	1,244,899		1,309,343
Commitments and contingencies (Note 5)
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, 80,957,654 shares issued and outstanding as of June 30, 2023; 78,334,666 shares issued and outstanding as of December 31, 2022	81		78
Additional paid-in capital	1,727,874		1,700,855
Accumulated deficit	(1,407,688)		(1,179,972)
Accumulated other comprehensive loss	(26,749)		(19,445)
Total stockholders’ equity	293,518		501,516
Total liabilities and stockholders’ equity	$	1,538,417	$	1,810,859

See accompanying notes to condensed consolidated financial statements.

4

2U, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023			2022
Revenue	$	222,089	$	241,464	$	460,593		$	494,793
Costs and expenses
Curriculum and teaching	34,102		32,145		66,942			65,375
Servicing and support	33,585		37,061		69,694			76,685
Technology and content development	44,250		45,616		89,734			96,673
Marketing and sales	95,882		116,350		196,057			247,332
General and administrative	32,657		41,523		71,907			91,758
Restructuring charges	3,622		16,753		8,497			17,540
Impairment charges	134,117		—		134,117			58,782
Total costs and expenses	378,215		289,448		636,948			654,145
Loss from operations	(156,126)		(47,984)		(176,355)		0	(159,352)
Interest income	371		241		736			498
Interest expense	(17,916)		(13,906)		(35,873)			(27,796)
Debt modification expense and loss on debt extinguishment	—		—		(16,735)			—
Other income (expense), net	227		(1,367)		834			(2,397)
Loss before income taxes	(173,444)		(63,016)		(227,393)			(189,047)
Income tax (expense) benefit	(210)		164		(323)			415
Net loss	$	(173,654)	$	(62,852)	$	(227,716)		$	(188,632)
Net loss per share, basic and diluted	$	(2.16)	$	(0.82)	$	(2.85)		$	(2.46)
Weighted-average shares of common stock outstanding, basic and diluted	80,560,755		77,059,157		79,939,048			76,667,681
Other comprehensive loss
Foreign currency translation adjustments, net of tax of $0 for all periods presented	(4,001)		(7,674)		(7,304)			(345)
Comprehensive loss	$	(177,655)	$	(70,526)	$	(235,020)		$	(188,977)

See accompanying notes to condensed consolidated financial statements.

5

2U, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, in thousands, except share amounts)

	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2022	78,334,666	$	78	$	1,700,855	$	(1,179,972)	$	(19,445)	$	501,516
Issuance of common stock in connection with employee stock purchase plan	207,160	1		1,176		—		—		1,177
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	1,047,765	1		(362)		—		—		(361)
Exercise of stock options	17,166	—		110		—		—		110
Stock-based compensation expense	—	—		14,563		—		—		14,563
Net loss	—	—		—		(54,062)		—		(54,062)
Foreign currency translation adjustment	—	—		—		—		(3,303)		(3,303)
Balance, March 31, 2023	79,606,757	80		1,716,342		(1,234,034)		(22,748)		459,640
Issuance of common stock in connection with employee stock purchase plan	255,169	—		925		—		—		925
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	1,095,728	1		(376)		—		—		(375)
Stock-based compensation expense	—	—		10,983		—		—		10,983
Net loss	—	—		—		(173,654)		—		(173,654)
Foreign currency translation adjustment	—	—		—		—		(4,001)		(4,001)
Balance, June 30, 2023	80,957,654	$	81	$	1,727,874	$	(1,407,688)	$	(26,749)	$	293,518

See accompanying notes to condensed consolidated financial statements.

6

2U, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(unaudited, in thousands, except share amounts)

	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balance, December 31, 2021	75,754,663	$	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 withholdings	577,416	1		(920)		—		—		(919)
Exercise of stock options	284,455	—		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, 2022	76,616,534	77		1,645,456		(983,601)		(8,582)		653,350
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings	464,984	—		(822)		—		—		(822)
Exercise of stock options	2,278	—		17		—		—		17
Issuance of common stock in connection with employee stock purchase plan	136,039	—		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, 2022	77,219,835	$	77	$	1,668,282	$	(1,046,453)	$	(16,256)	$	605,650

See accompanying notes to condensed consolidated financial statements.

7

2U, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(227,716)	$	(188,632)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash interest expense	6,818		5,664
Depreciation and amortization expense	57,348		65,757
Stock-based compensation expense	25,546		46,773
Non-cash lease expense	8,804		11,405
Restructuring charges	(13)		—
Impairment charges	134,117		58,782
Provision for credit losses	4,245		4,610
Loss on debt extinguishment	12,123		—
Other	(787)		2,920
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net	(26,968)		(6,632)
Other receivables, net	723		(2,790)
Prepaid expenses and other assets	4,358		2,585
Accounts payable and accrued expenses	5,014		3,484
Deferred revenue	16,736		45,549
Other liabilities, net	(19,166)		(20,831)
Net cash provided by operating activities	1,182		28,644
Cash flows from investing activities
Purchase of a business, net of cash acquired	—		5,010
Additions of amortizable intangible assets	(23,027)		(34,854)
Purchases of property and equipment	(2,105)		(5,218)
Advances made to university clients	—		(310)
Advances repaid by university clients	100		200
Other	—		(7)
Net cash used in investing activities	(25,032)		(35,179)
Cash flows from financing activities
Proceeds from debt	269,223		385
Payments on debt	(352,533)		(3,793)
Prepayment premium on extinguishment of senior secured term loan facility	(5,666)		—
Payment of debt issuance costs	(4,411)		—
Tax withholding payments associated with settlement of restricted stock units	(736)		(1,741)
Proceeds from exercise of stock options	110		892
Proceeds from employee stock purchase plan share purchases	2,102		1,282
Net cash used in financing activities	(91,911)		(2,975)
Effect of exchange rate changes on cash	(118)		(2,614)
Net decrease in cash, cash equivalents and restricted cash	(115,879)		(12,124)
Cash, cash equivalents and restricted cash, beginning of period	182,578		249,909
Cash, cash equivalents and restricted cash, end of period	$	66,699	$	237,785

See accompanying notes to condensed consolidated financial statements.

8

2U, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.    Organization

2U, Inc. (together with its subsidiaries, the “Company”) is a leading online education platform company. The Company’s mission is to expand access to high-quality education and unlock human potential. As a trusted partner to top-ranked nonprofit universities and other leading organizations, the Company delivers technology and services that enable its clients to bring their educational offerings online at scale.

The Company provides 78 million people worldwide with access to world-class education in partnership with 250 top-ranked global universities and other leading organizations. Through edX, its education consumer marketplace, the Company offers more than 4,300 high-quality online learning opportunities, including open courses, executive education offerings, boot camps, micro-credentials, professional certificates as well as undergraduate and graduate degree programs.

The Company’s offerings cover a wide range of topics including technology, business, healthcare, science, education, social work, and sustainability. Many of the offerings are stackable, providing learners with an affordable pathway to achieve both short-term and long-term professional and educational goals. The Company’s platform provides its clients with the digital infrastructure to launch world-class online education offerings and allow students to easily access high-quality, job-relevant education 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, technical, skills-based boot camps and micro-credential programs through relationships with nonprofit colleges and universities and other leading organizations. Students enrolled in these offerings are generally seeking to reskill or upskill for career advancement or personal development through shorter duration, lower-priced offerings. In addition to selling these offerings directly to individuals, the Company also sells to organizations and institutions, including employers, non-profits, governments and governmental entities to enable upskilling and reskilling of their workforces.

2.    Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements, which include the assets, liabilities, results of operations and cash flows of the Company have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (the “SEC”). As permitted under such rules, certain notes and other financial information normally required by U.S. GAAP have been condensed or omitted. The Company believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and six months ended June 30, 2023 and 2022 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, 2022. All significant intercompany accounts and transactions have been eliminated in consolidation.

The condensed consolidated balance sheet data as of December 31, 2022 was derived from the audited financial statements, but does not include all disclosures required by U.S. GAAP on an annual reporting basis.

Use of Estimates

The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. The Company bases its estimates and

9

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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, 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 3 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 June 30, 2023 and December 31, 2022. Refer to Note 8 for more information regarding the Company’s convertible senior notes.

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.

10

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

During the second quarter of 2023, the Company completed the update of its internal financial reporting structure to better align with the executive structure following the 2022 Strategic Realignment. As a result of this update, the Company’s three reporting units within the Alternative Credential Segment (Executive Education, Boot Camp, and Open Courses) were combined into a single reporting unit (Alternative Credential). The Degree Program Segment continues to have one reporting unit (Degree Program). The Company performed impairment assessments before and after the change in reporting units. Refer to the Interim Impairment Assessments section below for further information regarding the results of these assessments.

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 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, discount rates, terminal growth rates, and forecasts of revenue and margins. 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. The Company performed interim impairment assessments as of March 1, 2022 and September 30, 2022.

During the second quarter of 2023, the Company experienced a significant decline in its market capitalization, which management deemed to be a triggering event related to the Company’s goodwill and indefinite-lived intangible asset. In addition, as a result of the change in the Company’s reporting units in the second quarter of 2023, the Company performed interim impairment assessments before and after the change in reporting units. The Company performed these interim impairment assessments as of May 1, 2023.

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 an income-based approach to determine the fair value of its long-lived intangible asset. Key assumptions used in the income-based approach included discount rates, terminal growth rates, royalty rates, and forecasts of revenue and margins based upon each respective reporting unit’s or indefinite-lived intangible asset’s weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. The income-based approach largely relied on inputs that were not observable to active markets, which would be deemed “Level 3” fair value measurements, as defined in the Fair Value 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 of the Open Courses reporting unit and the carrying value of an indefinite-lived intangible asset, both within the Alternative

11

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Credential Segment, 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. 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 of 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 to goodwill, of which $43.0 million related to the Open Courses reporting unit and $7.2 million related to the Executive Education reporting unit. In addition, during the three months ended September 30, 2022, the Company recorded impairment charges of $29.3 million to the indefinite-lived intangible asset 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 May 1, 2023, before the change in reporting units, management determined the carrying value of the Open Courses reporting unit and the carrying value of an indefinite-lived intangible asset, both within the Alternative Credential Segment, exceeded their respective estimated fair value. As a result, during the three months ended June 30, 2023, the Company recorded impairment charges of $16.7 million to goodwill, all of which related to the Open Courses reporting unit, and $117.4 million to the indefinite-lived intangible asset. 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 May 1, 2023, after the change in reporting units, management determined it was not more likely than not that the fair values of the Degree Program reporting unit and the Alternative Credential reporting unit were less than their respective carrying amounts. As such, the Company concluded that the goodwill relating to those reporting units was not impaired and further quantitative impairment assessment was not necessary.

It is possible that future changes in circumstances, such as a decline in our market capitalization, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, could require us to record additional impairment charges in the future.

Convertible Senior Notes

In April 2020, the Company issued 2.25% convertible senior notes due May 1, 2025 (the “2025 Notes”) in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional 2025 Notes, in a private offering. Refer to Note 8 for more information regarding the 2025 Notes.

In January 2023, the Company issued 4.50% convertible senior notes due February 1, 2030 (the “2030 Notes”) in an aggregate principal amount of $147.0 million in a private offering. Refer to Note 8 for more information regarding the 2030 Notes.

During the first quarter of 2022, the Company adopted 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. Pursuant to this ASU, which simplified the accounting for convertible instruments, the Company’s convertible senior notes are accounted for as a single instrument. Refer to the Recent Accounting Pronouncements section below for further information regarding the Company’s adoption of ASU 2020-06.

Debt Issuance Costs

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

12

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

written off, and a loss on extinguishment may need to be recognized. Refer to Note 8 for further information about the Company’s debt.

Recent Accounting Pronouncements

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. On December 21, 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This ASU defers the sunset date from December 31, 2022 to December 31, 2024 and is effective immediately. The Company will adopt the 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 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 adopted this ASU in the first quarter of 2023. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

13

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

3.    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, 2022		Impairment Charges*		Foreign Currency Translation Adjustments		Balance as of June 30, 2023
	(in thousands)
Degree Program Segment
Gross goodwill		$	192,459	$	—	$	—	$	192,459
Accumulated impairments		—		—		—		—
Net goodwill		192,459		—		—		192,459
Alternative Credential Segment
Gross goodwill		$	691,531	$	—	$	(5,045)	$	686,486
Accumulated impairments		(149,370)		(16,717)		—		(166,087)
Net goodwill		542,161		(16,717)		(5,045)		520,399
Total
Gross goodwill		$	883,990	$	—	$	(5,045)	$	878,945
Accumulated impairments		(149,370)		(16,717)		—		(166,087)
Net goodwill		$	734,620	$	(16,717)	$	(5,045)	$	712,858

* Refer to Note 2 for further information about the impairment charges recorded during the second quarter of 2023.

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.

		June 30, 2023						December 31, 2022
	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	$	240,943	$	(149,270)	$	91,673	$	226,761	$	(132,621)	$	94,140
Capitalized content development	4-5	254,970		(184,418)		70,552		261,844		(177,154)		84,690
University client relationships	9-10	208,298		(64,895)		143,403		210,138		(55,556)		154,582
Enterprise client relationships	10	14,300		(2,323)		11,977		14,300		(1,609)		12,691
Trade names and domain names	5-10	29,743		(22,208)		7,535		29,701		(21,749)		7,952
Total definite-lived intangible assets		$	748,254	$	(423,114)	$	325,140	$	742,744	$	(388,689)	$	354,055

14

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

	June 30, 2023						December 31, 2022
	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	$	(176,700)	$	78,300	$	255,000	$	(59,300)	$	195,700
Total indefinite-lived intangible assets	$	255,000	$	(176,700)	$	78,300	$	255,000	$	(59,300)	$	195,700

*	During the first and third quarter of 2022, the Company recorded impairment charges of $30.0 million and $29.3 million, respectively, related to its indefinite-lived intangible asset. During the second quarter of 2023, the Company recorded impairment charges of $117.4 million related to its indefinite-lived intangible asset. Refer to Note 2 for further information about these impairment charges.
**	The Company concluded that due to changes in facts and circumstances, the trade name, which was previously classified as indefinite-lived, is now finite-lived. In the third quarter of 2023, the Company will begin to amortize the trade name on a straight-line basis over its estimated useful life.

The amounts presented in the table above include $53.7 million and $53.9 million of in-process capitalized technology and content development as of June 30, 2023 and December 31, 2022, respectively.

The Company recorded amortization expense related to amortizable intangible assets of $24.7 million and $28.5 million for the three months ended June 30, 2023 and 2022, respectively. The Company recorded amortization expense related to amortizable intangible assets of $51.9 million and $59.9 million for the six months ended June 30, 2023 and 2022, respectively.

The following table presents the estimated future amortization expense of the Company’s amortizable intangible assets placed in service as of June 30, 2023.

	Future Amortization Expense
	(in thousands)
Remainder of 2023	$	41,852
2024	71,439
2025	50,143
2026	36,209
2027	27,232
Thereafter	122,904
Total	$	349,779

4.    Other Balance Sheet Details

Prepaid expenses and other assets

As of June 30, 2023 and December 31, 2022, the Company had balances of $22.7 million and $20.5 million, respectively, of prepaid assets within prepaid expenses and other assets on the condensed consolidated balance sheets.

Other Assets, Non-current

As of June 30, 2023 and December 31, 2022, the Company had balances of $11.4 million and $9.3 million, respectively, of deferred expenses incurred to integrate the software associated with its cloud computing arrangements, within other assets, non-current on the condensed consolidated balance sheets. Such expenses are subject to amortization over the remaining contractual

15

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

term of the associated cloud computing arrangement, with a useful life of between three to five years. The Company incurred $1.0 million and $0.6 million of such amortization for the three months ended June 30, 2023 and 2022, respectively. The Company incurred $1.8 million and $1.3 million of such amortization for the six months ended June 30, 2023 and 2022, 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.

	June 30, 2023		December 31, 2022
	(in thousands)
Accrued university and instructional staff compensation	$	35,861	$	30,807
Accrued marketing expenses	19,847		15,988
Accrued compensation and related benefits	17,853		16,213
Accounts payable and other accrued expenses	48,449		47,012
Total accounts payable and accrued expenses	$	122,010	$	110,020

Other Current Liabilities

As of June 30, 2023 and December 31, 2022, the Company had balances of $9.0 million and $14.7 million, respectively, within other current liabilities on the condensed consolidated balance sheets, which represent proceeds received from students enrolled in certain of the Company’s alternative credential offerings that are payable to an associated university client.

5.    Commitments and Contingencies

Legal Contingencies

The Company is involved in various claims and legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. While the Company does not expect that the ultimate resolution of any existing claims and proceedings (other than the specific matters described below, if decided adversely), individually or in the aggregate, will have a material adverse effect on its financial position, an unfavorable outcome in some or all of these proceedings could have a material adverse impact on the results of operations or cash flows for a particular period. This assessment is based on the Company’s current understanding of relevant facts and circumstances. With respect to current legal proceedings, the Company does not believe it is probable a material loss exceeding amounts already recognized has been incurred as of the date of the balance sheets presented herein. As such, the Company’s view of these matters is subject to inherent uncertainties and may change in the future.

Stockholder Derivative Suits

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

On 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.

16

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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 September 14, 2022, Daniel Sebagh 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, James Kenigsberg, the Company’s former CTO, and the Company’s 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 the Company’s business prospects and financial projections.

On July 6, 2023 the court entered an order preliminarily approving the settlement of these claims. The hearing to enter final approval of the settlement is currently scheduled for September 15, 2023. The settlement payment is immaterial and is being funded by the Company's insurers.

Favell, et al. v. University of Southern California and 2U, Inc. Consumer Class Action

On December 20, 2022, Plaintiffs Iola Favell, Sue Zarnowski, and Mariah Cummings filed a putative class action in the Superior Court of the State of California, County of Los Angeles, against the University of Southern California (“USC”) and the Company on behalf of “[a]ll students who were enrolled in an online graduate degree program at USC Rossier, from April 1, 2009 through April 27, 2022.” (“Favell I”) Compl. ¶ 135. Plaintiffs purported to allege violations of California’s False Advertising Law (“FAL”), Cal. Civ. Code § 17500, California’s Unfair Competition Law (“UCL”), Cal. Civ. Code § 17200, California’s Consumers Legal Remedies Act (“CLRA”), Cal. Civ. Code § 1770, as well as for unjust enrichment related to the use of USC Rossier’s rankings in certain marketing materials.

On February 3, 2023, the Company removed the case to the United States District Court for the Central District of California. Then, on March 8, 2023, the Company filed a motion to dismiss the lawsuit, arguing, among other things, that all of Plaintiffs’ allegations lacked merit and that certain claims for relief could not be brought in federal court in light of other allegations Plaintiffs had made. On March 28, 2023, before the Court could rule on that motion, Plaintiffs filed a First Amended Complaint, dropping the challenged claims for relief and instead asserting only a single cause of action under the CLRA. The First Amended Complaint is based on the same factual allegations as the original complaint but seeks declaratory relief, actual damages, incidental damages, consequential damages, compensatory damages, punitive damages, and attorneys’ fees and costs in connection with their CLRA claim.

On March 28, 2023, Plaintiffs also filed a separate class action lawsuit in the Superior Court of the State of California, County of Los Angeles, reasserting the FAL, UCL, and CLRA claims they dropped from the federal lawsuit (“Favell II”). The state court lawsuit is based on the same factual allegations as the federal lawsuit. Plaintiffs seek declaratory and injunctive relief, restitution, and attorneys’ fees and costs in connection with the claims in state court.

On April 17, 2023, the Company moved to dismiss the First Amended Complaint in Favell I in its entirety, arguing that all of Plaintiffs’ claims lack merit. On May 4, 2023, the Company removed the Favell II lawsuit from state court to the United States District Court for the Central District of California, and Plaintiffs later filed a motion to remand it back to state court. On July 6, 2023, the Court held a hearing on the Company’s motion to dismiss the First Amended Complaint in Favell I and the Plaintiffs’ motion to remand in Favell II, and issued a ruling granting the Company’s motion to dismiss with leave to amend and denying Plaintiffs’ motion to remand. On July 28, 2023, Plaintiffs filed amended complaints in both Favell I and Favell II, adding an additional plaintiff and more detailed allegations but otherwise reasserting the same claims in each case. 2U’s motions to dismiss the amended complaints are due August 31, 2023.

The Company believes that both lawsuits are without merit and intends to vigorously defend against these claims. However, due to the complex nature of the legal and factual issues involved, the outcome of both matters is not presently determinable.

17

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

2U, Inc., et al. v. Cardona, et al.

On April 4, 2023, the Company filed a lawsuit on behalf of itself and its South African subsidiary, Get Educated International Proprietary Ltd., against the Department of Education and Secretary of Education Miguel Cardona. The suit challenges a Dear Colleague Letter issued by the Department that would treat the Company and other Online Program Managers (OPMs) as highly regulated “third-party servicers” for purposes of the Higher Education Act (HEA). The Company contends that the Department has exceeded its authority by seeking to expand the definition of “third-party servicer” contained in the HEA, 20 U.S.C. § 1088(c), as well as in the Department’s regulations and longstanding guidance documents. The Company also argues that the Department violated both the HEA and the Administrative Procedure Act in issuing its new understanding of third-party servicer without following required rulemaking procedures. The case is now pending in the District of D.C., under case number 1:23-cv-00925. On April 7, 2023, the Company filed a motion for a stay and preliminary injunction to block the new Dear Colleague Letter to take effect as planned on September 1, 2023. On April 11, 2023, the Department announced that it would suspend the September 1, 2023 effective date and consider changes to the Dear Colleague Letter. The Department indicated that when it finalizes an updated version of the Dear Colleague Letter, the updated version will not go into effect for at least six months, to give regulated entities sufficient time to comply. Given these developments, the Company withdrew its motion for a stay and preliminary injunction and the court stayed the litigation pending the release of the finalized Dear Colleague Letter. The Company believes that it has a meritorious claim and intends to vigorously pursue its challenge against the Department if the Department continues seeking to treat the Company as a third-party servicer. Due to the complex nature of the legal 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 June 30, 2023, 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, 2022.

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.

6.    Restructuring Charges

2022 Strategic Realignment Plan

During the second quarter of 2022, the Company accelerated its planned transition to a platform company (the “2022 Strategic Realignment Plan”). The plan was 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 simplified its executive structure, 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 $3.2 million and $15.8 million in restructuring

18

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

charges related to the 2022 Strategic Realignment Plan for the three months ended June 30, 2023 and 2022, respectively. The Company recorded $7.7 million and $15.8 million in restructuring charges related to the 2022 Strategic Realignment Plan for the six months ended June 30, 2023 and 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 June 30, 2023				Three Months Ended June 30, 2022
	Degree Program Segment		Alternative Credential Segment		Degree Program Segment		Alternative Credential Segment
2022 Strategic Realignment Plan
Severance and severance-related costs	$	—	$	—	$	8,772	$	6,431
Lease and lease-related charges	2,129		682		—		—
Professional and other fees relating to restructuring activities	404		—		554		—
Other	13		—		—		—
	2,546		682		9,326		6,431
Other restructuring charges*	$	373	$	21	$	926	$	70
Total restructuring charges	$	2,919	$	703	$	10,252	$	6,501

	Six Months Ended June 30, 2023				Six Months Ended June 30, 2022
	Degree Program Segment		Alternative Credential Segment		Degree Program Segment		Alternative Credential Segment
2022 Strategic Realignment Plan
Severance and severance-related costs	$	1,231	$	—	$	8,772	$	6,431
Lease and lease-related charges	4,272		1,441		—		—
Professional and other fees relating to restructuring activities	744		—		554		—
Other	26		—		—		—
	6,273		1,441		9,326		6,431
Other restructuring charges*	$	753	$	30	$	1,615	$	168
Total restructuring charges	$	7,026	$	1,471	$	10,941	$	6,599

* Includes severance and severance-related costs and lease-related charges.

19

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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, 2022		Additional Costs		Cash Payments		Balance as of June 30, 2023
	(in thousands)
2022 Strategic Realignment Plan
Severance and severance-related costs		$	5,225	$	1,231	$	(4,696)	$	1,760
Professional and other fees relating to restructuring activities		923		825		(1,292)		456
Lease and lease-related charges		83		6,486		(6,545)		24
Other severance and severance-related costs		461		211		(488)		184
Total restructuring		$	6,692	$	8,753	$	(13,021)	$	2,424

7.    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 11 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. These options to extend the terms of the Company’s operating leases were not deemed to be reasonably certain of exercise as of lease commencement and are therefore not included in the determination of their respective non-cancellable lease terms. The future lease payments due under non-cancellable operating lease arrangements contain fixed rent increases over the term of the lease.

The 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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(in thousands)
Operating lease expense	$	4,346	$	5,611	$	8,803	$	11,372
Short-term lease expense	35		157		69		268
Variable lease expense	1,362		1,546		3,269		3,369
Sublease income	(481)		(228)		(908)		(456)
Total lease expense	$	5,262	$	7,086	$	11,233	$	14,553

20

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

As of June 30, 2023, for the Company’s operating leases, the weighted-average remaining lease term was 6.5 years and the weighted-average discount rate was 10.7%. For the six months ended June 30, 2023 and 2022, cash paid for amounts included in the measurement of operating lease liabilities was $12.1 million and $13.1 million, respectively. There were no lease liabilities arising from obtaining right-of-use assets for the six months ended June 30, 2023. For the six months ended June 30, 2022, lease liabilities arising from obtaining right-of use assets were $1.3 million.

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 $3.8 million in aggregate.

	June 30, 2023
	(in thousands)
Remainder of 2023	$	12,248
2024	24,227
2025	20,446
2026	20,997
2027	21,571
Thereafter	49,412
Total lease payments	148,901
Less: imputed interest	(43,762)
Total lease liability	$	105,139

8.    Debt

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

	June 30, 2023		December 31, 2022
	(in thousands)
Term loan facilities	$	378,100	$	566,622
Revolving facility	—		—
Convertible senior notes	527,000		380,000
Deferred government grant obligations	3,500		3,500
Other borrowings	2,685		3,688
Less: unamortized debt discount and issuance costs	(49,673)		(17,666)
Total debt	861,612		936,144
Less: current portion of long-term debt	(5,213)		(7,580)
Total long-term debt	$	856,399	$	928,564

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 “2025 Notes”), which had an estimated fair value of $246.6 million and $241.6 million as of June 30, 2023 and December 31, 2022, respectively, and the 4.5% convertible senior notes due 2030 (the “2030 Notes”), which had an estimated fair value of $96.1 million as of June 30, 2023. The 2030 Notes, described below, were issued in January 2023. Each of the Company’s long-term debt instruments were classified as Level 2 within the fair value hierarchy.

21

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Term Loan Credit and Guaranty Agreement

On January 9, 2023, the Company entered into an Extension Amendment, Second Amendment and First Incremental Agreement to Credit and Guaranty Agreement, dated as of January 9, 2023 (the “Second Amended Credit Agreement”), which amended the Company’s existing term loan facilities, previously referred to as the Amended Term Loan Facilities. The provisions of the Second Amended Credit Agreement became effective upon the satisfaction of certain conditions set for therein, including, without limitation, the funding of the 2030 Notes referenced below and the prepayment of certain existing term loans to reduce the outstanding principal amount of term loans outstanding under the Amended Term Loan Facilities from $567 million to $380 million. Pursuant to the Second Amended Credit Agreement, the lenders thereunder agreed to, among other amendments, extend the maturity date of the term loans thereunder from December 28, 2024 to December 28, 2026 (or, if more than $40 million of the Company’s 2025 Notes remain outstanding on January 30, 2025, January 30, 2025) and to provide a senior secured first lien revolving loan facility to the Company in the principal amount of $40 million (the “Revolving Loan Facility”). The termination date for such revolving loans will be June 28, 2026 (or, if more than $50 million of the Company’s 2025 Notes remain outstanding on January 1, 2025, January 1, 2025). As of June 30, 2023, there were no outstanding borrowings under the Revolving Loan Facility.

Loans under the Second Amended Credit Agreement will bear interest at a per annum rate equal to (i) with respect to term loans, a base rate or the Term SOFR (as defined in the Second Amended Credit Agreement) rate, as applicable, plus a margin of 5.50% in the case of the base rate loans and 6.50% in the case of Term SOFR loans and (ii) with respect to revolving loans, a base rate or the Term SOFR rate, as applicable, plus a margin of 4.50% in the case of the base rate loans and 5.50% in the case of Term SOFR loans. If the term loans under the Second Amended Credit Agreement are prepaid or amended prior to the six month anniversary of the Second Amended Credit Agreement in connection with a Repricing Event (as defined in the Second Amended Credit Agreement), the Company shall pay a prepayment premium of 1.0% of the amount of the loans so prepaid.

Prior to the amendment, loans under the Amended Term Loan Facilities bore 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 Company is required to make quarterly principal repayments equal to 0.25% of the aggregate principal amount.

The obligations under the Second Amended Credit Agreement are guaranteed by certain of the Company’s subsidiaries (the Company and the guarantors, collectively, the “Credit Parties”). The obligations under the Second Amended Credit Agreement are secured, subject to customary permitted liens and other agreed-upon exceptions, by a perfected security interest in all tangible and intangible assets of the Credit Parties, except for certain customary excluded assets.

The Second Amended Credit 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 Second Amended Credit 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 Second Amended Credit Agreement contains (i) a financial covenant for the benefit of the lenders that requires the Company to maintain minimum Recurring Revenues (as defined in the Second Amended Credit 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 and (ii) three financial covenants solely for the benefit of the revolving lenders, in respect of a maximum consolidated senior secured net leverage ratio, a maximum consolidated total net leverage ratio, and a minimum consolidated fixed charge coverage ratio. The Second Amended Credit 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 Second Amended Credit Agreement); failure of any material provision of the Second Amended Credit 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 Second Amended Credit Agreement. As of both June 30, 2023 and December 31, 2022, the Company was in compliance with the covenants under the Second Amended Credit Agreement.

If an event of default under the Second Amended Credit Agreement occurs and is continuing, then, at the request (or with the consent) of the lenders holding the applicable requisite amount of commitments and loans under the Second Amended Credit Agreement, upon notice by the administrative agent to the borrowers, the obligations under the Second Amended Credit

22

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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 Second Amended Credit Agreement will automatically become immediately due and payable.

As of June 30, 2023 and December 31, 2022, the balance of unamortized debt discount and issuance costs related to the term loan under the Second Amended Credit Agreement was $25.2 million and $12.8 million, respectively. For the three months ended June 30, 2023 and 2022, the associated effective interest rate for the term loan under the Second Amended Credit Agreement was approximately 14.4% and 8.0%, respectively. For the six months ended June 30, 2023 and 2022, the associated effective interest rate for the term loan under the Second Amended Credit Agreement was approximately 14.1% and 8.0%, respectively. For the three and six months ended June 30, 2023 the associated interest rate for the revolving loan under the Second Amended Credit Agreement was approximately 10.6% and 10.4%, respectively. For the three months ended June 30, 2023 and 2022, the associated interest expense for these facilities was approximately $13.3 million and $11.1 million, respectively. For the six months ended June 30, 2023 and 2022, the associated interest expense for these facilities was approximately $26.5 million and $22.2 million, respectively.

Convertible Senior Notes

2025 Notes

In April 2020, the Company issued the 2025 Notes in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional 2025 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 2025 Notes were approximately $369.6 million after deducting the initial purchasers’ discounts, commissions and offering expenses payable by the Company.

The 2025 Notes are governed by an indenture (the “2025 Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The 2025 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 2025 Notes will mature on May 1, 2025, unless earlier repurchased, redeemed or converted.

The 2025 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 2025 Notes, effectively subordinated to the Company’s senior secured indebtedness (including indebtedness under the Second Amended Credit Agreement), 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.

The net carrying amount of the 2025 Notes consists of the following as of each of the dates indicated:

	June 30, 2023		December 31, 2022
	(in thousands)
Principal	$	380,000	$	380,000
Unamortized issuance costs	(3,854)		(4,898)
Net carrying amount	$	376,146	$	375,102

Issuance costs are being amortized to interest expense over the contractual term of the 2025 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 2025 Notes for the three months ended June 30, 2023 and 2022 was $2.6 million and $2.7 million, respectively. The interest expense related to the 2025 Notes for the six months ended June 30, 2023 and 2022 was $5.3 million and $5.3 million, respectively.

Holders may convert their 2025 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, par value $0.001 per

23

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

share (“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 2025 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 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 Common Stock, as provided in the 2025 Indenture;

•if the Company calls such 2025 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 2025 Notes is 35.3773 shares of the Common Stock per $1,000 principal amount of 2025 Notes, which represents an initial conversion price of approximately $28.27 per share of the Common Stock, and is subject to adjustment upon the occurrence of certain specified events as set forth in the 2025 Indenture. Upon conversion, the Company will pay or deliver, as applicable, cash, shares of the Common Stock or a combination of cash and shares of the Common Stock, at the Company’s election. In the event of the Company calling the 2025 Notes for redemption or the holders of the 2025 Notes electing to convert their 2025 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 2025 Indenture), the Company will in certain circumstances increase the conversion rate for a specified period of time.

In addition, upon the occurrence of a “fundamental change” (as defined in the 2025 Indenture), holders of the 2025 Notes may require the Company to repurchase their 2025 Notes at a cash repurchase price equal to the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest, if any.

The 2025 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 2025 Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Common Stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice, and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a “make-whole fundamental change” with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if such Note is converted after it is called for redemption. No sinking fund is provided for the Notes.

As of June 30, 2023, the conditions allowing holders of the 2025 Notes to convert had not been met and the Company has the right under the 2025 Indenture to determine the method of settlement at the time of conversion. Therefore, the 2025 Notes are classified as non-current on the condensed consolidated balance sheets.

24

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

In connection with the 2025 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 Common Stock upon any conversion of 2025 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2025 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 2025 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 2025 Notes for working capital or other general corporate purposes, which may include capital expenditures, potential acquisitions and strategic transactions.

2030 Notes

On January 11, 2023, the Company issued the 2030 Notes in an aggregate principal amount of $147.0 million. The 2030 Notes are governed by an indenture (the “2030 Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The 2030 Notes bear interest at a rate of 4.50% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2023. The 2030 Notes mature on February 1, 2030, unless earlier redeemed or repurchased by the Company or converted. The net proceeds from the issuance of the 2030 Notes was $127.1 million.

The 2030 Notes are the senior, unsecured obligations of the Company and are equal in right of payment with the Company’s senior indebtedness, senior in right of payment to the Company’s indebtedness that is expressly subordinated to the 2030 Notes, effectively subordinated to the Company’s senior secured indebtedness, 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.

The net carrying amount of the 2030 Notes consist of the following as of the date indicated:

	June 30, 2023
	(in thousands)
Principal	$	147,000
Unamortized debt discount and issuance costs	(20,594)
Net carrying amount	$	126,406

25

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

Issuance costs are being amortized to interest expense over the contractual term of the 2030 Notes. The effective interest rate used to amortize the issuance costs was 7.6% and 7.4% for three and six months ended June 30, 2023, respectively. The interest expense related to the 2030 Notes for the three and six months ended June 30, 2023 was $2.3 million and $4.3 million, respectively.

Holders may convert their 2030 Notes at their option in the following circumstances:

•at any time from, and after January 11, 2023 until the close of business on the second scheduled trading day immediately before the maturity date;

•upon the occurrence of certain corporate events or distributions on the Common Stock as provided in the Indenture;

•if the Company calls such 2030 Notes for redemption; subject to the right of certain holders to elect a delayed conversion period for any such 2030 Notes called for redemption that would cause such holders to beneficially own shares of Common Stock, in excess of the Ownership Cap (as defined below), over which threshold a settlement of such conversion could be made in cash; and

•upon the occurrence of a default with regard to the Company’s financial covenants under the Indenture.

The initial conversion rate for the 2030 Notes is 111.1111 shares of Common Stock per $1,000 principal amount of 2030 Notes, which represents an initial conversion price of approximately $9.00 per share, and is subject to adjustment upon the occurrence of certain specified events as set forth in the 2030 Indenture. Upon conversion, the Company will pay or deliver, as applicable, cash, shares of Common Stock or a combination of cash and shares of Common Stock, at the Company’s election (subject to aforementioned Ownership Cap). Upon the occurrence of a “Make-Whole Fundamental Change” (as defined in the 2030 Indenture) the Company will in certain circumstances increase the conversion rate for a specified period of time.

In addition, upon the occurrence of a “Fundamental Change” (as defined in the 2030 Indenture), holders of the 2030 Notes may require the Company to repurchase their 2030 Notes at a cash repurchase price equal to the principal amount of the 2030 Notes to be repurchased, plus accrued and unpaid interest, if any.

The 2030 Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, subject to limited exceptions with respect to 2030 Notes that cannot be immediately physically settled due to the Ownership Cap, on or after January 11, 2026 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the 2030 Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of Common Stock exceeds 130% of the conversion price on 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. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if such Note is converted after it is called for redemption. No sinking fund is provided for the 2030 Notes. The Company used cash on hand and the proceeds from the offering of the 2030 Notes to repay a portion of the amounts outstanding under the term loan facilities.

The Company has the right under the 2030 Indenture to determine the method of settlement at the time of conversion. Therefore, the 2030 Notes are classified as non-current on the condensed consolidated balance sheets.

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. The conditional loan with Prince George’s County has a maturity date of June 22, 2027 and the conditional loan agreement with the State of Maryland has a maturity date of June 30, 2028. The interest expense related to these loans for the three and six months ended June 30, 2023 and 2022 was immaterial. As of June 30, 2023 and December 31, 2022, the Company’s combined accrued interest balance associated with the deferred government grant obligations was $0.7 million and $0.6 million, respectively.

26

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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 June 30, 2023, the Company has entered into standby letters of credit totaling $12.7 million as security deposits for the applicable leased facilities and in connection with the deferred government grant obligations.

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

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:

	June 30, 2023
	(in thousands)
Remainder of 2023	$	1,900
2024	3,800
2025	383,800
2026	368,600
2027*	1,500
Thereafter*	149,000
Total future principal payments	$	908,600

* Amounts due in 2027 and thereafter include $1.5 million and $2.0 million, respectively, of conditional loan obligations that may be forgiven, provided that the Company attains certain conditions related to employment levels at 2U’s Lanham, Maryland headquarters.

Debt Refinancing Costs

In January 2023, the Company entered into the Second Amended Credit Agreement, which amended the Amended Term Loan Facilities. Certain investors in the Amended Term Loan Facilities participated in the Second Amended Credit Agreement and the change in the present value of future cash flows between the investments was less than 10%. Accordingly, the Company accounted for this refinancing event for these investors as a debt modification. Certain investors in the Amended Term Loan Facilities did not participate in the Second Amended Credit Agreement or the change in the present value of future cash flows between the investments was greater than 10%. Accordingly, the Company accounted for this refinancing event for these investors as a debt extinguishment. In applying debt modification accounting in connection with this refinancing event, during the first quarter of 2023, the Company recorded $12.1 million in loss on debt extinguishment and $4.6 million in debt modification expense.

27

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

9.    Income Taxes

The Company’s income tax provisions for all periods consist of federal, state and foreign income taxes. The income tax provision for the three and six months ended June 30, 2023 and 2022 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 six months ended June 30, 2023 and 2022 was less than 1%. For the three months ended June 30, 2023, the Company’s income tax expense was $0.2 million. For the three months ended June 30, 2022, the Company’s income tax benefit was $0.2 million. For the six months ended June 30, 2023, the Company’s income tax expense was $0.3 million. For the six months ended June 30, 2022, the Company’s income tax benefit was $0.4 million.

To date, the Company has not been required to pay U.S. federal income taxes because of current and accumulated net operating losses.

10.    Stockholders’ Equity

Common Stock

As of June 30, 2023, the Company was authorized to issue 205,000,000 total shares of capital stock, consisting of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of June 30, 2023, there were 80,957,654 shares of common stock outstanding, and the Company had reserved a total of 50,543,589 of its authorized shares of common stock for future issuance as follows:

	Shares Reserved for Future Issuance
Outstanding restricted stock units	6,384,461
Outstanding performance restricted stock units	2,153,760
Outstanding stock options	4,892,309
Reserved for convertible senior notes	37,113,059
Total shares of common stock reserved for future issuance	50,543,589

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 3,916,733 and 3,782,719 on January 1, 2023 and 2022, respectively, pursuant to the automatic share reserve increase provision in the 2014 Plan.

The Company also has a 2017 Employee Stock Purchase Plan (the “ESPP”). During the second quarter of 2023, shares available for purchase under the ESPP increased by 2,000,000 shares, pursuant to an amendment to the Company’s ESPP to increase the number of authorized shares available under such plan. As of June 30, 2023, 1,917,341 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.

28

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(in thousands)
Curriculum and teaching	$	51	$	49	$	91	$	96
Servicing and support	2,239		4,321		5,516		8,680
Technology and content development	1,960		2,635		3,617		6,497
Marketing and sales	1,369		1,722		2,523		3,848
General and administrative	5,364		13,622		13,799		27,652
Total stock-based compensation expense	$	10,983	$	22,349	$	25,546	$	46,773

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, 2022	4,739,861	$	14.24
Granted	3,865,105	6.58
Vested	(1,954,263)	15.68
Forfeited	(266,242)	13.34
Outstanding balance as of June 30, 2023	6,384,461	$	9.20

The total fair value of RSUs vested during the three months ended June 30, 2023 and 2022 was $7.9 million and $8.6 million, respectively. The total fair value of RSUs vested during the six months ended June 30, 2023 and 2022 was $13.1 million and $17.2 million, respectively. The total compensation expense related to the unvested RSUs not yet recognized as of June 30, 2023 was $47.3 million, and will be recognized over a weighted-average period of approximately 2.1 years.

Performance Restricted Stock Units

The 2014 Plan provides for the issuance of performance restricted stock units (“PRSUs”) to eligible participants. PRSUs generally include both service conditions and market conditions related to total shareholder return targets relative to that of companies comprising the Russell 3000 Index and/or conditions based on the Company’s internal financial performance achieving predetermined targets. The terms of the performance restricted stock unit grants under the 2014 Plan, including the vesting periods, are determined by the Company’s board of directors or the compensation committee thereof.

During the first quarter of 2023, as part of its annual equity award cycle, the Company awarded 1.4 million PRSUs with an aggregate intrinsic value of $12.2 million. The PRSU award agreements provide that the quantity of units subject to vesting may range from 150% to 0% of the granted quantities. For the first performance period, which began on January 1, 2023 and ends on December 31, 2023, the quantity of units eligible to be earned ranges from 130% to 0% depending on the achievement of internal financial performance-based targets, which are established annually. Additionally, the actual number of PRSUs earned may be adjusted upward or downward by 20% based upon the Company’s total shareholder return (“TSR”) performance compared to the Russell 3000 Index’s TSR performance over the same period. If the Company’s absolute TSR is negative, the TSR multiplier cannot exceed 0% and the achievement percentage based up on the internal financial performance-based targets is capped at 125%. The grant date fair value of the PRSUs granted in the first quarter of 2023 includes the fair value of the TSR-performance component of the award, which was determined using a Monte Carlo valuation model, and was $0.39 per share.

29

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

The following tables present a summary of (i) for the six months ended June 30, 2023, the assumptions used for estimating the fair value of the TSR-performance component of the PRSUs, (ii) for the six months ended June 30, 2022, the assumptions used for estimating the fair values of the PRSUs subject to market-based vesting conditions and (iii) the Company’s PRSU activity for the period indicated. As of June 30, 2023 and December 31, 2022, there were 1.4 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 June 30, 2023 and December 31, 2022, and have been excluded from the tables below. No PRSUs were granted during each of the three months ended June 30, 2023 and 2022.

	Six Months Ended June 30, 2023
Risk-free interest rate	4.68%
Expected term (years)	1.00
Expected volatility	108%
Dividend yield	0%
Weighted-average grant date fair value of the TSR-performance component	$0.39

	Six Months Ended June 30, 2022
Risk-free interest rate	0.39% – 1.88%
Expected term (years)	1.00 – 3.00
Expected volatility	49% – 97%
Dividend yield	0%
Weighted-average grant date fair value per share	$18.67

	Number of Units	Weighted- Average Grant Date Fair Value per Share
Outstanding balance as of December 31, 2022	1,651,864	$	22.74
Granted	1,176,077	9.55
Vested	—	—
Forfeited	(674,181)	20.22
Outstanding balance as of June 30, 2023	2,153,760	$	16.08

The total compensation expense related to the unvested PRSUs not yet recognized as of June 30, 2023 was $7.0 million, and will be recognized over a weighted-average period of approximately 1.4 years.

Stock Options

The Stock Plans provide for the issuance of stock options to eligible participants. Stock options issued under the Stock Plans generally are exercisable for periods not to exceed 10 years and generally vest over a three- or four-year period.

The following table summarizes the assumptions used for estimating the fair value of the stock options granted for the period presented. No stock options were granted during the three months ended June 30, 2023.

30

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

	Three Months Ended June 30, 2022
Risk-free interest rate	2.8% – 3.0%
Expected term (years)	5.63 – 5.78
Expected volatility	75% – 77%
Dividend yield	0%
Weighted-average grant date fair value per share	$7.03

	Six Months Ended June 30,
	2023	2022
Risk-free interest rate	3.6%	1.9% – 3.0%
Expected term (years)	5.69	5.63 – 5.78
Expected volatility	87%	75% – 77%
Dividend yield	0%	0%
Weighted-average grant date fair value per share	$4.93	$6.99

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, 2022	5,195,538	$	25.28	5.88	$	78
Granted	66,910	6.76		9.74
Exercised	(17,166)	6.38		0.67
Forfeited	(127,532)	10.96
Expired	(225,441)	12.73
Outstanding balance as of June 30, 2023	4,892,309	26.05		5.42	—
Exercisable as of June 30, 2023	3,411,916	$	31.71	4.06	$	—

The aggregate intrinsic value of options exercised during the six months ended June 30, 2023 and 2022 was $0.1 million and $3.2 million, respectively.

The total compensation expense related to the unvested options not yet recognized as of June 30, 2023 was $10.4 million, and will be recognized over a weighted-average period of approximately 1.6 years.

11.    Net Loss per Share

Diluted net loss per share is the same as basic net loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive, 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.

31

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

	Three and Six Months Ended June 30,
	2023	2022
Stock options	4,892,309	5,964,973
Restricted stock units	6,384,461	5,477,279
Performance restricted stock units	2,153,760	2,515,924
Shares related to convertible senior notes	29,776,706	13,443,374
Total antidilutive securities	43,207,236	27,401,550

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Numerator (in thousands):
Net loss	$	(173,654)	$	(62,852)	$	(227,716)	$	(188,632)
Denominator:
Weighted-average shares of common stock outstanding, basic and diluted	80,560,755		77,059,157		79,939,048		76,667,681
Net loss per share, basic and diluted	$	(2.16)	$	(0.82)	$	(2.85)	$	(2.46)

12.    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, universities, and other leading organizations.

Significant Customers

For each of the three and six months ended June 30, 2023 and June 30, 2022, no university clients accounted for 10% or more of the Company’s consolidated revenue.

As of June 30, 2023, 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, 2022, one university client in the Degree Program Segment each accounted for 10% or more of the Company’s consolidated accounts receivable, net balance, with $7.3 million, or approximately 12% of the Company’s consolidated accounts receivable, net balance.

32

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 June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
	(dollars in thousands)
Revenue by segment*
Degree Program Segment	$	119,494		$	143,090		$	259,974		$	297,257
Alternative Credential Segment	102,595			98,374			200,619			197,536
Total revenue	$	222,089		$	241,464		$	460,593		$	494,793
Segment profitability**
Degree Program Segment	$	33,111		$	39,539		$	80,315		$	75,357
Alternative Credential Segment	(11,319)			(17,637)			(28,332)			(41,175)
Total segment profitability	$	21,792		$	21,902		$	51,983		$	34,182
Segment profitability margin***
Degree Program Segment	27.7		%	27.6		%	30.9		%	25.4		%
Alternative Credential Segment	(11.0)			(17.9)			(14.1)			(20.8)
Total segment profitability margin	9.8		%	9.1		%	11.3		%	6.9		%

*	The Company has excluded immaterial amounts of intersegment revenues from each of the three and six months ended June 30, 2023 and 2022.
**	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, 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, debt modification expense and 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.

33

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(in thousands)
Net loss	$	(173,654)	$	(62,852)	$	(227,716)	$	(188,632)
Adjustments:
Stock-based compensation expense	10,983		22,349		25,546		46,773
Other (income) expense, net	(227)		1,367		(834)		2,397
Net interest expense	17,545		13,665		35,137		27,298
Income tax expense (benefit)	210		(164)		323		(415)
Depreciation and amortization expense	27,328		31,342		57,348		65,757
Impairment charges	134,117		—		134,117		58,782
Debt modification expense and loss on debt extinguishment	—		—		16,735		—
Restructuring charges	3,622		16,753		8,497		17,540
Other*	1,868		(558)		2,830		4,682
Total adjustments	195,446		84,754		279,699		222,814
Total segment profitability	$	21,792	$	21,902	$	51,983	$	34,182

* Includes (i) transaction and integration expense of $0.1 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and $3.4 million for the six months ended June 30, 2023 and 2022, respectively, and (ii) stockholder activism and litigation-related expense (recovery) of $1.8 million and $(1.6) million for the three months ended June 30, 2023 and 2022, respectively, and $2.6 million and $1.3 million for the six months ended June 30, 2023 and 2022, respectively.

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

	June 30, 2023		December 31, 2022
	(in thousands)
Total assets
Degree Program Segment	$	368,453	$	459,252
Alternative Credential Segment	1,169,964		1,351,607
Total assets	$	1,538,417	$	1,810,859

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 $28.8 million and $27.2 million for the three months ended June 30, 2023 and 2022, respectively. The Company’s non-U.S. revenue was $59.5 million and $55.3 million for the six months ended June 30, 2023 and 2022, respectively. Substantially all of the Company’s non-U.S. revenue for each of the aforementioned periods was sourced from the Alternative Credential Segment’s operations outside of the U.S. The Company’s long-lived tangible assets in non-U.S. countries as of June 30, 2023 and December 31, 2022 totaled approximately $3.9 million and $4.5 million, respectively.

34

2U, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

13.    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.

	June 30, 2023		December 31, 2022
	(in thousands)
Degree Program Segment accounts receivable	$	32,339	$	20,612
Degree Program Segment unbilled revenue	21,024		8,496
Alternative Credential Segment accounts receivable	41,108		51,360
Total	94,471		80,468
Less: Provision for credit losses	(7,124)		(17,642)
Trade accounts receivable, net	$	87,347	$	62,826

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, 2022	$	17,642
Current period provision	2,270
Amounts written off	(12,795)
Foreign currency translation adjustments	7
Balance as of June 30, 2023	$	7,124

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.

	June 30, 2023		December 31, 2022
	(in thousands)
Other receivables, amortized cost	$	51,607	$	52,180
Less: Provision for credit losses	(5,553)		(3,579)
Other receivables, net	$	46,054	$	48,601
Other receivables, net, current	$	29,685	$	33,813
Other receivables, net, non-current	$	16,369	$	14,788

35

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, 2022	$	3,579
Current period provision	1,974
Balance as of June 30, 2023	$	5,553

The Company considers receivables to be past due when amounts contractually due under the extended payment plans have not been paid. As of June 30, 2023, 82% 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.

	June 30, 2023
	Year of Origination
	2023		2022		2021		2020		2019 & Prior		Total
	(in thousands)
Credit Quality Tier
High	$	9,184	$	6,636	$	1,014	$	822	$	547	$	18,203
Mid	7,785		6,825		2,002		1,796		1,753		20,161
Low	3,129		3,405		3,001		1,789		1,919		13,243
Total	$	20,098	$	16,866	$	6,017	$	4,407	$	4,219	$	51,607

	December 31, 2022
	Year of Origination
	2022		2021		2020		2019		2018		Total
	(in thousands)
Credit Quality Tier
High	$	15,737	$	2,285	$	48	$	18	$	115	$	18,203
Mid	14,005		3,773		1,239		1,363		392		20,772
Low	6,160		3,099		1,677		1,939		330		13,205
Total	$	35,902	$	9,157	$	2,964	$	3,320	$	837	$	52,180

36

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.

	June 30, 2023		December 31, 2022
	(in thousands)
Degree Program Segment deferred revenue	$	24,180	$	1,245
Alternative Credential Segment deferred revenue	83,009		88,916
Total contract liabilities	$	107,189	$	90,161

For the Degree Program Segment, during the three months ended June 30, 2023 and 2022 the Company recognized $0.1 million and $0.1 million of revenue related to its deferred revenue balances that existed at the end of each preceding year, respectively. Revenue recognized in this segment during the six months ended June 30, 2023 and 2022 that was included in the deferred revenue balance that existed at the end of each preceding year was $1.2 million and $1.4 million, respectively.

For the Alternative Credential Segment, during the three months ended June 30, 2023 and 2022 the Company recognized $16.1 million and $16.3 million of revenue related to its deferred revenue balances that existed at the end of each preceding year. Revenue recognized in this segment during the six months ended June 30, 2023 and 2022 that was included in the deferred revenue balance that existed at the end of each preceding year was $71.0 million and $66.5 million, respectively.

Contract Acquisition Costs

The Degree Program Segment had $0.6 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 June 30, 2023 and December 31, 2022, respectively. For each of the six months ended June 30, 2023 and 2022, the Company capitalized an immaterial amount of contract acquisition costs and recorded an immaterial amount of associated amortization expense in the Degree Program Segment.

14.    Supplemental Cash Flow Information

The Company’s cash interest payments, net of amounts capitalized, were $28.4 million and $23.5 million for the six months ended June 30, 2023 and 2022, respectively. The Company’s accrued but unpaid capital expenditures were $2.4 million and $4.7 million for the six months ended June 30, 2023 and 2022, respectively.

37

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, 2022. 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 our Annual Report on Form 10-K for the year ended December 31, 2022, 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, 2022, which are included in our Annual Report on Form 10-K, filed with the SEC on February 21, 2023.

Overview

We are a leading online education platform company. Our mission is to expand access to high-quality education and unlock human potential. As a trusted partner to top-ranked nonprofit universities and other leading organizations, we deliver technology and services that enable our clients to bring their educational offerings online at scale. We provide 78 million people worldwide with access to world-class education in partnership with 250 top-ranked global universities and other leading organizations. Through edX, our education consumer marketplace, we offer more than 4,300 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.

Our offerings cover a wide range of topics including technology, business, healthcare, science, education, social work, and sustainability. Many of the offerings are stackable, providing learners with an affordable pathway to achieve both short-term and long-term professional and educational goals. Our platform provides clients with the digital infrastructure to launch world-class online education offerings and allow students to easily access high-quality, job-relevant education 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 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 through relationships with nonprofit colleges and universities and other leading organizations. Students enrolled in these offerings are generally seeking to reskill or upskill for career advancement or personal development through shorter duration, lower-priced offerings. In addition to selling these offerings directly to individuals, we also sell to organizations and institutions, including employers, non-profits, governments and governmental entities to enable upskilling and reskilling of their workforces.

38

January 2023 Debt Refinancing

In January 2023, we entered into an agreement to amend our First Amended Term Loan Agreement to, among other things, extend the maturity date from December 2024 to December 2026. In connection with amending the terms and extending the maturities under the First Amended Term Loan Agreement, we issued the 2030 Notes with an aggregate principal amount of $147.0 million. We used cash on hand and the $127.1 million of net proceeds from the 2030 Notes to reduce the outstanding principal amount of secured debt under our term loan facilities from $567 million to $380 million. As part of the refinancing transaction, in addition to extending the maturity date, the lenders provided us with a senior secured first lien revolving loan facility in the principal amount of $40 million. In connection with this refinancing event, during the first quarter of 2023, we recorded $12.1 million in loss on debt extinguishment and $4.6 million in debt modification expense. Refer to Note 8 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our debt.

2022 Strategic Realignment Plan

During the second quarter of 2022, we accelerated our planned transition to a platform company (the “2022 Strategic Realignment Plan”). The plan was 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 simplified our executive structure, reduced employee headcount, rationalized our real estate footprint and implemented steps to optimize marketing spend. Implementation of the 2022 Strategic Realignment Plan has resulted in improved profitability, and we expect it will lead to further profitability improvements going forward.

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. Our contracts generally have 10 to 15 year terms and do not include termination rights for convenience. From time to time, we have entered into and we may in the future enter into agreements to strategically exit certain of our clients’ programs. These agreements may provide for the provision of transition services and make-whole fees. 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 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.

39

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.

Impairment charges

Impairment charges consist of amounts recorded to write down the carrying value of assets to fair value.

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.

Debt modification expense and loss on debt extinguishment

Debt modification expense and loss on debt extinguishment consists of amounts recorded related to the refinancing of certain of our debt obligations.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency gains and losses, gains and losses related to the sale of investments and other non-operating income and expense.

Income Taxes

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

40

Results of Operations

Consolidated Operating Results

Comparison of Three Months Ended June 30, 2023 and 2022

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

	Three Months Ended June 30,
	2023				2022				Period-to-Period Change
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage
	(dollars in thousands)
Revenue	$	222,089	100.0	%	$	241,464	100.0	%	$	(19,375)	(8.0)	%
Costs and expenses
Curriculum and teaching	34,102		15.4		32,145		13.3		1,957		6.1
Servicing and support	33,585		15.1		37,061		15.3		(3,476)		(9.4)
Technology and content development	44,250		19.9		45,616		18.9		(1,366)		(3.0)
Marketing and sales	95,882		43.2		116,350		48.2		(20,468)		(17.6)
General and administrative	32,657		14.7		41,523		17.2		(8,866)		(21.4)
Restructuring charges	3,622		1.6		16,753		6.9		(13,131)		(78.4)
Impairment charges	134,117		60.4		—		—		134,117		*
Total costs and expenses	378,215		170.3		289,448		119.8		88,767		30.7
Loss from operations	(156,126)		(70.3)		(47,984)		(19.8)		(108,142)		225.4
Interest income	371		0.2		241		0.1		130		53.9
Interest expense	(17,916)		(8.1)		(13,906)		(5.8)		(4,010)		28.8
Other income (expense), net	227		0.1		(1,367)		(0.6)		1,594		(116.6)
Loss before income taxes	(173,444)		(78.1)		(63,016)		(26.1)		(110,428)		175.2
Income tax (expense) benefit	(210)		(0.1)		164		0.1		(374)		(228.0)
Net loss	$	(173,654)	(78.2)	%	$	(62,852)	(26.0)	%	$	(110,802)	176.3	%

* Not meaningful for comparative purposes.

Revenue. Revenue for the three months ended June 30, 2023 decreased $19.4 million, or 8.0%, to $222.1 million as compared to $241.5 million in 2022.

Revenue from our Degree Program Segment decreased $23.6 million, or 16.5%. This decrease reflects the impact of our transition to a new marketing framework in mid-2022 in connection with the 2022 Strategic Realignment Plan. Full course equivalent (“FCE”) enrollments decreased by 9,813, or 16.3%, and average revenue per FCE enrollment decreased from $2,373 to $2,367, or 0.3%.

Revenue from our Alternative Credential Segment increased $4.2 million, or 4.3%. FCE enrollments increased by 2,397, or 10.2%, and average revenue per FCE enrollment decreased from 3,891 to 3,591, or 7.7%.

Curriculum and Teaching. Curriculum and teaching expense increased $2.0 million, or 6.1%, to $34.1 million as compared to $32.1 million in 2022. This increase was primarily due to an increase in personnel and personnel-related expense.

Servicing and Support. Servicing and support expense decreased $3.5 million, or 9.4%, to $33.6 million as compared to $37.1 million in 2022. This decrease was primarily due to a decrease in personnel and personnel-related expense.

Technology and Content Development. Technology and content development expense decreased $1.4 million, or 3.0%, to $44.3 million as compared to $45.6 million in 2022. This decrease was primarily due to a $2.4 million decrease in professional fees and other costs to support technology and content development and a $2.2 million decrease in depreciation and amortization expense. These decreases were partially offset by a $2.0 million increase in personnel and personnel-related expense and a $1.9 million increase in expenses to support our platform and software applications.

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Marketing and Sales. Marketing and sales expense decreased $20.5 million, or 17.6%, to $95.9 million as compared to $116.4 million in 2022. This decrease was primarily due to a $16.4 million decrease in marketing expense from the implementation of a more efficient marketing framework in connection with the 2022 Strategic Realignment Plan, a $1.9 million decrease in depreciation and amortization expense, and a $1.3 million decrease in personnel and personnel-related expense.

General and Administrative. General and administrative expense decreased $8.9 million, or 21.4%, to $32.7 million as compared to $41.5 million in 2022. This decrease was primarily due to a $10.1 million decrease in personnel and personnel-related expense and a $1.3 million decrease in lease and facility costs. These decreases were partially offset by a $3.4 million increase in certain litigation-related expense.

Impairment Charges. In the second quarter of 2023, we recorded impairment charges of $16.7 million and $117.4 million to goodwill and the indefinite-lived intangible asset, respectively.

Restructuring Charges. Restructuring charges decreased $13.1 million, or 78.4%, to $3.6 million as compared to $16.8 million in 2022. Restructuring charges for the three months ended June 30, 2023 include $2.8 million in lease and facility exit costs in connection with the 2022 Strategic Realignment Plan. Restructuring charges for the three months ended June 30, 2022 include $15.2 million in severance and severance-related expense in connection with the 2022 Strategic Realignment Plan.

Net Interest Income (Expense). Net interest expense increased $3.9 million, or 28.4%, to $17.5 million as compared to $13.7 million in 2022. This increase was primarily due to a $2.3 million increase in interest expense related to the 2030 Notes that were issued in January 2023 and a $2.2 million increase in interest expense incurred under our Second Amended Credit Agreement.

Other Income (Expense), Net. Other income, net was $0.2 million for the three months ended June 30, 2023, as compared to other expense, net of $1.4 million for the three months ended June 30, 2022. 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 June 30, 2023, we recognized income tax expense of $0.2 million, and our effective tax rate was less than 1%. For the three months ended June 30, 2022, we recognized an income tax benefit of $0.2 million, and our effective tax rate was less than 1%. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.

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Comparison of Six Months Ended June 30, 2023 and 2022

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

	Six Months Ended June 30,
	2023				2022				Period-to-Period Change
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage
	(dollars in thousands)
Revenue	$	460,593	100.0	%	$	494,793	100.0	%	$	(34,200)	(6.9)	%
Costs and expenses
Curriculum and teaching	66,942		14.5		65,375		13.2		1,567		2.4
Servicing and support	69,694		15.1		76,685		15.5		(6,991)		(9.1)
Technology and content development	89,734		19.5		96,673		19.5		(6,939)		(7.2)
Marketing and sales	196,057		42.6		247,332		50.0		(51,275)		(20.7)
General and administrative	71,907		15.6		91,758		18.5		(19,851)		(21.6)
Restructuring charges	8,497		1.8		17,540		3.5		(9,043)		(51.6)
Impairment charge	134,117		29.1		58,782		11.9		75,335		128.2
Total costs and expenses	636,948		138.2		654,145		132.1		(17,197)		(2.6)
Loss from operations	(176,355)		(38.2)		(159,352)		(32.1)		(17,003)		10.7
Interest income	736		0.2		498		0.1		238		47.8
Interest expense	(35,873)		(7.8)		(27,796)		(5.6)		(8,077)		29.1
Debt modification expense and loss on debt extinguishment	(16,735)		(3.6)		—		—		(16,735)		*
Other income (expense), net	834		0.2		(2,397)		(0.5)		3,231		(134.8)
Loss before income taxes	(227,393)		(49.2)		(189,047)		(38.1)		(38,346)		20.3
Income tax (expense) benefit	(323)		(0.1)		415		0.1		(738)		(177.8)
Net loss	$	(227,716)	(49.3)	%	$	(188,632)	(38.0)	%	$	(39,084)	20.7	%

* Not meaningful for comparative purposes.

Revenue. Revenue for the six months ended June 30, 2023 decreased $34.2 million, or 6.9%, to $460.6 million as compared to $494.8 million in 2022.

Revenue from our Degree Program Segment decreased $37.3 million, or 12.5%. The decrease in revenue reflects the impact of our transition to a new marketing framework in mid-2022 in connection with the 2022 Strategic Realignment Plan. Of note, revenue for the six months ended June 30, 2023 includes $7.6 million in make-whole fees from agreements to strategically exit certain of our clients’ programs. Full course equivalent (“FCE”) enrollments decreased by 16,931, or 13.8%, and average revenue per FCE enrollment increased from $2,418 to $2,453, or 1.4%.

Revenue from our Alternative Credential Segment increased $3.1 million, or 1.6%. FCE enrollments increased by 1,723, or 3.7%, and average revenue per FCE enrollment decreased from 3,951 to 3,868, or 2.1%.

Curriculum and Teaching. Curriculum and teaching expense increased $1.6 million, or 2.4%, to $66.9 million as compared to $65.4 million in 2022. This increase was primarily due to higher expense as a result of an increase in amounts due to university clients driven by higher revenue in certain offerings in our Alternative Credential Segment.

Servicing and Support. Servicing and support expense decreased $7.0 million, or 9.1%, to $69.7 million as compared to $76.7 million in 2022. This decrease was primarily due to a $5.8 million decrease in personnel and personnel-related expense and a $1.7 million decrease in other student support costs.

Technology and Content Development. Technology and content development expense decreased $6.9 million, or 7.2%, to $89.7 million as compared to $96.7 million in 2022. This decrease was primarily due to a $3.2 million decrease in depreciation and amortization expense, a $2.5 million decrease in professional fees and other costs to support technology and content development, $1.9 million decrease in personnel and personnel-related expense, and a $1.4 million decrease in lease and facility

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costs. These decreases were partially offset by a $2.5 million increase in expenses to support our platform and software applications.

Marketing and Sales. Marketing and sales expense decreased $51.3 million, or 20.7%, to $196.1 million as compared to $247.3 million in 2022. This decrease was primarily due to a $38.3 million decrease in marketing expense from the implementation of a more efficient marketing framework in connection with the 2022 Strategic Realignment Plan, a $7.4 million decrease in personnel and personnel-related expense, and a $5.5 million decrease in depreciation and amortization expense.

General and Administrative. General and administrative expense decreased $19.9 million, or 21.6%, to $71.9 million as compared to $91.8 million in 2022. This decrease was primarily due to a $16.4 million decrease in personnel and personnel-related expense, a $3.0 million decrease in transaction and integration expense, and a $2.5 million decrease in lease and facility costs. These decreases were partially offset by a $1.4 million increase in certain litigation-related expense.

Impairment Charges. In the second quarter of 2023, we recorded impairment charges of $16.7 million and $117.4 million to goodwill and the indefinite-lived intangible asset, respectively. 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.

Restructuring Charges. Restructuring charges decreased $9.0 million, or 51.6%, to $8.5 million as compared to $17.5 million in 2022. Restructuring charges for the six months ended June 30, 2023 include $5.7 million in lease and facility exit costs and $1.2 million in severance and severance-related expense, each in connection with the 2022 Strategic Realignment Plan. Restructuring charges for the six months ended June 30, 2022 include $15.2 million in severance and severance-related expense in connection with the 2022 Strategic Realignment Plan.

Net Interest Income (Expense). Net interest expense increased $7.8 million, or 28.7%, to $35.1 million as compared to $27.3 million in 2022. This increase was primarily due to a $4.3 million increase in interest expense incurred under our Second Amended Credit Agreement and a $4.3 million increase in interest expense related to the 2030 Notes that were issued in January 2023.

Debt modification expense and loss on debt extinguishment. In the first quarter of 2023, we recorded $12.1 million in loss on debt extinguishment and $4.6 million in debt modification expense related to the refinancing of the Second Amended Credit Agreement.

Other Income (Expense), Net. Other income, net was $0.8 million for the six months ended June 30, 2023, as compared to other expense, net of $2.4 million for the six months ended June 30, 2022. This change was primarily due to fluctuations in foreign currency rates impacting our operations in the Alternative Credential Segment.

Income Tax Benefit. For the six months ended June 30, 2023, we recognized income tax expense of $0.3 million, and our effective tax rate was less than 1%. For the six months ended June 30, 2022, 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, 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, debt modification expense and 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 June 30,				Six Months Ended June 30,
	2023		2022		2023			2022
	(in thousands)
Net loss	$	(173,654)	$	(62,852)	$	(227,716)		$	(188,632)
Adjustments:
Stock-based compensation expense	10,983		22,349		25,546			46,773
Other (income) expense, net	(227)		1,367		(834)			2,397
Net interest expense	17,545		13,665		35,137			27,298
Income tax expense (benefit)	210		(164)		323			(415)
Depreciation and amortization expense	27,328		31,342		57,348			65,757
Impairment charges	134,117		—		134,117			58,782
Debt modification expense and loss on debt extinguishment	—		—		16,735			—
Restructuring charges	3,622		16,753		8,497			17,540
Other*	1,868		(558)		2,830			4,682
Total adjustments	195,446		84,754		279,699		279699000	222,814
Total segment profitability	$	21,792	$	21,902	$	51,983		$	34,182

* Includes (i) transaction and integration expense of $0.1 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and $3.4 million for the six months ended June 30, 2023 and 2022, respectively, and (ii) stockholder activism and litigation-related expense (recovery) of $1.8 million and $(1.6) million for the three months ended June 30, 2023 and 2022, respectively, and $2.6 million and $1.3 million for the six months ended June 30, 2023 and 2022, respectively.

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Three Months Ended June 30, 2023 and 2022

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

	Three Months Ended June 30,				Period-to-Period Change
	2023		2022		Amount		Percentage
	(dollars in thousands)
Revenue by segment*
Degree Program Segment	$	119,494	$	143,090	$	(23,596)	(16.5)	%
Alternative Credential Segment	102,595		98,374		4,221		4.3
Total revenue	$	222,089	$	241,464	$	(19,375)	(8.0)	%
Segment profitability
Degree Program Segment	$	33,111	$	39,539	$	(6,428)	(16.3)	%
Alternative Credential Segment	(11,319)		(17,637)		6,318		35.8
Total segment profitability	$	21,792	$	21,902	$	(110)	(0.5)	%

* Immaterial amounts of intersegment revenue have been excluded from the above results for the three months ended June 30, 2023 and 2022.

Degree Program Segment profitability decreased $6.4 million, or 16.3%, to $33.1 million as compared to $39.5 million in 2022. This decrease was primarily due to a $23.6 million decrease in revenue, partially offset by lower operating expenses due to the implementation of the 2022 Strategic Realignment Plan.

Alternative Credential Segment profitability increased $6.3 million, or 35.8%, to $(11.3) million as compared to $(17.6) million in 2022. This increase was primarily due to lower operating expenses due to the implementation of the 2022 Strategic Realignment Plan.

Six Months Ended June 30, 2023 and 2022

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

	Six Months Ended June 30,				Period-to-Period Change
	2023		2022		Amount		Percentage
	(dollars in thousands)
Revenue by segment*
Degree Program Segment	$	259,974	$	297,257	$	(37,283)	(12.5)	%
Alternative Credential Segment	200,619		197,536		3,083		1.6
Total revenue	$	460,593	$	494,793	$	(34,200)	(6.9)	%
Segment profitability
Degree Program Segment	$	80,315	$	75,357	$	4,958	6.6	%
Alternative Credential Segment	(28,332)		(41,175)		12,843		31.2	%
Total segment profitability	$	51,983	$	34,182	$	17,801	52.1	%

* Immaterial amounts of intersegment revenue have been excluded from the above results for the six months ended June 30, 2023 and 2022.

Degree Program Segment profitability increased $5.0 million to $80.3 million as compared to $75.4 million in 2022. This increase was primarily due to lower operating expenses due to the implementation of the 2022 Strategic Realignment Plan, partially offset by a $37.3 million decrease in revenue.

Alternative Credential Segment profitability increased $12.8 million, or 31.2%, to $(28.3) million as compared to $(41.2) million in 2022. This decrease was primarily due to lower operating expenses due to the implementation of the 2022 Strategic Realignment Plan.

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Liquidity and Capital Resources

As of June 30, 2023, our principal sources of liquidity were cash and cash equivalents totaling $53.3 million, which were held for working capital and general corporate purposes.

In April 2020, we issued the 2025 Notes in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional 2025 Notes, in a private placement to qualified institutional buyers under Rule 144A of the Securities Act. The 2025 Notes are governed by an indenture (the “2025 Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The 2025 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 2025 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 2025 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 2025 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 2025 Notes and/or to offset any cash payments we are required to make in excess of the principal amount of the converted 2025 Notes, with such reduction and/or offset subject to the cap. The net proceeds from the issuance of the 2025 Notes were $319.0 million after deducting the initial purchasers’ discount, offering expenses and the cost of the capped call transactions. As of June 30, 2023, the conditions allowing holders of the 2025 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 2025 Notes, therefore, are classified as a non-current on the condensed consolidated balance sheets.

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 “2021 Term Loan Facilities”), which had an initial maturity date of December 28, 2024. Loans under this facility, which was amended in January 2023 as described below, bore 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 Facilities”) primarily to provide for an incremental facility to us in an original principal amount of $100 million. The proceeds of the Amended Term Loan Facilities may be used for general corporate purposes.

In January 2023, we entered into an Extension Amendment, Second Amendment and First Incremental Agreement to Credit and Guaranty Agreement, (the “Second Amended Credit Agreement”), which amended the Amended Term Loan Facilities. The provisions of the Second Amended Credit Agreement became effective upon the satisfaction of certain conditions set for therein, including, without limitation, the funding of the 2030 Notes referenced below and the prepayment of certain existing term loans to reduce the outstanding principal amount of term loans outstanding under the Credit Agreement from $567 million to $380 million. Pursuant to the Second Amended Credit Agreement, the lenders thereunder agreed to, among other amendments, extend the maturity date of the term loans thereunder from December 28, 2024 to December 28, 2026 (or, if more than $40 million of our 2025 Notes remain outstanding on January 30, 2025, January 30, 2025) and to provide a senior secured first lien revolving loan facility in the principal amount of $40 million. The termination date for such revolving loans will be June 28, 2026 (or, if more than $50 million of the 2025 Notes remain outstanding on January 1, 2025, January 1, 2025). Loans under the Credit Agreement will bear interest at a per annum rate equal to (i) with respect to term loans, a base rate or the Term SOFR rate, as applicable, plus a margin of 5.50% in the case of the base rate loans and 6.50% in the case of Term SOFR loans and (ii) with respect to revolving loans, a base rate or the Term SOFR rate, as applicable, plus a margin of 4.50% in the case of the base rate loans and 5.50% in the case of Term SOFR loans.

In January 2023, we consummated the issuance of the notes (“the 2030 Notes”) in an aggregate principal amount of $147.0 million in a private placement to qualified institutional buyers under Rule 144A of the Securities Act. The 2030 Notes are governed by an indenture (“the 2030 Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The 2030 Notes bear interest at a rate of 4.50% per annum, payable semi-annually in arrears on February 1 and August 1 of each year, beginning on August 1, 2023. The 2030 Notes mature on February 1, 2030, unless earlier redeemed or repurchased by us or converted. At any time from, and after January 11, 2023, the 2030 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. The net proceeds from the issuance of the 2030 Notes were $127.1 million. We used the proceeds from the offering of the 2030 Notes, along with cash on our balance sheet, to repay a portion of the amounts outstanding under the Second Amended Term Loan Facility. We have the right under the 2030 Indenture to determine the method of settlement at the time of conversion. Therefore, the 2030 Notes are classified as non-current on the condensed

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consolidated balance sheets.

Refer to Note 8 in the “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information regarding our debt.

We have financed our operations primarily through payments from our clients and students for our technology and services, the borrowings under our Second Amended Credit Agreement, the 2025 Notes, the 2030 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 Second Amended Credit Agreement, will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. The implementation of the 2022 Strategic Realignment Plan has resulted in improved profitability and we expect this will lead to further profitability improvements going forward. We believe these profitability improvements will be further aided by our long-term revenue contracts. Our ability to support our cash requirements in the long term will depend on many factors, including our ability to realize the anticipated benefits of the 2022 Strategic Realignment Plan and our ability to obtain equity or debt financing on reasonable terms. 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 to optimize our balance sheet.

Our operations require us to make capital expenditures for content development, capitalized technology, and property and equipment and to service our debt. During the six months ended June 30, 2023 and 2022, our capital asset additions were $27.5 million and $34.5 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).

	Six Months Ended June 30,
	2023		2022
Net cash provided by operating activities	$	1,182	$	28,644
Net cash used in investing activities	(25,032)		(35,179)
Net cash used in financing activities	(91,911)		(2,975)
Effect of exchange rate changes on cash	(118)		(2,614)
Net decrease in cash, cash equivalents and restricted cash	$	(115,879)	$	(12,124)

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 and stock-based compensation expense. Our cash flows from operations can fluctuate from quarter to quarter due to changes in accounts receivable and deferred revenue driven by the varying academic schedules of our offerings and university clients. In addition to these fluctuations in working capital, cash flows from operations at the beginning of the year are impacted by greater marketing spend and the timing of certain payments. We typically reduce our paid search and other marketing and sales efforts during late November and December because of less demand during the holiday season.

The following sections set forth the components of our $1.2 million of cash provided by operating activities during the six months ended June 30, 2023.

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Net income (loss) (adjusted for non-cash charges)

The following table sets forth our net loss (adjusted for non-cash charges) during the six months ended June 30, 2023 (in thousands):

Net loss	$	(227,716)
Non-cash interest expense	6,818
Depreciation and amortization expense	57,348
Stock-based compensation expense	25,546
Non-cash lease expense	8,804
Restructuring charges	(13)
Impairment charges	134,117
Provision for credit losses	4,245
Loss on debt extinguishment	12,123
Other	(787)
Net loss (adjusted for non-cash charges)	$	20,485

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 six months ended June 30, 2023 (in thousands):

Changes in operating assets and liabilities, net of assets and liabilities acquired:
Cash used in accounts receivable, net and other receivables, net	$	(26,245)
Cash used in prepaid expenses, other assets, and other liabilities, net	(14,808)
Cash provided by accounts payable and accrued expenses	5,014
Cash provided by deferred revenue	16,736
Net cash used in changes in operating assets and liabilities	$	(19,303)

From December 31, 2022 to June 30, 2023:

•Accounts receivable, net and other receivables, net increased $26.2 million and deferred revenue increased $16.7 million. These increases were primarily due to the timing of our Degree Program Segment clients’ academic terms.

•Accounts payable and accrued expenses increased $5.0 million, primarily due to an increase in the amount due to university clients and a higher accrual for marketing expense.

•Other liabilities decreased $19.2 million, primarily due to a decrease in our lease liability and a decrease in amounts payable for proceeds received from students enrolled in certain alternative credential offerings that are payable to an associated university client.

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 six months ended June 30, 2023, net cash used in investing activities was $25.0 million. This use of cash was driven by cash outflows of $23.0 million for the addition of amortizable intangible assets and $2.1 million for purchases of property and equipment.

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 six months ended June 30, 2023, net cash used in financing activities was $91.9 million. This use of cash was driven by net cash outflows of $93.4 million under the Second Amended Credit Agreement and the 2030 Notes and $0.7

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million for tax withholding payments associated with the settlement of restricted stock units, partially offset by $2.2 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.

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.

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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 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.

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.

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

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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. During the second quarter of 2023, we completed the update of our internal financial reporting structure to better align with the executive structure following the 2022 Strategic Realignment. As a result of this update, our three reporting units within the Alternative Credential Segment (Executive Education, Boot Camp, and Open Courses) were combined into a single reporting unit (Alternative Credential). The Degree Program Segment continues to have one reporting unit (Degree Program). We performed impairment assessments before and after the change in reporting units. The results of these assessments are described further below.

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 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, discount rates, terminal growth rates, and forecasts of revenue and margins. 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.

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. We performed interim impairment assessments as of March 1, 2022 and September 30, 2022.

During the second quarter of 2023, we experienced a significant decline in our market capitalization, which management deemed to be a triggering event related to our goodwill and indefinite-lived intangible asset. In addition, as a result of the change in the our reporting units in the second quarter of 2023, we performed interim impairment assessments before and after the change in reporting units. We performed these interim impairment assessments as of May 1, 2023.

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 an income-based approach to determine the fair

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value of its long-lived intangible asset. For the impairment assessments performed in 2022, 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. For the goodwill impairment assessment performed as of May 1, 2023, 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 weighted-average cost of capital adjusted for the risk associated with the operations at the time of the assessment. For the long-lived intangible asset impairment assessment performed as of May 1, 2023, key assumptions used in the income-based approach included discount rates, terminal growth rates, forecasts of revenue, and a royalty rate.

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 of our Open Courses reporting unit and the carrying value of our indefinite-lived intangible asset, both within the Alternative Credential Segment, 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 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, we determined the carrying values of 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 to goodwill, of which $43.0 million related to the Open Courses reporting unit and $7.2 million related to the Executive Education reporting unit. In addition, during three months ended September 30, 2022, we recorded impairment charges of $29.3 million to the indefinite-lived intangible asset 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.

For the interim impairment assessment performed as of May 1, 2023, before the change in reporting units, we determined the carrying value of our Open Courses reporting unit and the carrying value of our indefinite-lived intangible asset, both within the Alternative Credential Segment, exceeded their respective estimated fair value. As a result, during the three months ended June 30, 2023, we recorded impairment charges of $16.7 million to goodwill and $117.4 million to the indefinite-lived intangible asset. 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.

For the interim impairment assessment performed as of May 1, 2023, after the change in reporting units, management determined it was not more likely than not that the fair values of the Degree Program reporting unit and the Alternative Credential reporting unit were less than their respective carrying amounts. As such, we concluded that the goodwill relating to those reporting units was not impaired and further quantitative impairment assessment was not necessary.

As of June 30, 2023 and December 31, 2022, the goodwill balance was $712.9 million and $734.6 million, respectively. As of June 30, 2023 the Degree Program reporting unit and the Alternative Credential reporting unit had goodwill balances of $192.5 million and $520.4 million, respectively. It is possible that future changes in circumstances, such as a decline in our market capitalization, or in the variables associated with the judgments, assumptions and estimates used in assessing the fair value of our reporting units, could require us to record additional impairment charges in the future.

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 impairment analysis of the Open Courses reporting unit performed as of May 1, 2023, a 1% increase or decrease to the discount rate, in isolation, would result in a $6.6 million decrease or a $7.5 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 $2.2 million decrease or a $2.5 million increase to the estimated fair value of the reporting unit, respectively.

For the impairment analysis of the indefinite-lived intangible asset performed as of May 1, 2023, a 1% increase or decrease to the discount rate, in isolation, would result in a $8.9 million decrease or a $11.2 million increase to the estimated fair value,

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respectively, and a 1% decrease or increase to the royalty rate, in isolation, would result a $9.8 million decrease or a $9.7 million increase to the estimated fair value, respectively.

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 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. As of June 30, 2023 and December 31, 2022, the indefinite-lived intangible asset balance was $78.3 million and $195.7 million, respectively. 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 our indefinite-lived intangible asset.

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.

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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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Degree Program Segment
FCE enrollments	50,490		60,303		105,981		122,912
Average revenue per FCE enrollment	$	2,367	$	2,373	$	2,453	$	2,418
Alternative Credential Segment*
FCE enrollments	25,840		23,443		47,830		46,107
Average revenue per FCE enrollment	$	3,591	$	3,891	$	3,868	$	3,951

* FCE enrollments and average revenue per FCE exclude the impact of enrollments in edX offerings and the related revenue of $9.8 million and $7.1 million for the three months ended June 30, 2023 and 2022, respectively. FCE enrollments and average revenue per FCE exclude the impact of enrollments in edX offerings and the related revenue of $15.6 million and $15.4 million for the six months ended June 30, 2023 and 2022, 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, 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 modification and 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) interest or tax payments that may represent a reduction in cash; or (xi) 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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(in thousands)
Net loss	$	(173,654)	$	(62,852)	$	(227,716)	$	(188,632)
Adjustments:
Stock-based compensation expense	10,983		22,349		25,546		46,773
Other (income) expense, net	(227)		1,367		(834)		2,397
Net interest expense	17,545		13,665		35,137		27,298
Income tax expense (benefit)	210		(164)		323		(415)
Depreciation and amortization expense	27,328		31,342		57,348		65,757
Impairment charges	134,117		—		134,117		58,782
Debt modification expense and loss on debt extinguishment	—		—		16,735		—
Restructuring charges	3,622		16,753		8,497		17,540
Other*	1,868		(558)		2,830		4,682
Total adjustments	195,446		84,754		279,699		222,814
Adjusted EBITDA	$	21,792	$	21,902	$	51,983	$	34,182

* Includes (i) transaction and integration expense of $0.1 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $0.2 million and $3.4 million for the six months ended June 30, 2023 and 2022, respectively, and (ii) stockholder activism and litigation-related expense (recovery) of $1.8 million and $(1.6) million for the three months ended June 30, 2023 and 2022, respectively, and $2.6 million and $1.3 million for the six months ended June 30, 2023 and 2022, respectively.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to market risk from the information provided in Part II, Item 7A of our Annual Report on Form 10-K, filed with the SEC on February 21, 2023.

Interest Rate Risk

We are subject to interest rate risk through our borrowings under our Second Amended Credit Agreement. Loans under the Second Amended Credit Agreement will bear interest at a per annum rate equal to (i) with respect to term loans, a base rate or the Term SOFR (as defined in the Second Amended Credit Agreement) rate, as applicable, plus a margin of 5.50% in the case of the base rate loans and 6.50% in the case of Term SOFR loans and (ii) with respect to revolving loans, a base rate or the Term SOFR rate, as applicable, plus a margin of 4.50% in the case of the base rate loans and 5.50% in the case of Term SOFR loans. As of June 30, 2023, borrowings under our Second Amended Credit Agreement were $378.1 million. A hypothetical increase in interest rates by 100 basis points would not have a material impact on our financial position.

Foreign Currency Exchange Risk

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

For the three months ended June 30, 2023 and 2022, our foreign currency translation adjustment losses were $4.0 million and $7.7 million, respectively. For the six months ended June 30, 2023 and 2022, our foreign currency translation adjustment losses were $7.3 million and $0.3 million, respectively.

For the three months ended June 30, 2023 and 2022, we recognized a foreign currency exchange gain of $0.2 million and a loss of $1.4 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss. For the six months ended June 30, 2023 and 2022, we recognized a foreign currency exchange gain of $0.8 million and a loss of $2.8 million, respectively, included on our condensed consolidated statements of operations and comprehensive loss.

The foreign exchange rate volatility of the trailing 12 months ended June 30, 2023 was 11.4% and 9.3% for the South African rand and British pound, respectively. The foreign exchange rate volatility of the trailing 12 months ended June 30, 2022 was 11% 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 six months ended June 30, 2023 and 2022, 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.

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Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of June 30, 2023 at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

We made no changes in internal control over financial reporting during the three months ended June 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

The information required by this Item is incorporated herein by reference to Note 5 in “Notes to Condensed Consolidated Financial Statements” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A.    Risk Factors

The risks described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 21, 2023, remain current in all material respects. These risks do not identify all risks that we face. Our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations.

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

(a) Sales of Unregistered Securities

None.

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

None.

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

None.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

None.

Item 5.    Other Information

(c) Information required by Item 408(a) of Regulation S-K.

			Trading Arrangement
	Action	Date	Rule 10b5-1*	Non-Rule 10b5-1**	Total Shares to be Sold	Expiration Date
Matthew J. Norden (Chief Legal Officer)	Adopt	June 16, 2023	X		30,000	June 14, 2024

*	Intended to satisfy the affirmative defense of Rule 10b5-1(c)
**	A “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K

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Item 6.    Exhibits

Exhibit Number	Description	Form	File No.	Exhibit Number	Filing Date	Filed/Furnished Herewith
3.1	Amended and Restated Certificate of Incorporation of the Registrant.	8-K	001-36376	3.1	June 10, 2022
3.2	Amended and Restated Bylaws of the Registrant.	8-K	001-36376	3.2	June 10, 2022
10.1†	Offer letter agreement, dated as of May 23, 2023, between Aaron McCullough and 2U, Inc.					X
10.2†	Summary of Non-Employee Director Compensation.					X
31.1	Certification of Chief Executive Officer of 2U, Inc. pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
31.2	Certification of Chief Financial Officer of 2U, Inc. pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					X
32.1	Certification of Chief Executive Officer of 2U, Inc. in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
32.2	Certification of Chief Financial Officer of 2U, Inc. in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					X
101.INS	XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.					X
101.SCH	XBRL Taxonomy Extension Schema Document.					X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.					X
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
104	Cover 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.

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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.
August 8, 2023	By:	/s/ Christopher J. Paucek
		Christopher J. Paucek
		Chief Executive Officer
August 8, 2023	By:	/s/ Paul S. Lalljie
		Paul S. Lalljie
		Chief Financial Officer

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