2U(US:TWOU)2024-05-02 21:12PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company reported a net loss of $54.6 million, with total assets decreasing and significant 'Going Concern' uncertainty due to substantial debt Condensed Consolidated Balance Sheets Total assets decreased to $1.43 billion, cash increased to $124.7 million, and total liabilities rose to $1.26 billion as of March 31, 2024 Condensed Consolidated Balance Sheets (in thousands) | | March 31, 2024 (unaudited) | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $124,728 | $60,689 | | Accounts receivable, net | $67,235 | $115,944 | | Goodwill | $650,008 | $651,498 | | Total current assets | $259,390 | $251,464 | | Total assets | $1,432,937 | $1,459,683 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $284,765 | $259,339 | | Long-term debt | $898,416 | $896,514 | | Total liabilities | $1,264,359 | $1,240,638 | | Total stockholders' equity | $168,578 | $219,045 | | Total liabilities and stockholders' equity | $1,432,937 | $1,459,683 | Condensed Consolidated Statements of Operations and Comprehensive Loss Revenue decreased by 16.8% to $198.4 million, resulting in a net loss of $54.6 million and a widened operating loss for Q1 2024 Condensed Consolidated Statements of Operations (unaudited, in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Revenue | $198,377 | $238,504 | | Total costs and expenses | $225,699 | $258,733 | | Loss from operations | ($27,322) | ($20,229) | | Interest expense | ($19,267) | ($17,957) | | Other (expense) income, net | ($8,404) | $607 | | Net loss | ($54,649) | ($54,062) | | Net loss per share, basic and diluted | ($0.65) | ($0.68) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $72.2 million in Q1 2024, leading to a net increase in cash of $64.0 million for the period Condensed Consolidated Statements of Cash Flows (unaudited, in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $72,249 | $27,478 | | Net cash used in investing activities | ($7,310) | ($11,808) | | Net cash used in financing activities | ($827) | ($89,463) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $64,039 | ($73,292) | | Cash, cash equivalents and restricted cash, end of period | $137,438 | $109,286 | - The significant increase in cash from operating activities was largely due to a $39.2 million positive change in accounts receivable, which included proceeds from a receivables factoring transaction, compared to an $11.5 million use of cash in the prior year27219 Notes to Condensed Consolidated Financial Statements The notes detail a critical 'Going Concern' warning due to debt and covenant risks, segment performance, and ongoing restructuring plans - The company has two reportable segments: the Degree Program Segment, which partners with universities for online degree programs, and the Alternative Credential Segment, which offers shorter, skills-based courses, boot camps, and executive education3334 - Going Concern Warning: Substantial doubt exists about the company's ability to continue as a going concern due to the risk of its $372.4 million term loan maturity accelerating, a potential breach of its $900 million minimum Recurring Revenue covenant, and Nasdaq delisting risk394042 - In January 2024, the company entered into a receivables factoring agreement and sold $82.1 million of receivables for net proceeds of $74.0 million, recognizing an $8.1 million loss on the sale, which significantly improved operating cash flow219220 - The company is involved in several legal proceedings, including a consumer class action related to USC Rossier rankings (dismissed), a lawsuit against the Department of Education regarding 'Third-Party Servicer' status, and a privacy class action related to the Video Privacy Protection Act9399101 - The company is undergoing a 2022 Strategic Realignment Plan, expected to incur total charges of $70-$75 million, with $58.5 million incurred as of March 31, 2024, and also began a new performance improvement exercise in late 2023 involving further headcount reductions107110111 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 16.8% revenue decline to $198.4 million, highlighting significant liquidity risks and 'going concern' uncertainty due to substantial debt Results of Operations Q1 2024 revenue fell 16.8% to $198.4 million, with both segments declining, leading to a wider operating loss despite decreased expenses Consolidated Operating Results Comparison (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Period-to-Period Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $198,377 | $238,504 | (16.8)% | | Degree Program Segment | $111,546 | $140,480 | (20.6)% | | Alternative Credential Segment | $86,831 | $98,024 | (11.4)% | | Loss from operations | ($27,322) | ($20,229) | 35.1% | | Net loss | ($54,649) | ($54,062) | 1.1% | - The decrease in Degree Program revenue was attributed to the wind-down of certain programs and a lower number of new student enrollments compared to the number of students graduating who had enrolled during the pandemic262 - The decrease in Alternative Credential revenue was primarily due to a $21.9 million decline from boot camp offerings, driven by a 30% decrease in FCE enrollments, especially in coding boot camps263 Liquidity and Capital Resources The company faces substantial 'going concern' doubt due to significant debt, upcoming maturities, potential covenant breaches, and Nasdaq delisting risk - The company's ability to continue as a going concern is dependent on refinancing its debt or raising capital in the short term, as failure could lead to insufficient liquidity to meet debt obligations287 - The Second Amended Credit Agreement requires $900 million in minimum Recurring Revenues, which the company expects to breach for the period ending June 30, 2024, potentially leading to debt acceleration288 - The company received a Nasdaq notification for failing to meet the minimum $1.00 bid price requirement, with potential delisting by September 10, 2024, which could trigger debt repurchase obligations for Convertible Notes290 Key Business and Financial Performance Metrics Key metrics show Degree Program FCEs decreased 19.5% while Alternative Credential FCEs increased 13.5%, with Adjusted EBITDA falling to $17.3 million in Q1 2024 FCE Enrollments and Average Revenue per FCE | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Degree Program Segment | | | | FCE enrollments | 44,693 | 55,491 | | Average revenue per FCE enrollment ($) | $2,496 | $2,532 | | Alternative Credential Segment | | | | FCE enrollments | 24,955 | 21,990 | | Average revenue per FCE enrollment ($) | $3,260 | $4,193 | Adjusted EBITDA Reconciliation (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net loss | $(54,649) | $(54,062) | | Total adjustments | $71,944 | $84,253 | | Adjusted EBITDA | $17,295 | $30,191 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations, with a 100 basis point increase raising annual interest expense by $4.2 million, and foreign currency exposure - The company is subject to interest rate risk on its $415.3 million of borrowings, where a hypothetical 1% (100 basis points) increase would raise its 2024 interest expense by about $4.2 million354 - The company has foreign currency exchange risk from operations in South Africa and the United Kingdom, recording a foreign currency translation loss of $1.7 million for Q1 2024355356 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2024359 - No material changes were made to the company's internal control over financial reporting during the quarter ended March 31, 2024360 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, including a privacy class action and a lawsuit against the Department of Education regarding 'Third-Party%20Servicer'%20status - The company is a defendant in a putative class action (Francis v. 2U, Inc. et al) alleging violations of the federal Video Privacy Protection Act related to sharing viewing information with Facebook, with a motion to dismiss pending101 - The company has sued the Department of Education to challenge guidance that would classify it as a 'Third-Party Servicer,' which would subject it to stricter regulation, with litigation currently stayed pending new guidance99 Item 1A. Risk Factors The company outlines significant financial, operational, and regulatory risks, including 'going concern' uncertainty, substantial indebtedness, and potential changes to education regulations Risks Related to Our Business Model The company faces risks from its evolving business model, including a history of net losses, dependence on student recruitment, and high upfront costs for new programs - The company has a history of significant net losses, including $54.6 million for Q1 2024, and may not achieve or maintain profitability in the future371 - Financial performance is heavily dependent on recruiting students, which can be affected by negative perceptions of online learning, damage to university client reputations, and general economic conditions372374376 - Launching new degree programs requires significant upfront costs, with an estimated average of approximately three years to recover the investment for a new program380381 Risks Related to Our Operations and Our Growth Strategy Operational risks include heavy reliance on third-party advertising platforms, intense competition, security breaches, and execution risks from recent management changes and restructuring plans - Student acquisition efforts rely heavily on limited third-party advertising platforms, and Google's plan to phase out third-party cookies by the end of Q2 2024 could negatively affect advertising effectiveness394 - The company faces significant competition from established and emerging companies, potentially leading to pricing pressure and reduced market share411 - Recent changes in senior management, including a new CEO appointment in November 2023, and organizational restructuring create inherent risks related to strategic planning and execution421422 Risks Related to Our Indebtedness and Capital Structure The company's substantial $947.0 million debt poses significant risks, including restrictive covenants, potential breach of minimum recurring revenue, and Nasdaq delisting risk - As of March 31, 2024, the company has approximately $947.0 million of indebtedness, which could adversely affect its ability to fund operations and react to market changes435 - The company must maintain $900 million in minimum Recurring Revenue under its credit agreement and expects to fail this covenant for the period ending June 30, 2024, potentially leading to a default and debt acceleration441457 - The company received a Nasdaq delisting notice for its stock price falling below $1.00, and failure to regain compliance could trigger a 'fundamental change' allowing convertible note holders to demand repurchase for cash459465 Risks Related to Regulation of Our Business and That of Our University Clients The company's business model is highly exposed to regulatory risks, including potential changes to DOE's 'bundled services' guidance and 'Third-Party%20Servicer' definitions, and evolving data privacy laws - The company's tuition revenue-sharing model relies on a DOE 'bundled services rule' that is not codified and could be altered or removed, requiring a fundamental change to its business model476477480 - The DOE is reviewing its 'Third-Party Servicer' (TPS) definition, and if the company is deemed a TPS, it would face increased regulatory burden and limited ability to contract with institutions482485 - The company is subject to numerous evolving global data privacy laws (e.g., GDPR, CCPA) and educational privacy laws (FERPA), with non-compliance potentially leading to significant fines, litigation, and reputational damage492500 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities, no use of public offering proceeds, and no equity security purchases during the period - There were no unregistered sales of equity securities or share repurchases during the quarter544 Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None545 Item 4. Mine Safety Disclosures This item is not applicable to the company - None546 Item 5. Other Information Andrew Hermalyn, President of the Degree Program Segment, adopted a Rule 10b5-1 trading plan for the sale of up to 50,851 shares - Andrew Hermalyn, President of the Degree Program Segment, adopted a Rule 10b5-1 trading plan on March 8, 2024, to sell up to 50,851 shares548 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The exhibits include certifications from the CEO and CFO as required by Sections 302 and 906 of the Sarbanes-Oxley Act549