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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020

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

Commission File Number: 001-36376

2U, INC.
(Exact name of registrant as specified in its charter)
Delaware
26-2335939
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
7900 Harkins Road
Lanham,
MD
20706
(Address of Principal Executive Offices)
(Zip Code)
(301) 892-4350
(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No
As of October 23, 2020, there were 72,068,858 shares of the registrant’s common stock, par value $0.001 per share, outstanding.


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TABLE OF CONTENTS
Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019
Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) for the three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and 2019

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
trends in the higher education market and the market for online education, and expectations for growth in those markets;
the acceptance, adoption and growth of online learning by colleges and universities, faculty, students, employers, accreditors and state and federal licensing bodies;
the impact of competition on our industry and innovations by competitors;
our ability to comply with evolving regulations and legal obligations related to data privacy, data protection and information security;
our expectations about the potential benefits of our cloud-based software-as-a-service technology and technology-enabled services to university clients and students;
our dependence on third parties to provide certain technological services or components used in our platform;
our expectations about the predictability, visibility and recurring nature of our business model;
our ability to meet the anticipated launch dates of our degree programs, short courses and boot camps;
our ability to acquire new university clients and expand our degree programs, short courses and boot camps with existing university clients;
our ability to successfully integrate the operations of our acquisitions, including Trilogy, to achieve the expected benefits of our acquisitions and manage, expand and grow the combined company;
our ability to refinance our indebtedness on attractive terms, if at all, to better align with our focus on profitability;
our ability to service our substantial indebtedness and comply with the covenants and conversion obligations contained in the Indenture (as defined below) governing our convertible senior notes and the Credit Agreement (as defined below) governing our revolving credit facility;
our ability to generate sufficient future operating cash flows from recent acquisitions to ensure related goodwill is not impaired;
our ability to execute our growth strategy in the international, undergraduate and non-degree alternative markets;
our ability to continue to recruit prospective students for our offerings;
our ability to maintain or increase student retention rates in our degree programs;
our ability to attract, hire and retain qualified employees;
our expectations about the scalability of our cloud-based platform;
potential changes in regulations applicable to us or our university clients;
our expectations regarding the amount of time our cash balances and other available financial resources will be sufficient to fund our operations;
the impact and cost of stockholder activism;
2

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

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

 September 30,
2020
December 31,
2019
 (unaudited) 
Assets  
Current assets  
Cash and cash equivalents$481,329 $170,593 
Restricted cash18,235 19,276 
Accounts receivable, net95,756 33,655 
Prepaid expenses and other assets40,270 37,424 
Total current assets635,590 260,948 
Property and equipment, net53,603 57,643 
Right-of-use assets53,453 43,401 
Goodwill407,860 418,350 
Amortizable intangible assets, net316,405 333,075 
Other assets, non-current85,867 73,413 
Total assets$1,552,778 $1,186,830 
Liabilities and stockholders’ equity  
Current liabilities  
Accounts payable and accrued expenses$84,404 $65,381 
Accrued compensation and related benefits44,484 21,885 
Deferred revenue91,783 48,833 
Lease liability9,185 7,320 
Other current liabilities17,100 12,535 
Total current liabilities246,956 155,954 
Long-term debt268,224 246,620 
Deferred tax liabilities, net2,134 5,133 
Lease liability, non-current75,621 66,974 
Other liabilities, non-current8,270 899 
Total liabilities601,205 475,580 
Commitments and contingencies (Note 6)
Stockholders’ equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none issued
  
Common stock, $0.001 par value, 200,000,000 shares authorized, 71,294,706 shares issued and outstanding as of September 30, 2020; 63,569,109 shares issued and outstanding as of December 31, 2019
71 63 
Additional paid-in capital1,629,565 1,197,379 
Accumulated deficit(658,215)(479,388)
Accumulated other comprehensive loss(19,848)(6,804)
Total stockholders’ equity951,573 711,250 
Total liabilities and stockholders’ equity$1,552,778 $1,186,830 
 
See accompanying notes to condensed consolidated financial statements.
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2U, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited, in thousands, except share and per share amounts)

 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Revenue$201,073 $153,798 $559,239 $411,493 
Costs and expenses
Curriculum and teaching30,153 21,336 76,887 41,345 
Servicing and support32,536 27,351 93,363 71,518 
Technology and content development40,223 34,132 113,040 79,969 
Marketing and sales100,068 93,521 297,624 260,231 
General and administrative44,000 42,040 127,207 93,471 
Impairment charge 70,379  70,379 
Total costs and expenses246,980 288,759 708,121 616,913 
Loss from operations(45,907)(134,961)(148,882)(205,420)
Interest income713 924 1,380 5,087 
Interest expense(7,564)(5,651)(19,575)(8,130)
Loss on debt extinguishment  (11,671) 
Other income (expense), net42 (710)(1,659)(1,093)
Loss before income taxes(52,716)(140,398)(180,407)(209,556)
Income tax benefit (expense)162 (714)1,580 18,918 
Net loss$(52,554)$(141,112)$(178,827)$(190,638)
Net loss per share, basic and diluted$(0.77)$(2.23)$(2.69)$(3.14)
Weighted-average shares of common stock outstanding, basic and diluted
68,580,439 63,358,890 66,368,686 60,690,536 
Other comprehensive income (loss)  
Foreign currency translation adjustments, net of tax of $0 for all periods presented
1,667 (5,856)(13,044)(3,985)
Comprehensive loss$(50,887)$(146,968)$(191,871)$(194,623)
 
See accompanying notes to condensed consolidated financial statements.
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2U, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited, in thousands, except share amounts)

 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other Comprehensive
Income (Loss)
Total
Stockholders’
Equity
 SharesAmount
Balance, December 31, 201963,569,109 $63 $1,197,379 $(479,388)$(6,804)$711,250 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings
96,683 1 (1)— —  
Exercise of stock options
37,275 — 384 — — 384 
Stock-based compensation expense
— — 20,870 — — 20,870 
Net loss— — — (60,106)— (60,106)
Foreign currency translation adjustment
— — — — (16,115)(16,115)
Balance, March 31, 202063,703,067 $64 $1,218,632 $(539,494)$(22,919)$656,283 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings
355,506 — (463)— — (463)
Exercise of stock options
158,453 — 1,441 — — 1,441 
Issuance of common stock in connection with employee stock purchase plan
83,573 — 1,771 — — 1,771 
Equity component of convertible senior notes, net of issuance costs— — 114,551 — — 114,551 
Purchases of capped calls in connection with convertible senior notes— — (50,540)— — (50,540)
Stock-based compensation expense
— — 21,091 — — 21,091 
Net loss— — — (66,167)— (66,167)
Foreign currency translation adjustment
— — — — 1,404 1,404 
Balance, June 30, 202064,300,599 $64 $1,306,483 $(605,661)$(21,515)$679,371 
Issuance of common stock in connection with a public offering of common stock, net of offering costs
6,800,000 7 299,789 — — 299,796 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings
112,460 — (6)— — (6)
Exercise of stock options
81,647 — 1,298 — — 1,298 
Stock-based compensation expense
— — 22,001 — — 22,001 
Net loss— — — (52,554)— (52,554)
Foreign currency translation adjustment
— — — — 1,667 1,667 
Balance, September 30, 202071,294,706 $71 $1,629,565 $(658,215)$(19,848)$951,573 

See accompanying notes to condensed consolidated financial statements.
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2U, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Continued)
(unaudited, in thousands, except share amounts)

 Common StockAdditional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other Comprehensive
Income (Loss)
Total
Stockholders’
Equity
 SharesAmount
Balance, December 31, 201857,968,493 $58 $957,631 $(244,166)$(8,514)$705,009 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings
9,319 — — — —  
Exercise of stock options
211,506 — 1,928 — — 1,928 
Stock-based compensation expense
— — 9,584 — — 9,584 
Net loss— — — (21,554)— (21,554)
Foreign currency translation adjustment
— — — — (372)(372)
Balance, March 31, 201958,189,318 $58 $969,143 $(265,720)$(8,886)$694,595 
Issuance of common stock in connection with business combination, net of offering costs
4,608,101 5 184,317 — — 184,322 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings
348,418 — (2,558)— — (2,558)
Exercise of stock options
85,539 — 452 — — 452 
Stock-based compensation expense
— — 9,967 — — 9,967 
Net loss— — — (27,972)— (27,972)
Foreign currency translation adjustment
— — — — 2,243 2,243 
Balance, June 30, 201963,231,376 $63 $1,161,321 $(293,692)$(6,643)$861,049 
Issuance of common stock in connection with settlement of restricted stock units, net of withholdings
61,016 — (15)— — (15)
Exercise of stock options
41,828 — 562 — — 562 
Issuance of common stock in connection with employee stock purchase plan
54,485 — 1,895 — — 1,895 
Stock-based compensation expense
— — 16,535 — — 16,535 
Net loss— — — (141,112)— (141,112)
Foreign currency translation adjustment
— — — — (5,856)(5,856)
Balance, September 30, 201963,388,705 $63 $1,180,298 $(434,804)$(12,499)$733,058 

See accompanying notes to condensed consolidated financial statements.
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2U, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)

Nine Months Ended September 30,
 20202019
Cash flows from operating activities  
Net loss$(178,827)$(190,638)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense13,161 883 
Depreciation and amortization expense71,406 46,639 
Stock-based compensation expense63,962 36,086 
Non-cash lease expense11,181 8,407 
Provision for credit losses2,703 1,785 
Impairment charge 70,379 
Loss on debt extinguishment11,671  
Changes in operating assets and liabilities, net of assets and liabilities acquired:
Accounts receivable, net(65,095)(39,743)
Payments to university clients2,171 (22,257)
Prepaid expenses and other assets(17,153)(6,760)
Accounts payable and accrued expenses15,281 12,712 
Accrued compensation and related benefits22,737 (109)
Deferred revenue43,138 20,162 
Other liabilities, net(5,680)(24,263)
Other2,486 1,056 
Net cash used in operating activities(6,858)(85,661)
Cash flows from investing activities  
Purchase of a business, net of cash acquired(949)(388,004)
Additions of amortizable intangible assets(46,750)(50,950)
Purchases of property and equipment(5,516)(11,306)
Purchase of investments (10,000)
Proceeds from maturities of investments 25,000 
Advances made to university clients (100)
Advances repaid by university clients925 350 
Net cash used in investing activities(52,290)(435,010)
Cash flows from financing activities  
Proceeds from issuance of common stock, net of offering costs299,796  
Proceeds from debt371,681 243,726 
Payments on debt(250,479) 
Payment of debt issuance costs(3,419)(1,953)
Purchases of capped calls in connection with issuance of convertible senior notes(50,540) 
Prepayment premium on extinguishment of senior secured term loan facility(2,528) 
Proceeds from exercise of stock options3,123 2,942 
Tax withholding payments associated with settlement of restricted stock units(470)(2,573)
Proceeds from employee stock purchase plan share purchases1,771 1,895 
Payments for acquisition of amortizable intangible assets (1,283)
Net cash provided by financing activities368,935 242,754 
Effect of exchange rate changes on cash(92)(1,025)
Net increase (decrease) in cash, cash equivalents and restricted cash309,695 (278,942)
Cash, cash equivalents and restricted cash, beginning of period189,869 449,772 
Cash, cash equivalents and restricted cash, end of period$499,564 $170,830 
See accompanying notes to condensed consolidated financial statements.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1.    Organization
2U, Inc. (together with its subsidiaries, the “Company”) is a leading provider of education technology for nonprofit colleges and universities. The Company builds, delivers, and supports more than 475 digital and in-person educational offerings, including graduate and undergraduate degrees, professional certificates, boot camps, and short courses, across the Career Curriculum Continuum.
The Company has two reportable segments: the Graduate Program Segment and the Alternative Credential Segment. The Company’s Graduate Program Segment includes the technology and services provided to nonprofit colleges and universities to enable the online delivery of degree programs. Students enrolled in these programs are generally seeking an undergraduate or graduate degree of the same quality they would receive on campus. The Company’s Alternative Credential Segment includes the premium online short courses and technical, skills-based boot camps provided through relationships with nonprofit colleges and universities. Students enrolled in these offerings are generally working professionals seeking career advancement through skills attainment.
2.    Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements, which include the assets, liabilities, results of operations and cash flows of the Company have been prepared in accordance with: (i) generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information; (ii) the instructions to Form 10-Q; and (iii) the guidance of Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for financial statements required to be filed with the Securities and Exchange Commission (the “SEC”). As permitted under such rules, certain notes and other financial information normally required by U.S. GAAP have been condensed or omitted. The Company believes the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair statement of the Company’s financial position, results of operations, and cash flows as of and for the periods presented herein. The Company’s results of operations for the three and nine months ended September 30, 2020 and 2019 may not be indicative of the Company’s future results. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet data as of December 31, 2019 was derived from the audited financial statements, but does not include all disclosures required by U.S. GAAP on an annual reporting basis.
Use of Estimates
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported herein. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Significant estimates and assumptions are inherent in the analysis and the measurement of provisions for credit losses, acquired intangible assets, the recoverability of goodwill, deferred tax assets, and convertible senior notes. Due to the inherent uncertainty involved in making estimates, particularly in light of the COVID-19 pandemic, actual results reported in future periods may be affected by changes in those estimates. The Company evaluates its estimates and assumptions on an ongoing basis.
Accounts Receivable, Contract Assets and Liabilities
Balance sheet items related to contracts consist of accounts receivable, net and deferred revenue on the Company’s condensed consolidated balance sheets. Accounts receivable, net includes trade accounts receivable, which are comprised of billed and unbilled revenue. Accounts receivable, net is stated at amortized cost net of provision for credit losses. The Company’s methodology to measure the provision for credit losses requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable. Some of these factors include current market conditions, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2.    Significant Accounting Policies (Continued)
The Company’s estimates are reviewed and revised periodically based on the ongoing evaluation of credit quality indicators. Historically, actual write-offs for uncollectible accounts have not significantly differed from prior estimates. The Company recognizes unbilled revenue when revenue recognition occurs in advance of billings. Unbilled revenue is recognized in the Graduate Program Segment because billings to university clients do not occur until after the academic term has commenced and final enrollment information is available. The Company’s unbilled revenue represents contract assets. Unbilled accounts receivable is recognized in the Alternative Credential Segment once the presentation period commences for amounts to be invoiced to students under installment plans that are paid over the same presentation period.
The following table presents the change in provision for credit losses on the Company’s condensed consolidated balance sheets for the period indicated:
Provision for Credit Losses
(in thousands)
Balance as of January 1, 2020$1,330 
Current period provision2,703 
Amounts written off(351)
Other(42)
Balance as of September 30, 2020$3,640 
Deferred revenue balances are contract liabilities that represent the excess of amounts billed or received as compared to amounts recognized in revenue on the Company’s condensed consolidated statements of operations and comprehensive loss as of the end of the reporting period, and such amounts are reflected as a current liability on the Company’s condensed consolidated balance sheets. The Company generally receives payments from Graduate Program Segment university clients early in each academic term and from Alternative Credential Segment students, either in full upon registration for the course or in full before the end of the course based on a payment plan, prior to completion of the service period. These payments are recorded as deferred revenue until the services are delivered or until the Company’s obligations are otherwise met, at which time revenue is recognized.
Convertible Senior Notes
In April 2020, the Company issued 2.25% convertible senior notes due May 1, 2025 (the “Notes”) in an aggregate principal amount of $380 million, including the exercise by the initial purchasers of an option to purchase additional Notes, in a private offering. Refer to Note 8 for more information regarding the Notes.
The Notes are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”). Pursuant to ASC 470-20, issuers of certain convertible debt instruments, such as the Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option using a market-based approach. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.
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
10

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

2.    Significant Accounting Policies (Continued)
convertible instruments. As a result, in more cases, convertible debt will be accounted for as a single instrument. The guidance also removes certain conditions for equity classification related to contracts in an entity’s own equity and requires the application of the if-converted method for calculating diluted earnings per share. This ASU is effective for fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is evaluating the impact that this ASU will have on its condensed consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU is intended to provide optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, to ease the potential accounting and financial reporting burden associated with the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU may be applied as of the beginning of any interim period that includes its effective date (i.e., March 12, 2020) through December 31, 2022. The Company does not expect the adoption of this standard to have a material impact on its condensed consolidated financial statements or related disclosures.
In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. ASU No. 2020-01 was issued to clarify the interaction of the accounting for equity securities under ASC 321 and investments accounted for under the equity method of accounting in ASC 323 and the accounting for certain forward contracts and purchased options accounted for under ASC 815. With respect to the interactions between ASC 321 and ASC 323, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting when applying the measurement alternative in ASC 321, immediately before applying or discontinuing the equity method of accounting. The amendments in this ASU are effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company is evaluating the impact that this ASU will have on its condensed consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments in the ASU include removal of certain exceptions to the general principles in Topic 740 related to recognizing deferred taxes for investments, performing intraperiod tax allocation and calculating income taxes in an interim period. The ASU also clarifies and simplifies other aspects of the accounting for income taxes, including the recognition of deferred tax liabilities for outside basis differences. The amendments in this ASU are effective for annual and interim periods in fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact that this ASU will have on its condensed consolidated financial statements and related disclosures.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU No. 2019-04 provides corrections, updates and clarifications to the previously issued updates of ASU No. 2016-01, ASU No. 2016-13 and ASU No. 2017-12. Various areas of the ASC were impacted by the update. This standard follows the effective dates of the previously issued ASUs, unless an entity has already early adopted the previous ASUs, in which case the effective date will vary according to each specific ASU adoption. The Company adopted the amendments related to ASU Nos. 2016-01 and 2016-13 on January 1, 2020 under the modified retrospective transition method, with the exception of the amendments related to equity securities without readily determinable fair values for which an entity elects the measurement alternative, which have been adopted prospectively. Adoption of these amendments did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures. Refer below for further discussion of ASU No. 2016-13. The amendments to ASU No. 2017-12 are not applicable to the Company.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Subsequently, the FASB has issued the following standards related to ASU No. 2016-13: ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; and ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU No. 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model, which includes historical experience, current conditions, and reasonable and supportable
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

2.    Significant Accounting Policies (Continued)
forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU No. 2016-13 also requires enhanced disclosures to help financial statement users better understand assumptions used in estimating expected credit losses. The Company adopted this ASU and the related amendments on January 1, 2020 under the modified retrospective transition method, which resulted in no cumulative-effect adjustment to retained earnings.
3.     Business Combination
On May 22, 2019, the Company completed its acquisition of Trilogy pursuant to an Agreement and Plan of Merger and Reorganization, dated as of April 7, 2019 (the “Merger Agreement”), for a net purchase price of $608.6 million in cash and stock consideration, subject to final adjustments related to working capital and indebtedness. These final adjustments to the purchase price were paid in the first quarter of 2020. Under the terms of the Merger Agreement, the Company has issued restricted stock units for shares of its common stock, par value $0.001 per share, to certain employees and officers of Trilogy. These awards were issued pursuant to the Company’s 2014 Equity Incentive Plan, are subject to future service requirements and primarily vest over an 18-month period. In addition, a portion of the purchase price held in escrow was recognized as compensation expense in the third quarter of 2019 as the service requirements of certain key employees was determined to be fulfilled. The net assets and results of operations of Trilogy are included on the Company’s condensed consolidated financial statements within the Alternative Credential Segment as of May 22, 2019.
The unaudited pro forma combined financial information below is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the business combination occurred as of the date indicated or what the results would be for any future periods. The following table presents the Company’s unaudited pro forma combined revenue, pro forma combined net loss and pro forma combined net loss per share for the nine months ended September 30, 2019, as if the acquisition of Trilogy had occurred on January 1, 2019:
Nine Months Ended
September 30, 2019
(in thousands, except per share amount)
Pro forma revenue$459,756 
Pro forma net loss(226,901)
Pro forma net loss per share, basic and diluted$(3.74)

4.    Goodwill and Amortizable Intangible Assets
The following table presents the changes in the carrying amount of goodwill by reportable segment on the Company’s condensed consolidated balance sheets for the periods indicated.
Graduate
Program Segment
Alternative
Credential Segment
Total
 (in thousands)
Balance as of December 31, 2019$ $418,350 $418,350 
Foreign currency translation adjustments (10,490)(10,490)
Balance as of September 30, 2020$ $407,860 $407,860 
The carrying amount of goodwill in the Alternative Credential Segment included accumulated impairment charges of $70.4 million as of both September 30, 2020 and December 31, 2019.
The following table presents the components of amortizable intangible assets, net on the Company’s condensed consolidated balance sheets as of each of the dates indicated.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

4.     Goodwill and Amortizable Intangible Assets (Continued)
  September 30, 2020December 31, 2019
 Estimated
Average Useful
Life (in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
 (in thousands)
Capitalized technology
3-5
$159,164 $(66,861)$92,303 $142,712 $(41,106)$101,606 
Capitalized content development
4-5
198,568 (78,729)119,839 167,758 (54,736)113,022 
University client relationships
9-10
106,384 (19,483)86,901 110,344 (12,419)97,925 
Trade names and domain names
5-10
25,613 (8,251)17,362 26,462 (5,940)20,522 
Total amortizable intangible assets, net
$489,729 $(173,324)$316,405 $447,276 $(114,201)$333,075 
The amounts presented in the table above include $37.3 million and $30.7 million of in-process capitalized technology and content development as of September 30, 2020 and December 31, 2019, respectively.
The Company recorded amortization expense related to amortizable intangible assets of $20.8 million and $19.2 million for the three months ended September 30, 2020 and 2019, respectively. The Company recorded amortization expense related to amortizable intangible assets of $61.8 million and $38.1 million for the nine months ended September 30, 2020 and 2019, respectively.
The following table presents the estimated future amortization expense of the Company’s amortizable intangible assets placed in service as of September 30, 2020.
Future Amortization Expense
(in thousands)
Remainder of 2020$20,577 
202178,471 
202262,124 
202344,691 
202427,366 
Thereafter47,351 
Total$280,580 

5.    Accrued Expenses
The following table presents the components of accounts payable and accrued expenses on the Company’s condensed consolidated balance sheets as of each of the dates indicated.
September 30, 2020December 31, 2019
(in thousands)
Accrued university and instructional staff compensation$23,506 $23,419 
Accrued marketing costs31,400 22,055 
Accrued transaction, integration and restructuring-related costs*2,058 4,459 
Accounts payable and other accrued expenses27,440 15,448 
Total accounts payable and accrued expenses$84,404 $65,381 
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Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

5.     Accrued Expenses (Continued)
*As of September 30, 2020 and December 31, 2019, accrued transaction, integration and restructuring-related costs included zero and $0.5 million, respectively, related to an employee termination benefits reserve for organizational restructuring.
For the three and nine months ended September 30, 2020 and 2019, expense related to the Company’s marketing and advertising efforts of its own brand were not material.
In response to COVID-19, various government programs have been announced to provide financial relief for affected businesses. Most significantly, under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted in the United States on March 27, 2020, the Company is allowed to defer payment of the employer’s share of Social Security taxes incurred from March 27, 2020 through December 31, 2020. In addition, the CARES Act provides eligible employers with an employee retention tax credit for employees whose services were impacted by COVID-19. The Company currently estimates the amount of payroll taxes subject to deferred payment, net of employee retention tax credits that have been claimed, is approximately $6.6 million, and has been reflected within other liabilities, non-current on the Company’s condensed consolidated balance sheet as of September 30, 2020. This total deferred amount is payable during the years ending December 31, 2021 and December 31, 2022.
6.    Commitments and Contingencies
Legal Contingencies
The Company is involved in various claims and legal proceedings arising in the ordinary course of business. The Company accrues a liability when a loss is considered probable and the amount can be reasonably estimated. While the Company does not expect that the ultimate resolution of any existing claims and proceedings (other than the specific matter described below, if decided adversely), individually or in the aggregate, will have a material adverse effect on its financial position, an unfavorable outcome in some or all of these proceedings could have a material adverse impact on the results of operations or cash flows for a particular period. This assessment is based on the Company’s current understanding of relevant facts and circumstances. With respect to current legal proceedings, the Company does not believe it is probable a material loss exceeding amounts already recognized has been incurred as of the date of the balance sheets presented herein. As such, the Company’s view of these matters is subject to inherent uncertainties and may change in the future.
 In re 2U, Inc., Securities Class Action
On August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaints against the Company, Christopher J. Paucek, the Company’s CEO, and Catherine A. Graham, the Company’s former CFO, in the United States District Court for the Southern District of New York, alleging violations of Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. The district court transferred the cases to the United States District Court for the District of Maryland, consolidated them under docket number 8:19-cv-3455 (D. Md.), and appointed Fiyyaz Pirani as the lead plaintiff in the consolidated action. On July 30, 2020, Mr. Pirani filed a consolidated class action complaint (“CAC”), adding Harsha Mokkarala, the Company’s former Chief Marketing Officer, as a defendant. The CAC also asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, against Mr. Paucek, Ms. Graham, members of the Company’s Board of Directors, and the Company’s underwriters, based on allegations related to the Company’s secondary stock offering on May 23, 2018. The proposed class consists of all persons who acquired the Company’s securities between February 26, 2018 and July 30, 2019. On October 27, 2020, defendants filed a motion to dismiss.
The Company believes that the claims are without merit, and it intends to vigorously defend against these claims. However, due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.
Stockholder Derivative Suits
On April 30, 2020, Richard Theis filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, and the Company’s board of directors in the United States District Court for the Southern District of New York, with docket number 20-cv-3360. The complaint alleges claims for breaches of fiduciary duty, insider sales and misappropriation of information, unjust enrichment, and violations of Section 14(a) of the Exchange Act based upon allegedly false and misleading statements
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Table of Contents
2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
6.    Commitments and Contingencies (Continued)
regarding the Company’s business prospects and financial projections. On July 22, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.
On August 21, 2020, Thomas Lucey filed a stockholder derivative complaint purportedly on behalf of the Company and against Christopher J. Paucek, the Company’s CEO, Catherine A. Graham, the Company’s former CFO, and the Company’s board of directors in the United States District Court for the District of Maryland, with docket number 1:20-cv-02424-GLR. The complaint alleges claims for breaches of fiduciary duty, insider trading, and contribution for alleged violations of Sections 10(b) and 21D of the Exchange Act based upon allegedly false and misleading statements regarding the Company’s business prospects and financial projections. On September 3, 2020, the court entered a joint stipulation staying the case pending resolution of the securities class action. Due to the complex nature of the legal and factual issues involved, the outcome of this matter is not presently determinable.
Marketing and Sales Commitments
Certain agreements entered into between the Company and its university clients in the Graduate 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 Graduate 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 Graduate Program Segment, the Company has made, or is obligated to make, payments to university clients in exchange for contract extensions and various marketing and other rights. As of September 30, 2020, the future minimum payments due to university clients have not materially changed relative to the amounts provided in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Contingent Payments
The Company has entered into agreements with certain of its university clients in the Graduate 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.
The Company has entered into an agreement to make an additional investment in an education technology company of up to $5.0 million, upon demand by the investee.
7.    Leases
The Company leases facilities under non-cancellable operating leases primarily in the United States, South Africa, the United Kingdom and Canada. The Company’s operating leases have remaining lease terms of between less than one to 11 years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. These options to extend the terms of the Company’s operating leases were not deemed to be reasonably certain of exercise as of lease commencement and are therefore not included in the determination of their respective non-cancellable lease terms. The future lease payments due under non-cancellable operating lease arrangements contain fixed rent increases over the term of the lease. The Company also leases office equipment under non-cancellable leases. The Company did not have any subleases as of September 30, 2020.
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.
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2U, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)

7.    Leases (Continued)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(in thousands)
Operating lease expense$3,848 $3,053 $11,189 $8,389 
Short-term lease expense50 188 284 578 
Variable lease expense1,603 1,031 4,274 3,036 
Total lease expense$5,501 $4,272 $15,747 $12,003 
As of September 30, 2020, for the Company’s operating leases, the weighted-average remaining lease term was 7.4 years and the weighted-average discount rate was 11.7%. For the nine months ended September 30, 2020 and 2019, cash paid for amounts included in the measurement of operating lease liabilities was $12.7 million and $9.6 million, respectively.
The following table presents the maturities of the Company’s operating lease liabilities as of the date indicated.
September 30, 2020
(in thousands)
Remainder of 2020$4,615 
202118,155 
202217,322 
202317,060 
202416,571 
Thereafter54,752 
Total lease payments128,475 
Less: imputed interest(