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.
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.
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.
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.
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
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.
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
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
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.
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 | |
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
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.
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.
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
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. |
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 | |
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.
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
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
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.
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 | |
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.
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.
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.
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.
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.
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.
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.
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. |
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.
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 | |
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 | |
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.
