2U
Annual Report 2019

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Sustainable. High Quality. Blended & Connected. Relevant. Accessible & Affordable. 2019 Annual Report Sustainable. High Quality. Blended & Connected. Relevant. 73 World-Class University Partners Undergraduate Degrees Graduate Degrees Professional Certificates HIGH ) y t i s n e t n I ( l a i t n e d e r C LOW Boot Camps Course Stacks Short Courses Library MOOCs YouTube 0 1 1 2 2 6 6 9 12 36+ Time to Complete (Months) 400+ Offerings for lifelong learners across the Career Curriculum Continuum 215K All-time Enrolled Students* Degree Programs Short Courses Boot Camps GetSmarter® Acquired 125K 100K 75K 50K 25K Trilogy Education Acquired 2014 YE 2015 YE 2016 YE 2017 YE 2018 YE 2019 YE *Enrolled students are defined as the cumulative total of all students that have registered for an educational offering inception to December 31, 2019, excluding students that withdrew from the offering prior to being financially obligated to pay for the offering. (Revenue in millions) $800 $700 $600 $500 $400 $300 $200 $100 $0 2015 2016 2017 2018 2019 40% Compound Annual Growth Rate We believe that great universities must redefine higher education to address the critical needs of society. As of April 17, 2020. Dear Fellow Stockholders, As I write this letter, we are experiencing an extraordinary moment in human history. The global COVID-19 pandemic has disrupted our lives, society, and the economy in profound and unprecedented ways. Although it is too early to know the full extent of the short- and long-term impacts of the pandemic, I sit here today steadfast and confident in our collective resilience and strength. Moments like this test humanity and force us to unite around a common purpose. They also push us to innovate and evolve. In my roles as husband, father, son, and CEO, I wholeheartedly believe in our ability to overcome the challenges we are facing today and those we will inevitably confront tomorrow. For centuries, civilization has relied upon great colleges and universities not only to educate minds, but to meet society’s needs through research and innovation. Today is no different. Universities are on the front lines of caring for individuals infected with COVID-19 and are also at the forefront of researching treatments and a vaccine. These great institutions have stood the test of time, including past wars and pandemics, and through it all helped society recover and progress. That legacy will be drawn upon once again as millions of people, whose livelihoods and careers have been negatively affected by COVID-19, turn to higher education on their path to recovery and greater economic stability. Our Vision: Meeting Society’s Critical Needs Today, we have 73 of the world’s best colleges and universities in our portfolio. We are proud to call each one of them a partner. And now more than ever, we believe they can and must redefine higher education to address the critical needs of society. Twelve years into our journey, 2U’s story is no longer simply about bringing high-quality 92% 90% AVERAGE COMPLETION RATE FOR SHORT COURSES AND BOOT CAMPS PARTNER PROGRAM ALUMNI WOULD STILL OBTAIN A PROGRAM DEGREE 82% AVERAGE DEGREE PROGRAM RETENTION RATE degree programs online. Our vision—and the opportunity for our partners—is more ambitious and profound. To meet society’s critical needs, higher education must be more than just high quality. It must be blended and connected, relevant, affordable and accessible, and sustainable. And 2U is purpose built and singularly positioned to turn this vision into a reality. 14,500,000 hours students studying to become nurses, physician assistants, and social workers have spent in field placements helping real people Higher education must be high quality. This isn’t new for 2U—it’s been a constant since our founding in 2008. Since then, over 215,000 adult learners have enrolled in a 2U-powered offering. Our alternative credentials have a 90% average completion rate and our degree portfolio has an 82% average retention rate. And according to the findings of our recently released “Gallup-2U Graduate Outcomes Benchmark Report,” comparing experiences and outcomes of alumni from 2U-powered degrees with Gallup’s existing graduate degree alumni benchmarks, 92% of alums from our partners’ programs would still obtain a degree if they had the chance to do it all over again. Quality matters. Higher education must be blended and connected. It’s not just about moving online anymore. It’s about connections across your lifetime, digital and physical, that are deeply personal. It’s about the fact that I truly became a Tar-Heel when I completed the MBA@UNC program—as did my classmates. It’s about an experience so personal that two students living in different cities from my cohort end up married after graduating. And it’s about the 14,500,000 hours students studying to become nurses, physician assistants, and social workers have spent in field placements helping real people who are welcoming their first child into the world or are battling an undiagnosed illness, PTSD or depression. Truly great educational experiences are about being part of something bigger than just yourself. Higher education must be relevant. Whether it’s training the next generation of health care workers to fill an expected 3.4 million job openings by 2028, including 500,000 nurses by 2030, or reskilling and upskilling workers to fill the tech- driven jobs of today and tomorrow, higher education is more necessary than ever. And 2U’s unparalleled and growing nationwide portfolio of degree offerings in licensure-based disciplines that require clinical placements, tech skills- based boot camps, and in-demand short courses, offer the reach and relevance needed to meet the critical workforce demands of society. Higher education must be affordable and accessible. For too long, the cost of higher education has continued to climb. We believe 2U can play a constructive part in bending back that cost curve. Today, we have a broad portfolio of products at different price points and we estimate that in 2019 only 38% of our current revenue came from Title IV funding. We’ve announced a student friendly, interest-free deferred tuition plan under which students can defer a portion of their tuition upfront and only begin paying it back upon graduation if they are employed with no additional principal or accrued interest. And beginning in September 2020, Simmons University announced a 14% tuition reduction for their online and on-campus students making it easier and more affordable for people to pursue their dreams of becoming a nurse at Simmons. But accessibility isn’t just about cost. We need to ensure that high-quality education is available to everyone. We’re proud that 46% of students in the boot camps we power are people of color and 30% of participants do not hold a bachelor’s degree. We are driving access to education, but more specifically, high quality education. sustainability. Our model allows universities to realize a surplus from going online, while avoiding risk and focusing scarce resources on other core academic or institutional priorities. At the same time, universities benefit from the scale efficiencies and investment-driven improvements to our comprehensive 2UOS bundle of technology and services, all while providing world-class educational offerings that deliver great student outcomes. When students win, universities win, and then 2U wins. We need to ensure that high-quality education is available to everyone. We’re proud that 46% of students in the boot camps we power are people of color 2U has evolved. And we did it intentionally. We expanded our capabilities, our product offerings, and our geographic reach, all while keeping great universities at the center of our strategy. Together with our 73 university partners, we will continue to lead the way in reimagining higher education to meet the critical needs of society—for today and tomorrow. Thank you for joining us in our mission of eliminating the back row in higher education. #NoBackRow Finally, higher education must be sustainable—for all stakeholders. Sustainability is not optional—it is critical. Arguably now more than ever. And 2U’s revenue-share partnerships are a proven model for shared success and Christopher “Chip” Paucek Co-Founder & CEO When students And that’s a 2U Win. Win. Win. Universities (This page has been left blank intentionally.)2U-2019-AnnualReport-FINAL_r4.20.indd 62U-2019-AnnualReport-FINAL_r4.20.indd 64/24/20 5:47 PM4/24/20 5:47 PMUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(cid:2)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2019or(cid:3)TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File Number: 001-363762U, INC.(Exact name of registrant as specified in its charter)Delaware26-2335939(State or other jurisdiction of(I.R.S. Employer Identification No.)incorporation or organization)7900 Harkins Road Lanham, MD20706(Address of Principal Executive Offices)(Zip Code)(301) 892-4350Registrant’s telephone number, including area code:Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon stock, $0.001 par value per shareTWOUThe Nasdaq Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:2)No (cid:3)Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. Yes (cid:2)No (cid:3)Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant toRule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant wasrequired to submit such files). Yes (cid:2)No (cid:3)Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reportingcompany, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company’’ and‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.Large accelerated filer (cid:2)Accelerated filer (cid:3)Non-accelerated filer (cid:3)Smaller reporting company (cid:3)Emerging growth company (cid:3)If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period forcomplying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:3)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:3)No (cid:2)The aggregate market value of the 47,449,901 shares of the registrant’s common stock held by non-affiliates as of June 28, 2019 (computedbased on the closing price on such date as reported on The Nasdaq Global Select Market) was $1,786,014,274.As of February 24, 2020, there were 63,627,643 shares of the registrant’s common stock, par value $0.001 per share, outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Company’s definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934,for its 2020 Annual Meeting of Stockholders, or an amendment on Form 10-K/A are incorporated by reference in Part III of this Form 10-K.25FEB201610120468 2U, Inc.FORM 10-KTABLE OF CONTENTSPAGEPART IItem 1.Business...........................................................4Item 1A.Risk Factors........................................................15Item 1B.Unresolved Staff Comments.............................................46Item 2.Properties..........................................................46Item 3.Legal Proceedings....................................................46Item 4.Mine Safety Disclosures................................................46PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases47of Equity Securities.................................................Item 6.Selected Financial Data................................................48Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations...49Item 7A.Quantitative and Qualitative Disclosures About Market Risk.......................65Item 8.Financial Statements and Supplementary Data.................................67Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...116Item 9A.Controls and Procedures................................................116Item 9B.Other Information....................................................116PART IIIItem 10.Directors, Executive Officers and Corporate Governance..........................117Item 11.Executive Compensation................................................117Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder117Matters..........................................................Item 13.Certain Relationships and Related Transactions, and Director Independence............117Item 14.Principal Accounting Fees and Services......................................117PART IVItem 15.Exhibits, Financial Statement Schedules.....................................118Item 16.Form 10-K Summary..................................................118Signatures..................................................................1191SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 and which are subject to substantial risks anduncertainties. In some cases, you can identify forward-looking statements by the words ‘‘may,’’ ‘‘might,’’‘‘will,’’ ‘‘could,’’ ‘‘would,’’ ‘‘should,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘objective,’’ ‘‘anticipate,’’ ‘‘believe,’’‘‘estimate,’’ ‘‘predict,’’ ‘‘project,’’ ‘‘potential,’’ ‘‘continue’’ and ‘‘ongoing,’’ or the negative of these terms,or other comparable terminology intended to identify statements about the future. These statementsinvolve known and unknown risks, uncertainties and other factors that may cause our actual results,levels of activity, performance or achievements to be materially different from the informationexpressed or implied by these forward-looking statements. Although we believe that we have areasonable basis for each forward-looking statement contained in this Annual Report on Form 10-K, wecaution you that these statements are based on a combination of facts and factors currently known byus and our expectations of the future, about which we cannot be certain. Factors that may cause actualresults to differ materially from current expectations include, but are not limited to:(cid:129)trends in the higher education market and the market for online education, and expectations forgrowth in those markets;(cid:129)the acceptance, adoption and growth of online learning by colleges and universities, faculty,students, employers, accreditors and state and federal licensing bodies;(cid:129)the impact of competition on our industry and innovations by competitors;(cid:129)our ability to comply with evolving regulations and legal obligations related to data privacy, dataprotection and information security;(cid:129)our expectations about the potential benefits of our cloud-based software-as-a-service, or SaaS,technology and technology-enabled services to university clients and students;(cid:129)our dependence on third parties to provide certain technological services or components used inour platform;(cid:129)our ability to meet the anticipated launch dates of our degree programs, short courses and bootcamps;(cid:129)our expectations about the predictability, visibility and recurring nature of our business model;(cid:129)our ability to acquire new university clients and expand our degree programs, short courses andboot camps with existing university clients;(cid:129)our ability to successfully integrate the operations of our acquisitions, including TrilogyEducation Services, Inc., or Trilogy, achieve the expected benefits of our acquisitions andmanage, expand and grow the combined company;(cid:129)our ability to service our substantial indebtedness and comply with the financial and otherrestrictive covenants contained in the credit agreement governing our senior secured term loanfacility;(cid:129)our ability to refinance our indebtedness on attractive terms, if at all, to better align with ourfocus on profitability;(cid:129)our ability to generate sufficient future operating cash flows from recent acquisitions to ensurerelated goodwill is not impaired;(cid:129)our ability to execute our growth strategy in the international, undergraduate and non-degreealternative markets;(cid:129)our ability to continue to recruit prospective students for our offerings;2 (cid:129)our ability to maintain or increase student retention rate in our degree programs;(cid:129)our ability to attract, hire and retain qualified employees;(cid:129)our expectations about the scalability of our cloud-based platform;(cid:129)our expectations regarding future expenses in relation to future revenue;(cid:129)potential changes in regulations applicable to us or our university clients;(cid:129)our expectations regarding the amount of time our cash balances and other available financialresources will be sufficient to fund our operations;(cid:129)the impact and cost of stockholder activism.You should refer to the risks described in Part I, Item 1A ‘‘Risk Factors’’ in this Annual Report onForm 10-K for a discussion of important factors that may cause our actual results to differ materiallyfrom those expressed or implied by our forward-looking statements. As a result of these factors, wecannot assure you that the forward-looking statements in this Annual Report on Form 10-K will proveto be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracymay be material. In light of the significant uncertainties in these forward-looking statements, youshould not regard these statements as a representation or warranty by us or any other person that wewill achieve our objectives and plans in any specified time frame, or at all. We undertake no obligationto publicly update any forward-looking statements, whether as a result of new information, futureevents or otherwise, except as required by law.You should read this Annual Report on Form 10-K completely and with the understanding thatour actual future results may be materially different from what we expect. We qualify all of ourforward-looking statements by these cautionary statements.In this Annual Report on Form 10-K, the terms ‘‘2U,’’ ‘‘our company,’’ ‘‘we,’’ ‘‘us,’’ and ‘‘our’’refer to 2U, Inc. and its subsidiaries, unless the context indicates otherwise.3PART IItem 1.BusinessOverviewWe are a leading provider of education technology for nonprofit colleges and universities. Webuild, deliver, and support more than 400 digital and in-person educational offerings, includinggraduate degrees, undergraduate degrees, professional certificates, boot camps, and short courses,across the career curriculum continuum. Together with our university clients, we have positivelytransformed the lives of more than 200,000 students.Our comprehensive platform of tightly integrated technology and services provides the digitalinfrastructure that universities need to attract, enroll, educate and support students at scale. With ourplatform, students can pursue their education anytime, anywhere, without quitting their jobs or moving;and university clients can provide broader access to their educational offerings, thereby improvingoutcomes, skills attainment, and career prospects for a greater number of students.We are leading the way in helping nonprofit colleges and universities succeed in the digital age andwe have become a trusted partner and brand steward to 73 leading institutions. We continue to developnew and innovative tools to enhance the effectiveness of instructional methods and improve the studentlearning experience. In addition, our platform allows our university clients to extend their brands andfulfill their missions by delivering high quality education offerings to students anywhere in the world,while maintaining their academic rigor and admissions standards.Business SegmentsWe have two reportable segments: the Graduate Program Segment and the Alternative CredentialSegment.In our Graduate Program Segment, we provide the technology and services to nonprofit collegesand universities to enable the online delivery of degree programs. Students enrolled in these programsare generally seeking an undergraduate or graduate degree of the same quality they would receive oncampus.In our Alternative Credential Segment, we provide premium online short courses and technical,skills-based boot camps through relationships with nonprofit colleges and universities. Students enrolledin these offerings are generally working professionals seeking career advancement through skillsattainment.Our PlatformOur platform, or 2UOS, consists of a seamlessly integrated ecosystem of technology, people anddata. Through 2UOS, we provide front-end and back-end cloud-based SaaS technology and technology-enabled services, which are tightly integrated and optimized with data analysis and machine learningtechniques. Our 2UOS platform includes the following technology and services:Data-Driven Approach to Selecting OfferingsThrough our experience launching and operating educational offerings, we have developed aproprietary algorithm to drive the process for identifying new offerings, which enables us tosystematically identify offerings that we believe have the highest probability of success. Our algorithmdraws on a wide variety of data, including the operating history of our existing offerings, and is basedon key market variables, such as the existing market size of an offering, potential student demographicsand university characteristics. The algorithm not only enables us to deploy capital with greater4 confidence, but it also provides our university clients with greater assurance of, and visibility into, thesuccess of the offering.Pre-Launch Technology and Services2UOS provides the following before launching an offering:(cid:129)Technology Infrastructure.We use a variety of proprietary technologies to unify our suite ofapplications and automate the setup of technology infrastructure for new degree programs. Wealso have proprietary technology that translates school-specific code into a common language tostreamline launching new degree programs with multiple schools.(cid:129)Marketing.We use data analytics and proprietary algorithms to develop digital marketingcampaigns to engage prospective students efficiently. Our marketing services include thefollowing:(cid:129)Attract Prospective Students—Our marketing team uses best-in-class digital marketingstrategies to attract prospective students, including Search Engine Optimization, SearchEngine Marketing and Social Media Optimization.(cid:129)Brand Identity—Our brand marketing team works with each university client to developoffering-specific content and ensure that the right message is presented to the consumer.(cid:129)Data Analysis—Using data analytics and machine learning techniques, we focus ourmarketing efforts on finding prospective students for appropriate offerings at times whenconversion is more likely. We also believe that our continuously expanding selection ofeducational offerings increases our marketing efficiency across our portfolio.(cid:129)Compliance.Many of our degree programs are subject to authorization requirements in states inwhich students reside. We typically work with our university clients to identify and comply with acomplex array of state authorization requirements to ensure that students can enroll in ourdegree programs no matter where they live.Recruiting and Enrollment Technology and Services2UOS provides the following technology and services to streamline the admissions and enrollmentprocess for students and university clients:(cid:129)Recruiting.We use third-party and proprietary technologies to support prospective studentsthrough the admissions process. We provide prospective students with transparent informationregarding admissions requirements, the application process, curriculum, financial information,and time to completion. For our degree programs, while our clients make admissions decisions,we organize and route completed student application packages to the university’s admissionsoffice.(cid:129)Technology Tools.The following systems and applications automate and simplify admissions-related processes for our university clients:(cid:129)Customer Relationship Management.We deploy a customer relationship managementsystem for each degree program we enable. This system serves as the data hub for studentrecruiting activities, application progress, university admissions review, registration andstudent support. We and our university clients use this information to ensure propercoordination and support as a student progresses through the program.(cid:129)University Systems Integration Applications.We use a proprietary application to integrateour technology with our university clients’ student information systems. This application5automates the student enrollment process, allowing for efficient and timely studentenrollments.(cid:129)Admissions Application Processing Portal.Our proprietary admissions application system,known as the Online Application and Recommendation System, or OARS, automates theadmissions application process for degree programs. OARS is customized to meet eachdegree program’s unique application requirements.Learning and Student Success Technology and Services2UOS provides the following technology and services to develop engaging curriculum for ourofferings and to support the student learning experience:(cid:129)Learning Technology.Our online learning platform is an end-to-end learning and teachingplatform that allows our university clients to deliver high-quality educational content. For ourdegree programs, our online learning platform provides a live and engaging classroomenvironment that is accessible through proprietary web, mobile and TV applications, as well asoffline for convenient consumption of asynchronous coursework. Our STEM-based educationtools and collaborative annotation technology significantly enhance the learning experience fordegree program students and instruction capabilities for faculty. Offerings in our AlternativeCredential Segment are delivered through our proprietary learning platforms that share many ofthe core features of our degree program learning platform.(cid:129)Live classes.Our offerings feature live, online, face-to-face classes, in addition to asynchronouscontent and coursework.(cid:129)Curriculum.For many of our offerings, our production staff and course developers collaboratewith faculty to produce high-quality, engaging, online coursework and content. We use a contentmanagement system that facilitates reviewing and deploying asynchronous content. For our bootcamp offerings, we use an application to make real-time updates to our boot camp curriculumand keep our offerings current in quickly evolving fields such as coding, data analytics andcybersecurity.(cid:129)Placements.Using our global network of clinics, hospitals, schools and other sites, our fieldplacement team secures local placements for students enrolled in degree programs such asnursing, social work, teaching and other programs that require field placements to satisfycurriculum and accreditation requirements.(cid:129)Hybrid Experiences.Many of our university clients’ degree programs require students to attendin-person immersions. These experiences provide students with collaborative learning experienceswhere they develop invaluable personal and professional relationships. We provide the resourcesand technology to support our clients in facilitating these experiences.(cid:129)Accessibility.Our platform provides many features to accommodate the accessibility needs ofstudents with disabilities, including clear navigation, flexible, robust content display, andcompatibility with screen-reading and assistive keyboard technologies. Working with ouruniversity clients, we support certain accommodations requested by students with disabilities,including providing real-time sign language and captioning for live classes and audio descriptionsof video content we produce.(cid:129)Student Success.We augment each student’s academic experience by providing ongoing,personalized non-academic support. For degree programs, we provide a dedicated team tosupport and train university administration and faculty on how to use our platform to facilitateoutstanding live instruction. In addition, we help our university clients succeed by assisting withfaculty recruiting efforts, including attracting, cultivating and vetting a pool of faculty candidates6 for our university clients. In our boot camp offerings, we use a proprietary analytics platform tocapture the sentiment of students in our classes. We use this data to improve our curricula,calibrate differences across classrooms and offer targeted support to students.Key Benefits to University ClientsOur platform provides our university clients with the following key benefits:(cid:129)Extend Institutional Mission and Reach.Our platform enables our university clients to extendtheir brands and fulfill their missions by delivering high quality education offerings to studentsanywhere in the world, while maintaining their academic rigor and admissions standards.(cid:129)Low Financial Risk.We make the initial investment required to launch new offerings across ourportfolio. In our Graduate Program Segment, in particular, we make significant investments intechnology, integration, content production, marketing, student and faculty support, and otherservices. Our revenue-share model, combined with long contractual terms in this segment,enables us to make these investments without significant financial risk to our clients.(cid:129)Turnkey Solution.Our platform provides a broad set of capabilities that would otherwise requireuniversities to purchase multiple, disparate point solutions, and significantly increase headcountin marketing, data analytics, technology and other areas.(cid:129)Qualified Student Enrollment.Our robust marketing capabilities enable us to find qualifiedstudents for our university clients’ degree programs who meet the university’s admissions criteria.Key Benefits to StudentsOur platform provides students with the following key benefits:(cid:129)Flexibility.Many students require flexible learning environments to accommodate work andpersonal responsibilities. Often, these students are working adults who are looking to eithercomplete a full degree, or who want to gain a credential to accelerate or change careers. Ourspectrum of offerings provides students with the flexible, high-quality offerings they need toachieve their goals.(cid:129)Outcomes.Our platform allows students to pursue a wide range of high-quality educationofferings provided by leading universities. Through these offerings, students obtain valuable skillsand credentials that can create upward career mobility, facilitate a transition to a new field orlead to personal enrichment.(cid:129)Lower Cost-Burden.Students do not need to move or quit their jobs to enroll in our offerings.As a result, many students incur lower total costs than they otherwise would on-campus.(cid:129)Support.High-quality student support is a central pillar of our platform. Prior to enrollment, oursupport teams work with prospective students as they consider and apply to a particular offering.Once enrolled, we augment each student’s academic experience by assigning a dedicated advisorto provide ongoing individualized non-academic support. We also help improve retention ratesby using data analysis to predict when students may need additional support.Our Growth StrategyWe intend to continue our industry leadership as a provider of a digital education platform thatenables nonprofit colleges and universities to deliver education online. Our approach to growth is7disciplined and focused on long-term success. The principal elements of our strategy are to increasestudent enrollments by:(cid:129)Adding Degree Programs.We intend to add degree programs in select academic disciplines wherewe believe we have a strategic advantage, such as degrees that require field placements to satisfycurriculum and accreditation requirements, as well as to continue to expand into theundergraduate market.(cid:129)Adding Alternative Credential Offerings.We intend to add short courses with globally recognizeduniversities and broadly deploy our existing boot camp offerings across our university client base.(cid:129)Expanding our Reach.We believe that there are significant opportunities to provide multipletypes of offerings to our current university clients and prospective students. We also intend toprovide short course and boot camp offerings to enterprise clients looking to offer valuabletraining and reskilling opportunities to their employees.ClientsGraduate Program SegmentAs of December 31, 2019, we had 31 university clients with 127 offerings in 26 academicdisciplines.Our long-term university client contracts, which typically have 10 to 15 year terms, generally do notinclude termination rights for convenience, and require universities to pay teach-out fees for auniversity client’s non-renewal, unless the university client otherwise terminates due to our uncuredbreach.Our contracts also set forth the parties’ respective rights to offer competitive programs. Forexample, some contracts permit us to offer competitive programs with other schools whose potentialstudents are not academically qualified or otherwise interested in the program we offer with our client.Other contracts prohibit us from offering competitive programs with a specific list of schools, expressedeither by reference to a certain ranking on U.S. News & World Report’s ‘‘best’’ schools list or as aspecifically enumerated list of schools negotiated with our university client. In addition, any limitationon our ability to offer competitive programs becomes inapplicable if a university client either refuses toscale the program to accommodate all students qualifying for admission into the program, or raises theprogram admissions standards above those at the time of contract execution. In addition, our contractsgenerally prohibit our university clients from offering any online competitive program. Most of ourmore recent contracts either do not restrict our ability to offer competitive programs or provide foronly limited restrictions.For the years ended December 31, 2019 and 2018, 15% and 21%, respectively, of our consolidatedrevenue was derived from our programs with University of Southern California, or USC, including ourtwo longest running programs, launched in 2009 and 2010. We expect that these programs will continueto account for a large portion of our revenue.Our programs with Simmons University accounted for 8% and 13% of our consolidated revenuefor the years ended December 31, 2019 and 2018, respectively. Our programs with Syracuse Universityaccounted for 8% and 10% of our consolidated revenue for the years ended December 31, 2019 and2018, respectively.Alternative Credential SegmentIn our Alternative Credential Segment, as of December 31, 2019, we had more than 250 offeringswith 60 university clients. Revenue in this segment is derived from individual students, rather than8 directly from university clients. No university clients in this segment accounted for 10% or more of ourconsolidated revenue.CompetitionThe overall market for technology solutions that enable higher education providers to delivereducation online is highly fragmented, rapidly evolving and subject to changing technology, shiftingneeds of students and educators and frequent introductions of new delivery methods. Severalcompetitors provide platforms that compete with some of the capabilities of our platform.Two of our largest competitors are Pearson Online Learning Services and Wiley EducationServices, owned by Pearson and John Wiley & Sons, respectively, both of which are large education andpublishing companies. In addition, traditional massive open online course providers have evolved fromproviding massive open online courses to providing degrees, short course certificates and similarnon-degree alternatives. We also face competition from companies providing corporate trainingprograms, boot camps and online courses taught outside the university environment (e.g., by experts invarious fields). Many of these companies provide components of the technology and services weprovide, and these companies may choose to pursue some of the institutions we target. Moreover,nonprofit colleges and universities may elect to continue using or develop their own online learningsolutions in-house.We expect that the competitive landscape will expand as the market for online education offeringsat nonprofit institutions matures. We believe the principal competitive factors in our market include thefollowing:(cid:129)robustness and evolution of technology solutions and content;(cid:129)brand awareness and reputation;(cid:129)ability of online degree programs, short courses and boot camps to deliver desired studentoutcomes;(cid:129)breadth and depth of service offering;(cid:129)ability to make significant investments in launching and operating degree programs;(cid:129)expertise in marketing, student acquisition and student retention;(cid:129)student and faculty experience;(cid:129)ease of deployment and use of technology solutions;(cid:129)level of customization, configurability, integration, security, scalability and reliability oftechnology solutions; and(cid:129)quality of university client base and track record of performance.We believe we compete favorably on the basis of these factors. Our ability to remain competitivewill depend, to a great extent, on our ability to consistently deliver high-quality offerings; meetuniversity client needs for content development; attract, support and retain students; and deliverdesired student, faculty and university outcomes.SeasonalityWe experience seasonality in our marketing and sales expense in both our Graduate ProgramSegment and our Alternative Credential Segment. We typically reduce our paid search and othermarketing and sales efforts during late November and December because of less demand during theholiday season. We generally do not experience pronounced seasonality in our revenue, although9revenue can fluctuate significantly from quarter to quarter due to variations driven by the varyingacademic schedules of our offerings and university clients.Intellectual PropertyWe protect our intellectual property by relying on a combination of copyrights, trademarks, tradesecrets and contractual agreements. For example, we rely on trademark protection in the United Statesand various foreign jurisdictions to protect our rights to various marks, including 2U, NO BACK ROW,GETSMARTER, TRILOGY and other distinctive logos associated with our brand. We continue toevaluate developing and expanding our intellectual property rights in patents, trademarks andcopyrights, as available through registration in the United States and internationally.We ensure that we own intellectual property created for us by signing agreements with employees,independent contractors, consultants, companies, and any other third party that creates intellectualproperty for us that assign any intellectual property rights to us.We have also established business procedures designed to maintain the confidentiality of ourproprietary information, including the use of confidentiality agreements with employees, independentcontractors, consultants and companies with which we conduct business.We also purchase or license technology that we incorporate into our technology or services. Whileit may be necessary in the future to seek or renew licenses relating to various aspects of our technologyand services, we believe, based upon past experience and industry practice, such licenses generally couldbe obtained on commercially reasonable terms.For important additional information related to our intellectual property position, please reviewthe information set forth in ‘‘Risk Factors—Risks Related to Intellectual Property.’’Education Laws and RegulationsThe higher education industry is heavily regulated. Institutions of higher education that awarddegrees and certificates to signify the successful completion of an academic program are subject toregulation from three primary entities: the U.S. Department of Education, or DOE, accreditingagencies and state licensing authorities. Each of these entities promulgates and enforces its own laws,regulations and standards, which we refer to collectively as education laws.We contract with postsecondary institutions that are subject to education laws. In addition, weourselves are required to comply with certain education laws as a result of our role as a serviceprovider to institutions of higher education, either directly or indirectly through our contractualarrangements with university clients. Our failure, or that of our university clients, to comply witheducation laws could adversely impact our operations. As a result, we work closely with our universityclients to maintain compliance with education laws.Federal Laws and RegulationsUnder the Higher Education Act of 1965, as amended, or the HEA, institutions offeringpostsecondary education must comply with certain laws and related regulations promulgated by theDOE in order to participate in the Title IV federal student financial assistance programs. Most of ouruniversity clients participate in the Title IV programs.The HEA and the regulations promulgated thereunder are frequently revised, repealed orexpanded. Congress historically has reauthorized and amended the HEA in regular intervals,approximately every seven years. The re-authorization process is currently under way.The re-authorization of the HEA could alter the regulatory landscape of the higher educationindustry, and thereby impact the manner in which we conduct business and serve our university clients.10 In addition, the DOE is independently conducting an ongoing series of rulemakings. The DOE alsoissues formal and informal guidance instructing institutions of higher education and other coveredentities how to comply with various federal laws and regulations. DOE guidance is subject to changeand may impact our business model.Although we are not considered an institution of higher education and we do not directlyparticipate in Title IV programs, we are required to comply with certain regulations promulgated bythe DOE as a result of our role as a service provider to institutions that do participate in Title IVprograms. These include, for example, regulations governing student privacy under Family EducationalRights and Privacy Act, or FERPA. While online short courses and boot camps are typically not eligiblefor Title IV aid, when offered by or on behalf of Title IV eligible institutions, many education laws,such as FERPA, remain applicable to us or our university clients even in the Alternative CredentialSegment.Current DOE rules material to our business include principally the incentive compensation rule,the misrepresentation rule, the ‘‘written arrangements’’ rules and state authorization requirements,which are discussed in further detail below. Certain DOE rules have been revised by the currentadministration as part of its policy to deregulate and spur innovation in higher education, and suchchanges are generally expected to become final in 2020.Incentive Compensation RuleThe HEA provides that any institution that participates in the Title IV federal student financialassistance programs must agree with the DOE that the institution will not provide any commission,bonus or other incentive payment to any person or entity engaged in any student recruiting oradmission activities as those terms are defined in DOE regulations.Under DOE’s incentive compensation regulations, each higher education institution agrees that itwill not ‘‘provide any commission, bonus, or other incentive payment based in any part, directly orindirectly, upon success in securing enrollments or the award of financial aid, to any person or entitywho is engaged in any student recruitment or admission activity, or in making decisions regarding theaward of Title IV, HEA program funds.’’ Pursuant to this rule, we are prohibited from offering ourcovered employees, who are those involved with or responsible for recruiting or admissions activities,any bonus or incentive-based compensation based on the successful recruitment, admission orenrollment of students into a postsecondary institution.At the time the incentive compensation rule was last revised in July 2011, the revised rule initiallyraised a question as to whether entities could be prohibited from entering into tuition revenue-sharingarrangements with university clients. On March 17, 2011, the DOE issued official agency guidance,known as a ‘‘Dear Colleague Letter,’’ or the DCL, providing guidance on this point. The DCL statesthat ‘‘[t]he Department generally views payment based on the amount of tuition generated as anindirect payment of incentive compensation based on success in recruitment and therefore a prohibitedbasis upon which to measure the value of the services provided’’ and that ‘‘[t]his is true regardless ofthe manner in which the entity compensates its employees.’’ But the DCL also provides an importantexception to the ban on tuition revenue-sharing arrangements between institutions and third parties.According to the DCL, the DOE does not consider payment based on the amount of tuition generatedby an institution to violate the incentive compensation ban if the payment compensates an ‘‘unaffiliatedthird party’’ that provides a set of ‘‘bundled services’’ that includes recruitment services, such as thosewe provide. Example 2-B in the DCL is described as a ‘‘possible business model’’ developed ‘‘with thestatutory mandate in mind.’’ Example 2-B describes the following as a possible business model:‘‘A third party that is not affiliated with the institution it serves and is not affiliated with any otherinstitution that provides educational services, provides bundled services to the institution includingmarketing, enrollment application assistance, recruitment services, course support for online delivery of11courses, the provision of technology, placement services for internships, and student career counseling.The institution may pay the entity an amount based on tuition generated for the institution by theentity’s activities for all the bundled services that are offered and provided collectively, as long as theentity does not make prohibited compensation payments to its employees, and the institution does notpay the entity separately for student recruitment services provided by the entity.’’The DCL guidance indicates that an arrangement that complies with Example 2-B will be deemedto be in compliance with the incentive compensation provisions of the HEA and the DOE’sregulations. Our business model and contractual arrangements with our university clients closely followExample 2-B in the DCL. In addition, we assure that none of our ‘‘covered employees’’ are paid anybonus or other incentive compensation in violation of the rule.Because the bundled services rule was promulgated in the form of agency guidance issued by theDOE in the form of a DCL and is not codified by statute or regulation, the rule could technically bealtered or removed without prior notice, public comment period or other administrative proceduralrequirements that accompany formal agency rulemaking. Similarly, a court could technically invalidatethe rule in an action involving our company or our university clients, or in an action that does notinvolve us at all. Finally, while most states defer to DOE regulations, different versions of the federalincentive compensation rule exist under state law, and such statutes or rules, or their interpretation,may change at any time. The revision, removal or invalidation of the bundled services rule by Congress,the DOE or a court could technically require us to change our business model, and separate revisionsat the state level could require us to amend certain of our contracts.Misrepresentation RuleThe HEA prohibits an institution that participates in the Title IV programs from engaging in any‘‘substantial misrepresentation’’ regarding three broad subject areas: (i) the nature of the school’seducation programs, (ii) the school’s financial charges and (iii) the employability of the school’sgraduates.Under the rule, ‘‘misrepresentation’’ is defined broadly as any false, erroneous or misleadingstatement, written, visual or oral. This may include even statements that ‘‘have the likelihood ortendency to deceive.’’ Therefore, a statement need not be intentionally deceitful to qualify as amisrepresentation. ‘‘Substantial misrepresentation’’ is defined loosely as a misrepresentation on whichthe person to whom it was made could reasonably be expected to rely, or has reasonably relied, to thatperson’s detriment.The current regulation also covers statements made by any representative of an institution,including agents, employees and subcontractors, and statements made directly or indirectly to any thirdparty, including state agencies, government officials or the public, and not just statements made tostudents or prospective students.Violations of the misrepresentation rule are subject to various sanctions by the DOE and violationsmay be used as a basis for legal action by third parties or as a defense to the obligation to repaystudent loans. Similar rules apply under state laws or are incorporated in institutional accreditationstandards, and the Federal Trade Commission, or FTC, applies similar rules that prohibit any unfair ordeceptive marketing practices by vendors in the education sector. As a result, we and our employeesand subcontractors, as agents of our university clients, must use a high degree of care to comply withsuch rules and are prohibited by contract from making any false, erroneous or misleading statementsabout our university clients. To avoid an issue under the misrepresentation rule and similar state andfederal rules, we assure that all marketing materials are approved in advance by our university clientsbefore they are used by our employees.12 Accreditation Rules and StandardsAccrediting agencies primarily examine the academic quality of the instructional programs of aneducational institution, and a grant of accreditation is typically viewed as confirmation that aninstitution or an institution’s programs meet generally accepted academic standards. Accreditingagencies also review the administrative and financial operations of the institutions they accredit toensure that each institution has the resources to perform its educational mission. The DOE also relieson accrediting agencies to determine whether institutions qualify to participate in Title IV programs.In addition to institutional accreditation, colleges and universities may require specializedprogrammatic accreditation for particular educational programs. Many states and professionalassociations require professional programs to be accredited, and require individuals to have graduatedfrom accredited programs in order to sit for professional license exams. Programmatic accreditation,while not a sufficient basis for institutional Title IV Program certification by the DOE, assists graduatesto practice or otherwise secure appropriate employment in their chosen field. Common fields of studysubject to programmatic accreditation include teaching and nursing.Although we are not an accredited institution and are not required to maintain accreditation,accrediting agencies are responsible for reviewing an accredited institution’s third-party contracts withservice providers like us and may require an institution to obtain approval from or to notify theaccreditor in connection with such arrangements. One purpose of the notification and approvalrequirements is to verify that the accredited institution remains responsible for providing academicinstruction leading to a credential and provides oversight of other activities undertaken by third partieslike us that are within the scope of its accreditation. We work closely with our university clients toassure that the standards of their respective accreditors are met and are not adversely impacted by us.Accrediting agencies are also responsible for assuring that any ‘‘written arrangements’’ to outsourceacademic instruction meet accrediting standards and related regulations of the DOE. Our operationsare generally not subject to such ‘‘written arrangements’’ rules because academic instruction is providedby our university client institutions and not by us; however, the ‘‘written arrangements’’ rules may applyto online programs in the Alternative Credential Segment to the extent such courses are outsourced byuniversity clients. The ‘‘written arrangements’’ rule is under review by the current administration. Anychanges are not expected to be final until later in 2020.State Laws and RegulationsEach state has at least one licensing agency responsible for the oversight of educational institutionsoperating within its jurisdiction. Continued approval by such agencies is necessary for an institution tooperate and grant degrees, diplomas or certificates in those states. Moreover, under the HEA, approvalby such agencies is necessary to maintain eligibility to participate in Title IV programs. State attorneysgeneral are also active in enforcing education laws, and the level of regulatory oversight variessubstantially from state to state.We and our university clients may be subject to regulation in each state in which we or they ownfacilities, provide distance education or recruit students. State laws establish standards for, among otherthings, student instruction, qualifications of faculty, location and nature of facilities, recruiting practicesand financial policies. The need to comply with applicable state laws and regulations may limit or delayour ability to market or expand our offerings. In addition, the interpretation of state authorizationregulations is subject to substantial discretion by the state agency responsible for enforcing theregulations.DOE requires, among other things, that an institution offering distance learning or onlineprograms secure the approval of those states which require such approval and provide evidence of suchapproval to the DOE upon request. This regulation increases the importance of state authorization13because failure to obtain the necessary state authorization for online programs (which may also beobtained through participation in a state authorization reciprocity agreement) could result in anobligation to return federal funds received by an institution. The current administration initially delayedthe effective date of the current state authorization regulations before making minor changes to them,which are expected to be effective on July 1, 2020.All states except California now participate in the State Authorization Reciprocity Agreement, orSARA, governing the licensing of online offerings. All SARA-member institutions may provide onlineofferings in SARA states without obtaining separate state authorization (this includes externships,recruiting, local advertising, and faculty presence). SARA-member institutions must still obtain aseparate authorization in order to open a physical location in another state and are also required toobtain any additional approvals that may be required for offerings leading to professional licensure in astate (e.g., nursing, teaching, or counseling). Most of our university clients are SARA members and theDOE accepts participation in a reciprocity agreement as evidence of state approval.Finally, many programs leading to professional licensure, such as graduate degree programs innursing or teaching, also require approval from, and are subject to ongoing oversight by separate stateagencies such as state nursing boards. Membership in SARA does not encompass approvals byprofessional licensing boards, which must be obtained separately.We monitor state law developments closely and work closely with our university clients to assistthem with obtaining any required approvals.Other LawsOur activities are also subject to other federal and state laws. These regulations include, but arenot limited to, consumer marketing and unfair trade practices laws and regulations, including thosepromulgated and enforced by the FTC, state and federal consumer lending laws, student accessibilityrequirements and federal and state data protection and privacy requirements.Culture and Employees2U was founded on a set of ‘‘guiding principles’’ that are core to our culture and guide big andsmall decisions every day. New employees are introduced to the guiding principles in orientation andare expected to bring these guiding principles to life as they work with their teams, interact with ouruniversity clients and students or otherwise represent 2U in the community.(cid:129)Cherish each opportunity.Life is short, so treasure every moment.(cid:129)Give a damn.Care about what you do each day.(cid:129)Strive for excellence.Don’t settle for second best.(cid:129)Be bold and fearless.Question the status quo and embrace change.(cid:129)Be candid, honest and open.Listen to others and offer respectful feedback.(cid:129)Have fun.Fun is important. Fun is simply better.(cid:129)Make service your mission.Give the highest level of support to our partners and to one another.(cid:129)Don’t let the skeptic win.‘‘No’’ is easy. ‘‘Yes’’ is hard. Fight for ‘‘yes.’’(cid:129)Relationships matter.Invest the time, build trust, and value differences.As of December 31, 2019, we had 3,749 full-time employees and 2,099 part-time employees. Noneof our employees are represented by a labor union or covered by a collective bargaining agreement. Weconsider our relations with our employees to be good.14 Other InformationWe were incorporated as a Delaware corporation in April 2008 and completed our initial publicoffering in April 2014. We acquired Get Educated International Proprietary Limited, or GetSmarter, inJuly 2017, and acquired Trilogy in May 2019.Our principal executive offices are located at 7900 Harkins Road, Lanham, MD 20706, and ourtelephone number is (301) 892-4350.You can obtain copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K, and other filings with the U.S. Securities and Exchange Commission, orthe SEC, and all amendments to these filings, free of charge from our website at investor.2u.com or onthe SEC’s website at www.sec.gov as soon as reasonably practicable following our filing of any of thesereports with the SEC. The contents of these websites are not incorporated into this filing. Further, ourreferences to the URLs for these websites are intended to be inactive textual references only.Item 1A.Risk FactorsIn addition to the other information set forth in this Annual Report on Form 10-K, you shouldcarefully consider the factors discussed in the ‘‘Special Note Regarding Forward-Looking Statements’’in this Annual Report on Form 10-K.Risks Related to Our Business Model, Our Operations and Our Growth StrategyWe have a limited operating history, which makes it difficult to predict our future financial and operatingresults, and we may not achieve our expected financial and operating results in the future.We were incorporated in 2008 and launched our first graduate program in 2009. In July 2017, weacquired GetSmarter and extended our offerings to include premium online short courses, and in May2019, we acquired Trilogy and further extended our offerings to include skills-based boot camps. As aresult of our limited operating history, our ability to forecast our future operating results, includingrevenue, cash flows and profitability, is limited and subject to a number of uncertainties. We haveencountered and will encounter risks and uncertainties frequently experienced by growing companies inthe technology industry. If our assumptions regarding these risks and uncertainties are incorrect orchange due to factors impacting our targeted markets, or if we do not manage these risks successfully,our operating and financial results may differ materially from our expectations and our business maysuffer.We have incurred significant net losses since inception, and we are uncertain about our future profitability.We incurred net losses of $235.2 million, $38.3 million and $29.4 million during the years endedDecember 31, 2019, 2018 and 2017, respectively. We will need to generate and sustain increasedrevenue levels in future periods to become profitable, and, even if we do, we may not be able tomaintain or increase our level of profitability. We expect to continue to expend substantial financial andother resources on, technology and production efforts to support a growing number of offerings andour marketing and sales efforts to drive the acquisition of potential students. In addition, as a publiccompany, we will continue to incur significant accounting, legal and other expenses that we did notincur as a private company. These expenditures will make it harder for us to achieve and maintainprofitability. Our efforts to grow our business may be more costly than we expect, and we may not beable to increase our revenue enough to offset our operating expenses. If we are forced to reduce ourexpenses, our growth strategy could be compromised. We may incur significant losses in the future for anumber of reasons, including unforeseen expenses, difficulties, complications, delays and otherunknown events. As a result, we may be unable to achieve and maintain profitability, and the value ofour company and our common stock could decline significantly.15Our financial performance depends heavily on our ability to recruit qualified potential students for ourofferings, and our ability to do so may be affected by circumstances beyond our control.Building awareness of our offerings is critical to our ability to recruit prospective students for ouruniversity clients’ offerings and generate revenue. A substantial portion of our expenses is attributableto marketing and sales efforts dedicated to attracting potential students to our offerings. Because wegenerate revenue based on a portion of the tuition and fees that students pay, it is critical to oursuccess that we identify qualified prospective students for our offerings in a cost-effective manner, andthat enrolled students remain active in our offerings until graduation or completion.The following factors, many of which are largely outside of our control, may prevent us fromsuccessfully driving and maintaining student enrollment in our offerings in a cost-effective manner or atall:(cid:129)Negative perceptions about online learning programs.As a non-traditional form of educationdelivery, prospective students will subject our university clients’ online offerings to increasedscrutiny. Online offerings that we or our competitors provide may not be successful or operateefficiently, and new entrants to the field of online learning also may not perform well. Suchunderperformance could create the perception that online offerings in general are not aneffective way to educate students, whether or not our offerings achieve satisfactory performance,which could make it difficult for us to successfully attract prospective students. Students may bereluctant to enroll in online educational offerings for fear that the learning experience may besubstandard, that employers may be averse to hiring students who received their educationonline, or that organizations granting professional licenses or certifications may be reluctant togrant them based on degrees earned through online education.(cid:129)Unsuccessful marketing efforts.We invest substantial resources in developing and implementingdata-driven marketing strategies that focus on identifying the right potential student at the righttime. These marketing efforts make substantial use of search engine optimization, paid search,social media and custom website development and deployment and we rely on a small numberof internet search engines and marketing partners. If our execution of this strategy proves to beinefficient or unsuccessful in generating a sufficient quantity of qualified prospective students, orif the costs associated with the execution of this strategy increase, our revenue and ability toachieve profitability could be adversely affected.(cid:129)Damage to university client reputation.Because we market a specific offering to each potentialstudent and use the university client’s brand in connection with our marketing efforts, thereputations of our university clients are critical to our ability to enroll students. Many factorsaffecting our university clients’ reputations are beyond our control and can change over time,including their academic performance, ranking among nonprofit educational institutions anduniversity leadership positions.(cid:129)Lack of interest in an offering.We may encounter difficulties attracting qualified students forofferings that are not highly desired or that are relatively new within their fields. Macroeconomicconditions beyond our control may diminish interest in employment in a field, and that couldcontribute to a lack of interest in offerings in the disciplines related to that field.(cid:129)Our lack of control over our university clients’ admissions standards and admissions decisions fordegree programs.Even if we are able to identify prospective students for a degree program, thereis no guarantee that students will be admitted to that program. In the Graduate ProgramSegment, the university clients retain complete discretion over setting admissions standards andmaking admissions decisions, and any changes to admissions standards, or inconsistentapplication of admissions standards, could affect student enrollment and our ability to generaterevenue.16 (cid:129)Inability of students to secure funding.Like traditional college and university students, many ofthe students in our university clients’ offerings, in particular degree programs, rely on theavailability of third-party financing to pay for the costs of their educations, including tuition.This tuition assistance may include federal or private student loans, scholarships and grants, orbenefits or reimbursement provided by the students’ employers. Any developments that reducethe availability of financial aid for higher education generally, or for our university clients’offerings, could impair students’ abilities to meet their financial obligations, which in turn couldresult in reduced enrollment and harm our ability to generate revenue.(cid:129)General economic conditions.Student enrollment in our offerings may be affected by changes inglobal economic conditions. An improvement in economic conditions and, in particular, animprovement in the economic conditions in the U.S. and the U.S. unemployment rate, mayreduce demand among potential students for educational services, as they may find adequateemployment without additional education. Conversely, a worsening of economic and employmentconditions may reduce the willingness of employers to sponsor educational opportunities fortheir employees or discourage existing or potential students from pursuing additional educationdue to a perception that there are insufficient job opportunities, increased economic uncertaintyor other factors, any of which could adversely impact our ability to attract qualified students toour offerings. If one or more of these factors reduces student demand for our offerings,enrollment could be negatively affected, our costs associated with student acquisition andretention could increase, or both, any of which could materially compromise our ability to growour revenue or achieve profitability. These developments could also harm our reputation andmake it more difficult for us to engage new and existing university clients for new offerings,which would negatively impact our ability to expand our business.Our business depends heavily on the adoption by colleges and universities of online delivery of theireducational offerings. If we fail to attract new university clients, or if new leadership at existing universityclients does not have an interest in continuing or expanding online delivery of their educational offerings, ourrevenue growth and profitability may suffer.The success of our business depends in large part on our ability to enter into agreements withadditional nonprofit colleges and universities to offer their offerings online. In particular, to engagenew university clients, we need to convince potential university clients, many of which have beeneducating students in generally the same types of on-campus programs for hundreds of years, to investsignificant time and resources to adjust the manner in which they teach students. The delivery of onlineeducation at leading nonprofit colleges and universities is nascent, and many administrators and facultymembers have expressed concern regarding the perceived loss of control over the education processthat might result from offering content online, as well as skepticism regarding the ability of collegesand universities to provide high-quality education online that maintains the standards they set for theiron-campus programs. It may be difficult to overcome this resistance, and online programs of the kindwe develop with our university clients may not achieve significant market acceptance. In addition, ouruniversity clients have regular turnover in their leadership positions, and there is no guarantee that anynew leader will have an interest in continuing or expanding online delivery of the university’seducational offerings. If new leaders at our university clients do not embrace online delivery ofeducational offerings, we may not be able to add additional offerings with the university client and theuniversity client may attempt to terminate or may not renew their relationship with us.Disruption to or failures of our platform could reduce university client and student satisfaction with ourofferings and could harm our reputation.The performance and reliability of our platform is critical to our operations, reputation and abilityto attract new university clients, as well as our student acquisition and retention efforts. Our university17clients rely on this technology to provide their offerings online, and students access this technology on afrequent basis as an important part of their educational experience. Because our platform is complexand incorporates a variety of hardware and proprietary and third-party software, our platform may haveerrors or defects that could result in unanticipated downtime for our university clients and students.Web- and mobile- based applications frequently contain undetected errors when first introduced orwhen new versions or enhancements are released, and we have from time to time found errors anddefects in our technology and new errors and defects may be detected in the future. In addition, wehave experienced and may in the future experience temporary system interruptions to our platform fora variety of reasons including network failures, power failures, problems with third-party firmwareupdates, as well as an overwhelming numbers of users trying to access our platform. Any errors,defects, disruptions or other performance problems with our platform could damage our or ouruniversity clients’ reputations, decrease student satisfaction and retention and impact our ability toattract new students and university clients. If any of these problems occur, our university clients couldattempt to terminate their agreements with us, or make indemnification or other claims against us. Inaddition, sustained or recurring disruptions in our platform could adversely affect our and ouruniversity clients’ compliance with applicable regulations and accrediting body standards.We rely upon Amazon Web Services to host certain aspects of our platform and any disruption of orinterference with our use of Amazon Web Services could impair our ability to deliver our platform touniversity clients and students, resulting in university client and student dissatisfaction, damage to ourreputation, and harm to our business.Amazon Web Services, or AWS, provides a distributed computing infrastructure platform forbusiness operations, or what is commonly referred to as a cloud computing service. We have designedour technology and technology-enabled services to use data processing, storage capabilities and otherservices provided by AWS. Currently, our online learning platform and certain of our front-end andback-end technology and services are run on AWS. Given this, along with the fact that we cannot easilyswitch our AWS operations to another cloud provider, any disruption of, or interference with our useof, AWS would impact our operations and our business would be adversely impacted. AWS provides uswith computing and storage capacity pursuant to an agreement that continues until terminated byeither party. AWS may terminate the agreement without cause by providing 30 days’ prior writtennotice, and may terminate the agreement for cause with 30 days’ prior written notice, including anymaterial default or breach of the agreement by us that we do not cure within the 30-day period.Additionally, AWS has the right to terminate the agreement immediately with notice to us in certainscenarios such as if AWS believes providing the services could create a substantial economic ortechnical burden or material security risk for AWS, or in order to comply with the law or requests ofgovernmental entities. If any of our arrangements with AWS is terminated, we could experienceinterruptions in our software as well as delays and additional expenses in arranging new facilities andservices.We utilize third-party data center hosting facilities operated by AWS. Our operations depend, inpart, on AWS’s abilities to protect these facilities against damage or interruption from natural disasters,power or telecommunications failures, criminal acts and similar events. The occurrence of spikes inusage volume, a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close afacility without adequate notice, or other unanticipated problems at a facility could result in lengthyinterruptions in the availability of our platform, which would result in harm to our business. In theevent of a system failure, the backup systems and disaster recovery services provided by AWS may beinsufficient or fail. Also, in the event of damage or interruption, our insurance policies may notadequately compensate us for any losses that we may incur. These factors in turn could further reduceour revenue, subject us to liability or cause our university clients to fail to renew or terminate theircontracts, any of which could harm our business.18 Our ability to deliver our services is dependent on the development and maintenance of the infrastructure ofthe Internet by third parties.The infrastructure of the Internet consists of multiple fragmented networks. Multiple third-partyorganizations run this infrastructure together under the governance of the Internet Corporation forAssigned Numbers and Names (‘‘ICANN’’) and the Internet Assigned Numbers Authority under thestewardship of ICANN. The Internet has experienced outages and other delays resulting from damageto portions of infrastructure, denial-of-service attacks or related cyber incidents, and the Internet couldface outages and delays in the future. These outages and delays could reduce the level of Internetusage or result in fragmentation of the Internet, resulting in multiple separate networks lackinginterconnection. These scenarios are outside of our control and could impair the delivery of ourplatform to our university clients and students. Resulting interruptions in our platform or the ability ofour university clients or students to access our platform could result in a loss of potential or existinguniversity clients and students, subject us to liability or harm our business.Our student acquisition efforts depend in large part upon the availability of advertising space through avariety of media.We depend upon the availability of advertising space through a variety of media, including third-party applications on platforms such as Facebook and LinkedIn, to direct traffic to, and recruit newstudents for, our offerings. The availability of advertising space varies, and a shortage of advertisingspace in any particular media or on any particular platform, or the elimination of a particular mediumon which we advertise, could limit our ability to direct traffic to our offerings and recruit new studentson a cost-effective basis, any of which could have a material adverse effect on our business, results ofoperations and financial condition.The market for our offerings may be limited based on the types of nonprofit colleges and universities wetarget.Our target market of select nonprofit colleges and universities is necessarily limited. Some of thecontracts we have entered into or may enter into with our university clients contain limitations on ourability to contract with other institutions to provide the same or a similar offering. In addition, in orderto maintain good relations with our university clients, we may decide not to approach certaininstitutions that our university clients regard as their direct competitors to offer similar programs orcourses, even if we are allowed to do so under our contracts.We have agreed to incur, and we may incur in the future, costs to terminate some or all of the exclusivityobligations in certain of our university client contracts.Certain of our contracts with our university clients limit our ability to enable competitive offeringswith other schools. In our Graduate Program Segment, we have determined that enabling some ofthese contractually prohibited competitive programs may be part of our business strategy. To eliminatesome or all of the exclusivity obligations in certain university clients’ contracts with us, we have agreedwith certain university clients in our Graduate Program Segment to do some or all of the following:make fixed and contingent cash payments over time, reduce our revenue share over time, and/or makeminimum investments in marketing under certain conditions.We may determine in the future that enabling additional contractually prohibited competitiveofferings is desirable, and we may therefore agree with additional university clients to incur costssimilar to those noted above to reduce or eliminate the exclusivity obligations contained in theircontracts with us.19If the competitive offerings we ultimately enable fail to reach scale or cannot be scaled at areasonable cost, or if we need to incur contingent costs in connection with enabling competitiveofferings, our ability to grow our business and achieve profitability would be impaired.Attracting new university clients for the launch of new offerings is complex and time-consuming. If we pursueunsuccessful opportunities, we may forgo more profitable opportunities and our operating results and growthwould be harmed.The process of identifying new offerings at select nonprofit colleges and universities, and thennegotiating contracts with potential university clients, is complex and time-consuming. Because of theinitial reluctance on the part of some nonprofit colleges and universities to embrace a new method ofdelivering their education services and the complicated approval process within universities, our salesprocess to attract and engage a new university client can be lengthy. Depending on the particularcollege or university and the particular offering, we may face resistance from university administratorsor faculty members during the process.The sales cycle for a new university client often spans one year or longer. In addition, our salescycle can vary substantially because of a number of factors, including the university client’s approvalprocesses or disagreements over the terms of our offerings. We spend substantial time and managementresources on these sales efforts without any assurance that our efforts will result in the launch of a newoffering. If we invest substantial resources pursuing unsuccessful opportunities, we may forgo othermore profitable university client relationships, which would harm our operating results and growth.To launch a new degree program, we must incur significant expense in technology and content development, aswell as in marketing and sales to identify and attract prospective students, and it may be several years, if ever,before we generate revenue from a new program sufficient to recover our costs.To launch a new degree program, we must integrate components of our platform with the variousstudent information and other operating systems our university clients use to manage functions withintheir institutions. In addition, our content development staff must work closely with the universityclient’s faculty members to produce engaging online coursework and content, and we must commencestudent acquisition activities. This process of launching a new degree program is time-consuming andcostly and, under our agreements with our university clients, we are primarily responsible for thesignificant costs of this effort, even before we generate any revenue. Additionally, during the life of ouruniversity client agreements, we are responsible for the costs associated with continued marketing,maintaining our platform and providing non-academic and other support for students enrolled in thedegree program. We invest significant resources in these new degree programs from the beginning ofour relationship with a university client, and there is no guarantee that we will ever recoup these costs.We make significant upfront investments in our university clients’ degree programs, therefore, ouruniversity client agreements provide that we receive a fixed percentage of the tuition that the universityclients receive from the students enrolled in their degree programs, we only begin to recover thesecosts once students are enrolled and our university clients begin billing students for tuition and fees.The time that it takes for us to recover our investment in a new degree program depends on a varietyof factors, primarily the level of our content development costs, student acquisition costs, the rate ofgrowth in student enrollment in the program, and the tuition of the program. We estimate that, onaverage, it takes approximately four to five years after engagement with a university client to fullyrecover our investment in that university client’s new degree program. Because of the lengthy periodrequired to recoup our investment in a new degree program, unexpected developments beyond ourcontrol could occur that result in the university client ceasing or significantly curtailing a degreeprogram before we are able to fully recoup our investment. As a result, we may ultimately be unable torecover the full investment that we make in a new degree program or achieve our expected level ofprofitability for the degree program.20 If new offerings do not scale efficiently and in the time frames we expect, our reputation and our revenue willsuffer.Our continued growth and profitability depends on our and our university clients’ ability tosuccessfully scale newly launched offerings. As we continue growing our business, we plan to continueto hire new employees, particularly in our marketing and sales team and our technology and contentdevelopment teams. If we cannot adequately train these new employees, we may not be successful inrecruiting potential students for our offerings, which would adversely impact our ability to generaterevenue, and our university clients and the students in their offerings could lose confidence in theknowledge and capability of our employees. If we cannot quickly and efficiently scale our technology tohandle growing student enrollment and new offerings, our university clients’ and their students’experiences may suffer, which could damage our reputation among colleges and universities and theirfaculty and students and impact our ability to acquire new university clients.In addition, in our Graduate Program Segment, if our university clients cannot quickly develop theinfrastructure and hire sufficient faculty and administrators to handle growing student enrollments, ouruniversity clients’ and their students’ experiences with our platform may suffer, which could damage ourreputation among colleges and universities and their faculty and students.Our ability to effectively manage any significant growth of new offerings and increasing studentenrollment will depend on a number of factors, including our ability to:(cid:129)satisfy existing students in, and attract and enroll new students for, our offerings;(cid:129)assist our university clients in recruiting qualified faculty to support their expanding enrollments;(cid:129)assist our university clients in developing and producing an increased volume of course content;(cid:129)successfully introduce new features and enhancements and maintain a high level of functionalityin our platform; and(cid:129)deliver high-quality support to our university clients and their faculty and students.Establishing new offerings or expanding existing offerings will require us to make investments inmanagement and key staff, increase capital expenditures, incur additional marketing expenses andreallocate other resources. If student enrollment in our offerings does not increase, if we are unable tolaunch new offerings in a cost-effective manner or if we are otherwise unable to manage new offeringseffectively, our ability to grow our business and achieve profitability would be impaired, and the qualityof our platform and the satisfaction of our university clients and their students could suffer.Our financial performance depends heavily on student retention within our offerings, and factors influencingstudent retention may be out of our control.Once a student is enrolled in an offering, we and our university client must retain the student overthe life of the offering to generate ongoing revenue. Our strategy involves offering high-quality supportto students enrolled in these offerings to support their retention. If we are unable to help studentsquickly resolve any educational, technological or logistical issues they encounter, otherwise provideeffective ongoing support to students or deliver the type of high-quality, engaging educational contentthat students expect, students may withdraw from the offering, which would negatively impact ourrevenue.In addition, student retention could be compromised by the following factors, many of which arelargely outside of our control:(cid:129)Reduced support from our university clients.Because revenue from a particular offering is directlyattributable to the level of student enrollment in the offering, our ability to grow our revenuefrom a university client relationship depends on the growth of enrollment in that offering. Our21university clients could limit enrollment in their offerings, cease providing the offeringsaltogether or significantly curtail or inhibit our ability to promote their offerings, any of whichwould negatively impact our revenue.(cid:129)Lack of support from faculty members in our university clients’ degree programs.It takes asignificant time commitment and dedication from our university clients’ faculty members to workwith us to develop course content for their degree programs and courses designed for an onlinelearning environment. Our university clients’ faculty may be unfamiliar with the developmentand production process, may not understand the time commitment involved to develop thecourse content, or may otherwise be resistant to changing the ways in which they present thesame content in an on-campus class. Our ability to maintain high student retention will dependin part on our ability to convince our university clients’ faculty of the value in the time andeffort they will spend developing the course content. Lack of support from faculty could causethe quality of our degree programs to decline, which could contribute to decreased studentsatisfaction and retention in our Graduate Program Segment.(cid:129)Student dissatisfaction.Enrolled students may drop out of our offerings based on their individualperceptions of the value they are getting from the offering. For example, we may face retentionchallenges as a result of students’ dissatisfaction with the quality of course content andpresentation, dissatisfaction with our university clients’ faculty, changing views of the value ofour offerings and perceptions of employment prospects following completion of the offering.Factors outside our control related to student satisfaction with, and overall perception of, anoffering may contribute to decreased student retention rates for that offering.(cid:129)Personal factors.Factors impacting a student’s willingness and ability to stay enrolled in anoffering include personal factors, such as ability to continue to pay tuition, ability to meet therigorous demands of the offering, and lack of time to continue classes, all of which are generallybeyond our control.If student retention is compromised by any of these factors, it could significantly reduce therevenue that we generate from our offerings, which would negatively impact our return on investmentfor the particular offering, and could compromise our ability to grow our business and achieveprofitability.Of the degree programs we operate, only a small number contribute a significant portion of our revenue, andloss or material underperformance of any one of these programs could have a disproportionate effect on ourbusiness.In our Graduate Program Segment, we currently have, and for the foreseeable future expect tocontinue to have, a small number of degree programs that contribute a meaningful portion of ourrevenue and generate positive earnings and cash flows. Therefore, if any of these programs were tomaterially underperform for any reason or if the university client for these programs terminate or doesnot renew their relationship with us, it would hurt our future financial performance.A significant portion of our revenue is currently attributable to degree programs with three university clients.The loss of, or a decline in enrollment in, these programs could significantly reduce our revenue.We expect that our programs with our three largest university clients in the Graduate ProgramSegment will continue to account for a large portion of our revenue until our other university clientprograms become more mature and achieve significantly higher enrollment levels. Any decline inreputation, any increase in tuition, or any changes in policies or leadership at these university clients,could adversely affect the number of students that enroll in these programs. Further, the faculty oradministrators of these university clients could become resistant to offering their online programsthrough our platform, making it more difficult for us to attract and retain students. These university22 clients are not required to expand student enrollment in these online programs, and, upon theexpiration of their contracts, they are not required to continue using us as the provider of these orother online programs. If certain of these programs were to materially underperform for any reason orif any of these university clients terminated or did not renew their relationships with us, it wouldsignificantly reduce our revenue.A significant portion of our revenue in the Alternative Credential Segment is attributable to short courses withone university client. The loss of the university client, or a decline in enrollment in certain short coursesoffered with this university client, could significantly reduce our revenue in this segment.We expect that our short courses with our largest university client in the Alternative CredentialSegment will continue to account for a large portion of our revenue in this segment. Any decline in thisuniversity clients’ reputation or any increase in the fees charged by the university client for its shortcourses could adversely affect the number of students that enroll in these short courses. Further, thisuniversity client could become resistant to offering online short courses through our platform, and it isnot required to continue using us as its provider for online short courses. If this university clientelected to end certain short courses or to terminate or not renew its relationships with us, it wouldsignificantly reduce our revenue in this segment.The loss, or material underperformance, of any one of our degree programs could harm our reputation, whichcould in turn affect our future revenue growth.We rely on our reputation for delivering high-quality online degree programs andrecommendations from existing university clients to attract potential new university clients. Therefore,the loss of any single degree program, or the failure of any university client to renew its agreementwith us upon expiration, could harm our reputation and impair our ability to pursue our growthstrategy and ultimately to become profitable.If our security measures or those of our third-party service providers are breached or fail and result inunauthorized disclosure of data, we could lose university clients, fail to attract new university clients and beexposed to protracted and costly litigation.Our platform and computer systems store and transmit proprietary and confidential university,student, and company information, which may include personal information of students, prospectivestudents, faculty and employees, that are subject to stringent legal and regulatory obligations. As atechnology company, we face an increasing number of threats to our platform and computer systems,including unauthorized activity and access, system viruses, worms, malicious code, denial of serviceattacks, phishing attacks, and organized cyberattacks, any of which could breach our security anddisrupt our platform and our university clients’ offerings. The techniques used by computer hackers andcyber criminals to obtain unauthorized access to data or to sabotage computer systems changefrequently and generally are not detected until after an incident has occurred. We have implementedcertain safeguards and processes to thwart hackers and protect the data in our platform and computersystems. However, our efforts to maintain the security and integrity of our platform, and thecybersecurity measures taken by our third-party service providers may be unable to anticipate, detect orprevent all attempts to compromise our systems. If our security measures are breached or fail as aresult of third-party action, employee error, malfeasance or otherwise, it could result in the loss ormisuse of proprietary and confidential university, student (including prospective student), employee andcompany information, which could subject us to liability, or interrupt our business, potentially over anextended period of time. Any or all of these issues could harm our reputation, adversely affect ourability to attract new university clients and students, cause existing university clients to scale back theirofferings or elect not to renew their agreements, cause prospective students not to enroll or existingstudents to not stay enrolled in our offerings, or subject us to third-party lawsuits, regulatory fines or23other action or liability. Further, any reputational damage resulting from breach of our securitymeasures could create distrust of our company by prospective university clients or students. In addition,our insurance coverage may not be adequate to cover losses associated with such events, and in anycase, such insurance may not cover all of the types of costs, expenses and losses we could incur torespond to and remediate a security breach. As a result, we may be required to expend significantadditional resources to protect against the threat of these disruptions and security breaches or toalleviate problems caused by such disruptions or breaches.Many governments have enacted laws that require companies and institutions to notify impactedindividuals of data breach incidents, usually in writing. Under the terms of our contracts with ouruniversity clients, we would be responsible for the costs of investigating and disclosing data breaches tothe university clients’ students. In addition to costs associated with investigating and fully disclosing adata breach, we could be subject to substantial monetary fines or private claims by affected parties andour reputation would likely be harmed.If we fail to manage our growth effectively, the success of our business model will be compromised.We have experienced rapid growth in a relatively short period of time, which has placed, and willcontinue to place, a significant strain on our administrative and operational infrastructure, facilities andother resources. Our ability to manage our operations and growth may require us to continue toexpand our marketing and sales personnel, technology team, finance and administration teams, as wellas our facilities and infrastructure. We will also be required to refine our operational, financial andmanagement controls and reporting systems and procedures. If we fail to manage this expansion of ourbusiness efficiently, our costs and expenses may increase more than we plan and we may notsuccessfully expand our university client base, enhance our platform, develop new offerings with newand existing university clients, attract a sufficient number of qualified students in a cost-effectivemanner, satisfy the requirements of our existing university clients, respond to competitive challenges orotherwise execute our business plan. Accordingly, our historical revenue growth rate may not continuein the future.Our ability to manage any significant growth of our business effectively will depend on a numberof factors, including our ability to:(cid:129)effectively recruit, integrate, train and motivate a large number of new employees, including ourmarketing and technology teams, while retaining existing employees;(cid:129)maintain the beneficial aspects of our corporate culture and effectively execute our businessplan;(cid:129)continue to improve our operational, financial and management controls;(cid:129)protect and further develop our strategic assets, including our intellectual property rights; and(cid:129)make sound business decisions in light of the scrutiny associated with operating as a publiccompany.These activities will require significant capital expenditures and allocation of valuable managementand employee resources, and our growth will continue to place significant demands on our managementand our operational and financial infrastructure.We may not be able to effectively manage any future growth in an efficient, cost-effective or timelymanner, or at all. In particular, any failure to implement systems enhancements and improvementssuccessfully will likely negatively impact our ability to manage our expected growth, ensureuninterrupted operation of key business systems and comply with the rules and regulations that areapplicable to public reporting companies. Moreover, if we do not manage the growth of our business24 and operations effectively, the quality of our platform could suffer, which could negatively affect ourreputation, results of operations and overall business.We may expand by acquiring or investing in other companies or technologies, which may divert ourmanagement’s attention, result in dilution to our shareholders and consume resources that are necessary tosustain our business.We have in the past and may in the future acquire complementary products, services, technologiesor businesses. Negotiating these transactions can be time-consuming, difficult and expensive, and ourability to complete these transactions may often be subject to conditions or approvals that are beyondour control. In addition, we have limited experience in acquiring other companies or technologies. Wemay not be able to identify desirable additional acquisition targets, may incorrectly estimate the valueof an acquisition target or may not be successful in entering into an agreement with any particulartarget. Consequently, these transactions, even if undertaken and announced, may not close.An acquisition, investment, or new business relationship may result in unforeseen operatingdifficulties and expenditures. It is also possible that the integration process could result in materialchallenges, including, without limitation:(cid:129)the diversion of management’s attention from ongoing business concerns and performance as aresult of the devotion of management’s attention to acquisition or integration activities;(cid:129)managing a larger combined company;(cid:129)maintaining employee morale and retaining key management and other employees;(cid:129)the possibility of faulty assumptions underlying expectations regarding the integration process;(cid:129)retaining existing business and operational relationships and attracting new business andoperational relationships;(cid:129)consolidating corporate and administrative infrastructures and eliminating duplicative operationsand inconsistencies in standards, controls, procedures and policies;(cid:129)coordinating geographically separate organizations;(cid:129)unanticipated issues in integrating information technology, communications and other systems;(cid:129)undetected errors or unauthorized use of a third party’s code in the products of the acquiredcompanies or in the technology acquired;(cid:129)breaches of our cybersecurity measures if there are cybersecurity issues we are not aware of atthe time of the acquisition;(cid:129)entry into highly competitive markets in which we have no or limited direct prior experience andwhere competitors have stronger market positions; and(cid:129)exposure to unknown liabilities, including claims and disputes by third parties against thecompanies we acquire.Many of these factors will be outside of the combined company’s control and any one of themcould result in delays, increased costs, decreased revenue and diversion of management’s time andenergy, which could materially affect our financial position, results of operations and cash flows.If we experience difficulties with the integration process following an acquisition, the anticipatedbenefits of the acquisition may not be realized fully or at all, or may take longer to realize thanexpected. Moreover, the anticipated benefits of any acquisition, investment, or business relationshipmay not be realized.25In addition, in connection with an acquisition, investment or new business relationship we may:(cid:129)issue additional equity securities that would dilute current shareholders;(cid:129)use cash that we may need in the future to operate our business;(cid:129)incur debt on terms unfavorable to us or that we are unable to repay or that may placeburdensome restrictions on our operations;(cid:129)incur large charges or substantial liabilities; or(cid:129)become subject to adverse tax consequences.Any of these outcomes could harm our business and operating results.We face competition from established and emerging companies, which could divert university clients orstudents to our competitors, result in pricing pressure and significantly reduce our revenue.We expect that the online learning market will continue to expand and that the number of degreeand non-degree offerings available online will proliferate.Particularly in the Graduate Program Segment, the number of new competitive entrants into theonline learning market has expanded rapidly in recent years. As the number of online degree programsexpands, we face increasing competition to enroll students in our offerings. This expansion has alsoresulted in an increase in regional online degree program offerings for potential students. In additionto making enrollment decisions based on factors such as program quality and university brand strength,we have observed potential students giving preference to universities located in their region, which hasfurther impacted the competitive landscape in our Graduate Program Segment.In our Alternative Credential Segment, which has a lower barrier to entry, we are facing increasingcompetition from traditional massive open online course providers, which have evolved from providingmassive open online courses to providing short course certificates, nano-degrees and similar non-degreealternatives, as well as from companies that provide corporate training programs and online coursestaught outside the university environment (e.g., by experts in various fields).We expect existing competitors and new entrants to the online learning market to revise andimprove their business models constantly in response to challenges from competing businesses,including ours. If these or other market participants introduce new or improved delivery of onlineeducation and technology-enabled services that we cannot match or exceed in a timely or cost-effectivemanner, our ability to grow our revenue and achieve profitability could be compromised.Some of our competitors and potential competitors have significantly greater resources than we do.Increased competition may result in pricing pressure for us in terms of the percentage of tuition andfees we are able to negotiate to receive. The competitive landscape may also result in longer and morecomplex sales cycles with a prospective university client or a decrease in our market share among selectnonprofit colleges and universities seeking to offer online educational offerings, any of which couldnegatively affect our revenue and future operating results and our ability to grow our business.A number of competitive factors could cause us to lose potential university client and studentopportunities or force us to offer our platform on less favorable economic terms, including:(cid:129)competitors may develop service offerings that our potential university clients or students find tobe more compelling than ours;(cid:129)competitors may adopt more aggressive pricing policies and offer more attractive sales terms,adapt more quickly to new technologies and changes in university client and studentrequirements, and devote greater resources to the acquisition of qualified students than we can;26 (cid:129)current and potential competitors may establish cooperative relationships among themselves orwith third parties to enhance their products and expand their markets, and our industry is likelyto see an increasing number of new entrants and increased consolidation. Accordingly, newcompetitors or alliances among competitors may emerge and rapidly acquire significant marketshare; and(cid:129)colleges and universities may choose to continue using or to develop their own online learningsolutions in-house, rather than pay for our platform.We may not be able to compete successfully against current and future competitors. In addition,competition may intensify as our competitors raise additional capital and as established companies inother market segments or geographic markets expand into our market segments or geographic markets.If we cannot compete successfully against our competitors, our ability to grow our business and achieveprofitability could be impaired.If for-profit postsecondary institutions, which offer online education alternatives different from ours, or onlineprogram management providers perform poorly or continue to attract negative publicity, it could tarnish thereputation of online education as a whole, which could impair our ability to grow our business.For-profit postsecondary institutions, many of which provide course offerings predominantly online,remain under intense regulatory and other scrutiny, even under the current administration, which hasled to media attention that has portrayed that sector in an unflattering light. Some for-profit onlineschool operators have been subject to governmental investigations alleging the misuse of public funds,financial irregularities, exaggerated promises to students, and failure to achieve positive outcomes forstudents, including the inability to obtain employment in their fields. These allegations have attractedsignificant adverse media coverage and have prompted ongoing legislative hearings and actions as wellas regulatory responses at both the state and federal level. These investigations have focused on specificcompanies and individuals, and the entire industry in the case of marketing and recruiting practices byfor-profit higher education companies. Even though we do not market our platform to for-profitinstitutions, and have a different business model from them, this negative media attention maynevertheless foster skepticism about online higher education generally and our company specifically.Allegations of abuse of federal financial aid funds and other statutory violations against for-profithigher education companies, even if unfounded, could negatively impact our opportunity to succeeddue to increased regulation or decreased demand for our offerings. More recently, our company hasbeen the subject of articles and inquires by critics of for-profit education models more generally, andsuch critics have advocated for changes in law and regulation at the state and federal level that wouldbe adverse to our business model and sought information regarding the business practices of onlineprogram management companies generally. Efforts to further regulate for-profit institutions or our ownbusiness model could increase in the event of a change in political party control of the U.S. Congressor the executive branch. Any of these factors could negatively impact our ability to increase ouruniversity client base and grow our offerings and our revenue, which would make it difficult to continueto grow our business.Our internal information technology systems are critical to our business. System integration andimplementation issues could disrupt our operations, which could have a material adverse impact on ourbusiness or result in significant deficiencies or material weaknesses in our internal controls.We rely on the efficient and uninterrupted operation of complex information technology systems,including systems for billing, human resources, enterprise resource planning, and customer relationshipmanagement. As our business has grown in size and complexity, the growth has placed, and willcontinue to place, significant demands on our internal information technology systems. To effectivelymanage this growth, we must commit significant financial resources and personnel to maintain andenhance existing systems and develop or acquire new systems to keep pace with continuing changes in27our business and information-processing technology as well as evolving industry, regulatory, andaccounting standards. If the information we rely upon to run our businesses is determined to beinaccurate or unreliable, or if we fail to properly maintain or enhance our internal informationtechnology systems, we could have operational disruptions, significant deficiencies, or materialweaknesses in our internal controls, incur increased operating and administrative expenses, lose ourability to produce timely and accurate financial reports, or suffer other adverse consequences.If we do not retain our senior management team and key employees, we may not be able to sustain ourgrowth or achieve our business objectives.Our future success is substantially dependent on the continued service of our senior managementteam. Because of our small number of university clients and the significant nature of each newuniversity client relationship, our senior management team is heavily involved in the university clientidentification and sales process, and their expertise is critical in navigating the complex approvalprocesses of large nonprofit colleges and universities. We do not maintain key-person insurance on anyof our employees, including our senior management team. The loss of the services of any individual onour senior management team, or failure to find a suitable successor, could make it more difficult tosuccessfully operate our business and achieve our business goals.Our future success also depends heavily on the retention of our marketing and sales, technologyand content development and support teams to continue to attract and retain qualified students,thereby generating revenue for us. In particular, our highly-skilled technology and content developmentemployees provide the technical expertise underlying our bundled technology-enabled services thatsupport our university clients’ offerings and the students enrolled in these offerings. Competition forthese employees is intense. As a result, we may be unable to attract or retain these key personnel thatare critical to our success, resulting in harm to our relationships with university clients, loss of expertiseor know-how and unanticipated recruitment and training costs.In addition, as a result of business acquisitions, current and prospective employees of 2U and anyacquired company may experience uncertainty about their future roles following the acquisition. If ouremployees or the employees of any acquired company depart because of issues relating to uncertaintyor perceived difficulties of integration, our ability to realize the anticipated benefits of an acquisitioncould be adversely impacted.We have incurred substantial transaction and integration expenses related to the acquisition of Trilogy andexpect to incur additional integration expenses related to the Trilogy acquisitions that could negatively impactour financial results and cash flows.We have incurred, and expect to continue to incur, a number of non-recurring costs associatedwith the Trilogy acquisition and associated integration activities. For example, we expect to incur costsrelated to formulating and implementing integration plans, including facilities and systems consolidationcosts and employment-related costs. We continue to assess the magnitude of these costs, and additionalunanticipated costs may be incurred in the integration process. Any expected efficiencies to offset thesecosts may not be achieved in the near term, or at all.We may need additional capital in the future to pursue our business objectives. Additional capital may not beavailable on favorable terms, or at all, which could compromise our ability to grow our business.We may need to raise additional funds to respond to business challenges or opportunities,accelerate our growth, develop new offerings or enhance our platform. If we seek to raise additionalcapital, it may not be available on favorable terms or may not be available at all. In addition, under ourcredit facility, we may be restricted from using the net proceeds of financing transactions for ouroperating objectives. Lack of sufficient capital resources could significantly limit our ability to manage28 our business and to take advantage of business and strategic opportunities. Any additional capitalraised through the sale of equity or debt securities with an equity component would dilute our stockownership. If adequate additional funds are not available if and when needed, we may be required todelay, reduce the scope of, or eliminate material parts of our business strategy.We maintain offices outside of the United States, have international residents that apply to and enroll in ourofferings and plan to expand our international business, which exposes us to risks inherent in internationaloperations.Since 2017, we have significantly increased our international operations, including the number ofinternational applicants and students in our offerings. One element of our growth strategy is tocontinue expanding our international operations and to establish a worldwide client base. Our currentinternational operations and future initiatives will involve a variety of risks that could constrain ouroperations and compromise our growth prospects, including:(cid:129)the need to localize and adapt online offerings for specific countries, including translation intoforeign languages and ensuring that these offerings enable our university clients to comply withlocal education laws and regulations;(cid:129)the burden of complying with a wide variety of laws, including those relating to labor andemployment matters, education, data protection and privacy;(cid:129)difficulties in staffing and managing foreign operations, including different pricing environments,longer sales cycles, longer accounts receivable payment cycles and collections issues;(cid:129)lack of familiarity with and unexpected changes in foreign regulatory requirements;(cid:129)challenges inherent in efficiently managing an increased number of employees over largegeographic distances, including the need to implement appropriate systems, policies, benefits andcompliance programs;(cid:129)new and different sources of competition, and practices which may favor local competitors;(cid:129)weaker protection for intellectual property and other legal rights than in the United States andpractical difficulties in enforcing intellectual property and other rights outside of the UnitedStates;(cid:129)compliance challenges related to the complexity of multiple, conflicting and changinggovernmental laws and regulations, including employment, tax, education, privacy and dataprotection, and anti-bribery laws and regulations such as the U.S. Foreign Corrupt Practices Actand the U.K. Bribery Act;(cid:129)increased financial accounting and reporting burdens and complexities;(cid:129)restrictions on the transfer of funds;(cid:129)adverse tax consequences, including liabilities for indirect taxes or the potential for requiredwithholding taxes for our overseas employees;(cid:129)terrorist attacks, acts of violence or war and adverse environmental conditions;(cid:129)unstable regional and economic political conditions; and(cid:129)fluctuations in currency exchange rates or restrictions on foreign currency, and the resultingeffect on our revenue and expenses.Our expansion efforts may not be successful. Our experience with attracting university clients andstudents in the U.S. may not be relevant to our ability to attract clients and students in other markets.If we invest substantial time and resources to expand our international operations and are unable to29attract university clients and students successfully and in a timely manner, our business and operatingresults will be harmed.Our international operations expose us to fluctuations in currency exchange rates that could negatively impactour financial results and cash flows.After the GetSmarter and Trilogy acquisitions, we conduct a more substantial portion of ourbusiness outside the U.S. and we accordingly make certain business and resource decisions consideringassumptions about foreign currency. As a result, we face exposure to adverse movements in foreigncurrency exchange rates, in particular with respect to the volatility of the South African rand, or ZAR.While our reporting currency is in U.S. dollars, a portion of our consolidated revenue and expenses isdenominated in ZAR, certain of our assets are denominated in ZAR and we have a significantemployee base in South Africa. A decrease in the value of the U.S. dollar in relation to the ZAR couldincrease our cost of doing business in South Africa.Alternatively, if the ZAR depreciates against the U.S. dollar, the value of our ZAR revenue,earnings and assets as expressed in our U.S. dollar financial statements will decline. We have notentered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. Ourexposure to adverse movements in foreign currency exchange rates, including the ZAR, could have amaterial adverse impact on our financial results and cash flows.In addition, local political events, financial instability and other factors can lead to economicuncertainty and currency exchange rate fluctuations. For example, the United Kingdom has recently leftthe European Union (‘‘Brexit’’) and is currently in a transition period, which will end at or afterDecember 31, 2020. The uncertainties caused by Brexit resulted in significant volatility in the globalstock markets and exchange rates.The fluctuations of currencies in which we conduct business can both increase and decrease ouroverall revenue and expenses for any given fiscal period. Such volatility, even when it increases ourrevenue or decreases our expense, impacts our ability to accurately predict our future results andearnings.Our operations in South Africa expose us to risks that could have an adverse effect on our business.We have a significant employee base in South Africa. We may incur costs complying with laborlaws, rules and regulations in South Africa, including laws that regulate work time, provide formandatory compensation in the event of termination of employment for operational reasons, andimpose monetary penalties for non-compliance with administrative and reporting requirements inrespect of affirmative action policies. Our reliance on a workforce in South Africa also exposes us todisruptions in the business, political, and economic environment in that region, as well as naturaldisasters and other environmental conditions. Maintenance of a stable political environment isimportant to our operations in South Africa, and terrorist attacks and acts of violence or war maydirectly affect our physical facilities and workforce or contribute to general instability. Our operationsin South Africa require us to comply with complex local laws and regulatory requirements and exposeus to foreign currency exchange rate risk. The economy of South Africa in the past has been, and inthe future may continue to be, characterized by rates of inflation and interest rates that aresubstantially higher than those prevailing in the United States, which could increase our South-African-based costs and decrease our operating margins. Our operations in South Africa may also subject us totrade restrictions, exchange control limitations, reduced or inadequate protection for intellectualproperty rights, security breaches, and other factors that may adversely affect our business. Negativedevelopments in any of these areas could increase our costs of operations or otherwise harm ourbusiness.30 We might not be able to utilize a portion of our net operating loss carryforwards, which could adversely affectour profitability.As of December 31, 2019, we had federal net operating loss carryforwards due to prior periodlosses, which, if not utilized, will begin to expire in 2029. Our gross state net operating losscarryforwards are equal to or less than the federal net operating loss carryforwards and expire overvarious periods based on individual state tax laws. These net operating loss carryforwards could expireunused and be unavailable to offset future income tax liabilities, which could adversely affect ourprofitability. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, if acorporation undergoes an ‘‘ownership change,’’ which is generally defined as a greater than 50%change, by value, in its equity ownership over a three-year period, the corporation’s ability to use itspre-change net operating loss carryforwards and other pre-change tax attributes to offset itspost-change income may be limited. Similar rules may apply under state tax laws. During the three-yearperiod ended December 31, 2016, we determined that such an ownership change occurred. Absent asubsequent ownership change, however, all of our historical net operating losses should be available.Therefore, the occurrence of the ownership change during the three-year period ended December 31,2016 is not expected to limit our ability to carry forward historical net operating losses beforeexpiration. We may experience ownership changes in the future as a result of subsequent shifts in ourstock ownership. If a future ownership change occurs and limits our ability to use our historical netoperating loss carryforwards, it would harm our future financial statement results by increasing ourfuture tax obligations. We also have net operating loss carryforwards in South Africa and the UnitedKingdom, and there is no guarantee that entities in these countries will generate enough taxableincome to fully utilize them.We engage some individuals classified as independent contractors, not employees, and if federal or state lawmandates that they be classified as employees, our business would be adversely impacted.We engage independent contractors and are subject to the Internal Revenue Service regulationsand applicable state law guidelines regarding independent contractor classification. These regulationsand guidelines are subject to judicial and agency interpretation, and it could be determined that theindependent contractor classification is inapplicable. Further, if legal standards for classification ofindependent contractors change, it may be necessary to modify our compensation structure for thesepersonnel, including by paying additional compensation or reimbursing expenses. In addition, if ourindependent contractors are determined to have been misclassified as independent contractors, wewould incur additional exposure under federal and state law, workers’ compensation, unemploymentbenefits, labor, employment and tort laws, including for prior periods, as well as potential liability foremployee benefits and tax withholdings. Any of these outcomes could result in substantial costs to us,could significantly impair our financial condition and our ability to conduct our business as we choose,and could damage our reputation and our ability to attract and retain other personnel.We rely on certain third-party providers of software and services integral to the operations of our business.Certain aspects of the operation of our business depend on third party software and serviceproviders. We rely on software that we license from third parties and services provided by third partiesto offer certain components of our technology and services. In addition, we may need to obtain futurelicenses or services from third parties necessary for the continued provision of our technology andservices, which might not be available to us on acceptable terms, or at all. If our agreements with third-party software or services vendors are not renewed or the third-party software or services becomeobsolete, fail to function properly, are defective or otherwise fail to provide quality service or addressour or our university clients’ needs, there is no assurance that we would be able to replace thefunctionality provided by the third-party software or service provider with software or services from31alternative providers. Any of these factors could have a material adverse effect on our financialcondition, cash flows or results of operations.Our substantial indebtedness could adversely affect our ability to raise additional capital to fund ouroperations, limit our ability to react to changes in the economy or our industry, expose us to interest rate riskand prevent us from meeting our obligations with respect to our indebtedness.As of December 31, 2019, we had approximately $254.5 million of indebtedness on a consolidatedbasis. See Note 9 in the Notes to Consolidated Financial Statements included in Part II, Item 8 of thisAnnual Report on Form 10-K.Our substantial indebtedness could have important consequences. For example, it could:(cid:129)limit our ability to obtain additional financing for working capital, capital expenditures,acquisitions, investments and other general corporate purposes;(cid:129)require a substantial portion of our cash from operating activities to be dedicated to debt servicepayments and reduce the amount of cash available for working capital, capital expenditures,investments or acquisitions and other general corporate purposes;(cid:129)expose us to increased interest rate risk as a significant portion of our indebtedness is subject tovariable interest rates;(cid:129)place us at a competitive disadvantage compared to certain of our competitors who have lessdebt;(cid:129)hinder our ability to adjust rapidly to changing market conditions;(cid:129)limit our ability to secure adequate bank financing in the future with reasonable terms andconditions; and(cid:129)increase our vulnerability to, and limit our flexibility in planning for or reacting to, a potentialdownturn in general economic conditions or in one or more of our businesses.Our variable rate indebtedness may use LIBOR as a benchmark for establishing the rate. OnJuly 27, 2017, the authority that regulates LIBOR announced that it intends to stop compelling banksto submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods ofcalculating LIBOR will be established such that it continues to exist after 2021. The U.S. FederalReserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S.dollar LIBOR with a newly created index, calculated with a broad set of short-term repurchaseagreements backed by treasury securities. It is not possible to predict the effect of these changes, otherreforms or the establishment of alternative reference rates in the United Kingdom, the United Statesor elsewhere.In addition, the Credit Agreement governing our Term Loan contains affirmative and negativecovenants that limit our ability to engage in activities that may be in our long-term best interests. Ourfailure to comply with those covenants could result in an event of default which, if not cured or waived,could result in the acceleration of all of our debt.Despite current indebtedness levels and existing restrictive covenants, we may still incur additionalindebtedness that could further exacerbate the risks associated with our substantial financial leverage.We may incur significant additional indebtedness in the future under the agreements governing ourindebtedness. Although the Credit Agreement governing our Term Loan contains restrictions on theincurrence of additional indebtedness, these restrictions are subject to a number of thresholds,qualifications and exceptions, and the additional indebtedness incurred in compliance with these32 restrictions could be substantial. Additionally, these restrictions permit us to incur obligations that,although preferential to our common stock in terms of payment, do not constitute indebtedness.To service our indebtedness, we will require a significant amount of cash, and our ability to generate cashdepends on many factors beyond our control.Our ability to make cash payments on and to refinance our indebtedness will depend upon ourfinancial condition and operating performance, which are subject to prevailing economic andcompetitive conditions and to financial, business, legislative, regulatory and other factors beyond ourcontrol.If we are unable to generate sufficient cash from operating activities or are otherwise unable toobtain funds necessary to meet required payments of principal, premium, if any, and interest on ourindebtedness or if we fail to comply with the various covenants in the instruments governing ourindebtedness and we are unable to obtain waivers from the required lenders, we could be in defaultunder the terms of the agreements governing such indebtedness. In the event of such default, theholders of our indebtedness could elect to declare all the funds borrowed to be due and payable,together with accrued and unpaid interest. As a result, we could be forced into bankruptcy orliquidation.Our debt obligations may limit our flexibility in managing our business.The Credit Agreement governing our Term Loan requires us to comply with several customaryfinancial and other restrictive covenants, such as maintaining leverage ratios in certain situations,maintaining insurance coverage, and restricting our ability to make certain investments. We are alsorequired to maintain liquidity of $25.0 million of unrestricted cash as of the last day of each fiscalquarter, which may limit our ability to engage in new lines of business, make certain investments, paydividends, or enter into various transactions. The Credit Agreement also includes covenants thatrequire us to maintain minimum: (i) annualized last quarter Graduate Program Segment revenue(‘‘Minimum Graduate LQAR’’) and (ii) Alternative Credential Segment revenue for the last fourconsecutive fiscal quarters (‘‘Minimum Alternative Credential LTMR’’). For the quarter and fourconsecutive fiscal quarters ended December 31, 2019, our Minimum Graduate LQAR and MinimumAlternative Credential LTMR were $432.9 million and $218.8 million, respectively, which exceeded therequirements of $397.8 million and $185.0 million, respectively. In order to satisfy the MinimumGraduate LQAR covenant during the year ending December 31, 2020, we will be required to achieveminimum Graduate Program Segment revenue each fiscal quarter of various levels ranging from$92 million to $111 million. In order to satisfy the Minimum Alternative Credential LTMR covenantduring the year ending December 31, 2020, we will be required to achieve Minimum AlternativeCredential LTMR each fiscal quarter of various levels ranging from $204 million to $207 million. Thesecovenants may limit the flexibility of our operations, and failure to meet either one of these minimumrevenue covenants could result in defaults under the Credit Agreement governing our Term Loan evenif we have satisfied our payment obligations. If such a default were to occur, our business, financialcondition, and results of operations would be materially adversely affected. See Note 9 in the ‘‘Notes toConsolidated Financial Statements’’ included in Part II, Item 8 of this Annual Report on Form 10-Kfor additional details regarding our Credit Agreement.We have incurred and may incur in the future significant charges due to impairment of our goodwill.We review goodwill at least annually, and more frequently if indicators of impairment occur, at thereporting unit level. An interim goodwill impairment test performed during the reporting periodindicated that the carrying value of Trilogy exceeded its fair value, primarily due to lower expectationsof future performance of Trilogy that impacted estimated operating cash flows. As a result, we recordedan impairment charge of $70.4 million on our consolidated statements of operations and comprehensive33loss for the year ended December 31, 2019. Future changes in our circumstances or in the variablesassociated with the judgments, assumptions and estimates used in assessing the fair value of ourreporting units could require us to record additional impairment charges, which could have a materialadverse effect on our business, financial condition, and results of operations.Risks Related to Regulation of Our Business and That of Our University ClientsOur business model relies on university client institutions complying with federal and state laws andregulations.Higher education is heavily regulated. All of our university clients in the United States and certainuniversity clients outside of the United States participate in Title IV federal student financial assistanceprograms under the HEA of 1965, as amended, or HEA, and are subject to extensive regulation by theDOE, as well as various state agencies, licensing boards and accrediting commissions. To participate inthe Title IV programs, an institution must receive and maintain authorization by the appropriate stateeducation agencies, be accredited by an accrediting commission recognized by the DOE, and becertified by the DOE as an eligible institution. If a university client participating in Title IV was foundto be in non-compliance with any of these laws, regulations, standards or policies, the university clientcould lose some or all of its access to Title IV program funds, lose the ability to offer certain programsor lose its ability to operate in certain states, any of which could cause our revenue from that universityclient’s program to decline.The regulations, standards and policies applicable to our university clients change frequently andare often subject to interpretation. Changes in, or new interpretations of, applicable laws, regulations orstandards could compromise our university clients’ accreditation, authorization to operate in variousstates, permissible activities or use of federal funds under Title IV programs. We cannot predict withcertainty how the requirements applied by our university clients’ regulators will be interpreted, orwhether our university clients will be able to comply with these requirements in the future.Our activities are subject to federal and state laws and regulations and other requirements.Although we are not an institution of higher education, we are required to comply with certaineducation laws and regulations as a result of our role as a service provider to higher educationinstitutions, either directly or indirectly through our contractual arrangements with university clients.Failure to comply with these laws and regulations could result in breach of contract and indemnificationclaims and could cause damage to our reputation and impair our ability to grow our business andachieve profitability.Activities of the U.S. Congress or Department of Education could result in adverse legislation or regulatoryaction.The process of re-authorization of the HEA began in 2014 and is ongoing. Congressional hearingswill continue to be scheduled by the U.S. Senate Committee on Health, Education, Labor andPensions, the U.S. House of Representatives Committee on Education and the Workforce and otherCongressional committees regarding various aspects of the education industry, including accreditationmatters, student debt, student recruiting, cost of tuition, distance learning, competency-based learning,student success and outcomes and other matters.The increased scrutiny and results-based accountability initiatives in the education sector, as well asongoing policy differences in Congress regarding spending levels and other issues, could lead tosignificant changes in connection with the reauthorization of the HEA or otherwise. These changes mayplace new or additional regulatory burdens on postsecondary schools generally, and specific initiativesmay be targeted at or have an impact upon companies like us that serve higher education. Theadoption of any laws or regulations that limit our ability to provide our bundled services to our34 university clients could compromise our ability to drive revenue through their programs or make ourplatform less attractive to them. Congress could also enact laws or authorize regulations that require usto modify our practices in ways that could increase our costs, including as a result of new regulatoryburdens.In addition, regulatory activities and initiatives of the DOE may have similar consequences for ourbusiness even in the absence of Congressional action. For example, in September 2015, the DOEpublicly released its College Scorecard website, a tool aimed at helping students make informeddecisions about education options after high school (including 2 and 4-year degree programs, certificateprograms and some degree programs). In May 2019, the DOE expanded the data available in CollegeScorecard and students can now view data regarding salary after completion or graduation, graduationrates, average cost, transfer rates, median debt after graduation, and earnings based on fields of study,among other data. College Scorecard data may not accurately reflect our university clients’ offeringsbecause it only includes students who are recipients of Title IV program funds and does not distinguishbetween a university’s online and campus-based programs, however it may impact enrollment in ourofferings if students have a negative impression of our university clients’ offerings based on the datapresented. The DOE is expected to update the data annually to demonstrate how graduates’ earningprospects and debt levels progress in years following completion or graduation. We cannot predict theimpact that College Scorecard may have on enrollment in our offerings, reputation or operating results.Our business model, which depends on our ability to receive a share of tuition revenue as payment from ouruniversity clients, has been validated by a DOE ‘‘dear colleague’’ letter, but such validation is not codified bystatute or regulation and may be subject to change.Each institution that participates in Title IV programs agrees it will not ‘‘provide any commission,bonus, or other incentive payment based in any part, directly or indirectly, upon success in securingenrollments or the award of financial aid, to any person or entity who is engaged in any studentrecruitment or admission activity, or in making decisions regarding the award of Title IV, HEAprogram funds.’’ All of our university clients participate in Title IV Programs.Although this rule, referred to as the incentive compensation rule, generally prohibits entities orindividuals from receiving incentive-based compensation payments for the successful recruitment,admission or enrollment of students, the DOE provided guidance in 2011 permitting tuition revenue-sharing arrangements known as the ‘‘bundled services rule.’’ Our current business model relies in parton the bundled services rule to enter into tuition revenue-sharing agreements with our universityclients.Because the bundled services rule was promulgated in the form of agency guidance issued by theDOE in the form of a ‘‘dear colleague’’ letter, or DCL, and is not codified by statute or regulation,there is risk that the rule could be altered or removed without prior notice, public comment period orother administrative procedural requirements that accompany formal agency rulemaking. Although theDCL represents the current policy of the DOE, the bundled services rule could be reviewed, altered orvacated in the future. In addition, the legal weight the DCL would carry in litigation over the proprietyof any specific compensation arrangements under the HEA or the incentive compensation rule isuncertain. We can offer no assurances as to how the DCL would be interpreted by a court. Therevision, removal or invalidation of the bundled services rule by Congress, the DOE or a court, whetherin an action involving our company or our university clients, or in action that does not involve us, couldrequire us to change our business model and renegotiate the terms of our university client contractsand could compromise our ability to generate revenue.35If we or our subcontractors or agents violate the incentive compensation rule, we could be liable to ouruniversity clients for substantial fines, sanctions or other liabilities.Even though the DCL clarifies that tuition revenue-sharing arrangements with our universityclients are permissible, we are still subject to other provisions of the incentive compensation rule thatprohibit us from offering to our employees who are involved with or responsible for recruiting oradmissions activities any bonus or incentive-based compensation based on the successful identification,admission or enrollment of students into any institution. If we or our subcontractors or agents violatethe incentive compensation rule, we could be liable to our university clients for substantial fines,sanctions or other liabilities, including liabilities related to ‘‘whistleblower’’ claims under the federalFalse Claims Act. Any such claims, even if without merit, could require us to incur significant costs todefend the claim, distract management’s attention and damage our reputation.If we or our subcontractors or agents violate the misrepresentation rule, or similar federal and state regulatoryrequirements, we could face fines, sanctions and other liabilities.We are required to comply with other regulations promulgated by the DOE that affect our studentacquisition activities, including the misrepresentation rule. The misrepresentation rule is broad in scopeand applies to statements our employees, subcontractors or agents may make about the nature of auniversity client’s program, a university client’s financial charges or the employability of a universityclient’s program graduates. A violation of this rule, FTC rules or other federal or state regulationsapplicable to our marketing activities by an employee, subcontractor or agent performing services foruniversity clients could hurt our reputation, result in the termination of university client contracts,require us to pay fines or other monetary penalties or require us to pay the costs associated withindemnifying a university client from private claims or government investigations.If our university clients fail to maintain their state authorizations, or we or our university clients violate otherstate laws and regulations, students in their offerings could be adversely affected and we could lose our abilityto operate in that state and provide services to these university clients.Our university clients must be authorized in certain states to offer online educational offerings,engage in recruiting and operate externships, internships, clinical training or other forms of fieldexperience, depending on state law. The loss of or failure to obtain state authorization would, amongother things, limit the ability of a university client to enroll students in that state, render the universityclient and its students ineligible to participate in Title IV programs in that state, diminish theattractiveness of the university client’s offering and ultimately compromise our ability to generaterevenue and become profitable.In addition, if we or any of our university clients fail to comply with any state agency’s rules,regulations or standards beyond authorizations, the state agency or state attorney general could limitthe ability of the university client to offer educational offerings in that state or limit our ability toperform our contractual obligations to our university client in that state.If our university clients fail to maintain institutional or programmatic accreditation for their offerings, ourrevenue could be materially affected.The loss or suspension of a university client’s accreditation or other adverse action by theuniversity client’s institutional or programmatic accreditor would render the institution or its offeringsineligible to participate in Title IV programs, could prevent the university client from offering certaineducational offerings and, for certain degree-granting programs, could make it impossible for thegraduates of the university client’s program to obtain employment in the profession for which theytrained. If any of these results occurs, it could hurt our ability to generate revenue from that offering.36 Our future growth could be impaired if our university clients fail to obtain timely approval from applicableregulatory agencies to offer new programs, make substantive changes to existing programs or expand theirprograms into or within certain states.Our university clients are required to obtain the appropriate approvals from the DOE andapplicable state and accrediting regulatory agencies for new programs or locations, which may beconditioned, delayed or denied in a manner that could impair our strategic plans and future growth.Regulatory constraints have resulted in delays to various approvals our university clients are requesting,and such delays could in turn delay the timing of our ability to generate revenue from our universityclients’ programs.If more state agencies require specialized approval of our university clients’ offerings, our operating costscould increase significantly, approval times could lag, or we could be prohibited from operating in certainstates.In addition to state licensing agencies, our university clients may be required to obtain approvalfrom professional licensing boards in certain states to offer specialized programs in specific fields ofstudy. Currently, relatively few states require institutions to obtain professional board approval for theironline educational offerings. However, more states could pass laws requiring our university clients’offerings, such as graduate programs in teaching or nursing, to obtain approval from state professionalboards. If a significant number of states pass additional laws requiring schools to obtain professionalboard approval, the cost of obtaining all necessary state approvals could dramatically increase, whichcould make our platform less attractive to university clients, and these university clients could be barredfrom operating in some states entirely.Evolving regulations and legal obligations related to data privacy, data protection and information securityand our actual or perceived failure to comply with such obligations, could have an adverse effect on ourbusiness.The legislative and regulatory framework for privacy and security issues worldwide is rapidlyevolving and is likely to remain uncertain for the foreseeable future. In providing our platform touniversity clients and in operating our business, we collect and process regulated personal informationfrom students, faculty, prospective students and employees. Our handling of this personal information issubject to a variety of laws and regulations, which have been adopted by federal, state and foreigngovernments to regulate the collection, distribution, use and storage of personal information. Anyfailure or perceived failure by us to comply with these privacy laws and regulations or any securityincident that results in the unauthorized release or transfer of this personal information in ourpossession, could result in government enforcement actions, litigation, fines and penalties or adversepublicity, all of which could have an adverse effect on our reputation and business.Various federal, state and foreign legislative, regulatory or other governmental bodies may enactnew or additional laws or regulations, or issue rulings that invalidate prior laws or regulationsconcerning privacy, data storage and data protection that could materially adversely impact ourbusiness. For example, in April 2016, the European Parliament and the Council of the European Unionformally adopted a comprehensive General Data Protection Regulation (‘‘GDPR’’), which took effect inMay 2018. The GDPR introduces new requirements for the protection of personal data of individualsin the EU and substantial fines for non-compliance. After the United Kingdom withdraws from the EU(‘‘Brexit’’), we will also be subject to the UK Data Protection Act 2018 which introduces certainUK-specific requirements and also imposes substantial fines for non-compliance. As another example,the European ePrivacy Directive (Directive 2002/58/EC, as amended by Directive 2009/136/EC), whichobliges EU member states to introduce certain national laws regulating privacy in the electroniccommunications sector, will soon be replaced by the ePrivacy Regulation. As the text of the ePrivacyRegulation is still under development and in draft form, and as further guidance is issued and37interpretations of both the ePrivacy Regulation and the GDPR develop, it is difficult to assess theimpact of either on our business or operations, but it may require us to modify our data practices andpolicies (e.g., in relation to management of cookies and direct marketing messages sent throughdifferent media) and we could incur substantial costs as a result. We are also subject to evolving EUlaws on data transfer, as we may transfer personal data from the European Economic Area to otherjurisdictions. There is currently litigation challenging various EU mechanisms for adequate datatransfers and it is uncertain whether various mechanisms, such as the ‘‘Privacy Shield’’ or ‘‘modelcontractual clauses’’ will be invalidated by the European courts. Brexit has also introduced significantuncertainty about data transfers from the EU to the UK and from the UK to other jurisdictions, whichcould affect our operations in the U.K. and EU.Similarly, in the U.S., various states have either passed or proposed privacy laws that will go intoeffect in the next few years. For example, California passed the California Consumer Privacy Act(‘‘CCPA’’) in 2018, which took effect in January 2020, and Massachusetts recently proposed MA BillSD 341, ‘‘An Act relative to consumer data privacy.’’ There are similar bills pending in a number ofother states, as well. CCPA and MA Bill SD 341 each represent a trend toward stronger privacyprotections and greater data transparency in the U.S. Currently, federal law legislates privacy on anindustry by industry basis. Without an overarching federal law driving privacy compliance, the risk ishigh of a patchwork of privacy legislation formed by individual state laws, similar to the states’approach to breach notification obligations. This could not only increase costs for compliance but alsoraise the risk of enforcement by individual state attorneys general.Complying with these and other changing requirements could cause us to incur substantial costs, orrequire us to change our business practices, any of which could materially adversely affect our businessand operating results.We are required to comply with the Family Educational Rights and Privacy Act, or FERPA, and failure to doso could harm our reputation and negatively affect our business.FERPA generally prohibits an institution of higher education participating in Title IV programsfrom disclosing personally identifiable information from a student’s education records without thestudent’s consent. Our university clients and their students disclose to us certain information thatoriginates from or comprises a student education record under FERPA. As an entity that providesservices to institutions participating in Title IV programs, we are indirectly subject to FERPA, and wemay not transfer or otherwise disclose any personally identifiable information from a student record toanother party other than in a manner permitted under the statute. If we violate FERPA, it could resultin a material breach of contract with one or more of our university clients and could harm ourreputation. Further, in the event that we disclose student information in violation of FERPA, the DOEcould require a university client to suspend our access to its student information for at least five years.In our Alternative Credential Segment, we are subject to risks and compliance rules and regulations related tothe third-party credit card payment processing platform integrated within our websites or otherwise used byour business.Students typically use a credit or debit card to pay application and enrollment fees and to maketuition payments for our short courses and boot camps. We are subject to payment card associationoperating rules, certification requirements and rules governing electronic funds transfers, which couldchange or be reinterpreted to make it difficult or impossible for us to comply. We believe that we andthe payment processing service providers we use are compliant in all material respects with thePayment Card Industry Data Security Standard. However, there is no guarantee that such compliancewill be maintained or that compliance will prevent illegal or improper use of our systems that areintegrated with our payment processing providers. If we or any of the third-party payment processorswe use fails to be in compliance with applicable credit card rules and regulations, we may be required38 to migrate to an alternate payment processor which could result in transaction downtime during themigration and/or a loss of students and have a material adverse effect on our business, financialcondition and results of operations.Risks Related to Intellectual PropertyWe operate in an industry with extensive intellectual property litigation. Claims of infringement against usmay hurt our business.Our success depends, in part, upon our ability to avoid infringing intellectual property rights ownedby others and being able to resolve claims of intellectual property infringement without major financialexpenditures or adverse consequences. The technology and software fields generally are characterizedby extensive intellectual property litigation and many companies that own, or claim to own, intellectualproperty have aggressively asserted their rights. In addition, we face potential copyright and trademarkinfringement from the content we produce in connection with our marketing activities, including inwebsites related to our offerings. From time to time, we may be subject to legal proceedings and claimsrelating to the intellectual property rights of others, and we expect that third parties will assertintellectual property claims against us, particularly as we expand the complexity and scope of ourbusiness. In addition, our university client agreements require us to indemnify our university clientsagainst claims that our platform infringes the intellectual property rights of third parties.Future litigation may be necessary to defend ourselves or our university clients from intellectualproperty infringement claims or to establish our proprietary rights. Some of our competitors havesubstantially greater resources than we do and would be able to sustain the costs of complexintellectual property litigation to a greater degree and for longer periods of time than we could. Inaddition, patent holding companies that focus solely on extracting royalties and settlements by enforcingpatent rights may target us. Regardless of whether claims that we are infringing patents or otherintellectual property rights have any merit, these claims are time-consuming and costly to evaluate anddefend and could:(cid:129)hurt our reputation;(cid:129)adversely affect our relationships with our current or future university clients;(cid:129)cause delays or stoppages in providing our platform;(cid:129)divert management’s attention and resources;(cid:129)require technology changes to our software that could cause us to incur substantial cost;(cid:129)subject us to significant liabilities; and(cid:129)require us to cease some or all of our activities.In addition to liability for monetary damages against us, which may include attorneys’ fees, trebledamages in the event of a finding of willful infringement, or, in some circumstances, damages againstour university clients, we may be prohibited from developing, commercializing or continuing to providesome or all of our bundled technology-enabled platform unless we obtain licenses from, and payroyalties to, the holders of the patents or other intellectual property rights, which may not be availableon commercially favorable terms, or at all.We may incur liability, or our reputation may be harmed, as a result of the activities of our university clientsand students or the content in our online learning environments.We may be subject to potential liability for the activities of our university clients or students inconnection with the data they post or store in our online learning platform. For example, universitypersonnel or students, or our employees or independent contractors, may post to our online learning39platform various articles or other third-party content for use in class discussions or within asynchronouslessons.Various U.S. federal statutes may apply to us with respect to these activities. The Copyright Act of1976 provides recourse to copyright owners who believe that their rights under U.S. copyright law havebeen infringed on the internet. Those rights can be limited by operation of the Digital MillenniumCopyright Act of 1998, or DMCA, such that we may not be liable for infringing content posted byuniversity clients or students, provided that we follow the procedures for handling copyrightinfringement claims set forth in the DMCA.Although statutes and case law in the U.S. have generally shielded us from liability for theseactivities to date, court rulings in pending or future litigation may narrow the scope of protectionafforded us under these laws. In addition, laws governing these activities are unsettled in manyinternational jurisdictions. As a result, we could incur liability to third parties for the unauthorizedduplication, distribution or other use of third-party content. Any such claims could subject us to costlylitigation and impose a significant strain on our financial resources and management personnelregardless of whether the claims have merit. Our various liability insurance coverages may not coverpotential claims of this type adequately or at all, and we may be required to alter or cease our uses ofsuch material, which may include changing or removing content from courses or altering thefunctionality of our online learning platform, or to pay monetary damages.Additionally, university personnel or students, or our employees or independent contractors coulduse our online learning platform to store or process regulated personal information without ourknowledge. In the event that our systems experience a data security incident, or an individual or entityaccesses information without, or in excess of, proper authorization, we could be subject to data securityincident notification laws, as described elsewhere, which may require prompt remediation andnotification to individuals. If we are unaware of the data and information stored on our systems, wemay be unable to appropriately comply with all legal obligations, and we may be exposed togovernmental enforcement or prosecution actions, private litigation, fines and penalties or adversepublicity and these incidents could harm our reputation and business.Our failure to protect our intellectual property rights could diminish the value of our platform, weaken ourcompetitive position and reduce our revenue.We regard the protection of our intellectual property, which includes trade secrets, copyrights,trademarks and domain names, as critical to our success. We protect our proprietary information fromunauthorized use and disclosure by entering into confidentiality agreements with any party that maycome in contact with such information. We also seek to ensure that we own intellectual propertycreated for us by signing agreements with employees, independent contractors, consultants, companiesand any other third party that may create intellectual property for us that assigns any copyright andpatent rights to us. However, these arrangements and the other steps we have taken to protect ourintellectual property may not prevent the misappropriation of our proprietary information or deterindependent development of similar technologies by others.We pursue the registration of our domain names, trademarks and service marks in the UnitedStates and in jurisdictions outside the United States. However, third parties may knowingly orunknowingly infringe on our trademark or service mark rights, third parties may challenge ourtrademark or service mark rights, and pending or future trademark or service mark applications maynot be approved. In addition, effective trademark protection may not be available in every country inwhich we operate or intend to operate. In any or all cases, we may be required to expend significanttime and expense to prevent infringement or enforce our rights.Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts toprotect our proprietary rights may not be adequate to prevent misappropriation of our intellectual40 property. Further, we may not be able to detect unauthorized use of, or take appropriate steps toenforce, our intellectual property rights. Our competitors may also independently develop similartechnology. In addition, the laws of many countries may not protect our proprietary rights to as greatan extent as do the laws of the United States. Further, the laws in the United States and elsewherechange rapidly, and any future changes could adversely affect us and our intellectual property rights.Our failure to meaningfully protect our intellectual property could result in competitors offeringservices that incorporate our most technologically advanced features, which could seriously reducedemand for our platform. In addition, we may in the future need to initiate litigation such asinfringement or administrative proceedings, to protect our intellectual property rights. Litigation,whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the effortsof our technical staff and managerial personnel, whether or not such litigation results in adetermination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we maynot be able to stop our competitors from infringing upon our intellectual property rights.The use of ‘‘open source’’ software in our platform could negatively affect our ability to offer our platform andsubject us to possible litigation.A substantial portion of our platform incorporates so-called ‘‘open source’’ software, and we mayincorporate additional open source software in the future. Open source software is generally freelyaccessible, usable and modifiable. Certain open source licenses may, in certain circumstances, requireus to offer our platform that incorporates the open source software for no cost, to make availablesource code for modifications or derivative works we create based upon, incorporating or using theopen source software and to license such modifications or derivative works under the terms of theparticular open source license. Our efforts to monitor the use of open source software in our platformto ensure that no open source software is used in such a way as to require us to disclose our sourcecode when we do not wish to do so, may be unable to prevent such use from occurring. In addition, ifa third-party software provider has incorporated certain types of open source software into software welicense from such third party without our knowledge, we could, under certain circumstances, berequired to comply with the foregoing conditions. If an author or other third party that distributes opensource software that we use were to allege that we had not complied with the conditions of one ormore of these licenses, we could be required to incur significant legal expenses defending against suchallegations and could be subject to significant damages, including being enjoined from offering thecomponent of our platform that contained the open source software and being required to comply withthe foregoing conditions, which could disrupt our ability to offer certain components of our platform.We could also be subject to suits by parties claiming ownership of what we believe to be opensource software. The terms of many open source licenses to which we are subject have not beeninterpreted by U.S. or foreign courts. Accordingly, there is a risk that those licenses could be construedin a manner that imposes unanticipated conditions or restrictions on our ability to offer our platform.Litigation could be costly for us to defend, have a negative effect on our operating results and financialcondition and require us to devote additional research and development resources to change ourproducts.If internet search engines’ methodologies are modified, our search engine optimization capability in connectionwith our student recruiting efforts could be harmed.Our search engine optimization capability in connection with our student acquisition effortssubstantially depends on various internet search engines, such as Google, to direct a significant amountof traffic to websites related to our offerings. Our ability to influence the number of visitors directed tothese websites through search engines is not entirely within our control. For example, search enginesfrequently revise their algorithms in an attempt to optimize their search result listings. Future changesthat may be made by Google or any other search engines could impact our ability to effectively utilize41search engine optimization as part of our student acquisition strategies in the long-term. Changes in themethodologies used by search engines to display results could cause the websites related to ourofferings to receive less favorable placements, which could reduce the number of prospective studentswho visit these websites from search engines. Further, if our competitors’ search engine optimizationefforts are more successful than ours, fewer prospective students may be directed to our websites. Anyreduction in the number of prospective students directed to our websites could negatively affect ourability to generate prospective students, and ultimately revenue, through our student acquisitionactivities.Individuals that appear in content hosted on our online learning platform may claim violation of their rights.Faculty and students that appear in video segments hosted on our online learning platform mayclaim that proper assignments, licenses, consents and releases were not obtained for use of theirlikenesses, images or other contributed content. Our contracts typically require that our universityclients ensure that proper assignments, licenses, consents and releases are obtained for their coursematerial, but we cannot know with certainty that they have obtained all necessary rights. Moreover, thelaws governing rights of publicity and privacy, and the laws governing faculty ownership of coursecontent, are imprecise and adjudicated on a case-by-case basis, such that the enforcement ofagreements to transfer the necessary rights is unclear. As a result, we could incur liability to thirdparties for the unauthorized duplication, display, distribution or other use of this material. Any suchclaims could subject us to costly litigation and impose a significant strain on our financial resources andmanagement personnel regardless of whether the claims have merit. Our various liability insurancecoverages may not cover potential claims of this type adequately or at all, and we may be required toalter or cease our use of such material, which may include changing or removing content from courses,or to pay monetary damages. Moreover, claims by faculty and students could damage our reputation,regardless of whether such claims have merit.Risks Related to Ownership of Our Common Stock and Our Status as a Public CompanyOur operating results have fluctuated in the past and may do so in the future, which could cause our stockprice to decline.Our operating results have historically fluctuated due to seasonality and changes in our business,and our future operating results may vary significantly due to a variety of factors, many of which arebeyond our control. You should not rely on period-to-period comparisons of our operating results as anindication of our future performance. Factors that may cause fluctuations in our operating resultsinclude, but are not limited to, the following:(cid:129)the timing of our costs incurred in connection with the launch of new degree programs and thedelay in receiving revenue from these new programs, which delay may last for several years;(cid:129)seasonal variation driven by the semester schedules for our university clients’ degree programs,which may vary from year to year;(cid:129)changes in the student enrollment and retention levels in our university clients’ offerings;(cid:129)changes in our key metrics or the methods used to calculate our key metrics;(cid:129)changes in tuition rates;(cid:129)the timing and amount of our marketing and sales expenses;(cid:129)costs necessary to improve and maintain our platform;(cid:129)fluctuations in foreign currency exchange rates;(cid:129)costs related to any acquisition and integration of business and technology;42 (cid:129)our ability to effectively integrate businesses and technologies that we acquire; and(cid:129)changes in the prospects of the economy generally, which could alter current or prospectiveuniversity clients’ or students’ spending priorities, or could increase the time it takes us to launchnew offerings.Our operating results may fall below the expectations of market analysts and investors in somefuture periods, which could cause the market price of our common stock to decline substantially.The trading price of the shares of our common stock may be volatile, and purchasers of our common stockcould incur substantial losses.The trading price of the shares of our common stock may be volatile. The stock market in general,and the market for technology companies in particular, have experienced extreme volatility that hasoften been unrelated to the operating performance of particular companies. As a result of thisvolatility, investors may not be able to sell their common stock at or above the price paid for theshares. The market price for our common stock may be influenced by many factors, including:(cid:129)actual or anticipated variations in our operating results;(cid:129)variations between our actual operating results and the expectations of securities analysts,investors and the financial community;(cid:129)changes in financial estimates by us or by any securities analysts who might cover our stock orour failure to meet these financial estimates;(cid:129)conditions or trends in our industry, the stock market or the economy;(cid:129)the level of demand for our stock, including the amount of short interest in our stock;(cid:129)stock market price and volume fluctuations of comparable companies and, in particular, thosethat operate in the software and information technology industries;(cid:129)announcements by us or our competitors of new product or service offerings, significantacquisitions, strategic partnerships or divestitures;(cid:129)announcements of investigations or regulatory scrutiny of our operations or lawsuits filed againstus;(cid:129)capital commitments;(cid:129)investors’ general perception of our company and our business;(cid:129)actions instituted by activist shareholders or others;(cid:129)lawsuits threatened or filed against us;(cid:129)recruitment or departure of key personnel; and(cid:129)sales of our common stock, including sales by our directors and officers or specific stockholders.Activist shareholders who disagree with the composition of our board of directors, our strategy orthe way the we are managed may seek to effect change through various strategies that range fromprivate engagement to publicity campaigns, proxy contests, efforts to force transactions not supportedby our board of directors and litigation. Responding to these actions may be costly andtime-consuming, disrupt our operations, divert the attention of our board of directors, management andemployees and interfere with the execution of our strategic plan. A contested election could alsorequire us to incur substantial legal and public relations fees and proxy solicitation expenses. Theperceived uncertainty as to our future direction resulting from activist strategies could also affect themarket price and volatility of our common stock.43As described in Part I, Item 3 of this Annual Report on Form 10-K, certain stockholders haveinitiated class action lawsuits against us. Our defense against this litigation will cause us to incuradditional expenses and could divert management’s attention and resources from our business.If equity research analysts do not continue to publish research or reports, or publish unfavorable research orreports, about us, our business or our market, our stock price and trading volume could decline.The trading market for our common stock will be influenced by the research and reports thatequity research analysts publish about us and our business. Equity research analysts may elect not toinitiate or to continue to provide research coverage of our common stock, and such lack of researchcoverage may adversely affect the market price of our common stock. Even if we do have equityresearch analyst coverage, we will not have any control over the analysts or the content and opinionsincluded in their reports. The price of our stock could decline if one or more equity research analystsdowngrade our stock or issue other unfavorable commentary or research. If one or more equityresearch analysts ceases coverage of our company or fails to publish reports on us regularly, demandfor our stock could decrease, which in turn could cause our stock price or trading volume to decline. Inaddition, if our operating results fail to meet the forecasts of analysts, our stock price would likelydecline.Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts byour stockholders to change our management and hinder efforts to acquire a controlling interest in us, and themarket price of our common stock may be lower as a result.Provisions in our amended and restated certificate of incorporation and amended and restatedbylaws may make it difficult for a third party to acquire, or attempt to acquire, control of our company,even if a change in control is considered favorable by you and other stockholders. For example, ourboard of directors has the authority to issue up to 5,000,000 shares of preferred stock. The board ofdirectors can fix the price, rights, preferences, privileges, and restrictions of the preferred stock withoutany further vote or action by our stockholders. An issuance of shares of preferred stock may result inthe loss of voting control to other stockholders, which could delay or prevent a change in controltransaction. As a result, the market price of our common stock and the voting and other rights of ourstockholders may be adversely affected.Our charter documents also contain other provisions that could have an anti-takeover effect,including:(cid:129)only one of our three classes of directors is elected each year;(cid:129)stockholders are not entitled to remove directors other than by a 662⁄3% vote and only for cause;(cid:129)stockholders are not permitted to take actions by written consent;(cid:129)stockholders are not permitted to call a special meeting of stockholders;(cid:129)our board of directors is allowed to adopt, amend or repeal our bylaws; and(cid:129)stockholders are required to give us advance notice of their intention to nominate directors orsubmit proposals for consideration at stockholder meetings.In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware GeneralCorporation Law, which regulates corporate acquisitions by prohibiting Delaware corporations fromengaging in specified business combinations with particular stockholders of those companies. Theseprovisions could discourage potential acquisition proposals and could delay or prevent a change incontrol transaction. They could also have the effect of discouraging others from making tender offersfor our common stock, including transactions that may be in your best interests. These provisions may44 also prevent changes in our management or limit the price that investors are willing to pay for ourstock.Concentration of ownership of our common stock among our existing executive officers, directors and largestockholders may prevent smaller stockholders from influencing significant corporate decisions.Our executive officers, directors and current beneficial owners of 5% or more of our commonstock and their respective affiliates, in the aggregate, beneficially own a substantial percentage of ouroutstanding common stock. These persons, acting together, are able to significantly influence allmatters requiring stockholder approval, including the election and removal of directors, any merger,consolidation, sale of all or substantially all of our assets, or other significant corporate transaction. Theinterests of this group of stockholders may not coincide with our interests or the interests of otherstockholders.If we fail to maintain proper and effective internal controls, our ability to produce accurate financialstatements on a timely basis could be impaired.We are subject to the reporting requirements of the Securities Exchange Act of 1934, theSarbanes-Oxley Act and the rules and regulations of the Nasdaq Global Select Market. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and proceduresand internal control over financial reporting. We are required to perform system and process evaluationand testing of our internal control over financial reporting to allow management to report on theeffectiveness of our internal control over financial reporting in our Form 10-K filing for that year, asrequired by Section 404 of the Sarbanes-Oxley Act. This may require us to incur substantial additionalprofessional fees and internal costs to further expand our accounting and finance functions and expendsignificant management efforts.We may in the future discover material weaknesses in our system of internal financial andaccounting controls and procedures that could result in a material misstatement of our financialstatements. In addition, our internal control over financial reporting will not prevent or detect all errorsand all fraud. A control system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives will be met. Because of theinherent limitations in all control systems, no evaluation of controls can provide absolute assurance thatmisstatements due to errors or fraud will not occur or that all control issues and instances of fraud willbe detected.If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in atimely manner, or if we are unable to maintain proper and effective internal controls, we may not beable to produce timely and accurate financial statements. If that were to happen, the market price ofour stock could decline and we could be subject to sanctions or investigations by the stock exchange onwhich our common stock is listed, the Securities and Exchange Commission, or SEC, or otherregulatory authorities.Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future,capital appreciation, if any, will be your sole source of gains and you may never receive a return on yourinvestment.You should not rely on an investment in our common stock to provide dividend income. We havenot declared or paid cash dividends on our common stock to date. We currently intend to retain ourfuture earnings, if any, to fund the development and growth of our business. In addition, the terms ofour existing credit facility preclude, and the terms of any future debt agreements are likely to similarlypreclude, us from paying dividends. As a result, capital appreciation, if any, of our common stock will45be your sole source of gain for the foreseeable future. Investors seeking cash dividends should notpurchase our common stock.Item 1B.Unresolved Staff CommentsNone.Item 2.PropertiesOur headquarters are located in Lanham, Maryland, where we occupy approximately 281,000square feet under a lease that expires in 2028. Our other material properties are 121,000 square feet ofleased office space in Denver, Colorado, 59,000 square feet of leased office space in Brooklyn, NewYork and 98,000 square feet of leased office space in Cape Town, South Africa. All of our materialproperties are used to support both of our business segments.We intend to adjust our facility occupancy commensurate with our employee base and believe thatwe will be able to do so on commercially reasonable terms.Item 3.Legal ProceedingsWe are involved in various claims and legal proceedings arising in the ordinary course of business.We accrue a liability when a loss is considered probable and the amount can be reasonably estimated.See ‘‘Note 7. Commitments and Contingencies—Legal Contingencies’’ to our financial statementsincluded elsewhere in this Annual Report on Form 10-K. While we do not expect that the ultimateresolution of any existing claims and proceedings (other than the specific matter described below, ifdecided adversely), individually or in the aggregate, will have a material adverse effect on our financialposition, an unfavorable outcome in some or all of these proceedings could have a material adverseimpact on the results of operations or cash flows for a particular period. This assessment is based onour current understanding of relevant facts and circumstances. As such, our view of these matters issubject to inherent uncertainties and may change in the future.In re 2U, Inc., Securities Class ActionOn August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaintsagainst us, Christopher J. Paucek, our CEO, and Catherine A. Graham, our former CFO, in the UnitedStates District Court for the Southern District of New York. The district court consolidated the twoactions on August 27, 2019, under the caption In re 2U, Inc., Securities Class Action, No. 1:19-cv-7390(S.D.N.Y.). On November 26, 2019, the court transferred the case to the United States District Courtfor the District of Maryland, and the docket number is now 8:19-cv-345. The complaints allegeviolations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, and SEC Rule 10b-5promulgated thereunder, based upon allegedly false and misleading statements regarding our company’sbusiness prospects and financial projections. The proposed class consists of all persons who acquiredour company’s securities between February 26, 2018 and July 30, 2019.We believe that the claims are without merit and we intend to vigorously defend against theseclaims. However, due to the complex nature of the legal and factual issues involved, the outcome ofthis matter is not presently determinable.Item 4.Mine Safety DisclosuresNone.46 17MAR202005103508PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity SecuritiesOur common stock has been listed on the Nasdaq Global Select Market since March 28, 2014,under the symbol ‘‘TWOU.’’As of February 24, 2020, there were 81 registered stockholders of record for our common stock.The actual number of stockholders is greater than this number of record holders and includesstockholders who are beneficial owners but whose shares are held in street name by brokers and othernominees. This number of holders of record also does not include stockholders whose shares may beheld in trust by other entities.Stock Performance GraphThe graph set forth below compares the cumulative total stockholder return on our common stockwith that of the Nasdaq Composite Index, the Russell 3000 Index and the S&P North AmericanTechnology Software Index for the five years ended December 31, 2019. The graph assumes that $100was invested at the close of market on the last trading day of the fiscal year ended December 31, 2014in the common stock of 2U, Inc., the Nasdaq Composite Index, the Russell 3000 Index and the S&PNorth American Technology Software Index. We have not paid any cash dividends and, therefore, thecumulative total return calculation on our common stock is based solely upon our stock priceappreciation or depreciation and does not include any reinvestment of cash dividends. The data for theNasdaq Composite Index, the Russell 3000 Index and the S&P North American Technology SoftwareIndex assumes reinvestments of gross dividends. The comparisons shown in the graph below are basedupon historical data, and are not necessarily indicative of, nor intended to forecast, the potential futurestock performance of our common stock.Comparison of Cumulative Total ReturnThrough December 31, 2019Assumes Initial Investment of $10047The information presented above in the stock performance graph shall not be deemed to be‘‘soliciting material’’ or to be ‘‘filed’’ with the SEC or subject to Regulation 14A or 14C, except to theextent that we subsequently specifically request that such information be treated as soliciting materialor specifically incorporate it by reference into a filing under the Securities Act of 1933, as amended, ora filing under the Securities Exchange Act of 1934, as amended.Item 6.Selected Financial DataThe following selected consolidated statements of operations data for the years endedDecember 31, 2019, 2018 and 2017, and the selected consolidated balance sheets data as ofDecember 31, 2019 and 2018 are derived from our audited consolidated financial statements in‘‘Financial Statements and Supplementary Data’’ included in Part II, Item 8 of this Annual Report onForm 10-K. The selected consolidated statements of operations data for the years ended December 31,2016 and 2015, and the selected consolidated balance sheets data as of December 31, 2017, 2016 and2015 are derived from our audited consolidated financial statements that are not included in thisAnnual Report on Form 10-K, except as otherwise noted. Our historical results are not necessarilyindicative of the results to be expected in the future. The selected consolidated financial data should beread together with Item 7 ‘‘Management’s Discussion and Analysis of Financial Condition and Resultsof Operations’’ and in conjunction with the consolidated financial statements, related notes, and otherfinancial information included elsewhere in this Annual Report on Form 10-K.Year Ended December 31,20192018201720162015(in thousands, except share and per share amounts)Consolidated Statements ofOperations Data:Revenue.....................$574,671$411,769$286,752$205,864$150,194Costs and expensesCurriculum and teaching.......63,27023,2906,609——Servicing and support.........98,89067,20350,76740,98232,047Technology and contentdevelopment..............115,47363,81245,92633,28327,211Marketing and sales..........342,395221,015150,923106,61082,911General and administrative.....131,02082,98962,66546,02134,123Impairment charge...........70,379————Total costs and expenses.....821,427458,309316,890226,896176,292Loss from operations...........(246,756)(46,540)(30,138)(21,032)(26,098)Interest income..............5,8005,173371383167Interest expense.............(13,419)(108)(87)(35)(552)Other expense, net...........(707)(1,722)(866)—(250)Loss before income taxes........(255,082)(43,197)(30,720)(20,684)(26,733)Income tax benefit.............19,8604,8671,297——Net loss.....................$(235,222)$(38,330)$(29,423)$(20,684)$(26,733)Net loss per share, basic anddiluted....................$(3.83)$(0.69)$(0.60)$(0.44)$(0.63)Weighted-average common sharesoutstanding used in computingnet loss per share, basic anddiluted....................61,393,66655,833,49249,062,61146,609,75142,420,35648 As of December 31,20192018201720162015(in thousands)Consolidated Balance Sheets Data:Cash and cash equivalents..............$170,593$449,772$223,370$168,730$183,729Working capital*.....................104,994453,200190,053143,629160,310Goodwill and amortizable intangible assets,net.............................751,425198,457162,74934,13125,024Total assets.........................1,186,830807,354482,062244,320231,041Total liabilities.......................475,580102,34594,23049,08335,252Additional paid-in capital...............1,197,379957,631588,289371,455351,324Total stockholders’ equity...............$711,250$705,009$387,832$195,237$195,789*We define working capital as current assets minus current liabilities.Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion and analysis of our financial condition and results ofoperations in conjunction with our consolidated financial statements and the related notes and otherfinancial information included elsewhere in this Annual Report on Form 10-K. Some of the informationcontained in this discussion and analysis or set forth elsewhere in this report, including information withrespect to our plans and strategy for our business, includes forward-looking statements that involve risks anduncertainties. You should review ‘‘Special Note Regarding Forward-Looking Statements’’ and Item 1A ‘‘RiskFactors’’ in this report for a discussion of important factors that could cause actual results to differmaterially from the results described in or implied by the forward-looking statements contained in thefollowing discussion and analysis.This section of this Form 10-K does not address certain items regarding the year ended December 31,2017. For a discussion of our results of operations and liquidity and capital resources for the year endedDecember 31, 2017, including a year-over-year comparison between the years ended December 31, 2018 and2017, refer to ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.OverviewWe are a leading provider of education technology for nonprofit colleges and universities. Webuild, deliver, and support more than 400 digital and in-person educational offerings, includinggraduate degrees, undergraduate degrees, professional certificates, boot camps, and short courses,across the career curriculum continuum. Together with our university clients, we have positivelytransformed the lives of more than 200,000 students.Our comprehensive platform of tightly integrated technology and services provides the digitalinfrastructure that universities need to attract, enroll, educate and support students at scale. With ourplatform, students can pursue their education anytime, anywhere, without quitting their jobs or moving;and university clients can provide broader access to their educational offerings, thereby improvingoutcomes, skills attainment and career prospects for a greater number of students.We have two reportable segments: the Graduate Program Segment and the Alternative CredentialSegment.(cid:129)In our Graduate Program Segment, we provide the technology and services to nonprofit collegesand universities to enable the online delivery of degree programs. Students enrolled in theseprograms are generally seeking an undergraduate or graduate degree of the same quality theywould receive on campus.49(cid:129)In our Alternative Credential Segment, we provide premium online short courses and technical,skills-based boot camps through relationships with nonprofit colleges and universities. Studentsenrolled in these offerings are generally working professionals seeking career advancementthrough skills attainment.Certain Trends and UncertaintiesThe following represents a summary of certain trends and uncertainties, which could have asignificant impact on our financial condition and results of operations. This summary is not intended tobe a complete list of potential trends and uncertainties and should be considered along with the factorsidentified in the section titled ‘‘Risk Factors’’ of this Annual Report on Form 10-K and elsewhere inthis report.(cid:129)The risk of a data security breach or service disruption has increased as the frequency, intensityand sophistication of attempted attacks and intrusions from around the world have increased.While we make significant efforts to maintain the security and integrity of our services andcomputer systems, our cybersecurity measures and the cybersecurity measures taken by ourthird-party data center facilities may be unable to anticipate, detect or prevent all attempts tocompromise our systems.(cid:129)We and our university clients are subject to certain education regulations, such as the HEA,which are frequently revised, repealed or expanded. The re-authorization of the HEA iscurrently in process and the outcome could alter the regulatory landscape of the highereducation industry, and thereby impact the manner in which we conduct business and serve ouruniversity clients.(cid:129)Our university clients have regular turnover in leadership positions. These changes can have apositive or negative impact on our business. If new leaders do not support online delivery ofeducational offerings, we may not be able to add additional offerings with the university client orthe university client may not renew their relationship with us. New leaders may also makechanges in university policies, which could result in changes to admissions standards orapplication of admissions standards and negatively impact student enrollment in a universityclient’s 2U-powered degree programs.Our Business Model and Components of Operating ResultsThe key elements of our business model and components of our operating results are describedbelow.Revenue DriversIn our Graduate Program Segment, we derive substantially all of our revenue from revenue-sharearrangements with our university clients under which we receive a contractually specified percentage ofthe amounts students pay them to enroll in degree programs. In our Alternative Credential Segment,we derive substantially all of our revenue from tuition and fees that students pay to take our shortcourses and boot camps. Accordingly, the primary driver of our revenue growth is the number ofstudent enrollments in the offerings we enable. This in turn is influenced primarily by three factors:(cid:129)our ability to increase the number of degree programs and other offerings, either by adding newuniversity clients or by expanding the number of offerings we provide with current universityclients;(cid:129)our ability to identify and attract prospective students to our degree programs and otherofferings; and(cid:129)our ability, and that of our university clients, to retain students.50 Marketing and Sales ExpenseOur most significant expense relates to marketing and sales activities to attract students to ourofferings across both of our segments. This includes the cost of Search Engine Optimization, SearchEngine Marketing and Social Media Optimization, as well as personnel and personnel-related expensefor our marketing and recruiting teams.Graduate Program SegmentOur marketing and sales expense in any period generates student enrollments eight months later,on average. We then generate revenue as students progress through their programs, which generallyoccurs over a two-year period following initial enrollment. Accordingly, our marketing and salesexpense in any period is an investment to generate revenue in future periods. Therefore, we do notbelieve it is meaningful to directly compare current period revenue to current period marketing andsales expense. Further, we believe that our marketing and sales expense in future periods will generallydecline as a percentage of the revenue reported in those same periods as our revenue base fromreturning students in existing programs increases.Alternative Credential SegmentOur marketing and sales expense in any period generates student enrollments as much as 24 weekslater, on average. We then generate revenue as students progress through their courses, which typicallyoccurs over a two to six month period following initial enrollment.Other Operating ExpenseOur other operating expense consist of the following:Curriculum and teaching.Curriculum and teaching expense consists primarily of amounts due touniversities for licenses to use their brand names and other trademarks in connection with our shortcourse and boot camp offerings. The payments are based on contractually specified percentages of thetuition and fees we receive from students in those offerings. Curriculum and teaching expense alsoincludes personnel and personnel-related expense for our short course and boot camp instructionalstaff.Servicing and support.Servicing and support expense consists primarily of personnel andpersonnel-related expense associated with the management and operations of our educational offerings,as well as supporting students and faculty members. Servicing and support expense also includes coststo support our platform, facilitate in-program field placements and student immersions, and assist withcompliance requirements.Technology and content development.Technology and content development expense consistsprimarily of personnel and personnel-related expense associated with the ongoing improvement andmaintenance of our platform, as well as hosting and licensing costs. Technology and content expensealso includes the amortization of capitalized technology and content.General and administrative.General and administrative expense consists primarily of personneland personnel-related expense for our corporate departments, including executive management, legal,finance, human resources, and other departments that do not provide direct operational services.General and administrative expense also includes professional fees and other corporate expense.Net Interest Income (Expense)Net interest income (expense) consists primarily of interest expense from our long-term debt andinterest income from our cash and cash equivalents. Interest expense also includes the amortization ofdebt issuance costs.51Other Expense, NetOther expense, net primarily consists of foreign currency gains and losses.Income TaxesOur income tax provisions for all periods consist of U.S. federal, state and foreign income taxes.Our effective tax rate for the period is based on a mix of higher-taxed and lower-taxed jurisdictions.Due to our current and accumulated net operating losses, we have not been required to pay U.S.federal income taxes to date.Results of OperationsConsolidated Operating ResultsComparison of Years Ended December 31, 2019 and 2018The following table sets forth selected consolidated statement of operations data for each of theperiods indicated.Year Ended December 31,20192018Period-to-Period ChangePercentage ofPercentage ofAmountRevenueAmountRevenueAmountPercentage(dollars in thousands)Revenue...................$574,671100.0%$411,769100.0%$162,90239.6%Costs and expensesCurriculum and teaching.....63,27011.023,2905.739,980171.7Servicing and support.......98,89017.267,20316.331,68747.2Technology and contentdevelopment............115,47320.163,81215.551,66181.0Marketing and sales.........342,39559.6221,01553.7121,38054.9General and administrative...131,02022.882,98920.248,03157.9Impairment charge.........70,37912.2——70,379*Total costs and expenses....821,427142.9458,309111.4363,11879.2Loss from operations.........(246,756)(42.9)(46,540)(11.4)(200,216)430.2Interest income............5,8001.05,1731.362712.1Interest expense...........(13,419)(2.3)(108)—(13,311)*Other expense, net.........(707)(0.1)(1,722)(0.4)1,015(58.9)Loss before income taxes.......(255,082)(44.3)(43,197)(10.5)(211,885)490.5Income tax benefit...........19,8603.54,8671.214,993308.1Net loss...................$(235,222)(40.8)%$(38,330)(9.3)%$(196,892)513.7%*Not meaningful for comparative purposes.Revenue.Revenue for the year increased $162.9 million, or 39.6%, to $574.7 million as comparedto $411.8 million in 2018. This increase in revenue was driven by a 19.8% increase in GraduateProgram Segment revenue to $417.2 million as compared to $348.4 million in 2018 and a 148.3%increase in Alternative Credential Segment revenue to $157.5 million as compared to $63.4 million in2018. The increase in revenue from the Alternative Credential Segment includes incremental revenueof $74.3 million from Trilogy, which we acquired in May 2019.52 Revenue from our Graduate Program Segment increased $68.8 million, or 19.8%, primarily due togrowth in full course equivalent enrollments of 33,628, or 26.3%.Revenue from our Alternative Credential Segment increased $94.1 million, or 148.3%, primarilydue to growth in full course equivalent enrollments of 18,956, or 58.9%, as well as an increase in theaverage revenue per full course equivalent enrollment, from $1,969 to $3,296. These increases wereprimarily due to the addition of incremental full course equivalent enrollments from Trilogy.Curriculum and Teaching.Curriculum and teaching expense increased $40.0 million, or 171.7%, to$63.3 million as compared to $23.3 million in 2018. This increase was primarily due to the addition ofincremental curriculum and teaching expense from Trilogy and an increase in short course enrollmentin our Alternative Credential Segment.Servicing and Support.Servicing and support expense increased $31.7 million, or 47.2%, to$98.9 million as compared to $67.2 million in 2018. This increase was primarily due to a $27.7 millionincrease in personnel and personnel-related expense to serve a greater number of students and facultyin existing and new offerings, including the incremental addition of Trilogy boot camps. The remaining$4.0 million of the increase was primarily due to travel, rent and other servicing and support expense.Technology and Content Development.Technology and content development expense increased$51.7 million, or 81.0%, to $115.5 million as compared to $63.8 million in 2018. This increase was duein part to a $29.3 million increase in amortization expense and a $14.4 million increase in personneland personnel-related expense (net of amounts capitalized for technology and content development),including the addition of incremental technology and content development expense from Trilogy. Inaddition, $6.5 million of the increase was due to non-capitalized curriculum expense and hosting andlicensing expense to support the launch of new programs, including the incremental addition of Trilogyboot camps. The remaining $1.5 million of the increase was primarily due to costs to support andmaintain our internal software applications.Marketing and Sales.Marketing and sales expense increased $121.4 million, or 54.9%, to$342.4 million as compared to $221.0 million in 2018. This increase was primarily due to a $72.7 millionincrease in marketing and sales expense to attract prospective students to new and existing offerings,including the addition of incremental marketing and sales expense from Trilogy. In addition,$34.1 million of the increase was due to personnel and personnel-related expense, primarily related tothe addition of incremental personnel and personnel-related expense from Trilogy. Amortization andmarketing infrastructure expense increased $10.8 million to support an increased number of offerings,including the incremental addition of Trilogy boot camps. The remaining $3.8 million related to othermarketing and sales expense.General and Administrative.General and administrative expense increased $48.0 million, or57.9%, to $131.0 million as compared to $83.0 million in 2018. This increase was primarily due to an$18.7 million increase in personnel and personnel-related expense, including the addition ofincremental personnel and personnel-related expense from Trilogy. In addition, $10.8 million of theincrease was due to a restructuring-related charge associated with our September 2019 organizationalrestructuring. There was no corresponding restructuring-related charge in 2018. Lastly, $9.1 million ofthis increase was attributable to one-time transaction and integration-related expense from ouracquisition of Trilogy and other expense related to shareholder activism.Impairment charge.For the year ended December 31, 2019, we recorded an impairment charge of$70.4 million. Refer to Note 5 in the ‘‘Notes to Consolidated Financial Statements’’ included in Part II,Item 8 of this Annual Report on Form 10-K for more information regarding this impairment charge.53Net Interest Income (Expense).Net interest income (expense) was $(7.6) million and $5.1 millionfor the years ended December 31, 2019 and 2018, respectively. This change was primarily due tointerest expense of $13.2 million related to our Term Loan.Other Expense, Net.Other expense, net was $0.7 million and $1.7 million for the years endedDecember 31, 2019 and 2018, respectively. This decrease was primarily due to fluctuations in foreigncurrency rates impacting our operations in the Alternative Credential Segment.Income Tax Benefit.For the year ended December 31, 2019, we recognized a tax benefit of$19.9 million, and our effective tax rate was approximately 8%. This tax benefit was primarily due to adiscrete tax benefit of approximately $17.5 million related to the acquisition of Trilogy. The acquisitionof Trilogy triggered a release of our tax valuation allowance as a result of recognizing an additional netdeferred tax liability. The remaining tax benefit of $2.4 million was due to net operating loss and thereversal of taxable temporary differences of the acquired intangibles in our Alternative CredentialSegment. We expect to continue to recognize a tax benefit for our Alternative Credential Segment tothe extent that this segment continues to generate pre-tax losses while carrying a net deferred taxliability. To date, we have not been required to pay U.S. federal income taxes because of our currentand accumulated net operating losses.Business Segment Operating ResultsWe define segment profitability as net income or net loss, as applicable, before net interest income(expense), taxes, depreciation and amortization expense, foreign currency gains or losses, deferredrevenue fair value adjustments, transaction costs, integration costs, restructuring-related costs,shareholder activism costs, impairment charges, and stock-based compensation expense. Some or all ofthese items may not be applicable in any given reporting period.The following table reconciles net loss to total segment profitability:Year EndedDecember 31,20192018(in thousands)Net loss........................................$(235,222)$(38,330)Adjustments:Interest income.................................(5,800)(5,173)Interest expense................................13,419108Foreign currency loss............................7071,722Income tax benefit..............................(19,860)(4,867)Depreciation and amortization expense...............69,84332,785Deferred revenue fair value adjustment...............11,175—Transaction costs................................4,786—Integration costs................................3,255—Restructuring-related costs........................10,826—Shareholder activism costs.........................1,042—Impairment charge..............................70,379—Stock-based compensation expense..................51,50431,410Total adjustments.............................211,27655,985Total segment profitability..........................$(23,946)$17,65554 Years Ended December 31, 2019 and 2018Revenue by segment and segment profitability for the years ended December 31, 2019 and 2018were as follows:Year EndedDecember 31,Period-to-Period Change20192018AmountPercentage(dollars in thousands)Revenue by segment*Graduate Program Segment.........$417,206$348,361$68,84519.8%Alternative Credential Segment......157,46563,40894,057148.3Total revenue..................$574,671$411,769$162,90239.6%Segment profitabilityGraduate Program Segment.........$5,770$16,839$(11,069)(65.7)%Alternative Credential Segment......(29,716)816(30,532)**Total segment profitability.........$(23,946)$17,655$(41,601)(235.6)%*Immaterial amounts of intersegment revenue have been excluded from the above resultsfor the years ended December 31, 2019 and 2018.**Not meaningful for comparative purposes.Graduate Program Segment profitability decreased $11.1 million, or 66%, to $5.8 million ascompared to $16.8 million in 2018. This decrease was primarily due to an increase in marketing andsales expense incurred to support the launch of new degree programs.Alternative Credential Segment profitability decreased $30.5 million to $(29.7) million as comparedto $0.8 million in 2018. This decrease was primarily due to the addition of Trilogy’s results ofoperations since the acquisition date.Key Business and Financial Performance MetricsWe use a number of key metrics to evaluate our business, measure our performance, identifytrends affecting our business, formulate financial projections and make strategic decisions. In additionto adjusted EBITDA (loss), which we discuss below, and revenue and the components of loss fromoperations in the section above entitled ‘‘Our Business Model and Components of Operating Results,’’we utilize full course equivalent enrollments as a key metric to evaluate the success of our business.Full Course Equivalent EnrollmentsWe measure full course equivalent enrollments for each of the courses offered during a particularperiod by taking the number of students enrolled in that course and multiplying it by the percentage ofthe course completed during that period. We add the full course equivalent enrollments for each coursewithin each segment to calculate the total full course equivalent enrollments per segment. This metricallows us to consistently view period over period changes in enrollments by accounting for the fact thatmany courses we enable straddle multiple fiscal quarters. For example, if a course had 25 enrolledstudents and 40% of the course was completed during a particular period, we would count the courseas having 10 full course equivalent enrollments for that period. Any individual student may be enrolledin more than one course during a period.Average revenue per full course equivalent enrollment represents our weighted-average revenueper course across the mix of courses being offered during a period in each of our operating segments.55This number is derived by dividing the total revenue for a period for each of our operating segments bythe number of full course equivalent enrollments within the applicable segment during that sameperiod. This amount may vary from period to period depending on the academic calendars of ouruniversity clients, the relative growth rates of our degree programs, short courses, and boot camps, asapplicable, and varying tuition levels, among other factors.The following table sets forth the full course equivalent enrollments and average revenue per fullcourse equivalent enrollment in our Graduate Program Segment and Alternative Credential Segmentfor the periods presented.Year Ended December 31,20192018Graduate Program SegmentFull course equivalent enrollments..................161,306127,678Average revenue per full course equivalent enrollment...$2,586$2,728Alternative Credential Segment*Full course equivalent enrollments..................51,15832,202Average revenue per full course equivalent enrollment...$3,296**$1,969*Trilogy’s results of operations are included in our results of operations since theacquisition date.**The calculation of the Alternative Credential Segment’s average revenue per full courseequivalent enrollment includes $11.2 million of revenue that was excluded from theresults of operations in the year ended December 31, 2019, due to a deferred revenue fairvalue purchase accounting adjustment recorded in connection with the acquisition ofTrilogy.Of the increase in full course equivalent enrollments in our Graduate Program Segment for theyears ended December 31, 2019 and 2018, 4,354 or 12.9% and 7,899 or 27.5%, respectively, wereattributable to degree programs launched during the preceding 12 months. Of the increase in fullcourse equivalent enrollments in our Alternative Credential Segment for the years ended December 31,2019 and 2018, 7,106 or 37.5% and 7,266 or 34.0%, respectively, were attributable to short courseslaunched during the preceding 12 months.Adjusted EBITDA (Loss)We define adjusted EBITDA (loss) as net income or net loss, as applicable, before net interestincome (expense), taxes, depreciation and amortization expense, foreign currency gains or losses,deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs,shareholder activism costs, impairment charges, and stock-based compensation expense.In 2019, we revised our definition of adjusted EBTIDA (loss) to exclude the impact of(i) transaction costs, deferred revenue fair value adjustments, integration and restructuring-related costsand impairment charges, in each case, in connection with the acquisition of Trilogy and (ii) shareholderactivism costs. We believe these changes are meaningful to investors because we did not have thesecosts in prior periods, and as a result, excluding the impact of such costs in 2019 facilitates aperiod-to-period comparison of our business. The revision to the definition of adjusted EBITDA (loss)had no material impact on our reported adjusted EBITDA (loss) for the years ended December 31,2018.Adjusted EBITDA (loss) is a key measure used by our management and board of directors tounderstand and evaluate our operating performance and trends, to develop short- and long-termoperational plans and to compare our performance against that of other peer companies using similar56 measures. In particular, the exclusion of certain expenses in calculating adjusted EBITDA (loss) canprovide a useful measure for period-to-period comparisons of our business. Accordingly, we believe thatadjusted EBITDA (loss) provides useful information to investors and others in understanding andevaluating our operating results in the same manner as our management and board of directors.Adjusted EBITDA (loss) is not a measure calculated in accordance with U.S. GAAP, and shouldnot be considered as an alternative to any measure of financial performance calculated and presentedin accordance with U.S. GAAP. Our use of adjusted EBITDA (loss) has limitations as an analyticaltool, and you should not consider it in isolation or as a substitute for analysis of our financial results asreported under U.S. GAAP. Some of these are:(cid:129)although depreciation and amortization expense are non-cash charges, the assets beingdepreciated and amortized may have to be replaced in the future, and adjusted EBITDA (loss)does not reflect cash capital expenditure requirements for such replacements or for new capitalexpenditure requirements;(cid:129)adjusted EBITDA (loss) does not reflect changes in, or cash requirements for, our workingcapital needs;(cid:129)adjusted EBITDA (loss) does not reflect the impact of changes in foreign currency exchangerates;(cid:129)adjusted EBITDA (loss) does not reflect acquisition related gains or losses such as, but notlimited to, post-acquisition changes in the value of contingent consideration reflected inoperations;(cid:129)adjusted EBITDA (loss) does not reflect transaction costs, integration costs, restructuring-relatedcosts, impairment charges, or shareholder activism costs;(cid:129)adjusted EBITDA (loss) does not reflect the impact of deferred revenue fair value adjustments;(cid:129)adjusted EBITDA (loss) does not reflect the potentially dilutive impact of equity-basedcompensation;(cid:129)adjusted EBITDA (loss) does not reflect interest or tax payments that may represent a reductionin cash available to us; and(cid:129)other companies, including companies in our industry, may calculate adjusted EBITDA (loss)differently, which reduces its usefulness as a comparative measure.Because of these and other limitations, you should consider adjusted EBITDA (loss) alongsideother U.S. GAAP-based financial performance measures, including various cash flow metrics, net57income (loss) and our other U.S. GAAP results. The following table presents a reconciliation of netloss to adjusted EBITDA (loss) for each of the periods indicated:Year EndedDecember 31,20192018(in thousands)Net loss........................................$(235,222)$(38,330)Adjustments:Interest income.................................(5,800)(5,173)Interest expense................................13,419108Foreign currency loss............................7071,722Income tax benefit..............................(19,860)(4,867)Depreciation and amortization expense...............69,84332,785Deferred revenue fair value adjustment...............11,175—Transaction costs................................4,786—Integration costs................................3,255—Restructuring-related costs........................10,826—Shareholder activism costs.........................1,042—Impairment charge..............................70,379—Stock-based compensation expense..................51,50431,410Total adjustments.............................211,27655,985Adjusted EBITDA (loss)...........................$(23,946)$17,655Liquidity and Capital ResourcesAs of December 31, 2019, our principal sources of liquidity were cash and cash equivalents totaling$170.6 million, which were held for working capital and general corporate purposes.On May 22, 2019, we entered into a credit agreement with Owl Rock Capital Corporation, asadministrative agent and collateral agent, for a $250 million senior secured Term Loan, which matureson May 22, 2024 (refer to Note 9 of the notes to our consolidated financial statements for moreinformation).To date, we have financed our operations primarily through payments from university clients andstudents for our technology and services, the Term Loan, and public and private equity financings. Webelieve that our existing cash and cash equivalents, together with cash generated from operations, willbe sufficient to meet our working capital and capital expenditure requirements for the next 12 months.Capital asset additions during the year ended December 31, 2019 were $81.4 million, primarily dueto $66.2 million of capitalized technology and content development, $8.1 million of leaseholdimprovements, $3.7 million of furniture and equipment and $2.9 million of other property andequipment. The $81.4 million of capital asset additions consisted of $78.3 million in cash capitalexpenditures and $3.1 million of non-cash capital expenditures, primarily related to the acquisition ofcertain long-lived assets for which we have an accrued liability. Due to extended payment termsassociated with the timing of cash capital expenditures made more than 90 days after the date ofpurchase, an additional $2.2 million was classified as cash flows from financing activities in theconsolidated statement of cash flows for the year ended December 31, 2019. In 2020, we expect newcapital asset additions of approximately $93 to $97 million, of which approximately $2.5 to $4.5 millionwill be funded from landlord leasehold improvement allowances.58 Sources and Uses of CashOperating ActivitiesCash flows from operating activities have typically been generated from our net income (loss) andby changes in our operating assets and liabilities, particularly from accounts receivable, adjusted fornon-cash expense items such as amortization and depreciation expense and stock-based compensationexpense.Cash used in operating activities for the year ended December 31, 2019 consisted primarily of ournet loss of $235.2 million, adjusted for non-cash items including a $70.4 million impairment charge,$69.8 million of depreciation and amortization expense, $51.5 million of stock-based compensationexpense, and $11.7 million of amortization of our right-of-use assets. The net change in operating assetsand liabilities of $21.6 million was unfavorable to cash flows from operations primarily due to a$28.6 million decrease in other liabilities, net, as a result of a $17.5 million release of our tax valuationallowance and a $21.7 million increase in payments to university clients, partially offset by $22.0 millionof cumulative favorable changes in accounts receivable and deferred revenue, and a $17.1 millionincrease in accounts payable and accrued expenses due to growth in our business.Cash used in operating activities for the year ended December 31, 2018 consisted primarily of ournet loss of $38.3 million, adjusted for non-cash items including $32.8 million of depreciation andamortization expense and $31.4 million of stock-based compensation expense. The net change inoperating assets and liabilities of $29.0 million was unfavorable to cash flows from operations primarilydue to a $18.5 million increase in accounts receivable due to the delay in the fall term payments of twouniversity clients and an $11.3 million increase in payments to university clients.Investing ActivitiesCash used in investing activities for the year ended December 31, 2019 was $451.4 million,primarily consisting of $388.0 million to acquire Trilogy, net of cash acquired, $64.9 million of additionsof amortizable intangible assets, $13.4 million of purchases of property, plant and equipment, partiallyoffset by $15.0 million of proceeds from net investment activity.Cash used in investing activities for the year ended December 31, 2018 was $102.5 million,primarily consisting of $65.2 million of additions of amortizable intangible assets, $12.0 million ofpurchases of property, plant and equipment and $25.0 million related to investing activities.5913APR202013194756Opera(cid:2)ng Ac(cid:2)vi(cid:2)es, $52.0 Opera(cid:2)ng Ac(cid:2)vi(cid:2)es, $3.1 Trilogy Acquisi(cid:2)on, $388.0 Addi(cid:2)ons of Intangibles, $67.1 Addi(cid:2)ons of Intangibles, $70.1 Purchases of PPE, $13.4 Purchases of PPE, $12.0 Maturity of Investments, $25.0 Purchases of Investments, $10.0 Purchases of Investments, $25.0 Proceeds from Debt, $242.7 Common Stock Offering, $330.9 Op(cid:2)on Exercises/ESPP Purchases, $6.5 Op(cid:2)on Exercises/ESPP Purchases, $10.5 Other, $3.7 Other, $4.8 Sources of CashUses of CashSources of CashUses of Cash20192018Financing ActivitiesCash provided by financing activities for the year ended December 31, 2019 was $244.5 million,primarily consisting of $242.7 million in proceeds, net of issuance costs, from our Term Loan.Cash provided by financing activities for the year ended December 31, 2018 was $333.0 million,primarily consisting of $330.9 million in proceeds received from our public offering of common stock inMay 2018.Contractual Obligations and CommitmentsThe following table summarizes our obligations under our Term Loan, deferred government grantobligations, non-cancelable operating leases, commitments to certain of our university clients inexchange for contract extensions and various marketing and other rights, and purchase obligations as ofDecember 31, 2019. Future events could cause actual payments to differ from these amounts.Payment due by periodLess thanMore thanContractual Obligations1 year1 - 3 years3 - 5 years5 yearsTotal(in thousands)Senior secured term loan facility............$—$—$250,000$—$250,000Deferred government grant obligations.......———3,5003,500Operating lease obligations...............15,95628,97726,94745,952117,832Future minimum payments to university clients.2,6252,2501,2503,1509,275Purchase obligations....................8,4342,305——10,739Total................................$27,015$33,532$278,197$52,602$391,346Other purchase orders made in the ordinary course of business are excluded from the table above.Any amounts for which we are liable under purchase orders are reflected on our consolidated balancesheets as accounts payable and accrued liabilities.We have entered into agreements with certain of our university clients in our Graduate ProgramSegment under which we would be obligated to make future minimum payments in the event thatcertain program metrics are not achieved on an annual basis. We recognize any estimated contingentpayments under these agreements as contra revenue over the period in which they relate, and record aliability in other current liabilities on the consolidated balance sheets.See Note 7 in the ‘‘Notes to Consolidated Financial Statements’’ included in Part II, Item 8 and‘‘Legal Proceedings’’ contained in Part I, Item 3 of this Annual Report on Form 10-K for additionalinformation regarding contingencies.Off-Balance Sheet ArrangementsWe do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purposeentities or variable interest entities.Critical Accounting Policies and Significant Judgments and EstimatesThis management’s discussion and analysis of financial condition and results of operations is basedon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.The preparation of these consolidated financial statements requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assetsand liabilities at the date of the consolidated financial statements, and the reported amounts of revenue60 and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates onhistorical experience and on various other assumptions we believe to be reasonable under thecircumstances. Actual results may differ from these estimates if conditions differ from our assumptions.While our significant accounting policies are more fully described in Note 2 in the ‘‘Notes toConsolidated Financial Statements’’ included in Part II, Item 8 of this Annual Report on Form 10-K,we believe the following accounting policies are critical to the process of making significant judgmentsand estimates in preparation of our consolidated financial statements.Revenue Recognition, Accounts Receivable and Allowance for Doubtful AccountsOn January 1, 2018, we adopted Accounting Standards Update (‘‘ASU’’) No. 2014-09, Revenuefrom Contracts with Customers (Topic 606) and the related amendments using the modified retrospectivetransition method and have concluded that doing so did not have a material impact on the amount andtiming of either our revenue or costs. As part of our assessment, we completed reviews of our contractsand evaluated our costs, including costs of obtaining contracts with our university clients and costsassociated with content development. Certain of these contract and content costs are capitalized underthe new standard. The adoption of ASU 2014-09 did not have a material impact as of January 1, 2018,and no cumulative adjustment was recorded. Further, the amounts reported as of December 31, 2018on our consolidated balance sheets and our results of operations for the year ended December 31, 2018reported on our consolidated statements of operations and comprehensive loss would not have beenmaterially different than under legacy U.S. GAAP (i.e., Topic 605).We generate substantially all of our revenue from contractual arrangements, with either ouruniversity clients or students, to provide a comprehensive platform of tightly integrated technology andtechnology-enabled services that support our offerings.Performance ObligationsA performance obligation is a promise in a contract to transfer a distinct good or service to thecustomer. A contract’s transaction price is allocated to each distinct performance obligation andrecognized as revenue when, or as, the performance obligation is satisfied. The transaction price isdetermined based on the consideration to which we will be entitled in exchange for transferring servicesto the customer. To the extent the transaction price includes variable consideration, we estimate theamount of variable consideration that should be included in the transaction price utilizing the expectedvalue method. Variable consideration is included in the transaction price if, in our judgment, it isprobable that a significant future reversal of cumulative revenue under the contract will not occur. Anyestimates, including the effect of the constraint on variable consideration, are evaluated at eachreporting period, and if necessary, we adjust our estimate of the overall transaction price. Revenue isthen recognized over the remaining estimated period of performance using the cumulative catch-upmethod.Our Graduate Program Segment derives revenue primarily from contractually specified percentagesof the amounts our university clients receive from their students in 2U-enabled degree programs fortuition and fees, less credit card fees and other specified charges we have agreed to exclude in certainuniversity contracts. Our contracts with university clients in this segment typically have terms of 10 to15 years and have a single performance obligation, as the promises to provide a platform of tightlyintegrated technology and services that university clients need to attract, enroll, educate and supportstudents are not distinct within the context of the contracts. The single performance obligation isdelivered as the university clients receive and consume benefits, which occurs ratably over a series ofacademic terms. The amounts received from university clients over the term of the arrangement arevariable in nature in that they are dependent upon the number of students that are enrolled in theprogram within each academic term. These amounts are allocated to and are recognized ratably over61the related academic term, defined as the period beginning on the first day of classes through the last.Revenue is recognized net of an allowance, which is established for our expected obligation to refundtuition and fees to university clients.Our Alternative Credential Segment derives revenue primarily from contracts with students for thetuition and fees paid to enroll in, and progress through, our short courses and boot camps. Our shortcourses run between six and 16 weeks, while boot camps run between 12 and 24 weeks. In thissegment, our contracts with students include the delivery of the educational and related student supportservices and are treated as either a single performance obligation or multiple performance obligations,depending upon the offering being delivered. All performance obligations are satisfied ratably over thesame presentation period, which is defined as the period beginning on the first day of the coursethrough the last. We recognize the proceeds received, net of any applicable pricing concessions, fromthe students enrolled and share contractually specified amounts received from students with theassociated university client, in exchange for licenses to use the university brand name and otheruniversity trademarks. These amounts are recognized as curriculum and teaching costs on ourconsolidated statements of operations and comprehensive loss. Our contracts with university clients inthis segment are typically shorter and less restrictive than our contracts with university clients in ourGraduate Program Segment.We do not disclose the value of unsatisfied performance obligations for our Graduate ProgramSegment because the variable consideration is allocated entirely to a wholly unsatisfied promise totransfer a service that forms part of a single performance obligation. We do not disclose the value ofunsatisfied performance obligations for our Alternative Credential Segment because the performanceobligations are part of contracts that have original durations of less than one year.Contract Acquisition CostsWe pay commissions to certain of our employees to obtain contracts with university clients in ourGraduate Program Segment. These costs are capitalized and recorded on a contract-by-contract basisand amortized using the straight-line method over the expected life, which is generally the length of thecontract.With respect to contract acquisition costs in our Alternative Credential Segment, we have electedto apply the practical expedient in ASC Topic 606 to expense these costs as incurred, as the terms ofcontracts with students in this segment are less than one year.Payments to University ClientsPursuant to certain of our contracts in the Graduate Program Segment, we have made, or areobligated to make, payments to university clients at either execution of a contract or at the extension ofa contract in exchange for various marketing and other rights. Generally, these amounts are capitalizedand amortized as contra revenue over the life of the contract, commencing on the later of whenpayment is due or when contract revenue recognition begins.Accounts Receivable, Contract Assets and LiabilitiesBalance sheet items related to contracts consist of accounts receivable, net and deferred revenueon our consolidated balance sheets. Included in accounts receivable, net are trade accounts receivable,which are comprised of billed and unbilled revenue. Accounts receivable, net is stated at net realizablevalue, and we utilize the allowance method to provide for doubtful accounts based on management’sevaluation of the collectability of the amounts due. Our estimates are reviewed and revised periodicallybased on historical collection experience and a review of the current status of accounts receivable, net.Historically, actual write-offs for uncollectible accounts have not significantly differed from priorestimates. We recognize unbilled revenue when revenue recognition occurs in advance of billings.62 Unbilled revenue is recognized in our Graduate Program Segment because billings to university clientsdo not occur until after the academic term has commenced and final enrollment information isavailable. Unbilled accounts receivable is recognized in the Alternative Credential Segment once thepresentation period commences for amounts to be invoiced to students under installment plans that arepaid over the same presentation period. Our company’s unbilled revenue and accounts receivablerepresent contract assets.Deferred revenue represents the excess of amounts billed or received as compared to amountsrecognized in revenue on our consolidated statements of operations and comprehensive loss as of theend of the reporting period, and such amounts are reflected as a current liability on our consolidatedbalance sheets. We generally receive payments for our share of tuition and fees from degree programuniversity clients early in each academic term and from short course and boot camp students, either infull 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 theservices are delivered or until our obligations are otherwise met, at which time revenue is recognized.Long-Lived AssetsAmortizable Intangible AssetsAcquired Intangible Assets.We capitalize purchased intangible assets, such as software, websitesand domains, and amortize them on a straight-line basis over their estimated useful life. Historically,we have assessed the useful lives of these acquired intangible assets to be between three and ten years.Capitalized Technology.Capitalized technology includes certain purchased software and technologylicenses, direct third-party costs, and internal payroll and payroll-related costs used in the creation ofour internal-use software. Software development projects generally include three stages: the preliminaryproject stage (all costs are expensed as incurred), the application development stage (certain costs arecapitalized and certain costs are expensed as incurred) and the post-implementation/operation stage (allcosts are expensed as incurred). Costs capitalized in the application development stage include costs ofdesigning the application, coding, integrating our and the university’s networks and systems, and thetesting of the software. Capitalization of costs requires judgment in determining when a project hasreached the application development stage and the period over which we expect to benefit from theuse of that software. Once the software is placed in service, these costs are amortized using thestraight-line method over the estimated useful life of the software, which is generally three to fiveyears.Capitalized Content Development.We develop content for each offering on a course-by-coursebasis in collaboration with university client faculty and industry experts. Depending upon the offering,we may use materials provided by university clients and their faculty, including curricula, case studies,presentations and other reading materials. We are responsible for the creation of materials suitable fordelivery through our learning platform, including all expenses associated with this effort. With respectto the Graduate Program Segment, the development of content is part of our single performanceobligation and is considered a contract fulfillment cost.The content development costs that qualify for capitalization are third-party direct costs, such asvideography, editing and other services associated with creating digital content. Additionally, wecapitalize internal payroll and payroll-related costs incurred to create and produce videos and otherdigital content utilized in the university clients’ offerings for delivery via our online learning platform.Capitalization ends when content has been fully developed by both us and the university client, atwhich time amortization of the capitalized content development costs begins. The capitalized costs foreach offering are recorded on a course-by-course basis and included in capitalized content costs inamortizable intangible assets, net on our consolidated balance sheets. These costs are amortized usingthe straight-line method over the estimated useful life of the respective course, which is generally four63to five years. The estimated useful life corresponds with the planned curriculum refresh rate. Thisrefresh rate is consistent with expected curriculum refresh rates as cited by faculty members for similaron-campus offerings.Evaluation of Long-Lived AssetsWe review long-lived assets, which consist of property and equipment, capitalized technology costs,capitalized content development costs and acquired finite-lived intangible assets, for impairmentwhenever events or changes in circumstances indicate the carrying value of an asset may not berecoverable. In order to assess the recoverability of the capitalized technology and content developmentcosts, the costs are grouped by the lowest level of independent cash flows. Recoverability of along-lived asset is measured by a comparison of the carrying value of an asset or asset group to thefuture undiscounted net cash flows expected to be generated by that asset or asset group. If such assetsare not recoverable, the impairment to be recognized is measured by the amount by which the carryingvalue of an asset exceeds the estimated fair value (discounted cash flow) of the asset or asset group.Our impairment analysis is based upon cumulative results and forecasted performance.GoodwillGoodwill is the excess of purchase price over the fair value of identified net assets of businessesacquired. Our goodwill balance relates to the acquisitions of GetSmarter in July 2017 and Trilogy inMay 2019. We review goodwill at least annually, as of October 1. Between annual tests, goodwill isreviewed for possible impairment if an event occurs or circumstances change that would more likelythan not reduce the fair value of a reporting unit below its carrying value. We test our goodwill at thereporting unit level, which is an operating segment or one level below an operating segment. Weinitially assess qualitative factors to determine if it is necessary to perform a quantitative goodwillimpairment review. We review goodwill for impairment using a quantitative approach if we decide tobypass the qualitative assessment or determine that it is more likely than not that the fair value of areporting unit is less than its carrying value based on a qualitative assessment. Upon completion of aquantitative assessment, we may be required to recognize an impairment based on the differencebetween the carrying value and the fair value of the reporting unit.We determine the fair value of a reporting unit by utilizing a weighted combination of the income-based and market-based approaches.The income-based approach requires us to make significant assumptions and estimates. Theseassumptions and estimates primarily include, but are not limited to, the selection of appropriate peergroup companies, discount rates, terminal growth rates, and forecasts of revenue, operating income,depreciation and amortization expense, capital expenditures and future working capital requirements.When determining these assumptions and preparing these estimates, we consider each reporting unit’shistorical 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 limitedto, general economic and regulatory conditions, market capitalization, the continued efforts ofcompetitors to gain market share and prospective student enrollment patterns.In addition, the value of a reporting unit using the market-based approach is estimated bycomparing the reporting unit to other publicly-traded companies and/or to publicly-disclosed businessmergers and acquisitions in similar lines of business. The value of a reporting unit is based on pricingmultiples of certain financial parameters observed in the comparable companies. We also makeestimates and assumptions for market values to determine a reporting unit’s estimated fair value.In the third quarter of 2019, we recorded an impairment charge of $70.4 million on theconsolidated statement of operations and comprehensive loss. Other than the reporting unit impairedin the third quarter of 2019, we had no reporting units whose estimated fair value exceeded their64 carrying value by less than 10% as of October 1, 2019, the date of our annual goodwill impairmentassessment. It is possible that future changes in our circumstances, or in the variables associated withthe judgments, assumptions and estimates used in assessing the fair value of our reporting units, couldrequire us to record additional impairment charges in the future.Recent Accounting PronouncementsRefer to Note 2 in the ‘‘Notes to Consolidated Financial Statements’’ included in Part II, Item 8 ofthis Annual Report on Form 10-K for a discussion of FASB’s recent accounting pronouncements andtheir effect on us.Item 7A.Quantitative and Qualitative Disclosures About Market RiskMarket risk is the risk of loss to future earnings, values or future cash flows that may result fromchanges in the price of a financial instrument. The value of a financial instrument may change as aresult of changes in interest rates, exchange rates, commodity prices, equity prices and other marketchanges. Our exposure to market risk related to changes in foreign currency exchange rates is deemedmoderate as further described below. In addition, we do not use derivative financial instruments forspeculative, hedging or trading purposes, although in the future we may enter into exchange ratehedging arrangements to manage the risks described in the succeeding paragraphs.Interest Rate RiskWe are subject to interest rate risk in connection with borrowings under our Credit Agreementthat provides for a $250 million Term Loan that matures in May 2024. The Term Loan currently bearsinterest, at our option, at variable rates based on (i) a customary alternative base rate (with a floor of2.00%) plus an applicable margin of 5.75% or (ii) an adjusted LIBOR rate (with a floor of 1.00%) forthe interest period relevant to such borrowing plus an applicable margin of 6.75%. Increases in ourlender’s customary alternative base rate or LIBOR would increase the amount of interest payable onany borrowings outstanding under this Term Loan. As of December 31, 2019, the Term Loan had anoutstanding balance of $250 million.Foreign Currency Exchange RiskWe transact material business in foreign currencies and are exposed to risks resulting fromfluctuations in foreign currency exchange rates. Our primary exposures are related to non-U.S. dollardenominated revenue and operating expenses in South Africa and the United Kingdom. Accountsrelating to foreign operations are translated into U.S. dollars using prevailing exchange rates at therelevant period end. As a result, we would experience increased revenue and operating expenses in ournon-U.S. operations if there were a decline in the value of the U.S. dollar relative to these foreigncurrencies. Conversely, we would experience decreased revenue and operating expenses in our non-U.S.operations if there were an increase in the value of the U.S. dollar relative to these foreign currencies.Translation adjustments are included as a separate component of stockholders’ equity.For the years ended December 31, 2019 and 2018, our foreign currency translation adjustment wasa gain of $1.7 million and a loss of $13.8 million, respectively. For the years ended December 31, 2019and 2018, we recognized foreign currency exchange losses of $0.7 million and $1.7 million, respectively,included on our consolidated statements of operations and comprehensive loss.The foreign exchange rate volatility of the trailing 12 months ended December 31, 2019 was 10%and 7% for the South African rand and British pound, respectively. The foreign exchange rate volatilityof the trailing 12 months ended December 31, 2018 was 13% and 6% for the South African rand andBritish pound, respectively. A 10% fluctuation of foreign currency exchange rates would have had animmaterial effect on our results of operations and cash flows for all periods presented. The fluctuations65of currencies in which we conduct business can both increase and decrease our overall revenue andexpenses for any given fiscal period. Such volatility, even when it increases our revenue or decreasesour expense, impacts our ability to accurately predict our future results and earnings.InflationWe do not currently believe that inflation has had a material effect on our business, financialcondition or results of operations, though we continue to monitor costs we incur in higher inflationaryeconomies. Additionally, we continue to monitor all inflation-driven costs, regardless of where they areincurred. If our costs were to become subject to significant inflationary pressures, the price increasesimplemented by our university clients and our own pricing strategies might not fully offset the highercosts, which could harm our business, financial condition and results of operations.66 Item 8.Financial Statements and Supplementary Data2U, Inc.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSPAGEReports of Independent Registered Public Accounting Firm...........................68Consolidated Balance Sheets as of December 31, 2019 and 2018.......................73Consolidated Statements of Operations and Comprehensive Loss for the years endedDecember 31, 2019, 2018 and 2017...........................................74Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31,2019, 2018 and 2017......................................................75Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017.76Notes to Consolidated Financial Statements......................................7767Report of Independent Registered Public Accounting FirmTo the Stockholders and Board of Directors2U, Inc.:Opinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of 2U, Inc. and subsidiaries (theCompany) as of December 31, 2019 and 2018, the related consolidated statements of operations andcomprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement Schedule II—Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion,the consolidated financial statements present fairly, in all material respects, the financial position of theCompany as of December 31, 2019 and 2018, and the results of its operations and its cash flows foreach of the years in the three-year period ended December 31, 2019, in conformity with U.S. generallyaccepted accounting principles.We also have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States) (PCAOB), the Company’s internal control over financial reporting asof December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our reportdated February 27, 2020 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.Changes in Accounting PrinciplesAs discussed in Note 2 to the consolidated financial statements, the Company has changed itsmethod of accounting for revenue as of January 1, 2018 due to the adoption of Financial AccountingStandards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contractswith Customers.As discussed in Note 2 to the consolidated financial statements, the Company has changed itsmethod of accounting for leases as of January 1, 2019 due to the adoption of Financial AccountingStandards Board (FASB) Accounting Standards Codification (ASC) Topic 842, Leases.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits.We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud. Our auditsincluded performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to thoserisks. Such procedures included examining, on a test basis, evidence regarding the amounts anddisclosures in the consolidated financial statements. Our audits also included evaluating the accountingprinciples used and significant estimates made by management, as well as evaluating the overallpresentation of the consolidated financial statements. We believe that our audits provide a reasonablebasis for our opinion.68 Critical Audit MattersThe critical audit matters communicated below are matters arising from the current period audit ofthe consolidated financial statements that were communicated or required to be communicated to theaudit committee and that: (1) relate to accounts or disclosures that are material to the consolidatedfinancial statements and (2) involved our especially challenging, subjective, or complex judgments. Thecommunication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit mattersbelow, providing separate opinions on the critical audit matters or on the accounts or disclosures towhich they relate.Assessment of capitalized technology costs incurred on software development projectsAs discussed in Notes 2 and 5 to the consolidated financial statements, the Company’s capitalizedtechnology includes certain purchased software and technology licenses, direct third party costs, andinternal payroll and payroll-related costs used in the creation of internal-use software. The Company’scapitalized technology costs, net of accumulated amortization, was $101.6 million as of December 31,2019. The Company invested $64.9 million in additions to amortizable intangible assets during the yearended December 31, 2019, a portion of which related to internal-use software development projects.We identified the assessment of capitalized technology costs incurred on software developmentprojects as a critical audit matter. Specifically, assessing if the costs incurred on the softwaredevelopment project have met the capitalization criteria required a higher degree of auditor judgment.This included applying procedures to determine that the costs related to a project that had entered theapplication development stage, resulted in additional functionality, and for which it was probable thatthe project would be completed and used to perform the function intended. Evaluating these criteriarequired the assessment of the technical aspects of each individual project to which the capitalized costsare related.The primary procedures we performed to address this critical audit matter included the following.We tested certain internal controls over the Company’s capitalized technology process, including thosethat address the determination that a software development project has reached the applicationdevelopment stage, results in additional functionality, and it was probable that the project would becompleted and used for the function intended. For certain software development projects, we inspectedthe Company’s documentation to support the determination that the project had reached theapplication development stage, resulted in additional functionality, and it was probable that the projectwould be completed and used for the function intended. For those projects, we evaluated theCompany’s documentation through direct inquiry with certain of the Company’s technology developersresponsible for performing the software development activities.Evaluation of acquisition-date fair value of acquired intangible assetAs discussed in Notes 2 and 3 to the consolidated financial statements, on May 22, 2019, theCompany acquired Trilogy Education Services, Inc. (Trilogy) in a business combination. As a result ofthe transaction, the Company acquired a university client relationships intangible asset. Theacquisition-date fair value for the intangible asset was $84.2 million.We identified the evaluation of the initial measurement of the university client relationshipsintangible asset acquired in the Trilogy transaction as a critical audit matter. There was a high degreeof subjectivity in evaluating the discounted cash flows used to measure the acquisition-date fair value ofthe intangible asset. In addition, the discounted cash flow model included the following internally-developed assumptions for which there was limited observable market information, and themeasurement of the fair value of the intangible asset was sensitive to possible changes to theseassumptions:(cid:129)forecasted revenue growth attributable to university client contracts;69(cid:129)forecasted margins on earnings before interest, taxes, depreciation, and amortization (EBITDAmargins); and(cid:129)estimated discount rate.The primary procedures we performed to address this critical audit matter included the following.We tested certain internal controls over the Company’s acquisition-date valuation process to developthe assumptions, as listed above. We evaluated the Company’s forecasted revenue growth rates relatingto existing university client relationships by comparing forecasted revenue growth assumptions to thoseof the Company’s peers. We compared the Company’s estimate of forecasted revenue growth andEBITDA margins to Trilogy’s historical actual results. In addition, we involved valuation professionalswith specialized skills and knowledge, who assisted in:(cid:129)evaluating the Company’s discount rate by comparing it against a discount rate that wasindependently developed using publicly available third-party market data for comparable entities;and(cid:129)developing an estimate of the university client relationships intangible asset fair value using theforecasted cash flows and the independently developed discount rate, and comparing the resultsof our estimate of fair value to the Company’s fair value estimate.Evaluation of goodwill impairment analysis of the boot camp reporting unitAs discussed in Notes 2 and 5 to the consolidated financial statements, the goodwill balance as ofDecember 31, 2019 was $418 million, a substantial portion of which relates to the Company’s bootcamp reporting unit. The Company determined that the carrying value of its boot camp reporting unitexceeded its fair value, resulting in an impairment charge of $70.4 million. The Company used aweighted combination of the income-based and market-based approaches to determine the fair value ofthe boot camp reporting unit.We identified the evaluation of the goodwill impairment analysis of the boot camp reporting unitas a critical audit matter. A high degree of subjectivity was required to evaluate the forecastedreporting unit cash flow and discount rate assumptions used in the income-based estimationmethodology. Changes to these assumptions could have a substantial impact on the fair value of theboot camp reporting unit and the amount of the impairment charge.The primary procedures we performed to address this critical audit matter included the following.We tested certain internal controls over the Company’s goodwill impairment analysis process, includingcontrols related to the forecasted reporting unit cash flow and the development of the discount rateassumptions. We performed sensitivity analyses to assess the impact of reasonably possible changes toforecasted cash flow and discount rate assumptions on the reporting unit fair value. We evaluated theCompany’s forecasted revenue growth rates included in the forecasted reporting unit cash flows bycomparing to those of the Company’s peers. We compared the Company’s forecasted reporting unitcash flows to historical actual results. In addition, we involved a valuation professional with specializedskills and knowledge, who assisted in:(cid:129)evaluating the Company’s discount rate by comparing it against a discount rate that wasindependently developed using publicly available third-party market data for comparable entities;and(cid:129)developing an estimate of the boot camp reporting unit’s fair value using the reporting unit’scash flow forecast and the independently developed discount rate, and comparing the results ofour estimate of fair value to the Company’s fair value estimate./s/ KPMG LLPWe have served as the Company’s auditor since 2013.McLean, VirginiaFebruary 27, 202070 Report of Independent Registered Public Accounting FirmTo the Stockholders and Board of Directors2U, Inc.:Opinion on Internal Control Over Financial ReportingWe have audited 2U, Inc. and subsidiaries’ (the Company) internal control over financial reportingas of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, theCompany maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.We also have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as ofDecember 31, 2019 and 2018, and the related consolidated statements of operations and comprehensiveloss, changes in stockholders’ equity, and cash flows for each of the years in the three-year periodended December 31, 2019, and related notes and financial statement Schedule II—Valuation andQualifying Accounts (collectively, the consolidated financial statements), and our report datedFebruary 27, 2020 expressed an unqualified opinion on those consolidated financial statements.The Company acquired Trilogy Education Services, Inc. (Trilogy) on May 22, 2019, andmanagement excluded from its assessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2019, Trilogy’s internal control over financial reportingassociated with 4.1% of total assets and 12.9% of total revenues included in the consolidated financialstatements of the Company as of and for the year ended December 31, 2019. Our audit of internalcontrol over financial reporting of the Company also excluded an evaluation of the internal controlover financial reporting of Trilogy.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financialreporting and for its assessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Annual Report on Internal Control Over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control over financialreporting based on our audit. We are a public accounting firm registered with the PCAOB and arerequired to be independent with respect to the Company in accordance with the U.S. federal securitieslaws and the applicable rules and regulations of the Securities and Exchange Commission and thePCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether effective internalcontrol over financial reporting was maintained in all material respects. Our audit of internal controlover financial reporting included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our audit also includedperforming such other procedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements for71external purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made onlyin accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness to future periods are subjectto the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate./s/ KPMG LLPMcLean, VirginiaFebruary 27, 202072 2U, Inc.Consolidated Balance Sheets(in thousands, except share and per share amounts)December 31,December 31,20192018AssetsCurrent assetsCash and cash equivalents...................................$170,593$449,772Restricted cash...........................................19,276—Investments..............................................—25,000Accounts receivable, net.....................................33,65532,636Prepaid expenses and other assets..............................37,42414,272Total current assets.......................................260,948521,680Property and equipment, net...................................57,64352,299Right-of-use assets..........................................43,401—Goodwill..................................................418,35061,852Amortizable intangible assets, net...............................333,075136,605University payments and other assets, non-current...................73,41334,918Total assets...........................................$1,186,830$807,354Liabilities and stockholders’ equityCurrent liabilitiesAccounts payable and accrued expenses.........................$65,381$27,647Accrued compensation and related benefits.......................21,88523,001Deferred revenue..........................................48,8338,345Lease liability............................................7,320—Other current liabilities.....................................12,5359,487Total current liabilities....................................155,95468,480Long-term debt.............................................246,6203,500Deferred tax liabilities, net....................................5,1336,949Lease liability, non-current....................................66,974—Other liabilities, non-current...................................89923,416Total liabilities........................................475,580102,345Commitments and contingencies (Note 7)Stockholders’ equityPreferred stock, $0.001 par value, 5,000,000 shares authorized, none issued——Common stock, $0.001 par value, 200,000,000 shares authorized,63,569,109 shares issued and outstanding as of December 31, 2019;57,968,493 shares issued and outstanding as of December 31, 2018....6358Additional paid-in capital....................................1,197,379957,631Accumulated deficit........................................(479,388)(244,166)Accumulated other comprehensive loss..........................(6,804)(8,514)Total stockholders’ equity................................711,250705,009Total liabilities and stockholders’ equity...........................$1,186,830$807,354See accompanying notes to consolidated financial statements.732U, Inc.Consolidated Statements of Operations and Comprehensive Loss(in thousands, except share and per share amounts)Year Ended December 31,201920182017Revenue.......................................$574,671$411,769$286,752Costs and expensesCurriculum and teaching.........................63,27023,2906,609Servicing and support...........................98,89067,20350,767Technology and content development................115,47363,81245,926Marketing and sales............................342,395221,015150,923General and administrative.......................131,02082,98962,665Impairment charge.............................70,379——Total costs and expenses.......................821,427458,309316,890Loss from operations.............................(246,756)(46,540)(30,138)Interest income................................5,8005,173371Interest expense...............................(13,419)(108)(87)Other expense, net.............................(707)(1,722)(866)Loss before income taxes..........................(255,082)(43,197)(30,720)Income tax benefit...............................19,8604,8671,297Net loss.......................................$(235,222)$(38,330)$(29,423)Net loss per share, basic and diluted..................$(3.83)$(0.69)$(0.60)Weighted-average shares of common stock outstanding, basicand diluted...................................61,393,66655,833,49249,062,611Other comprehensive income (loss)Foreign currency translation adjustments, net of tax of $0for all periods presented........................1,710(13,840)5,326Comprehensive loss..............................$(233,512)$(52,170)$(24,097)See accompanying notes to consolidated financial statements.74 2U, Inc.Consolidated Statements of Changes in Stockholders’ Equity(in thousands, except share amounts)AccumulatedAdditionalOtherTotalCommon StockPaid-InAccumulatedComprehensiveStockholders’SharesAmountCapitalDeficitIncome (Loss)EquityBalance, December 31, 2016............47,151,635$47$371,455$(176,265)$—$195,237Cumulative-effect of accounting change...——148(148)——Balance, December 31, 2016, adjusted....47,151,63547371,603(176,413)—195,237Issuance of common stock in connectionwith a public offering of common stock,net of offering costs..............4,047,5004189,452——189,456Issuance of common stock in connectionwith settlement of restricted stock units,net of withholdings...............459,9001(1,310)——(1,309)Exercise of stock options............846,82116,614——6,615Stock-based compensation expense......——21,930——21,930Net loss.......................———(29,423)—(29,423)Foreign currency translation adjustment..————5,3265,326Balance, December 31, 2017............52,505,85653588,289(205,836)5,326387,832Issuance of common stock in connectionwith a public offering of common stock,net of offering costs..............3,833,3344330,897——330,901Issuance of common stock in connectionwith settlement of restricted stock units,net of withholdings...............553,159—(3,451)——(3,451)Exercise of stock options............1,012,47317,365——7,366Issuance of common stock in connectionwith employee stock purchase plan....63,671—3,121——3,121Stock-based compensation expense......——31,410——31,410Net loss.......................———(38,330)—(38,330)Foreign currency translation adjustment..————(13,840)(13,840)Balance, December 31, 2018............57,968,49358957,631(244,166)(8,514)705,009Issuance of common stock in connectionwith business combination, net ofoffering costs..................4,608,1015184,317——184,322Issuance of common stock in connectionwith settlement of restricted stock units,net of withholdings...............502,795—(2,574)——(2,574)Exercise of stock options............361,134—3,119——3,119Issuance of common stock in connectionwith employee stock purchase plan....123,365—3,382——3,382Issuance of common stock award.......5,221—————Stock-based compensation expense......——51,504——51,504Net loss.......................———(235,222)—(235,222)Foreign currency translation adjustment..————1,7101,710Balance, December 31, 2019............63,569,109$63$1,197,379$(479,388)$(6,804)$711,250See accompanying notes to consolidated financial statements.752U, Inc.Consolidated Statements of Cash Flows(in thousands)Year Ended December 31,201920182017Cash flows from operating activitiesNet loss................................................$(235,222)$(38,330)$(29,423)Adjustments to reconcile net loss to net cash (used in) provided by operatingactivities:Depreciation and amortization expense.........................69,84332,78519,624Stock-based compensation expense............................51,50431,41021,930Non-cash lease expense....................................11,725——Bad debt expense........................................1,425——Impairment charge.......................................70,379——Changes in operating assets and liabilities, net of assets and liabilitiesacquired:Accounts receivable, net..................................11,949(18,497)(5,634)Payments to university clients..............................(21,675)(11,322)(13,239)Prepaid expenses and other assets...........................(6,845)(4,932)1,549Accounts payable and accrued expenses.......................17,0814,7243,504Accrued compensation and related benefits.....................(5,539)4,0462,504Deferred revenue......................................10,0141,5271,661Other liabilities, net.....................................(28,595)(6,243)4,763Other................................................1,9821,712867Net cash (used in) provided by operating activities...............(51,974)(3,120)8,106Cash flows from investing activitiesPurchase of a business, net of cash acquired......................(388,004)—(97,102)Additions of amortizable intangible assets.......................(64,923)(65,190)(23,823)Purchases of property and equipment..........................(13,421)(11,996)(27,316)Purchase of investments...................................(10,000)(25,000)—Proceeds from maturities of investments........................25,000——Advances made to university clients...........................(400)(300)(1,950)Advances repaid by university clients...........................35025817Net cash used in investing activities..........................(451,398)(102,461)(149,374)Cash flows from financing activitiesProceeds from issuance of common stock, net of offering costs.........—330,901189,463Proceeds from debt.......................................244,724—3,500Payments on debt........................................——(1,517)Payment of debt issuance costs...............................(1,953)——Tax withholding payments associated with settlement of restricted stockunits...............................................(2,574)(3,451)(1,309)Proceeds from exercise of stock options.........................3,1197,3666,615Proceeds from employee stock purchase plan share purchases..........3,3823,121—Payments for acquisition of amortizable intangible assets.............(2,180)(4,900)—Net cash provided by financing activities.........................244,518333,037196,752Effect of exchange rate changes on cash..........................(1,049)(1,054)(844)Net (decrease) increase in cash, cash equivalents and restricted cash......(259,903)226,40254,640Cash, cash equivalents and restricted cash, beginning of period..........449,772223,370168,730Cash, cash equivalents and restricted cash, end of period..............$189,869$449,772$223,370See accompanying notes to consolidated financial statements.76 2U, Inc.Notes to Consolidated Financial Statements1. Organization2U, Inc. (together with its subsidiaries, the ‘‘Company’’) is a leading provider of educationtechnology for nonprofit colleges and universities. The Company builds, delivers, and supports morethan 400 digital and in-person educational offerings, including graduate degrees, undergraduatedegrees, professional certificates, boot camps, and short courses, across the career curriculumcontinuum.The Company has two reportable segments: the Graduate Program Segment and the AlternativeCredential Segment (formerly known as the Short Course Segment). The Company’s Graduate ProgramSegment includes the technology and services provided to nonprofit colleges and universities to enablethe online delivery of degree programs. Students enrolled in these programs are generally seeking anundergraduate or graduate degree of the same quality they would receive on campus. The Company’sAlternative Credential Segment includes the premium online short courses and technical, skills-basedboot camps provided through relationships with nonprofit colleges and universities. Students enrolled inthese offerings are generally working professionals seeking career advancement through skillsattainment.On May 22, 2019, the Company completed its acquisition of Trilogy Education Services, Inc.(‘‘Trilogy’’), a workforce accelerator that prepares adult learners for high-growth careers in the digitaleconomy through its boot camp offerings. The acquisition expanded the Company’s university clientportfolio and added another offering on the career curriculum continuum to make education moreaccessible for lifelong learners. The results of Trilogy’s operations are included in the AlternativeCredential Segment. Refer to Note 3 for further information about the acquisition of Trilogy.2. Significant Accounting PoliciesBasis of Presentation and Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries and have been prepared in accordance with United States generally acceptedaccounting principles (‘‘U.S. GAAP’’) and include the assets, liabilities, results of operations and cashflows of the Company. All significant intercompany accounts and transactions have been eliminated inconsolidation.Use of EstimatesThe preparation of consolidated financial statements in accordance with U.S. GAAP requiresmanagement to make certain estimates and assumptions that affect the amounts reported herein. TheCompany bases its estimates and assumptions on historical experience and on various other factors thatit believes to be reasonable under the circumstances. Significant estimates and assumptions are inherentin the analysis and the measurement of acquired intangible assets, the recoverability of goodwill anddeferred tax assets. Due to the inherent uncertainty involved in making estimates, actual resultsreported in future periods may be affected by changes in those estimates. The Company evaluates itsestimates and assumptions on an ongoing basis.Revenue Recognition, Accounts Receivable and Allowance for Doubtful AccountsOn January 1, 2018, the Company adopted Accounting Standards Update (‘‘ASU’’) No. 2014-09,Revenue from Contracts with Customers (Topic 606) and the related amendments using the modified772U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)retrospective transition method and has concluded that doing so did not have a material impact on theamount and timing of either its revenue or costs. As part of its assessment, the Company completedreviews of its contracts and evaluated its costs, including costs of obtaining contracts with its universityclients and costs associated with content development. Certain of these contract and content costs arecapitalized under the new standard. The adoption of ASU 2014-09 did not have a material impact as ofJanuary 1, 2018, and no cumulative adjustment was recorded. Further, the amounts reported as ofDecember 31, 2018 on the consolidated balance sheets and the results of operations for the year endedDecember 31, 2018 reported on the consolidated statements of operations and comprehensive losswould not have been materially different than under legacy U.S. GAAP (i.e., Topic 605).The Company generates substantially all of its revenue from contractual arrangements, with eitherits university clients or students, to provide a comprehensive platform of tightly integrated technologyand technology-enabled services that support its offerings.Performance ObligationsA performance obligation is a promise in a contract to transfer a distinct good or service to thecustomer. A contract’s transaction price is allocated to each distinct performance obligation andrecognized as revenue when, or as, the performance obligation is satisfied. The transaction price isdetermined based on the consideration to which the Company will be entitled in exchange fortransferring services to the customer. To the extent the transaction price includes variable consideration,the Company estimates the amount of variable consideration that should be included in the transactionprice utilizing the expected value method. Variable consideration is included in the transaction price if,in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue underthe contract will not occur. Any estimates, including the effect of the constraint on variableconsideration, are evaluated at each reporting period, and if necessary, the Company adjusts itsestimate of the overall transaction price. Revenue is then recognized over the remaining estimatedperiod of performance using the cumulative catch-up method.The Graduate Program Segment derives revenue primarily from contractually specified percentagesof the amounts the Company’s university clients receive from their students in 2U-enabled degreeprograms for tuition and fees, less credit card fees and other specified charges the Company has agreedto exclude in certain university contracts. The Company’s contracts with university clients in thissegment typically have terms of 10 to 15 years and have a single performance obligation, as thepromises to provide a platform of tightly integrated technology and services that university clients needto attract, enroll, educate and support students are not distinct within the context of the contracts. Thesingle performance obligation is delivered as the university clients receive and consume benefits, whichoccurs ratably over a series of academic terms. The amounts received from university clients over theterm of the arrangement are variable in nature in that they are dependent upon the number ofstudents that are enrolled in the program within each academic term. These amounts are allocated toand are recognized ratably over the related academic term, defined as the period beginning on the firstday of classes through the last. Revenue is recognized net of an allowance, which is established for theCompany’s expected obligation to refund tuition and fees to university clients.The Alternative Credential Segment derives revenue primarily from contracts with students for thetuition and fees paid to enroll in, and progress through, the Company’s short courses and boot camps.The Company’s short courses run between six and 16 weeks, while boot camps run between 12 and78 2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)24 weeks. In this segment, the Company’s contracts with students include the delivery of theeducational and related student support services and are treated as either a single performanceobligation or multiple performance obligations, depending upon the offering being delivered. Allperformance obligations are satisfied ratably over the same presentation period, which is defined as theperiod beginning on the first day of the course through the last. The Company recognizes the proceedsreceived, net of any applicable pricing concessions, from the students enrolled and shares contractuallyspecified amounts received from students with the associated university client, in exchange for licensesto use the university brand name and other university trademarks. These amounts are recognized ascurriculum and teaching costs on the Company’s consolidated statements of operations andcomprehensive loss. The Company’s contracts with university clients in this segment are typicallyshorter and less restrictive than the Company’s contracts with university clients in the GraduateProgram Segment.The Company does not disclose the value of unsatisfied performance obligations for the GraduateProgram Segment because the variable consideration is allocated entirely to a wholly unsatisfiedpromise to transfer a service that forms part of a single performance obligation. The Company doesnot disclose the value of unsatisfied performance obligations for the Alternative Credential Segmentbecause the performance obligations are part of contracts that have original durations of less than oneyear.Contract Acquisition CostsThe Company pays commissions to certain of its employees to obtain contracts with universityclients in the Graduate Program Segment. These costs are capitalized and recorded on acontract-by-contract basis and amortized using the straight-line method over the expected life, which isgenerally the length of the contract.With respect to contract acquisition costs in the Alternative Credential Segment, the Company haselected to apply the practical expedient in ASC Topic 606 to expense these costs as incurred, as theterms of contracts with students in this segment are less than one year.Payments to University ClientsPursuant to certain of the Company’s contracts in the Graduate Program Segment, the Companyhas made, or is obligated to make, payments to university clients at either execution of a contract or atthe extension of a contract in exchange for various marketing and other rights. Generally, theseamounts are capitalized and amortized as contra revenue over the life of the contract, commencing onthe later of when payment is due or when contract revenue recognition begins.Accounts Receivable, Contract Assets and LiabilitiesBalance sheet items related to contracts consist of accounts receivable, net and deferred revenueon the Company’s consolidated balance sheets. Included in accounts receivable, net are trade accountsreceivable, which are comprised of billed and unbilled revenue. Accounts receivable, net is stated at netrealizable value, and the Company utilizes the allowance method to provide for doubtful accountsbased on management’s evaluation of the collectability of the amounts due. The Company’s estimatesare reviewed and revised periodically based on historical collection experience and a review of thecurrent status of accounts receivable, net. Historically, actual write-offs for uncollectible accounts have792U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)not significantly differed from prior estimates. The Company recognizes unbilled revenue when revenuerecognition occurs in advance of billings. Unbilled revenue is recognized in the Graduate ProgramSegment because billings to university clients do not occur until after the academic term hascommenced and final enrollment information is available. Unbilled accounts receivable is recognized inthe Alternative Credential segment once the presentation period commences for amounts to beinvoiced to students under installment plans that are paid over the same presentation period. TheCompany’s unbilled revenue and accounts receivable represent contract assets.Deferred revenue represents the excess of amounts billed or received as compared to amountsrecognized in revenue on the consolidated statements of operations and comprehensive loss as of theend of the reporting period, and such amounts are reflected as a current liability on the Company’sconsolidated balance sheets. The Company generally receives payments for its share of tuition and feesfrom degree program university clients early in each academic term and from short course and bootcamp students, either in full upon registration for the course or in full before the end of the coursebased on a payment plan, prior to completion of the service period. These payments are recorded asdeferred revenue until the services are delivered or until the Company’s obligations are otherwise met,at which time revenue is recognized.Marketing and Sales CostsThe majority of the marketing and sales costs incurred by the Company are directly related torecruiting students for its university clients’ degree programs, with lesser amounts related to recruitingstudents for its short courses and boot camps and marketing and advertising efforts related to theCompany’s own brand. For the years ended December 31, 2019, 2018 and 2017, costs related to theCompany’s marketing and advertising efforts of its own brand were not material. All such costs areexpensed as incurred and reported in marketing and sales expense on the Company’s consolidatedstatements of operations and comprehensive loss.Stock-Based CompensationThe Company provides stock-based compensation awards consisting of restricted stock units(‘‘RSUs’’), performance restricted stock units (‘‘PRSUs’’) and stock options to employees, independentcontractors and directors. The Company measures all stock-based compensation awards at fair value asof the grant date. The fair values of RSUs and PRSUs containing performance-based vesting conditionsare based on the fair value of the Company’s stock. The Company uses a Monte Carlo model toestimate the fair value of PRSUs containing market-based vesting conditions and uses a Black-Scholesoption pricing model to measure the fair value of stock option grants. The Company also provides foran employee stock purchase plan (‘‘ESPP’’) and estimates the fair value of each purchase rightthereunder as of the grant date using a Black-Scholes option pricing model.For awards subject only to service-based vesting conditions, the Company recognizes stock-basedcompensation expense on a straight-line basis over the awards’ requisite service period. For awardssubject to both service and performance-based vesting conditions, the Company recognizes stock-basedcompensation expense using an accelerated recognition method when it is probable that theperformance condition will be achieved. For awards subject to both service and market-based vestingconditions, the Company recognizes stock-based compensation expense using an accelerated recognitionmethod over the requisite service period beginning with the date of the grant and ending upon80 2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)completion of the service period, with stock-based compensation expense being recognized irrespectiveof the achievement of the market condition. For shares subject to the ESPP, the Company uses thestraight-line method to record stock-based compensation expense over the respective offering period.Prior to April 1, 2017, the Company estimated expected volatility based on the historical volatilitiesof comparable publicly-traded companies over the expected life of the award. Effective April 1, 2017,the Company began to estimate expected volatility based on the historical volatilities of the Company’scommon stock.Refer to Note 12 for further information about the Company’s stock-based compensation awards.Income TaxesIncome taxes are accounted for under the asset and liability method, which requires therecognition of deferred tax assets and liabilities for the expected future tax consequences of events thatare included in the financial statements. Under this method, the deferred tax assets and liabilities aredetermined based on the differences between the financial statement and tax bases of the assets andliabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.The effect of a change in tax rates on the deferred tax assets and liabilities is recognized in earnings inthe period when the new rate is enacted. Deferred tax assets are subject to periodic recoverabilityassessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to theamount that more likely than not will be realized. The Company considers all positive and negativeevidence relating to the realization of the deferred tax assets in assessing the need for a valuationallowance. The Company currently maintains a full valuation allowance against deferred tax assets inthe U.S. and certain entities in the foreign jurisdictions.The Company records a liability for unrecognized tax benefits resulting from uncertain taxpositions taken or expected to be taken in a tax return. The Company accounts for uncertainty inincome taxes using a two-step approach for evaluating tax positions. Step one, recognition, occurs whenthe Company concludes that a tax position, based solely on its technical merits, is more likely than notto be sustained upon examination. Step two, measurement, determines the amount of benefit that ismore likely than not to be realized upon ultimate settlement with a taxing authority that has fullknowledge of all relevant information. De-recognition of a tax position that was previously recognizedwould occur if the Company subsequently determines that a tax position no longer meets the morelikely than not threshold of being sustained. The Company recognizes interest and penalties, if any,related to unrecognized tax benefits as income tax expense on the consolidated statements ofoperations and comprehensive loss.Cash and Cash EquivalentsCash and cash equivalents consist of bank checking accounts, money market accounts, investmentsin certificates of deposit that have an original maturity of three months or less and highly liquidmarketable securities with maturities at the time of purchase of three months or less.Restricted CashThe Company maintains restricted cash as collateral for standby letters of credit for the Company’sleased facilities and in connection with the deferred government grant obligations.812U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)Fair Value MeasurementsThe carrying amounts of certain assets and liabilities, including cash and cash equivalents, accountsreceivable, advances to university clients, accounts payable and accrued expenses and other currentliabilities, 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 aliability in an orderly transaction between market participants at the measurement date, based on theCompany’s principal or, in the absence of a principal, most advantageous, market for the specific assetor liability.U.S. GAAP provides for a three-tier fair value hierarchy to classify and disclose all assets andliabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fairvalue on a non-recurring basis, in periods subsequent to their initial measurement. Generally, assets arerecorded at fair value on a non-recurring basis as a result of impairment charges. The Companyremeasures non-financial assets such as goodwill, intangible assets and other long-lived assets at fairvalue when there is an indicator of impairment, and records them at fair value only when recognizingan impairment loss. The fair value hierarchy requires the Company to use observable inputs whenavailable, and to minimize the use of unobservable inputs when determining fair value. Refer toNotes 4 and 5 for further discussion of assets measured at fair value on a nonrecurring basis. The threetiers are defined as follows:(cid:129)Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets orliabilities in active markets;(cid:129)Level 2—Observable inputs, other than quoted prices in active markets, that are observableeither directly or indirectly in the marketplace for identical or similar assets and liabilities; and(cid:129)Level 3—Unobservable inputs that are supported by little or no market data, which require theCompany to develop its own assumptions about the assumptions market participants would usein pricing the asset or liability based on the best information available in the circumstances.The Company has financial instruments, including cash deposits, accounts receivable, accountspayable and a senior secured term loan facility. The carrying values for such financial instruments,other than the senior secured term loan facility, each approximated their fair values as of December 31,2019 and 2018.InvestmentsThe Company’s investments within current assets on the consolidated balance sheets relate tocertificates of deposit with original maturities between three months and one year. As of December 31,2018, the Company had a $25.0 million certificate of deposit included in investments that qualified as aLevel 1 fair value measurement asset and was stated at cost, which approximated fair value. Thiscertificate of deposit matured in the first quarter of 2019.Advances to University ClientsThe Company may periodically become contractually obligated to pay advances to certain of itsuniversity clients in order to fund start-up expenses of the program on behalf of the university client.Advances to university clients are stated at realizable value on the consolidated balance sheets, with the82 2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)current portion recorded within prepaid expenses and other assets, and the non-current portionrecorded within university payments and other assets, non-current. Advances are repaid to theCompany on terms as required in the respective agreements. The Company recognizes imputed interestincome on these advance payments when the related amount of imputed interest is deemed significant.For the years ended December 31, 2019, 2018 and 2017, the Company did not incur a material amountof imputed interest income.Long-Lived AssetsProperty and EquipmentProperty and equipment is stated at cost less accumulated depreciation and amortization.Expenditures for major additions, construction and improvements are capitalized. Depreciation andamortization is expensed using the straight-line method over the estimated useful lives of the relatedassets, which range from three to five years for computer hardware and five to seven years for furnitureand office equipment. Leasehold improvements are depreciated on a straight-line basis over the lesserof the remaining term of the leased facility or the estimated useful life of the improvement, whichgenerally ranges from four to approximately 11 years. Useful lives of significant assets are periodicallyreviewed and adjusted prospectively to reflect the Company’s current estimates of the respective assets’expected utility. Repair and maintenance costs are expensed as incurred.Amortizable Intangible AssetsAcquired Intangible Assets.The Company capitalizes purchased intangible assets, such as software,websites and domains, and amortizes them on a straight-line basis over their estimated useful life.Historically, the Company has assessed the useful lives of these acquired intangible assets to bebetween three and ten years.Capitalized Technology.Capitalized technology includes certain purchased software and technologylicenses, direct third-party costs, and internal payroll and payroll-related costs used in the creation ofour internal-use software. Software development projects generally include three stages: the preliminaryproject stage (all costs are expensed as incurred), the application development stage (certain costs arecapitalized and certain costs are expensed as incurred) and the post-implementation/operation stage (allcosts are expensed as incurred). Costs capitalized in the application development stage include costs ofdesigning the application, coding, integrating the Company’s and the university’s networks and systems,and the testing of the software. Capitalization of costs requires judgment in determining when a projecthas reached the application development stage and the period over which the Company expects tobenefit from the use of that software. Once the software is placed in service, these costs are amortizedusing the straight-line method over the estimated useful life of the software, which is generally three tofive years.Capitalized Content Development.The Company develops content for each offering on acourse-by-course basis in collaboration with university client faculty and industry experts. Dependingupon the offering, the Company may use materials provided by university clients and their faculty,including curricula, case studies, presentations and other reading materials. The Company is responsiblefor the creation of materials suitable for delivery through the Company’s learning platform, includingall expenses associated with this effort. With respect to the Graduate Program Segment, the832U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)development of content is part of the Company’s single performance obligation and is considered acontract fulfillment cost.The content development costs that qualify for capitalization are third-party direct costs, such asvideography, editing and other services associated with creating digital content. Additionally, theCompany capitalizes internal payroll and payroll-related costs incurred to create and produce videosand other digital content utilized in the university clients’ offerings for delivery via the Company’sonline learning platform. Capitalization ends when content has been fully developed by both theCompany and the university client, at which time amortization of the capitalized content developmentcosts begins. The capitalized costs for each offering are recorded on a course-by-course basis andincluded in capitalized content costs in amortizable intangible assets, net on the Company’sconsolidated balance sheets. These costs are amortized using the straight-line method over theestimated useful life of the respective course, which is generally four to five years. The estimated usefullife corresponds with the planned curriculum refresh rate. This refresh rate is consistent with expectedcurriculum refresh rates as cited by faculty members for similar on-campus offerings.Evaluation of Long-Lived AssetsThe Company reviews long-lived assets, which consist of property and equipment, capitalizedtechnology costs, capitalized content development costs and acquired finite-lived intangible assets, forimpairment whenever events or changes in circumstances indicate the carrying value of an asset maynot be recoverable. In order to assess the recoverability of the capitalized technology and contentdevelopment costs, the costs are grouped by the lowest level of independent cash flows. Recoverabilityof a long-lived asset is measured by a comparison of the carrying value of an asset or asset group tothe future undiscounted net cash flows expected to be generated by that asset or asset group. If suchassets are not recoverable, the impairment to be recognized is measured by the amount by which thecarrying value of an asset exceeds the estimated fair value (discounted cash flow) of the asset or assetgroup. The Company’s impairment analysis is based upon cumulative results and forecastedperformance.Non-Cash Long-Lived Asset AdditionsDuring the year ended December 31, 2019, the Company had capital asset additions of$81.4 million in property and equipment and capitalized technology and content development, of which$3.1 million consisted of non-cash capital expenditures, primarily related to landlord funded leaseholdimprovements. Due to extended payment terms associated with the timing of cash capital expendituresmade more than 90 days after the date of purchase, an additional $2.2 million was classified as cashflows from financing activities in the consolidated statement of cash flows for the year endedDecember 31, 2019.During the year ended December 31, 2018, the Company had capital asset additions of$87.4 million in property and equipment and capitalized technology and content development, of which$5.3 million consisted of non-cash capital expenditures, primarily related to the acquisition of certainlong-lived assets for which a liability was accrued. Due to extended payment terms associated with thetiming of cash capital expenditures made more than 90 days after the date of purchase, an additional$4.9 million was classified as cash flows from financing activities in the consolidated statement of cashflows for the year ended December 31, 2018.84 2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)GoodwillGoodwill is the excess of purchase price over the fair value of identified net assets of businessesacquired. The Company’s goodwill balance relates to its acquisitions of GetSmarter in July 2017 andTrilogy in May 2019. The Company reviews goodwill at least annually, as of October 1. Between annualtests, goodwill is reviewed for possible impairment if an event occurs or circumstances change thatwould more likely than not reduce the fair value of a reporting unit below its carrying value. TheCompany tests goodwill at the reporting unit level, which is an operating segment or one level below anoperating segment. The Company initially assesses qualitative factors to determine if it is necessary toperform a quantitative goodwill impairment review. The Company reviews goodwill for impairmentusing a quantitative approach if it decides to bypass the qualitative assessment or determines that it ismore likely than not that the fair value of a reporting unit is less than its carrying value based on aqualitative assessment. Upon completion of a quantitative assessment, the Company may be required torecognize an impairment based on the difference between the carrying value and the fair value of thereporting unit.The Company determines the fair value of a reporting unit by utilizing a weighted combination ofthe income-based and market-based approaches.The income-based approach requires the Company to make significant assumptions and estimates.These assumptions and estimates primarily include, but are not limited to, the selection of appropriatepeer group companies, discount rates, terminal growth rates, and forecasts of revenue, operatingincome, depreciation and amortization expense, capital expenditures and future working capitalrequirements. When determining these assumptions and preparing these estimates, the Companyconsiders 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 offactors 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 bycomparing the reporting unit to other publicly-traded companies and/or to publicly-disclosed businessmergers and acquisitions in similar lines of business. The value of a reporting unit is based on pricingmultiples of certain financial parameters observed in the comparable companies. The Company alsomakes estimates and assumptions for market values to determine a reporting unit’s estimated fair value.In the third quarter of 2019, the Company recorded an impairment charge of $70.4 million on theconsolidated statement of operations and comprehensive loss (see Note 5). Other than the reportingunit impaired in the third quarter of 2019, the Company had no reporting units whose estimated fairvalue exceeded their carrying value by less than 10% as of October 1, 2019, the date of the annualgoodwill impairment assessment. It is possible that future changes in the Company’s circumstances, orin the variables associated with the judgments, assumptions and estimates used in assessing the fairvalue of our reporting units, could require the Company to record additional impairment charges in thefuture.Equity InterestsAs of December 31, 2019, the Company had a $10.0 million investment in an education technologycompany recorded within university payments and other assets, non-current on the consolidated balance852U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)sheet. This investment does not have a readily determinable fair value, and is accounted for as a costmethod investment, which is subject to fair value remeasurement upon the occurrence of an observableevent. As of December 31, 2019, there were no events that would require a change in the fair value ofthis investment.Employee BenefitsThe Company offers a variety of benefits to its employees (e.g., health care, gym memberships andtuition reimbursement). The Company accounts for costs related to providing employee benefits asincurred, unless there is a service requirement, in which case, such costs are recognized over the servicecommitment period.Deferred Government Grant ObligationsGovernment grants awarded to the Company in the form of forgivable loans are recorded as‘‘deferred government grant obligations’’ within long-term liabilities on the consolidated balance sheetsuntil all contingencies are resolved and the grant is determined to be realized.Debt Issuance CostsDebt issuance costs are incurred as a result of entering into certain borrowing transactions and arepresented as a reduction from the carrying amount of the debt liability on the Company’s consolidatedbalance sheets. Debt issuance costs are amortized over the term of the associated debt instrument. Theamortization of debt issuance costs is included as a component of interest expense on the Company’sconsolidated statements of operations and comprehensive loss. If the Company extinguishes debt priorto the end of the underlying instrument’s full term, some or all of the unamortized debt issuance costsmay need to be written off, and a loss on extinguishment may need to be recognized. Refer to Note 9for further information about the Company’s debt.LeasesFor the Company’s operating leases, an assessment is performed to determine if an arrangement isa lease at inception. Right-of-use (‘‘ROU’’) assets represent the Company’s right to use an underlyingasset for the lease term and lease liabilities represent the Company’s obligation to make lease paymentsarising from the lease. Operating lease ROU assets and lease liabilities are recognized at the leasecommencement date based on the present value of lease payments over the lease term. As theinformation necessary to determine the rate implicit in the Company’s leases is not readily available,the Company determines its incremental borrowing rate based on the information available at the leasecommencement date in determining the present value of lease payments. The operating lease ROUasset also includes any prepaid lease payments made, less lease incentives. The Company’s lease termsinclude options to extend or terminate the lease when it is reasonably certain that the Company willexercise that option. Lease expense for lease payments is recognized on a straight-line basis over thelease term. The Company does not have any finance leases for any periods presented.The Company has elected, as an accounting policy for its leases of real estate, to account for leaseand non-lease components in a contract as a single lease component. In addition, the recognitionrequirements are not applied to leases with a term of 12 months or less. Rather, the lease payments for86 2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)short-term leases are recognized on the consolidated statements of operations and comprehensive losson a straight-line basis over the lease term.Variable payments that depend on an index or a rate are initially measured using the index or rateat the lease commencement date. Such variable payments are included in the total lease paymentswhen measuring the lease liabilities and ROU assets. The Company will only remeasure variablepayments that depend on an index or a rate when the Company is remeasuring the lease liabilities dueto any of the following occurring: (i) the lease is modified and the modification is not accounted for asa separate contract; (ii) a contingency, upon which some or all of the variable lease payments that willbe paid over the remainder of the lease term are based, is resolved; (iii) there is a change in leaseterm; (iv) there is a change in the probability of exercising a purchase option; or (v) there is a changein the amount probable of being owed under residual value guarantees. Until the lease liabilities areremeasured due to one of the aforementioned events, additional payments for an increase in the indexor rate will be recognized in the period in which they are incurred. Variable payments that do notdepend on an index or a rate are excluded from the measurement of the lease liabilities and recognizedin the consolidated statements of operations and comprehensive loss in the period in which theobligation for those payments is incurred.Business CombinationsThe purchase price of an acquisition is allocated to the assets acquired, including intangible assets,and liabilities assumed, based on their respective fair values at the acquisition date. Acquisition-relatedcosts are expensed as incurred. The excess of the cost of an acquired entity, net of the amountsassigned to the assets acquired and liabilities assumed, is recognized as goodwill. The net assets andresults of operations of an acquired entity are included on the Company’s consolidated financialstatements from the acquisition date.Foreign Currency TranslationFor the portion of the Company’s non-U.S. business where the local currency is the functionalcurrency, operating results are translated into U.S. dollars using the average rate of exchange for theperiod, and assets and liabilities are converted at the closing rates on the period end date. Gains andlosses on translation of these accounts are accumulated and reported as a separate component ofstockholder’s equity and comprehensive loss.For any transaction that is in a currency different from the entity’s functional currency, theCompany records a gain or loss based on the difference between the exchange rate at the transactiondate and the exchange rate at the transaction settlement date (or rate at period end, if unsettled) asother income (expense), net on the consolidated statements of operations and comprehensive loss.Concentration of Credit RiskFinancial instruments that subject the Company to significant concentrations of credit risk consistprimarily of cash and cash equivalents and accounts receivable. All of the Company’s cash is held atfinancial institutions that management believes to be of high credit quality. The Company’s bankaccounts exceed federally insured limits at times. The Company has not experienced any losses on cashto date. The Company maintains an allowance for doubtful accounts, if needed, based on collectionhistory.872U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)Recent Accounting PronouncementsIn December 2019, the Financial Accounting Standards Board (‘‘FASB’’) issued ASU No. 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reducecomplexity in the accounting standards. The amendments in the ASU include removal of certainexceptions to the general principles in Topic 740 related to recognizing deferred taxes for investments,performing intraperiod tax allocation and calculating income taxes in an interim period. The ASU alsoclarifies and simplifies other aspects of the accounting for income taxes, including the recognition ofdeferred tax liabilities for outside basis differences. The amendments in this ASU are effective forannual and interim periods in fiscal years beginning after December 15, 2020, with early adoptionpermitted. The Company is evaluating the impact that this ASU will have on its consolidated financialstatements and related disclosures.In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326,Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, FinancialInstruments. ASU No. 2019-04 provides corrections, updates and clarifications to the previously issuedupdates of ASU No. 2016-01, ASU No. 2016-13 and ASU No. 2017-12. Various areas of the AccountingStandards Codification were impacted by the update. This standard follows the effective dates of thepreviously issued ASUs, unless an entity has already early adopted the previous ASUs, in which casethe effective date will vary according to each specific ASU adoption. As the Company has adoptedASU No. 2016-01, the amendments related to ASU No. 2016-01 are effective for annual and interimperiods in fiscal years beginning after December 15, 2019. As the Company has not yet adopted ASUNo. 2016-13, the amendments related to ASU No. 2016-13 are effective for fiscal years beginning afterDecember 15, 2019. Refer below for further discussion of ASU No. 2016-13. The Company does notanticipate a significant impact on its consolidated financial statements upon the adoption of theamendments related to ASU Nos. 2016-13 and 2016-01. The amendments to ASU No. 2017-12 are notapplicable to the Company.In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-UseSoftware (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a CloudComputing Arrangement that is a Service Contract, which requires customers in cloud computingarrangements that are service contracts to follow the internal-use software guidance in ASC 350-40 todetermine which implementation costs to capitalize as assets or expense as incurred. The amendmentsin this ASU are effective for fiscal years beginning after December 15, 2019, with early adoptionpermitted. The Company early adopted this ASU on July 1, 2018 under the prospective method. As aresult of adopting this standard, as of December 31, 2019 and 2018, the Company had balances of$3.1 million and $0.4 million, respectively, of capitalized implementation costs incurred to integrate thesoftware associated with its cloud computing arrangements, within university payments and other assets,non-current on the consolidated balance sheets. Such capitalized costs are subject to amortization overthe remaining contractual term of the associated cloud computing arrangement, with a useful life ofbetween three to five years. The Company incurred $0.3 million of such amortization for the yearended December 31, 2019 and did not incur a material amount of such amortization for the year endedDecember 31, 2018.In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, which clarifies andcorrects unintended applications of guidance, and makes improvements to several AccountingStandards Codification topics. The applicable amendments in this ASU are effective for the Company88 2U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)in annual periods beginning after December 15, 2018. The Company adopted this ASU on January 1,2019. Adoption of this standard did not have a material impact on the Company’s consolidatedfinancial statements or related disclosures.In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718):Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting forshare-based payments to nonemployees. The amendments in this ASU are effective for fiscal yearsbeginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU onJanuary 1, 2019. Adoption of this standard did not have a material impact on the Company’sconsolidated financial statements or related disclosures.In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment, which eliminates step two from the goodwill impairmenttest and requires an entity to recognize an impairment charge for the amount by which the carryingamount of a reporting unit exceeds its fair value, up to the amount of goodwill allocated to thatreporting unit. The amendments in this ASU are effective for fiscal years beginning after December 15,2019, with early adoption permitted. The Company early adopted this ASU on January 1, 2019.In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments. The ASU addresses eight specific cash flowissues with the objective of reducing the existing diversity in practice surrounding how certaintransactions are classified in the statement of cash flows. The amendments in this ASU were effectivefor fiscal years beginning after December 15, 2017. The Company adopted this ASU on January 1,2018. Adoption of this standard did not have a material impact on the Company’s consolidatedstatements of cash flows or related disclosures.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326):Measurement of Credit Losses on Financial Instruments. Subsequently, the FASB has issued the followingstandards related to ASU No. 2016-13: ASU No. 2019-11, Codification Improvements to Topic 326,Financial Instruments—Credit Losses, ASU No. 2019-05, Financial Instruments—Credit Losses(Topic 326): Targeted Transition Relief; ASU No. 2019-04, Codification Improvements to Topic 326,Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, FinancialInstruments; and ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU No. 2016-13 requires entities to measure all expected credit losses for mostfinancial assets held at the reporting date based on an expected loss model, which includes historicalexperience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU No. 2016-13 also requires enhanceddisclosures to help financial statement users better understand assumptions used in estimating expectedcredit losses. The amendments in these ASUs are effective for annual and interim periods in fiscalyears beginning after December 15, 2019, with early adoption permitted. The Company is evaluatingthe impact that the new guidance will have on its consolidated financial statements and relateddisclosures. The Company does not anticipate a significant impact on its consolidated financialstatements based on the instruments currently held and its historical trend of bad debt expense relatingto trade accounts receivable.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedesASC 840, Leases (Topic 840). The ASU introduces a model for lessees requiring most leases to bereported on the balance sheet. The Company adopted this ASU and the related amendments on892U, Inc.Notes to Consolidated Financial Statements (Continued)2. Significant Accounting Policies (Continued)January 1, 2019 under the modified retrospective transition method, which resulted in no cumulative-effect adjustment to retained earnings. The Company’s financial results for periods ending afterJanuary 1, 2019 are presented in accordance with the requirements of Topic 842, while prior periodamounts are not adjusted and continue to be reported in accordance with Topic 840.Upon adoption, the Company elected to not recognize ROU assets or lease liabilities for leaseswith a term of 12 months or less, as permitted by the short-term lease practical expedient. In transition,the Company also applied the package of practical expedients that permit entities to not reassess(i) whether expired or existing contracts contain a lease under the new standard, (ii) the leaseclassification for expired or existing leases, or (iii) whether previously capitalized initial direct costswould qualify for capitalization under the new standard. The Company also applied the practicalexpedient that permits a lessee to account for lease and non-lease components in a contract as a singlelease component. In addition, the Company did not use hindsight during transition.Upon adoption, the Company recorded ROU assets of approximately $34 million, which have beenreduced for accrued rent, and the remaining balance of any lease incentives upon transition, and alsorecorded corresponding current and non-current lease liabilities for its operating leases ofapproximately $5 million and $58 million, respectively, on the consolidated balance sheets. Adoption ofthis standard did not have a material impact on the Company’s consolidated statements of operationsand comprehensive loss, the consolidated statements of changes in stockholders’ equity or theconsolidated statements of cash flows. Refer to Note 8 for more information about the Company’slease-related obligations.3. Business CombinationOn May 22, 2019, the Company completed its acquisition of Trilogy pursuant to an Agreement andPlan of Merger and Reorganization, dated as of April 7, 2019 (the ‘‘Merger Agreement’’), for a netpurchase price of $608.6 million in cash and stock consideration, subject to final adjustments related toworking capital and indebtedness. Under the terms of the Merger Agreement, the Company has issuedrestricted stock units for shares of its common stock, par value $0.001 per share, to certain employeesand officers of Trilogy. These awards were issued pursuant to the Company’s 2014 Equity IncentivePlan, are subject to future service requirements and will primarily vest over an 18-month period. Inaddition, a portion of the purchase price held in escrow was recognized as compensation expense in thethird quarter of 2019 as the service requirements of certain key employees was determined to befulfilled. The net assets and results of operations of Trilogy are included in the Company’s consolidatedfinancial statements within the Alternative Credential Segment as of May 22, 2019.90 2U, Inc.Notes to Consolidated Financial Statements (Continued)3. Business Combination (Continued)The following table reflects the Company’s completed valuation of the assets acquired andliabilities assumed of Trilogy as of the date of the acquisition:Estimated AveragePurchase PriceUseful Life (in years)Allocation(in thousands)Cash and cash equivalents..................$35,320Current assets...........................30,081Property and equipment, net................2,411Other non-current assets...................6,276Amortizable intangible assets:Developed technology...................348,096Developed content......................448,050University client relationships..............1084,150Trade names and domain names............57,100Goodwill..............................425,346Current liabilities........................(57,010)Non-current liabilities.....................(21,224)$608,596Intangible assets are valued using the cost replacement, multi-period excess earnings andrelief-from-royalty methodologies, which are Level 3 measurements. The fair value of the developedtechnology and developed content acquired from Trilogy was determined using the replacement costmethod under the cost approach. Under the replacement cost method, consideration was given to theestimated time, investment and resources required to recreate the acquired intangibles, adjusted forobsolescence, an estimated developer’s profit and rate of return, in accordance with accepted valuationmethodologies.The fair value of university client relationships was determined using the multi-period excessearnings method under the income approach based on discounted projected cash flows associated withthe net earnings attributable to the acquired customer relationships. These projected cash flows areestimated over the remaining economic life of the intangible asset and are considered from a marketparticipant perspective. Significant estimates and assumptions required under this method includegrowth rates for revenue attributable to the existing university partnership base, forecasted margins,attrition and renewal rates, a discount rate, and contributory asset charges.Trade names were valued using the relief-from-royalty method under the income approach. Thismethod assumes that trade names have value to the extent that their owner is relieved of the obligationto pay royalties for the benefits received from them. This method required several assumptions,including future revenue for the trade name, the appropriate royalty rate and the discount rate.The goodwill balance is primarily attributed to the assembled workforce, expanded marketopportunities and operating synergies anticipated upon the integration of the operations of theCompany and Trilogy. The goodwill resulting from the acquisition will not be tax deductible. Refer toNote 5 for details.912U, Inc.Notes to Consolidated Financial Statements (Continued)3. Business Combination (Continued)The unaudited pro forma combined financial information below is presented for illustrativepurposes and does not purport to represent what the results of operations would actually have been ifthe business combination occurred as of the dates indicated or what the results would be for any futureperiods. The following table presents the Company’s unaudited pro forma combined revenue, proforma combined net loss and pro forma combined net loss per share for the years ended December 31,2019 and 2018, as if the acquisition of Trilogy had occurred on January 1, 2018:Year Ended December 31,20192018(in thousands, except pershare amounts)Pro forma revenue...............................$624,796$497,637Pro forma net loss...............................(268,900)(109,508)Pro forma net loss per share, basic and diluted..........$(4.38)$(1.96)4. Property and Equipment, NetProperty and equipment, net consisted of the following as of:December 31,December 31,20192018(in thousands)Computer hardware............................$8,685$5,114Furniture and office equipment....................18,47814,888Leasehold improvements.........................50,46145,158Leasehold improvements in process.................4,3181,940Total.......................................81,94267,100Accumulated depreciation and amortization.........(24,299)(14,801)Property and equipment, net......................$57,643$52,299Depreciation expense of property and equipment was $11.6 million, $8.9 million and $5.5 millionfor the years ended December 31, 2019, 2018 and 2017, respectively.92 2U, Inc.Notes to Consolidated Financial Statements (Continued)5. Goodwill and Amortizable Intangible AssetsThe table below summarizes the changes in the carrying amount of goodwill by reportablesegment:GraduateAlternativeProgramCredentialSegmentSegmentTotal(in thousands)Balance as of December 31, 2017..............$—$71,988$71,988Foreign currency translation adjustments.........—(10,136)(10,136)Balance as of December 31, 2018..............—61,85261,852Goodwill recognized in connection with businesscombination............................—425,346425,346Impairment charge (current and cumulative)......—(70,379)(70,379)Foreign currency translation adjustments.........—1,5311,531Balance as of December 31, 2019..............$—$418,350$418,350The Company experienced a sustained decline in its stock price during the third quarter of 2019,which management deemed a triggering event that required the Company to perform an interimgoodwill impairment test as of September 1, 2019. The Company’s test relied in part on the work of anindependent valuation firm engaged to provide inputs as to the fair value of the reporting units and toassist in the related calculations and analysis. The results of the interim impairment test indicated thatthe carrying value of the boot camp business acquired in 2019 within the Company’s AlternativeCredential Segment exceeded the fair value by $70.4 million. The decrease in this reporting unit’s fairvalue was primarily due to lower expectations of future performance due to the impact of changes inkey management as well as an increased focus in integrating the operations of the newly acquiredreporting unit, which impacted the estimated operating cash flows. As a result, the Company recordedan impairment charge of $70.4 million on the consolidated statements of operations and comprehensiveloss in the third quarter of 2019. For purposes of testing the Company’s goodwill for impairment, fairvalue measurements were determined primarily using a weighted combination of the income-based andmarket-based approaches. The income-based approach largely relied on inputs that were not observableto active markets, which would be deemed ‘‘Level 3’’ fair value measurements, as defined in the FairValue Measurements section of Note 2. These inputs included the Company’s expectations about futurerevenue growth, profitability, income tax rates, cash flows and the rate at which cash flows should bediscounted, in order to determine this fair value estimate. The primary input used in the market-basedapproach was publicly-available data on the financial ratios of the Company’s competitors.In the fourth quarter of 2019, the Company performed a qualitative assessment for its October 1annual impairment assessment and was not required to recognize any additional impairment ofgoodwill.932U, Inc.Notes to Consolidated Financial Statements (Continued)5. Goodwill and Amortizable Intangible Assets (Continued)Amortizable intangible assets, net consisted of the following as of:December 31, 2019December 31, 2018EstimatedGrossNetGrossNetAverage UsefulCarryingAccumulatedCarryingCarryingAccumulatedCarryingLife (in years)AmountAmortizationAmountAmountAmortizationAmount(in thousands)Capitalized technology...3 - 5$142,712$(41,106)$101,606$68,291$(16,945)$51,346Capitalized contentdevelopment.........4 - 5167,758(54,736)113,02279,725(31,662)48,063University clientrelationships.........9 - 10110,344(12,419)97,92525,616(4,269)21,347Trade names and domainnames..............5 - 1026,462(5,940)20,52218,793(2,944)15,849Total amortizableintangible assets, net...$447,276$(114,201)$333,075$192,425$(55,820)$136,605The amounts presented in the table above include $30.7 million and $40.3 million of in processcapitalized technology and content development as of December 31, 2019 and December 31, 2018,respectively. Amortizable intangible assets recognized in connection with the acquisition of Trilogyconsisted of developed technology of $48.1 million, developed content of $48.1 million, university clientrelationships of $84.2 million and trade names and domain names of $7.1 million, and are included inthe balances presented in the table above as of December 31, 2019.During 2018, the Company acquired certain third-party technologies to enhance the Company’splatform, which is referred to as the 2U Operating System, or 2UOS, for aggregate consideration of$9.5 million. These acquired assets are classified as capitalized technology within amortizable intangibleassets, net, on the Company’s consolidated balance sheets. Additionally, during the same period theCompany purchased several active websites and additional domains for consideration of $7.6 million tosupport the marketing efforts of certain offerings within our Graduate Program Segment. Theseacquired assets are classified as trade names and domain names within amortizable intangible assets,net, on the Company’s consolidated balance sheets.In the first quarter of 2018, the Company entered into an agreement to purchase a perpetualsource code license for the Learn.co platform and certain integration software development services for$14.5 million. These acquired assets are classified as capitalized technology and recorded withinamortizable intangible assets, net on the Company’s consolidated balance sheets.The Company recorded amortization expense related to amortizable intangible assets of$58.3 million, $23.9 million and $14.0 million for the years ended December 31, 2019, 2018 and 2017,94 2U, Inc.Notes to Consolidated Financial Statements (Continued)5. Goodwill and Amortizable Intangible Assets (Continued)respectively. As of December 31, 2019, the estimated future amortization expense for amortizableintangible assets placed in service is as follows (in thousands):2020...................................................$75,9552021...................................................69,6052022...................................................55,5202023...................................................36,4032024...................................................19,512Thereafter...............................................45,357Total...................................................$302,3526. Accrued ExpensesIncluded within accounts payable and accrued expenses on the Company’s consolidated balancesheet as of December 31, 2019 was $23.4 million of accrued university and head tutor compensationand $22.1 million of accrued marketing costs. Also included within accounts payable and accruedexpenses as of December 31, 2019 was $4.4 million of accrued transaction, integration andrestructuring-related costs, of which $0.5 million related to an employee termination benefits reservefor a September 2019 organizational restructuring.As of December 31, 2018, accounts payable and accrued expenses included $10.3 million ofaccrued marketing costs.7. Commitments and ContingenciesLegal ContingenciesThe Company is involved in various claims and legal proceedings arising in the ordinary course ofbusiness. The Company accrues a liability when a loss is considered probable and the amount can bereasonably estimated. While the Company does not expect that the ultimate resolution of any existingclaims and proceedings (other than the specific matter described below, if decided adversely),individually or in the aggregate, will have a material adverse effect on its financial position, anunfavorable outcome in some or all of these proceedings could have a material adverse impact on theresults of operations or cash flows for a particular period. This assessment is based on the Company’scurrent 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 hasbeen incurred as of the date of the balance sheets presented herein. As such, the Company’s view ofthese matters is subject to inherent uncertainties and may change in the future.In re 2U, Inc., Securities Class ActionOn August 7 and 9, 2019, Aaron Harper and Anne M. Chinn filed putative class action complaintsagainst the Company, Christopher J. Paucek, the Company’s CEO, and Catherine A. Graham, theCompany’s former CFO, in the United States District Court for the Southern District of New York.The district court consolidated the two actions on August 27, 2019, under the caption In re 2U, Inc.,Securities Class Action, No. 1:19-cv-7390 (S.D.N.Y.). On November 26, 2019, the court transferred thecase to the United States District Court for the District of Maryland, and the docket number is now952U, Inc.Notes to Consolidated Financial Statements (Continued)7. Commitments and Contingencies (Continued)8:19-cv-3455 (D. Md.). The complaints allege violations of Section 10(b) and 20(a) of the SecuritiesExchange Act of 1934, and SEC Rule 10b-5 promulgated thereunder, based upon allegedly false andmisleading statements regarding the Company’s business prospects and financial projections. Theproposed class consists of all persons who acquired the Company’s securities between February 26, 2018and July 30, 2019.The Company believes that the claims are without merit, and it intends to vigorously defendagainst these claims. However, due to the complex nature of the legal and factual issues involved, theoutcome of this matter is not presently determinable.Marketing and Sales CommitmentsCertain of the agreements entered into between the Company and its university clients in theGraduate Program Segment require the Company to commit to meet certain staffing and spendinginvestment thresholds related to marketing and sales activities. In addition, certain of the agreements inthe Graduate Program Segment require the Company to invest up to agreed-upon levels in marketingthe programs to achieve specified program performance. The Company believes it is currently incompliance with all such commitments.Future Minimum Payments to University ClientsPursuant to certain of the Company’s contracts in the Graduate Program Segment, the Companyhas made, or is obligated to make, payments to university clients in exchange for contract extensionsand various marketing and other rights. As of December 31, 2019, the future minimum payments dueto university clients were as follows (in thousands):2020.....................................................$2,6252021.....................................................1,6252022.....................................................6252023.....................................................6252024.....................................................625Thereafter................................................3,150Total future minimum payments to university clients..................$9,275Contingent PaymentsThe Company has entered into agreements with certain of its university clients in the GraduateProgram Segment under which the Company would be obligated to make future minimum payments inthe event that certain program metrics are not achieved on an annual basis. The Company recognizesany estimated contingent payments under these agreements as contra revenue over the period in whichthey relate, and records a liability in other current liabilities on the consolidated balance sheets.As of December 31, 2019, the Company had an obligation to make an additional investment in aneducation technology company of up to $5.0 million, upon demand by the investee.96 2U, Inc.Notes to Consolidated Financial Statements (Continued)8. LeasesThe Company leases facilities under non-cancelable operating leases primarily in the United States,South Africa, the United Kingdom and Canada. The Company’s operating leases have remaining leaseterms of between one to 11 years, some of which include options to extend the leases for up to fiveyears, and some of which include options to terminate the leases within one year. These options toextend the terms of the Company’s operating leases were not deemed to be reasonably certain ofexercise as of lease commencement and are therefore not included in the determination of theirrespective non-cancelable lease terms. The future lease payments due under non-cancelable operatinglease arrangements contain fixed rent increases over the term of the lease. The Company also leasesoffice equipment under non-cancelable leases. The Company did not have any subleases as ofDecember 31, 2019.The components of lease expense consisted of the following for the period presented:Year EndedDecember 31, 2019(in thousands)Operating lease expense................................$11,725Short-term lease expense...............................737Variable lease expense.................................4,195Total lease expense...................................$16,657As of December 31, 2019, for the Company’s operating leases, the weighted-average remaininglease term was 7.9 years and the weighted-average discount rate was 12.3%. For the year endedDecember 31, 2019, cash paid for amounts included in the measurement of operating lease liabilitieswas $13.5 million.The maturities of operating lease liabilities were as follows:As ofDecember 31, 2019(in thousands)2020..............................................$15,9562021..............................................14,9342022..............................................14,0432023..............................................13,6852024..............................................13,262Thereafter..........................................45,952Total lease payments.................................117,832Less: imputed interest.................................(43,538)Total lease liability..................................$74,294As of December 31, 2019, the Company has additional operating leases for facilities that have notyet commenced with future minimum lease payments of approximately $93.1 million. These operatingleases will commence during fiscal years 2020 and 2021, with lease terms of between four to twelveyears.972U, Inc.Notes to Consolidated Financial Statements (Continued)8. Leases (Continued)As of December 31, 2018, the future minimum lease payments for operating leases having initial orremaining noncancellable lease terms in excess of one year were as follows (in thousands):2019...................................................$12,9412020...................................................14,0202021...................................................13,9002022...................................................13,6332023...................................................13,959Thereafter...............................................68,347Total future minimum lease payments...........................$136,8009. DebtThe Company’s outstanding long-term debt was as follows:December 31, 2019December 31, 2018(in thousands)Senior secured term loan facility.............$250,000$—Deferred government grant obligations........3,5003,500Less: unamortized debt issuance costs.........(7,238)—Other................................358—Long-term debt.........................$246,620$3,500The Company believes the carrying value of its long-term debt approximates the fair value of thedebt as the terms and interest rates approximate the market rates.As of December 31, 2019, the Company had a current portion of long-term debt balance of$0.6 million related to other borrowings, and had no such balance as of December 31, 2018.Credit AgreementOn May 22, 2019, the Company entered into a credit agreement (the ‘‘Credit Agreement’’) withOwl Rock Capital Corporation, as administrative agent and collateral agent, and certain other lendersparty thereto that provides for a $250 million senior secured term loan facility (the ‘‘Term Loan’’).Subject to certain exceptions, the Term Loan under the Credit Agreement may be increased or newterm loans may be established in an amount not to exceed (i) $50 million plus (ii) the amount ofcertain prepayments made by the Company plus (iii) an unlimited amount, subject to the achievementof either a certain First Lien LQA University Segment Revenue Leverage Ratio (as defined in theCredit Agreement) or a certain First Lien Net Leverage Ratio (as defined in the Credit Agreement), asapplicable.On February 25, 2020 (the ‘‘First Amendment Effective Date’’), the Company amended the creditagreement (as amended, the ‘‘Credit Agreement’’) to modify the Minimum Graduate LQAR (asdefined below) and Minimum Alternative Credential LTMR (as defined below) required for the fiscalquarters ending June 30, 2020, September 30, 2020 and December 31, 2020. In addition, theamendment increases the applicable interest rate margins and extends the prepayment premium98 2U, Inc.Notes to Consolidated Financial Statements (Continued)9. Debt (Continued)applicable to certain voluntary prepayments and mandatory prepayments. In connection with theamendment, the Company incurred incremental issuance costs of $2.5 million, which will be amortizedas a component of interest expense over the remaining term of the Credit Agreement.The Credit Agreement governing the Term Loan requires the Company to comply with severalcustomary financial and other restrictive covenants, such as maintaining leverage ratios in certainsituations, maintaining insurance coverage, and restricting the Company’s ability to make certaininvestments. The Company is also required to maintain liquidity of $25.0 million of unrestricted cash asof the last day of each fiscal quarter. The Credit Agreement also includes covenants that require theCompany to maintain minimum: (i) annualized last quarter Graduate Program Segment revenue(‘‘Minimum Graduate LQAR’’) and (ii) Alternative Credential Segment revenue for the last fourconsecutive fiscal quarters (‘‘Minimum Alternative Credential LTMR’’). For the quarter and fourconsecutive fiscal quarters ended December 31, 2019, the Company’s Minimum Graduate LQAR andMinimum Alternative Credential LTMR were $432.9 million and $218.8 million, respectively, whichexceeded the requirements of $397.8 million and $185.0 million, respectively.The Term Loan matures on May 22, 2024 and currently bears interest, at the Company’s option, atvariable rates based on (i) a customary alternative base rate (with a floor of 2.00%) plus an applicablemargin of 5.75% or (ii) an adjusted LIBOR rate (with a floor of 1.00%) for the interest period relevantto such borrowing plus an applicable margin of 6.75%. The effective interest rate of the Term Loan forthe year ended December 31, 2019 was 8.91%. Voluntary prepayments and mandatory prepaymentsfollowing or in connection with any asset sales, debt issuance or casualty events or following anyacceleration of the Term Loan are subject to a 2% prepayment premium if made prior to the firstanniversary of the First Amendment Effective Date, and a 1% prepayment premium if made on orafter the first anniversary of the First Amendment Effective Date, but prior to the second anniversaryof the First Amendment Effective Date; provided, that a 1% prepayment penalty shall apply to theextent the prepayment is made prior to the first anniversary of the First Amendment Effective Datewith the proceeds from the sale of equity securities, equity-linked securities and/or derivative securitiessettled in, or convertible into, equity securities. During the year ended December 31, 2019, theCompany incurred interest expense of $13.2 million in connection with the Credit Agreement. As ofDecember 31, 2019, the Company’s accrued interest balance associated with the Credit Agreement was$0.1 million.Comerica Line of CreditEffective in the second quarter of 2019, the Company terminated its $25.0 million revolving line ofcredit agreement and letters of credit with Comerica Bank. No amounts were outstanding under thiscredit agreement as of December 31, 2019 or 2018.Deferred Government Grant ObligationsThe Company has a total of two outstanding conditional loan agreements with Prince George’sCounty, Maryland and the State of Maryland for an aggregate amount of $3.5 million, each bearing aninterest rate of 3% per annum. These agreements are conditional loan obligations that may be forgivenprovided that the Company attains certain conditions related to employment levels at 2U’s Lanham,Maryland headquarters. The conditional loan with the State of Maryland has a maturity date ofDecember 31, 2026, and the conditional loan with Prince George’s County, Maryland has a maturity992U, Inc.Notes to Consolidated Financial Statements (Continued)9. Debt (Continued)date of June 22, 2027. As of December 31, 2019, the Company did not meet the employment levelthreshold set forth in the conditional loan agreement with Prince George’s County, Maryland and a$0.6 million portion of the $1.5 million principal balance and $0.1 million of accrued interest as of thatdate were no longer subject to forgiveness and became payable upon demand. The Company is indiscussions with Prince George’s County, Maryland to amend the employment conditions under thisconditional loan agreement. The interest expense related to these loans for the years endedDecember 31, 2019 and 2018 was immaterial. As of December 31, 2019 and 2018, the Company’scombined accrued interest balance associated with the deferred government grant obligations was$0.3 million and $0.2 million, respectively.Letters of CreditCertain of the Company’s operating lease agreements entered into require security deposits in theform of cash or an unconditional, irrevocable letter of credit. As of December 31, 2019, the Companyhas entered into standby letters of credit totaling $18.4 million as security deposits for the applicableleased facilities and in connection with the deferred government grant obligations.The Company maintains restricted cash as collateral for standby letters of credit for the Company’sleased facilities and in connection with the deferred government grant obligations.10. Income TaxesThe following table presents the components of loss before income taxes:Year Ended December 31,201920182017(in thousands)Loss before income taxes:United States............................$(239,629)$(33,339)$(25,002)Foreign................................(15,453)(9,858)(5,718)Total..................................$(255,082)$(43,197)$(30,720)100 2U, Inc.Notes to Consolidated Financial Statements (Continued)10. Income Taxes (Continued)The following table presents the components of the income tax (provision) benefit:Year Ended December 31,201920182017(in thousands)Current income tax (provision) benefit:United States federal and state..................$(97)$—$—Foreign...................................3——Total current income tax (provision) benefit..........$(94)$—$—Deferred income tax benefit:United States federal and state..................$17,459$2,774$—Foreign...................................2,4952,0931,297Total deferred income tax benefit..................$19,954$4,867$1,297Total income tax (provision) benefit................$19,860$4,867$1,297A reconciliation between the Company’s statutory federal income tax rate and the effective taxrate is presented below:Year Ended December 31,201920182017U.S. statutory federal income tax rate.................21.0%21.0%35.0%Increase (decrease) resulting from:U.S. state income taxes, net of federal benefits.........4.20.99.9Foreign tax rate differential.......................0.21.1(1.4)Non-deductible expenses.........................(1.1)(2.6)(1.8)Stock-based compensation........................0.530.040.9Change in valuation allowance.....................(10.9)(39.3)29.8Change in tax rate..............................—(0.1)(108.0)Non-deductible impairment.......................(5.8)——Other.......................................(0.3)0.3(0.2)Effective tax rate................................7.8%11.3%4.2%1012U, Inc.Notes to Consolidated Financial Statements (Continued)10. Income Taxes (Continued)The significant components of the Company’s deferred tax assets and liabilities are as follows:As of December 31,20192018(in thousands)Deferred tax assets:Accrued expenses and other.......................$3,037$2,580Accrued compensation and related benefits............2,7793,395Rebate reserve.................................—5Deferred rent..................................7,5436,388Stock-based compensation.........................14,5468,279Deferred income................................345257Interest expense carryforwards......................2,059—Foreign net operating loss carryforwards..............3,1711,543U.S. net operating loss carryforwards.................164,85496,809Valuation allowance.............................(116,244)(88,061)Total deferred tax assets............................$82,090$31,195Deferred tax liabilities:Prepaid expenses and other........................$(142)$(95)Property and equipment..........................(3,056)(4,038)Intangibles....................................(84,025)(34,011)Total deferred tax liabilities..........................(87,223)(38,144)Net deferred tax liabilities..........................$(5,133)$(6,949)As of December 31, 2019, the Company had a U.S. net operating loss (‘‘NOL’’) carryforward ofapproximately $627.7 million, of which $265.0 million expires between 2029 and 2037. In accordancewith the Tax Cuts and Jobs Act of 2017 (the ‘‘Tax Act’’), U.S. NOLs arising in a tax year ending after2017 will not expire. The Company has generated $362.7 million of U.S. NOLs in tax years ending after2017. The gross amount of the state NOL carryforwards is equal to or less than the federal NOLcarryforwards and expires over various periods based on individual state tax laws. The Company alsohad an NOL carryforward of $14.5 million in its foreign jurisdictions, which does not expire. A fullvaluation allowance has been established to offset its net deferred tax assets in the U.S., and certainforeign jurisdictions as the Company has not generated taxable income since inception and does nothave sufficient deferred tax liabilities to recover the deferred tax assets in these jurisdictions. The totalincrease in the valuation allowance was $28.2 million for the year ended December 31, 2019. Theutilization of the NOL carryforwards to reduce future income taxes will depend on the Company’sability to generate sufficient taxable income prior to the expiration of the NOL carryforwards. Underthe provisions of Internal Revenue Code Section 382, certain substantial changes in the Company’sownership may result in a limitation on the amount of U.S. net operating loss carryforwards that couldbe utilized annually to offset future taxable income and taxes payable. The Company does not expectsuch limitation, if any, to impact the use of the net operating losses prior to their expiration.A one-time tax benefit of approximately $17.5 million related to the acquisition of Trilogy wasincluded in the Company’s income tax benefit for the year ended December 31, 2019. This one-time102 2U, Inc.Notes to Consolidated Financial Statements (Continued)10. Income Taxes (Continued)benefit relates to the release of the Company’s tax valuation allowance that was no longer needed as aresult of recognizing an additional net deferred tax liability, due to the acquisition of Trilogy.As of December 31, 2019 and 2018, the Company has not recognized any amounts for uncertaintax positions.The Company has analyzed its filing positions in all significant federal, state and foreignjurisdictions where it is required to file income tax returns, as well as open tax years in thesejurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local taxexaminations by tax authorities for the years prior to 2016, though the NOL carryforwards can beadjusted upon audit and could impact taxes owed in open tax years. No income tax returns arecurrently under examination by the taxing authorities.On December 22, 2017, the Tax Act was enacted into law and contains certain key tax provisionsthat affect the Company. The Tax Act affects the Company by (i) reducing the U.S. tax rate to 21%,effective January 1, 2018, (ii) impacting the values of the Company’s deferred assets and liabilities,(iii) changing the Company’s ability to utilize future net operating losses and (iv) requiring a one-timetax on any of the Company’s unrepatriated foreign earnings and profits (‘‘E&P’’) in 2017. TheCompany did not incur the one-time tax as cumulative foreign earnings and profits were negative.The Tax Act includes Global Intangible Low-Taxed Income (‘‘GILTI’’) provisions that require acompany to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowablereturn on the foreign subsidiary’s tangible assets. Due to foreign subsidiary losses, this provision did notapply to the Company in 2019. Another significant section of the Tax Act, the Base Erosion Anti-AbuseTax (‘‘BEAT’’), did not apply to the Company’s 2019 tax year as the Company did not meet theminimum revenue requirements under the BEAT. As these taxes may become applicable in the future,the Company will continue to monitor the potential impact.11. Stockholders’ EquityOn May 22, 2019, the Company issued 4,608,101 shares of common stock in connection with itsacquisition of Trilogy. On May 22, 2018, the Company sold 3,833,334 shares of its common stock to thepublic, including 500,000 shares sold pursuant to the underwriters’ over-allotment option, and receivednet proceeds of $330.9 million. On September 11, 2017, the Company sold 4,047,500 shares of itscommon stock to the public, including 547,500 shares sold pursuant to the underwriters’ over-allotmentoption, and received net proceeds of $189.5 million.As of December 31, 2019, the Company was authorized to issue 205,000,000 total shares of capitalstock, consisting of 200,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of1032U, Inc.Notes to Consolidated Financial Statements (Continued)11. Stockholders’ Equity (Continued)December 31, 2019, the Company had reserved a total of 14,178,107 of its authorized shares ofcommon stock for future issuance as follows:Outstanding stock options..................................4,373,895Outstanding restricted stock units............................3,694,915Available for future issuance under Amended and Restated 2014 EquityIncentive Plan.........................................5,296,333Available for future issuance under 2017 Employee Stock Purchase Plan812,964Total shares of common stock reserved for future issuance..........14,178,10712. Stock-Based CompensationThe Company provides stock-based compensation awards to employees, independent contractorsand directors as an effective means for attracting, retaining and motivating such individuals. TheCompany maintains two stock-based compensation plans: the Amended and Restated 2014 EquityIncentive Plan (the ‘‘2014 Plan’’) and the 2008 Stock Incentive Plan (the ‘‘2008 Plan’’). Upon theeffective date of the 2014 Plan in January 2014, the Company ceased using the 2008 Plan to grant newequity awards, and began using the 2014 Plan for grants of new equity awards.2014 PlanIn February 2014, the Company’s stockholders approved the 2014 Plan. The 2014 Plan provides forthe grant of incentive stock options to the Company’s employees and for the grant of nonstatutorystock options, restricted stock awards, restricted stock unit awards, stock appreciation rights,performance stock awards and other forms of stock compensation to the Company’s employees,consultants and directors. The 2014 Plan also provides for the grant of performance-based cash awardsto the Company’s employees, consultants and directors.A total of 2,800,000 shares of the Company’s common stock were initially reserved for issuancepursuant to the 2014 Plan. In addition, the shares reserved for issuance under the 2014 Plan include(a) those shares reserved but unissued under the 2008 Plan, and (b) shares returned to the 2008 Planas the result of expiration or termination of awards (provided that the maximum number of shares thatmay be added to the 2014 Plan pursuant to (a) and (b) is 5,943,348 shares). The number of shares ofthe Company’s common stock that may be issued under the 2014 Plan will automatically increase onJanuary 1st of each year, for a period of ten years, from January 1, 2015 continuing through January 1,2024, by 5% of the total number of shares of the Company’s common stock outstanding onDecember 31st of the preceding calendar year, or a lesser number of shares as may be determined bythe Company’s board of directors. The shares available for issuance increased by 3,175,011 and2,896,365 on January 1, 2020 and 2019, respectively, pursuant to the automatic share reserve increaseprovision under the 2014 Plan.In addition, shares subject to outstanding stock awards granted under the 2008 Plan and 2014 Planthat (i) expire or terminate for any reason prior to exercise or settlement; (ii) are forfeited because ofthe failure to meet a contingency or condition required to vest such shares or otherwise return to theCompany; or (iii) are reacquired or withheld (or not issued) to satisfy a tax withholding obligation inconnection with an award or to satisfy the purchase price or exercise price of a stock award, return to104 2U, Inc.Notes to Consolidated Financial Statements (Continued)12. Stock-Based Compensation (Continued)the 2014 Plan’s share reserve and become available for future grant under the 2014 Plan, up to themaximum number of shares of 5,943,348.As of December 31, 2019, the Company had 5,296,333 shares reserved for issuance under the 2014Plan. Further, as of December 31, 2019, under the 2014 Plan, options to purchase 3,249,445 shares ofthe Company’s common stock were outstanding at a weighted-average exercise price of $44.14 pershare and 3,694,915 restricted stock units were outstanding.2008 PlanIn October 2008, the Company’s stockholders approved the Company’s 2008 Plan. The 2008 Planwas most recently amended on May 8, 2013. The 2008 Plan provided for the grant of incentive stockoptions to the Company’s employees and the employees of the Company’s subsidiaries, and for thegrant of nonstatutory stock options, restricted stock awards and deferred stock awards to theCompany’s employees, directors and consultants. The Company ceased granting equity awards underthe 2008 Plan, and accordingly, as of January 30, 2014, no shares were available for future grant underthe 2008 Plan. However, the 2008 Plan will continue to govern the terms and conditions of outstandingawards granted thereunder.As of December 31, 2019, options to purchase 1,124,450 shares of the Company’s common stockwere outstanding under the 2008 Plan at a weighted-average exercise price of $5.66 per share.Stock OptionsThe terms of stock option grants, including the exercise price per share and vesting periods, aredetermined by the Company’s board of directors or the compensation committee thereof. Stock optionsare granted at exercise prices of not less than the estimated fair market value of the Company’scommon stock at the date of grant. Stock options are generally subject to service-based vestingconditions and vest at various times from the date of the grant, with most options vesting in tranches,generally over a period of four years. Stock options granted under the 2014 Plan and the 2008 Plan aresubject to service-based vesting conditions, and generally expire ten years from the grant date.The Company values stock options using the Black-Scholes option pricing model, which requiresthe input of subjective assumptions, including the risk-free interest rate, expected life of the option,expected stock price volatility and dividend yield. The risk-free interest rate assumption is based uponobserved interest rates for constant maturity U.S. Treasury securities consistent with the expected termof the Company’s employee stock options. The expected life represents the period of time the stockoptions are expected to be outstanding and is based on the ‘‘simplified method.’’ Under the ‘‘simplifiedmethod,’’ the expected life of an option is presumed to be the mid-point between the vesting date andthe end of the contractual term. The Company uses the ‘‘simplified method’’ due to the lack ofsufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate theexpected life of the stock options. Expected volatility is based on the historical volatility of theCompany’s common stock over the estimated expected life of the stock options. The Company assumesno dividend yield because dividends are not expected to be paid in the near future, which is consistentwith the Company’s history of not declaring or paying dividends to date.1052U, Inc.Notes to Consolidated Financial Statements (Continued)12. Stock-Based Compensation (Continued)The following table summarizes the assumptions used for estimating the fair value of the stockoptions granted for the periods presented.Year Ended December 31,201920182017Risk-free interest rate.............1.6% - 2.6%2.3% - 3.0%2.0% - 2.1%Expected term (years).............5.96 - 6.085.97 - 6.776.00 - 6.08Expected volatility................45% - 64%44% - 45%46% - 49%Dividend yield...................0%0%0%The following is a summary of the stock option activity for the year ended December 31, 2019:Weighted-AverageWeighted-AverageRemainingAggregateNumber ofExercise PriceContractualIntrinsic ValueOptionsper ShareTerm (in years)(in thousands)Outstanding balance as of December 31,2018...........................4,057,788$27.235.95$113,211Granted........................809,28961.348.35Exercised.......................(361,134)8.641.36Forfeited........................(116,435)56.00Expired.........................(15,613)44.99Outstanding balance as of December 31,2019...........................4,373,89534.245.8828,736Exercisable as of December 31, 2019.....3,051,658$20.984.69$28,374The weighted-average grant date fair value of the Company’s stock options granted during theyears ended December 31, 2019, 2018 and 2017 was $28.49, $39.66 and $19.65 per share, respectively.The total unrecognized compensation cost related to the unvested options as of December 31,2019 was $35.5 million and will be recognized over a weighted-average period of approximately2.9 years.The aggregate intrinsic value of options exercised during the years ended December 31, 2019, 2018and 2017 was $15.4 million, $54.0 million and $24.9 million, respectively.Restricted Stock UnitsUnder the 2014 Plan, the Company grants RSUs and PRSUs to the Company’s directors andcertain of the Company’s employees and consultants. The terms of these grants under the 2014 Plan,including the vesting periods, are determined by the Company’s board of directors or the compensationcommittee, or a subcommittee thereof.During the first quarter of 2019, the Company granted 186,433 PRSUs with an aggregate grantdate fair value of $11.5 million to certain of its employees. These PRSU awards are generally subject tovesting over periods of approximately one or two years, based on the Company achievingpre-determined consolidated revenue and adjusted EBITDA (loss) performance targets for the 2019fiscal year. As of December 31, 2019, the performance targets were not met and no awards vested.106 2U, Inc.Notes to Consolidated Financial Statements (Continued)12. Stock-Based Compensation (Continued)During the fourth quarter of 2019, the Company granted 1,275,955 PRSUs with an aggregate grantdate fair value of $29.3 million to certain of its employees. These PRSU awards are subject to vestingover a period of three years, based on the Company’s stock price achieving pre-determined totalshareholder return targets relative to that of companies comprising the Russell 3000 Index during eachof the one, two and three-year vesting periods. The PRSU award agreements provide that the quantityof units subject to vesting may range from 200% to 0% of the granted quantities, depending on theachievement of market-based targets. The expense recognized each period is determined at the time ofgrant and not subject to fluctuation due to the achievement of market-based targets.Throughout 2019 and 2018, the Company granted RSUs under the 2014 Plan to the Company’sdirectors and certain of the Company’s employees and consultants. The terms of the restricted stockunit grants under the 2014 Plan, including the vesting periods, are determined by the Company’s boardof directors or the compensation committee thereof. Restricted stock units are generally subject toservice-based vesting conditions and vest at various times from the date of the grant, with mostrestricted stock units vesting in equal annual tranches, generally over a period of three to four years.The following is a summary of RSU and PRSU activity for the year ended December 31, 2019:Number ofWeighted-AverageRestricted StockGrant Date FairUnitsValue per ShareOutstanding balance as of December 31, 2018.....1,139,045$52.47Granted...............................3,388,91932.50Vested................................(538,752)42.74Forfeited..............................(294,297)50.15Outstanding balance as of December 31, 2019.....3,694,915$35.76The total compensation cost related to the nonvested restricted stock units not yet recognized as ofDecember 31, 2019 was $93.5 million and will be recognized over a weighted-average period ofapproximately 2.1 years.In January 2020, the Company issued its annual grants to certain employees consisting of1.7 million RSUs with an aggregate grant date fair value of $34.1 million and 1.9 million PRSUs withan aggregate intrinsic value of $37.6 million. These RSU and PRSU awards vest over a period of threeyears. The quantity of PRSU awards that will vest is based on the Company’s stock price achievingpre-determined total shareholder return targets relative to that of companies comprising the Russell3000 Index during each performance period. The PRSU award agreements provide that the quantity ofunits subject to vesting may range from 200% to 0% of the granted quantities for the first performanceperiod, depending on the achievement of market-based targets. Achievement percentages applicable tothe second and third performance periods will be determined in advance of the grants date, by theCompany’s compensation committee. The expense recognized each period is determined at the time ofgrant and not subject to fluctuation due to the achievement of market-based targets.Employee Stock Purchase PlanThe Company’s 2017 Employee Stock Purchase Plan (the ‘‘ESPP’’) provides (i) for two offeringperiods each year and (ii) that the purchase price for shares of the Company’s common stock1072U, Inc.Notes to Consolidated Financial Statements (Continued)12. Stock-Based Compensation (Continued)purchased under the ESPP will be 90% of the lesser of the fair market value of the Company’scommon stock on the purchase date or the fair market value of the Company’s common stock on thefirst day of the offering period. Notwithstanding the foregoing, the compensation committee of theCompany’s board of directors may exercise its discretion, subject to certain conditions, to make changesto certain aspects of the ESPP including, but not limited to, the length of the offering periods and thatthe purchase price will be 85% of the lesser of the fair market value of the Company’s common stockon the purchase date or the fair market value of 2U’s common stock on the first day of the offeringperiod. Participating eligible employees select a rate of payroll deduction between 1% and 15% of theirsalary or wage compensation received from the Company as in effect at the start of the offering period,with the aggregate purchase limited to a maximum fair market value of $25,000 per employee per year.Participation in the ESPP began on January 1, 2018. The ESPP is intended to qualify as an employeestock purchase plan under Section 423 of the Internal Revenue Code. A maximum of 1,000,000 sharesof 2U’s common stock may be issued under the ESPP, subject to adjustments for certain capitaltransactions.During the year ended December 31, 2019, an aggregate of 123,365 shares of 2U’s common stockwere purchased in accordance with the ESPP. Net proceeds from the issuance of shares of 2U’scommon stock under the ESPP for the year ended December 31, 2019 were $3.4 million. As ofDecember 31, 2019, 812,964 shares remain available for purchase under the ESPP.Stock-Based Compensation ExpenseStock-based compensation expense related to stock-based awards, as well as the ESPP, is includedin the following line items on the accompanying consolidated statements of operations andcomprehensive loss:Year Ended December 31,201920182017(in thousands)Curriculum and teaching......................$45$14$3Servicing and support........................8,9154,7644,036Technology and content development.............8,2414,0943,306Marketing and sales..........................7,0212,7431,742General and administrative....................27,28219,79512,843Total stock-based compensation expense.........$51,504$31,410$21,930Prior to January 1, 2017, the Company adjusted stock-based compensation expense for estimatedforfeitures of stock-based awards. Beginning on January 1, 2017, the Company began accounting forforfeitures (and the impact on stock-based compensation expense) as they occur and recorded thecumulative-effect of this accounting change at that time.108 2U, Inc.Notes to Consolidated Financial Statements (Continued)13. Net Loss per ShareDiluted net loss per share is the same as basic net loss per share for all periods presented becausethe effects of potentially dilutive items were anti-dilutive, given the Company’s net loss. The followingsecurities have been excluded from the calculation of weighted-average shares of common stockoutstanding because the effect is anti-dilutive for the years ended December 31, 2019, 2018 and 2017:Year Ended December 31,201920182017Stock options...........................4,373,8954,057,7884,559,176Restricted stock units.....................3,694,9151,139,0451,413,423Basic and diluted net loss per share is calculated as follows:Year Ended December 31,201920182017Numerator (in thousands):Net loss........................$(235,222)$(38,330)$(29,423)Denominator:Weighted-average shares of commonstock outstanding, basic and diluted..61,393,66655,833,49249,062,611Net loss per share, basic and diluted.....$(3.83)$(0.69)$(0.60)14. Segment and Geographic InformationThe Company has two reportable segments: the Graduate Program Segment and the AlternativeCredential Segment (formerly known as the Short Course Segment). The Company’s reportablesegments are determined based on (i) financial information reviewed by the chief operating decisionmaker, 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 segmentsdid not change as a result of the acquisition of Trilogy. The Company’s Graduate Program Segmentincludes the technology and services provided to nonprofit colleges and universities to enable the onlinedelivery of degree programs. The Company’s Alternative Credential Segment includes the premiumonline short courses and technical skills-based boot provided through relationships with nonprofitcolleges and universities.Graduate Program SegmentFor the year ended December 31, 2019, one university client accounted for 10% or more of theCompany’s consolidated revenue, with $83.5 million, or approximately 15% of the Company’sconsolidated revenue. For the year ended December 31, 2018, three university clients each accountedfor 10% or more of the Company’s consolidated revenue, as follows: $86.9 million, $54.2 million and$42.7 million, which equaled 21%, 13% and 10% of the Company’s consolidated revenue, respectively.For the year ended December 31, 2017, four university clients each accounted for 10% or more of theCompany’s consolidated revenue, as follows: $77.6 million, $48.2 million, $30.1 million and$28.3 million, which equaled 27%, 17%, 11% and 10% of the Company’s consolidated revenue,respectively.1092U, Inc.Notes to Consolidated Financial Statements (Continued)14. Segment and Geographic Information (Continued)As of December 31, 2019, two university clients each accounted for 10% or more of theCompany’s consolidated accounts receivable, net balance, as follows: $6.1 million and $4.9 million,which equaled 18% and 15% of the Company’s consolidated accounts receivable, net balance,respectively. As of December 31, 2018, two university clients each accounted for 10% or more of theCompany’s consolidated accounts receivable, net balance, as follows: $11.9 million and $11.8 million,which equaled 36% and 36% of the Company’s consolidated accounts receivable, net balance,respectively.Alternative Credential SegmentFor the year ended December 31, 2019, 2018 and 2017, there were no customers or individualuniversity clients that had revenue associated with it that accounted for 10% or more of the Company’sconsolidated revenue. In addition, as of December 31, 2019 and December 31, 2018, no customers hadaccounts receivable, net balances that accounted for 10% or more of the Company’s consolidatedaccounts receivable, net balance, as customers are individual students or third parties paying on theirbehalf, rather than university clients.For the year ended December 31, 2019, offerings associated with one university client accountedfor 10% or more of the segment’s revenue, with $33.9 million, or approximately 22% of the segment’srevenue. For the year ended December 31, 2018, offerings associated with three university clients eachaccounted for 10% or more of the segment’s revenue, and when combined, accounted forapproximately 81% of the segment’s revenue. For the year ended December 31, 2017, offeringsassociated with three university clients each accounted for 10% or more of the segment’s revenue, andwhen combined, accounted for approximately 82% of the segment’s revenue.110 2U, Inc.Notes to Consolidated Financial Statements (Continued)14. Segment and Geographic Information (Continued)Segment PerformanceThe following table summarizes financial information regarding each reportable segment’s resultsof operations for the periods presented:Year Ended December 31,201920182017(in thousands)Revenue by segment*Graduate Program Segment.............................$417,206$348,361$270,432Alternative Credential Segment..........................157,46563,40816,320Total revenue......................................$574,671$411,769$286,752Segment profitability**Graduate Program Segment.............................$5,770$16,839$13,022Alternative Credential Segment..........................(29,716)816(1,606)Total segment profitability............................$(23,946)$17,655$11,416Segment profitability margin***Graduate Program Segment.............................1.4%4.8%4.8%Alternative Credential Segment..........................(18.9)1.3(9.8)Total segment profitability margin.......................(4.2)%4.3%3.9%*The Company has excluded immaterial amounts of intersegment revenue from the years endedDecember 31, 2019, 2018 and 2017.**The Company defines segment profitability as net income or net loss, as applicable, before netinterest income (expense), taxes, depreciation and amortization expense, foreign currency gains orlosses, deferred revenue fair value adjustments, transaction costs, integration costs, restructuring-related costs, shareholder activism costs, impairment charges, and stock-based compensationexpense. Some or all of these items may not be applicable in any given reporting period.***The Company defines segment profitability margin as segment profitability as a percentage of therespective segment’s revenue.1112U, Inc.Notes to Consolidated Financial Statements (Continued)14. Segment and Geographic Information (Continued)The following table reconciles net loss to total segment profitability:Year Ended December 31,201920182017(in thousands)Net loss.............................................$(235,222)$(38,330)$(29,423)Adjustments:Interest income......................................(5,800)(5,173)(371)Interest expense.....................................13,41910887Foreign currency loss..................................7071,722866Income tax benefit...................................(19,860)(4,867)(1,297)Depreciation and amortization expense.....................69,84332,78519,624Deferred revenue fair value adjustment....................11,175——Transaction costs.....................................4,786——Integration costs.....................................3,255——Restructuring-related costs..............................10,826——Shareholder activism costs..............................1,042——Impairment charge...................................70,379——Stock-based compensation expense........................51,50431,41021,930Total adjustments...................................211,27655,98540,839Total segment profitability................................$(23,946)$17,655$11,416The Company’s total assets by segment are as follows:December 31,December 31,20192018(in thousands)Total assetsGraduate Program Segment.....................$507,187$702,827Alternative Credential Segment..................679,643104,527Total assets..................................$1,186,830$807,354112 2U, Inc.Notes to Consolidated Financial Statements (Continued)14. Segment and Geographic Information (Continued)Trade Accounts Receivable and Contract LiabilitiesThe Company’s trade accounts receivable and contract liabilities in each segment are as follows:December 31,December 31,20192018(in thousands)Trade accounts receivableGraduate Program Segment accounts receivable, net of allowance fordoubtful accounts of $0 for all periods presented.................$3,454$31,110Graduate Program Segment unbilled revenue.....................12,123265Alternative Credential Segment accounts receivable, net of allowance fordoubtful accounts of $1.3 million and $257 thousand as ofDecember 31, 2019 and 2018, respectively......................12,436982Alternative Credential Segment unbilled accounts receivable..........5,642—Total trade accounts receivable..................................$33,655$32,357Contract liabilitiesGraduate Program Segment deferred revenue.....................$2,210$2,864Alternative Credential Segment deferred revenue..................46,6235,481Total contract liabilities.......................................$48,833$8,345For the Graduate Program Segment, revenue recognized during the years ended December 31,2019 and 2018 that was included in the deferred revenue balance at the beginning of each year was$2.4 million and $2.5 million, respectively. For the Alternative Credential Segment, revenue recognizedduring the years ended December 31, 2019 and 2018 that was included in the deferred revenue balanceat the beginning of the year was $5.4 million and $4.5 million, respectively.Contract Acquisition CostsThe Graduate Program Segment had $0.5 million and $0.3 million of net capitalized contractacquisition costs capitalized primarily within university payments and other assets, non-current on theconsolidated balance sheets as of December 31, 2019 and 2018, respectively. For the year endedDecember 31, 2019, the Company capitalized $0.2 million and recorded an immaterial amount ofamortization expense in the Graduate Program Segment.Geographical InformationThe Company’s non-U.S. revenue is based on the currency of the country in which the universityclient primarily operates. The Company’s non-U.S. revenue was $40.8 million, $33.9 million and$10.0 million for the years ended December 31, 2019, 2018 and 2017, respectively, substantially all ofwhich was sourced from the Alternative Credential Segment’s operations outside of the U.S. TheCompany’s long-lived tangible assets in non-U.S. countries as of December 31, 2019 and 2018 totaledapproximately $2.7 million and $1.2 million, respectively.1132U, Inc.Notes to Consolidated Financial Statements (Continued)15. Retirement PlanThe Company has established a 401(k) plan for eligible employees to contribute up to 100% oftheir compensation, limited by the IRS-imposed maximum contribution amount. The Company matches33% of each employee’s contribution up to 6% of the employee’s salary deferral each plan year. Forthe years ended December 31, 2019, 2018 and 2017, the Company made employer contributions of$3.0 million, $2.1 million and $1.3 million, respectively.16. Quarterly Financial Information (Unaudited)The following tables set forth certain unaudited quarterly financial data for 2019 and 2018. Thisunaudited information has been prepared on the same basis as the audited information includedelsewhere in this Annual Report and includes all adjustments necessary to present fairly theinformation set forth therein. The operating results are not necessarily indicative of results for anyfuture period.Three Months EndedMarch 31,June 30,September 30,December 31,2019201920192019(in thousands, except share and per share amounts)Revenue............................$122,234$135,461$153,798$163,178Costs and expensesCurriculum and teaching...............6,70113,30821,33621,925Servicing and support.................20,17423,99327,35127,372Technology and content development......19,79426,04334,13235,504Marketing and sales..................76,96189,74993,52182,164General and administrative.............23,02328,40842,04037,549Impairment charge...................——70,379—Total costs and expenses.............146,653181,501288,759204,514Loss from operations...................(24,419)(46,040)(134,961)(41,336)Interest income.....................2,3491,814924713Interest expense.....................(55)(2,424)(5,651)(5,289)Other income (expense), net............(370)(13)(710)386Loss before income taxes................(22,495)(46,663)(140,398)(45,526)Income tax benefit (expense).............94118,691(714)942Net loss.............................$(21,554)$(27,972)$(141,112)$(44,584)Net loss per share, basic and diluted.......$(0.37)$(0.46)$(2.23)$(0.70)Weighted-average shares used in computingnet loss per share, basic and diluted......58,138,69260,516,66263,358,89063,481,130114 2U, Inc.Notes to Consolidated Financial Statements (Continued)16. Quarterly Financial Information (Unaudited) (Continued)Three Months EndedMarch 31,June 30,September 30,December 31,2018201820182018(in thousands, except share and per share amounts)Revenue...............................$92,288$97,423$106,963$115,095Costs and expensesCurriculum and teaching..................4,3076,0076,3516,625Servicing and support....................15,23317,29716,58618,087Technology and content development.........13,84015,23516,36118,376Marketing and sales.....................53,05858,37660,54849,033General and administrative................21,86922,48018,97419,666Total costs and expenses................108,307119,395118,820111,787Income (loss) from operations...............(16,019)(21,972)(11,857)3,308Interest income........................3429121,7992,120Interest expense........................(27)(27)(27)(27)Other expense, net......................(395)(825)(273)(229)Income (loss) before income taxes.............(16,099)(21,912)(10,358)5,172Income tax benefit (expense)................1,2283,565414(340)Net income (loss).........................$(14,871)$(18,347)$(9,944)$4,832Net income (loss) per share, basic............$(0.28)$(0.33)$(0.17)$0.08Net income (loss) per share, diluted...........$(0.28)$(0.33)$(0.17)$0.08Weighted-average shares used in computing netincome (loss) per share, basic..............52,687,29954,981,19257,663,36157,924,666Weighted-average shares used in computing netincome (loss) per share, diluted............52,687,29954,981,19257,663,36160,666,682115Item 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresDisclosure Controls and ProceduresUnder the supervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosurecontrols and procedures pursuant to the Securities Exchange Act of 1934 Rules 13a-15 and 15d-15 as ofthe end of the period covered by this report. Based on that evaluation, our Chief Executive Officer andChief Financial Officer have concluded that these disclosure controls and procedures are effective.Management’s Annual Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control overfinancial reporting for our company. With the participation of our Chief Executive Officer and ChiefFinancial Officer, management conducted an evaluation of the effectiveness of our internal control overfinancial reporting as of December 31, 2019 based on the Internal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based onthis evaluation, management concluded that our internal control over financial reporting was effectiveas of December 31, 2019.We acquired Trilogy on May 22, 2019, which represented 4.1% of our total assets as ofDecember 31, 2019 and 12.9% of our total revenue for the year ended December 31, 2019. As theTrilogy acquisition was completed during the second quarter of 2019, the scope of our evaluation of theeffectiveness of our internal control over financial reporting does not include Trilogy.Our independent registered public accounting firm, KPMG LLP, has issued an audit report on theeffectiveness of our internal control over financial reporting, which appears in Part II, Item 8 of thisAnnual Report on Form 10-K.Changes in Internal Control Over Financial ReportingWe made no changes in our internal control over financial reporting during the three monthsended December 31, 2019 that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting, other than changes in controls to integrate the business weacquired in the Trilogy acquisition.Item 9B.Other InformationOn February 25, 2020, we entered into the First Amendment (the ‘‘Amendment’’) to our CreditAgreement with Owl Rock Capital Corporation. The Amendment increases the applicable interest ratemargins, extends the prepayment premium applicable to certain voluntary prepayments and mandatoryprepayments and replaces the amounts of Minimum Graduate LQAR and Minimum AlternativeCredential LTMR required for the fiscal quarters ending June 30, 2020, September 30, 2020 andDecember 31, 2020.A full description of the terms of our Credit Agreement, as amended by the Amendment, isincluded in Note 9 in the ‘‘Notes Consolidated Financial Statements’’ included in Part II, Item 8 of thisAnnual Report on Form 10-K.116 PART IIIWe will file a definitive Proxy Statement for our 2020 Annual Meeting of Stockholders or our 2020Proxy Statement with the SEC, pursuant to Regulation 14A, not later than 120 days after the end ofour fiscal year. Accordingly, certain information required by Part III has been omitted under GeneralInstruction G(3) to Form 10-K. Only those sections of the 2020 Proxy Statement that specificallyaddress the items set forth herein are incorporated by reference.Item 10.Directors, Executive Officers and Corporate GovernanceThe information required by Item 10 will be contained in our 2020 Proxy Statement under thecaptions ‘‘Board of Directors and Committees,’’ ‘‘Election of Directors,’’ ‘‘Management,’’ ‘‘Code ofBusiness Conduct and Ethics for Employees, Executive Officers and Directors’’ and, if applicable,‘‘Delinquent Section 16(a) Reports’’ or in an amendment on Form 10-K/A and is incorporated hereinby reference.Item 11.Executive CompensationThe information required by Item 11 will be contained in our 2020 Proxy Statement under thecaptions ‘‘Executive Compensation,’’ ‘‘Director Compensation’’ and ‘‘Compensation CommitteeInterlocks and Insider Participation’’ or in an amendment on Form 10-K/A and is incorporated hereinby reference.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related StockholderMattersThe information required by Item 12 will be contained in our 2020 Proxy Statement under thecaptions ‘‘Security Ownership of Certain Beneficial Owners and Management’’ and ‘‘SecuritiesAuthorized for Issuance under Equity Compensation Plans’’ or in an amendment on Form 10-K/A andis incorporated herein by reference.Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by Item 13 will be contained in our 2020 Proxy Statement under thecaptions ‘‘Transactions with Related Parties’’ and ‘‘Director Independence’’ or in an amendment onForm 10-K/A and is incorporated herein by reference.Item 14.Principal Accounting Fees and ServicesThe information required by Item 14 will be contained in our 2020 Proxy Statement under thecaption ‘‘Independent Registered Public Accounting Firm Fees’’ and is incorporated herein byreference.117PART IVItem 15.Exhibits, Financial Statement Schedules(a)ExhibitsSee the Exhibit Index immediately following the signature page of this Annual Report onForm 10-K.(b)Financial Statement SchedulesSchedule II—Valuation and Qualifying Accounts (in thousands)Additions Charged toBalance at BeginningExpense/AgainstBalance at End ofof PeriodRevenueDeductionsPeriodAllowance for doubtful accounts:Year ended December 31, 2019....$257$1,425$(351)$1,331Year ended December 31, 2018....287571(601)257Year ended December 31, 2017....$—$287$—$287Balance at BeginningBalance at End ofof PeriodAdditionsDeductionsPeriodIncome tax valuation allowance:Year ended December 31, 2019........$88,061$45,642$(17,459)$116,244Year ended December 31, 2018........71,10116,960—88,061Year ended December 31, 2017........$62,297$17,967$(9,163)$71,101Item 16.Form 10-K SummaryNone.118 SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized:2U, Inc.February 27, 2020By:/s/CHRISTOPHER J. PAUCEKName:Christopher J. PaucekTitle:Chief Executive Officer and DirectorPOWER OF ATTORNEYKNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Christopher J. Paucek, Paul S. Lalljie and Matthew J. Norden, or each ofthem, as his or her true and lawful attorneys-in-fact and agents, each with the full power ofsubstitution, for him or her and in his or her name, place or stead, in any and all capacities, to sign anyamendments to this report and to file the same, with exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming allthat either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtuehereof.Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K hasbeen signed by the following persons on behalf of the registrant and in the capacities and on the datesindicated.119SignatureTitleDate/s/CHRISTOPHER J. PAUCEKChief Executive Officer and DirectorFebruary 27, 2020(Principal Executive Officer)Christopher J. Paucek/s/PAUL S. LALLJIEChief Financial Officer (PrincipalFebruary 27, 2020Financial Officer)Paul S. Lalljie/s/JOHN B. ELLISChief Accounting Officer (PrincipalFebruary 27, 2020Accounting Officer)John B. Ellis/s/PAUL A. MAEDERDirector and Chairman of the BoardFebruary 27, 2020Paul A. Maeder/s/TIMOTHY M. HALEYDirectorFebruary 27, 2020Timothy M. Haley/s/JOHN M. LARSONDirectorFebruary 27, 2020John M. Larson/s/CORETHA M. RUSHINGDirectorFebruary 27, 2020Coretha M. Rushing/s/ROBERT M. STAVISDirectorFebruary 27, 2020Robert M. Stavis/s/SALLIE L. KRAWCHECKDirectorFebruary 27, 2020Sallie L. Krawcheck/s/EARL LEWISDirectorFebruary 27, 2020Earl Lewis/s/EDWARD S. MACIASDirectorFebruary 27, 2020Edward S. Macias/s/VALERIE B. JARRETTDirectorFebruary 27, 2020Valerie B. Jarrett/s/GREGORY PETERSDirectorFebruary 27, 2020Gregory Peters/s/ALEXIS MAYBANKDirectorFebruary 27, 2020Alexis Maybank120 SPECIAL NOTE REGARDING EXHIBITSIn reviewing the agreements included as exhibits to this Annual Report on Form 10-K, pleaseremember they are included to provide you with information regarding their terms and are notintended to provide any other factual or disclosure information about the Company or the other partiesto the agreements. The agreements contain representations and warranties by each of the parties to theapplicable agreement. These representations and warranties have been made solely for the benefit ofthe other parties to the applicable agreement and:(cid:129)should not in all instances be treated as categorical statements of fact, but rather as a way ofallocating the risk to one of the parties if those statements prove to be inaccurate;(cid:129)have been qualified by disclosures that were made to the other party in connection with thenegotiation of the applicable agreement, which disclosures are not necessarily reflected in theagreement;(cid:129)may apply standards of materiality in a way that is different from what may be viewed asmaterial to you or other investors; and(cid:129)were made only as of the date of the applicable agreement or such other date or dates as maybe specified in the agreement and are subject to more recent developments.Accordingly, these representations and warranties may not describe the actual state of affairs as ofthe date they were made or at any other time. Additional information about the Company may befound elsewhere in this Annual Report on Form 10-K and the Company’s other public filings, whichare available without charge through the SEC’s website at http://www.sec.gov.The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionarystatements, it is responsible for considering whether additional specific disclosures of materialinformation regarding material contractual provisions are required to make the statements in thisreport not misleading.121Exhibit IndexExhibitExhibitFiled/FurnishedNumberDescriptionFormFile No.NumberFiling DateHerewith2.1Agreement and Plan of8-K001-363762.1April 8, 2019Merger and Reorganization,dated as of April 7, 2019, byand among 2U, Inc.,Skywalker Purchaser, LLC,Skywalker Sub, Inc., FortisAdvisors LLC, asstockholder representativeand Trilogy EducationServices, Inc.3.1Amended and Restated8-K001-363763.1April 4, 2014Certificate of Incorporationof the Registrant.3.2Amended and Restated8-K001-363763.2April 4, 2014Bylaws of the Registrant.4.1Specimen stock certificateS-1/A333-1940794.2March 17, 2014evidencing shares ofCommon Stock.4.2Description of Registrant’sXSecurities RegisteredPursuant to Section 12 ofthe Securities Exchange Actof 1934.10.1*Services Agreement, by andS-1333-19407910.1February 21, 2014between the Registrant andUniversity of SouthernCalifornia, on behalf of theUSC Rossier School ofEducation, dated as ofOctober 29, 2008, asamended to date.10.2*Master Services Agreement,S-1333-19407910.2February 21, 2014by and between theRegistrant and University ofSouthern California, onbehalf of School of SocialWork, dated as of April 12,2010, as amended.122 ExhibitExhibitFiled/FurnishedNumberDescriptionFormFile No.NumberFiling DateHerewith10.2.1*Second Addendum to theS-1/A333-19407910.2.1March 17, 2014Master Services Agreement,by and between theRegistrant and University ofSouthern California, onbehalf of the School ofSocial Work, dated as ofMarch 14, 2014.10.2.2*Amendment to Master10-K001-3637610.2.2March 10, 2016Services Agreement, by andbetween the Registrant andUniversity of SouthernCalifornia, on behalf ofSchool of Social Work,dated as of November 5,2015.10.3†Fourth Amended andS-1333-19407910.7February 21, 2014Restated 2008 StockIncentive Plan, as amendedto date.10.4†Form of Incentive StockS-1333-19407910.8February 21, 2014Option Agreement under2008 Stock Incentive Plan.10.5†Form of Non-QualifiedS-1333-19407910.9February 21, 2014Stock Option Agreementunder 2008 Stock IncentivePlan.10.6†Amended and Restated 201410-Q001-3637610.1August 2, 2018Equity Incentive Plan.10.7†Form of Stock Option10-Q001-3637610.2August 2, 2018Agreement under Amendedand Restated 2014 EquityIncentive Plan.10.8†Form of Restricted StockXUnit Award Agreementunder Amended andRestated 2014 EquityIncentive Plan.10.9†Form of Performance Stock10-Q001-3637610.3November 12, 2019Unit Award Agreementunder Amended andRestated 2014 EquityIncentive Plan.123ExhibitExhibitFiled/FurnishedNumberDescriptionFormFile No.NumberFiling DateHerewith10.10†Form of Performance StockXUnit Award Agreementunder Amended andRestated 2014 EquityIncentive Plan.10.11†Form of Severance Pay and8-K001-3637610.1February 21, 2020Change in Control Plan.10.12†Summary of Non-Employee10-Q001-3637610.2July 30, 2019Director Compensation.10.13†Confidential Information,S-1/A333-19407910.14March 17, 2014Invention Assignment, Workfor Hire, Noncompete andNo Solicit/No HireAgreement, dated as ofFebruary 28, 2009, by andbetween the Registrant andChristopher J. Paucek.10.14†Form of IndemnificationS-1333-19407910.15February 21, 2014Agreement with directorsand executive officers.10.15†Offer letter agreement,10-Q001-3637610.4August 2, 2018dated as of May 20, 2018,between Mark Chernis and2U, Inc.10.16†Offer letter agreement,8-K001-3637610.1October 16, 2019dated as of October 10,2019, between Paul S. Lalljieand 2U, Inc.10.17†Employee Intellectual8-K001-3637610.2October 16, 2019Property, Non-Competition,and Non-SolicitationAgreement, datedOctober 10, 2019, betweenPaul S. Lalljie and 2U, Inc.10.18†Separation and Transition8-K001-3637610.1October 23, 2019Agreement, datedOctober 17, 2019, betweenCatherine A. Graham and2U, Inc.124 ExhibitExhibitFiled/FurnishedNumberDescriptionFormFile No.NumberFiling DateHerewith10.19**Credit Agreement, dated8-K001-3637610.1May 22, 2019May 22, 2019, by and among2U, Inc., as borrower, theGuarantors from time totime party thereto, theLenders from time to timeparty thereto, Owl RockCapital Corporation, asadministrative agent andcollateral agent and OwlRock Capital Advisors LLC,as Lead Arranger andBookrunner.10.19.1**First Amendment to CreditXAgreement, by and among,2U, Inc., the Guarantorsparty thereto, the Lendersparty thereto and Owl RockCapital Corporation, asadministrative agent.10.20Office Lease, by and10-K001-3637610.16February 24, 2017between Lanham Office2015 LLC and 2U HarkinsRoad LLC, dated as ofDecember 23, 2015.10.21Agreement of Lease, by and10-K001-3637610.17February 24, 2017between 55 ProspectOwner LLC and 2UNYC, LLC, dated as ofFebruary 13, 2017.10.22Office Lease, by and10-K001-3637610.18February 24, 2017between SRI Ten DCC LCCand 2U, Inc., dated May 11,2016.21.1Subsidiaries of theXRegistrant.23.1Consent of KPMG LLP,Xindependent registeredpublic accounting firm.125ExhibitExhibitFiled/FurnishedNumberDescriptionFormFile No.NumberFiling DateHerewith31.1Certification of ChiefXExecutive Officer of2U, Inc. pursuant toExchange ActRule 13a-14(a)/15d-14(a), asadopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.31.2Certification of ChiefXFinancial Officer of 2U, Inc.pursuant to Exchange ActRule 13a-14(a)/15d-14 (a),as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002.32.1Certification of ChiefXExecutive Officer of2U, Inc. in accordance with18 U.S.C. Section 1350, asadopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.32.2Certification of ChiefXFinancial Officer of 2U, Inc.in accordance with 18U.S.C. Section 1350, asadopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.101.INSXBRL InstanceXDocument—The instancedocument does not appearin the interactive data filebecause its XBRL tags areembedded within the InlineXBRL document.101.SCHXBRL Taxonomy ExtensionXSchema Document.101.CALXBRL Taxonomy ExtensionXCalculation LinkbaseDocument.101.DEFXBRL Taxonomy ExtensionXDefinition LinkbaseDocument.126 ExhibitExhibitFiled/FurnishedNumberDescriptionFormFile No.NumberFiling DateHerewith101.LABXBRL Taxonomy ExtensionXLabel Linkbase Document.101.PREXBRL Taxonomy ExtensionXPresentation LinkbaseDocument.104Cover Page Interactive DataXFile (formatted as InlineXBRL and contained inExhibit 101).*Portions of this exhibit, indicated by asterisks, have been omitted pursuant to a request forconfidential treatment and have been separately filed with the Securities and ExchangeCommission.**Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Theregistrant hereby undertakes to supplementally furnish to the Securities and Exchange Commissioncopies of any of the omitted schedules and exhibits upon request by the Securities and ExchangeCommission.†Indicates management contract or compensatory plan.127Board of Directors.Christopher J. PaucekCo-Founder and CEOPaul A. MaederBoard ChairAudit Committee MemberGeneral Partner of Highland Capital PartnersTimothy M. HaleyNominating and Governance Committee ChairManaging Director of Redpoint VenturesJohn M. LarsonCompensation Committee ChairExecutive Chairman of Triumph Higher Education Group, Inc. and President of Triumph Group, Inc.Robert M. StavisAudit Committee ChairPartner at Bessemer Venture PartnersEarl LewisAudit Committee MemberThomas C. Holt Distinguished University Professor of History, Afroamerican and African Studies, and Public Policy at the University of MichiganShareholder InformationCopies of the Company’s Form 10-K filed with the Securities and Exchange Commssion for the year ended December 31, 2019; committee charters; Code of Business Conduct and Ethics, and other documents may be obtained free of charge at investor.2u.comor by contacting:2U, Inc.Investor Relations7900 Harkins RoadLanham, MD 20706301-892-4350Annual MeetingThe annual meeting of stockholders will be held virtually on June 23, 2020 at 3:00 p.m. ET at www.virtualshareholdermeeting.com/TWOU2020Sallie L. KrawcheckNominating and Governance Committee MemberCEO and Co-Founder of EllevestCoretha M. RushingCompensation Committee MemberPresident at Coretha Rushing ConsultingValerie JarrettNominating and Governance Committee MemberSenior Advisor to the Obama FoundationGregory K. PetersAudit Committee MemberChief Product Officer at NetflixAlexis MaybankCompensation Committee MemberCo-Founder of Gilt GroupeBoard Member, Girls Who CodeEdward S. MaciasNominating and Governance Committee MemberProvost Emeritus and Barbara and David Thomas Distinguished Professor Emeritus in Arts & Sciences at Washington University in St. Louis2U-2019-AnnualReport-FINAL_r4.20.indd 72U-2019-AnnualReport-FINAL_r4.20.indd 74/24/20 5:47 PM4/24/20 5:47 PM Board of Directors. Christopher J. Paucek Co-Founder and CEO Paul A. Maeder Board Chair Audit Committee Member General Partner of Highland Capital Partners Timothy M. Haley Nominating and Governance Committee Chair Managing Director of Redpoint Ventures John M. Larson Compensation Committee Chair Executive Chairman of Triumph Higher Education Group, Inc. and President of Triumph Group, Inc. Robert M. Stavis Audit Committee Chair Partner at Bessemer Venture Partners Sallie L. Krawcheck Nominating and Governance Committee Member CEO and Co-Founder of Ellevest Coretha M. Rushing Compensation Committee Member President at Coretha Rushing Consulting Valerie Jarrett Nominating and Governance Committee Member Senior Advisor to the Obama Foundation Gregory K. Peters Audit Committee Member Chief Product Officer at Netflix Alexis Maybank Compensation Committee Member Co-Founder of Gilt Groupe Board Member, Girls Who Code Earl Lewis Audit Committee Member Thomas C. Holt Distinguished University Professor of History, Afroamerican and African Studies, and Public Policy at the University of Michigan Edward S. Macias Nominating and Governance Committee Member Provost Emeritus and Barbara and David Thomas Distinguished Professor Emeritus in Arts & Sciences at Washington University in St. Louis Shareholder Information Copies of the Company’s Form 10-K filed with the Securities and Exchange Commssion for the year ended December 31, 2019; committee charters; Code of Business Conduct and Ethics, and other documents may be obtained free of charge at investor.2u.com or by contacting: 2U, Inc. Investor Relations 7900 Harkins Road Lanham, MD 20706 301-892-4350 Annual Meeting The annual meeting of stockholders will be held virtually on June 23, 2020 at 3:00 p.m. ET at www.virtualshareholdermeeting.com/TWOU2020 2U, Inc. 7900 Harkins Road Lanham, MD 20706 301-892-4350 2U.com

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