CHEGG, INC - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _________ to _________
Commission file number 001-36180
CHEGG, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 20-3237489 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
3990 Freedom Circle
Santa Clara, CA, 95054
(Address of principal executive offices)
(408) 855-5700
(Registrant’s telephone number, including area code)
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
| Common stock, $0.001 par value per share | CHGG | The New York Stock Exchange | ||||||
•Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) 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 x No ¨
•Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
•Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | x | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer (Do not check if a smaller reporting company) | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
•If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
•Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
•As of October 25, 2021, the Registrant had 144,947,411 outstanding shares of Common Stock.
| TABLE OF CONTENTS | ||||||||||||||
| Page | ||||||||||||||
Unless the context requires otherwise, the words “we,” “us,” “our,” “Company,” and “Chegg” refer to Chegg, Inc. and its subsidiaries taken as a whole.
Chegg, Chegg.com, Chegg Study, internships.com, Research Ready, EasyBib, the Chegg “C” logo, and Thinkful, are some of our trademarks that may be used in this Quarterly Report on Form 10-Q. Solely for convenience, our trademarks, trade names, and service marks that may be referred to in this Quarterly Report on Form 10-Q appear without the ®, ™ and SM symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names. Other trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.
2
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, our objectives for future operations, and the impact of the ongoing coronavirus (COVID-19) pandemic on our financial condition and results of operations are forward-looking statements. The words “believe,” “may,” “will,” “would,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “project,” “endeavor,” “expect,” “plans to,” “if,” “future,” “likely,” “potentially,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Moreover, we operate in a very competitive and rapidly changing environment where new risks emerge from time to time, such as the COVID-19 pandemic. Many of the risks and uncertainties are currently elevated by, and may or will continue to be elevated by, the current COVID-19 pandemic. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update or revise publicly these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CHEGG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)
(unaudited)
| September 30, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 713,837 | $ | 479,853 | |||||||
| Short-term investments | 1,038,345 | 665,567 | |||||||||
Accounts receivable, net of allowance of $111 and $153 at September 30, 2021 and December 31, 2020, respectively | 9,302 | 12,913 | |||||||||
| Prepaid expenses | 35,164 | 12,776 | |||||||||
| Other current assets | 29,316 | 11,846 | |||||||||
| Total current assets | 1,825,964 | 1,182,955 | |||||||||
| Long-term investments | 813,500 | 523,628 | |||||||||
| Textbook library, net | 15,834 | 34,149 | |||||||||
| Property and equipment, net | 156,121 | 125,807 | |||||||||
| Goodwill | 290,499 | 285,214 | |||||||||
| Intangible assets, net | 43,573 | 51,249 | |||||||||
| Right of use assets | 19,520 | 24,226 | |||||||||
| Other assets | 22,484 | 24,030 | |||||||||
| Total assets | $ | 3,187,495 | $ | 2,251,258 | |||||||
| Liabilities and stockholders' equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 10,518 | $ | 8,547 | |||||||
| Deferred revenue | 49,983 | 32,620 | |||||||||
| Accrued liabilities | 73,320 | 68,565 | |||||||||
| Total current liabilities | 133,821 | 109,732 | |||||||||
| Long-term liabilities | |||||||||||
| Convertible senior notes, net | 1,676,749 | 1,506,922 | |||||||||
| Long-term operating lease liabilities | 14,137 | 19,264 | |||||||||
| Other long-term liabilities | 8,271 | 5,705 | |||||||||
| Total long-term liabilities | 1,699,157 | 1,531,891 | |||||||||
| Total liabilities | 1,832,978 | 1,641,623 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity: | |||||||||||
Preferred stock, $0.001 par value per share, 10,000,000 shares authorized, no shares issued and outstanding | — | — | |||||||||
Common stock, $0.001 par value per share: 400,000,000 shares authorized; 144,901,435 and 129,343,524 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 145 | 129 | |||||||||
| Additional paid-in capital | 1,717,421 | 1,030,577 | |||||||||
| Accumulated other comprehensive (loss) income | (1,552) | 1,530 | |||||||||
| Accumulated deficit | (361,497) | (422,601) | |||||||||
| Total stockholders' equity | 1,354,517 | 609,635 | |||||||||
| Total liabilities and stockholders' equity | $ | 3,187,495 | $ | 2,251,258 | |||||||
See Notes to Condensed Consolidated Financial Statements.
4
CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net revenues | $ | 171,942 | $ | 154,018 | $ | 568,798 | $ | 438,617 | |||||||||||||||
| Cost of revenues | 67,102 | 62,370 | 199,194 | 148,284 | |||||||||||||||||||
| Gross profit | 104,840 | 91,648 | 369,604 | 290,333 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 43,269 | 44,041 | 130,995 | 123,956 | |||||||||||||||||||
| Sales and marketing | 27,239 | 24,625 | 75,139 | 60,621 | |||||||||||||||||||
| General and administrative | 33,971 | 40,784 | 111,560 | 98,221 | |||||||||||||||||||
| Total operating expenses | 104,479 | 109,450 | 317,694 | 282,798 | |||||||||||||||||||
| Income (loss) from operations | 361 | (17,802) | 51,910 | 7,535 | |||||||||||||||||||
| Interest expense, net and other income (expense), net: | |||||||||||||||||||||||
| Interest expense, net | (1,633) | (17,468) | (5,263) | (44,320) | |||||||||||||||||||
| Other income (expense), net | 8,670 | (804) | (66,618) | 7,396 | |||||||||||||||||||
| Total interest expense, net and other income (expense), net | 7,037 | (18,272) | (71,881) | (36,924) | |||||||||||||||||||
| Income (loss) before provision for income taxes | 7,398 | (36,074) | (19,971) | (29,389) | |||||||||||||||||||
| Provision for income taxes | 747 | 1,066 | 5,793 | 2,875 | |||||||||||||||||||
| Net income (loss) | $ | 6,651 | $ | (37,140) | $ | (25,764) | $ | (32,264) | |||||||||||||||
| Net income (loss) per share | |||||||||||||||||||||||
| Basic | $ | 0.05 | $ | (0.29) | $ | (0.18) | $ | (0.26) | |||||||||||||||
| Diluted | $ | 0.05 | $ | (0.29) | $ | (0.18) | $ | (0.26) | |||||||||||||||
Weighted average shares used to compute net income (loss) per share | |||||||||||||||||||||||
| Basic | 144,746 | 126,194 | 140,775 | 124,162 | |||||||||||||||||||
| Diluted | 146,699 | 126,194 | 140,775 | 124,162 | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
5
CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) | $ | 6,651 | $ | (37,140) | $ | (25,764) | $ | (32,264) | |||||||||||||||
| Other comprehensive (loss) income | |||||||||||||||||||||||
| Change in net unrealized (loss) gain on investments, net of tax | (455) | (1,642) | (1,974) | 1,922 | |||||||||||||||||||
| Change in foreign currency translation adjustments, net of tax | (127) | 1,125 | (1,108) | 507 | |||||||||||||||||||
| Other comprehensive (loss) income | (582) | (517) | (3,082) | 2,429 | |||||||||||||||||||
| Total comprehensive income (loss) | $ | 6,069 | $ | (37,657) | $ | (28,846) | $ | (29,835) | |||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
6
CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive (Loss) Income | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
Balances at June 30, 2021 | 144,621 | $ | 145 | $ | 1,706,855 | $ | (970) | $ | (368,148) | $ | 1,337,882 | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and ESPP | 14 | — | 106 | — | — | 106 | |||||||||||||||||||||||||||||
| Net share settlement of equity awards | 266 | — | (14,697) | — | — | (14,697) | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 25,157 | — | — | 25,157 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (582) | — | (582) | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 6,651 | 6,651 | |||||||||||||||||||||||||||||
Balances at September 30, 2021 | 144,901 | $ | 145 | $ | 1,717,421 | $ | (1,552) | $ | (361,497) | $ | 1,354,517 | ||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive (Loss) Income | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
Balances at June 30, 2020 | 124,123 | $ | 124 | $ | 907,908 | $ | 1,850 | $ | (411,504) | $ | 498,378 | ||||||||||||||||||||||||
| Equity component of 2026 convertible senior notes, net of issuance costs | — | — | 237,462 | — | — | 237,462 | |||||||||||||||||||||||||||||
| Purchase of 2026 convertible senior notes capped call | — | — | (103,400) | (103,400) | |||||||||||||||||||||||||||||||
| Equity component related to conversions of 2023 convertible senior notes | — | — | (345,552) | — | — | (345,552) | |||||||||||||||||||||||||||||
| Issuance of common stock upon conversion of 2023 convertible senior notes | 4,182 | 4 | 327,137 | — | — | 327,141 | |||||||||||||||||||||||||||||
| Proceeds from capped call related to conversions of 2023 convertible senior notes | — | — | 57,414 | — | — | 57,414 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and ESPP | 106 | 1 | 1,196 | — | — | 1,197 | |||||||||||||||||||||||||||||
| Net share settlement of equity awards | 243 | — | (11,120) | — | — | (11,120) | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 21,529 | — | — | 21,529 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (517) | — | (517) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (37,140) | (37,140) | |||||||||||||||||||||||||||||
Balances at September 30, 2020 | 128,654 | $ | 129 | $ | 1,092,574 | $ | 1,333 | $ | (448,644) | $ | 645,392 | ||||||||||||||||||||||||
7
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive (Loss) Income | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
Balances at December 31, 2020 | 129,344 | $ | 129 | $ | 1,030,577 | $ | 1,530 | $ | (422,601) | $ | 609,635 | ||||||||||||||||||||||||
| — | — | (465,006) | — | 86,868 | (378,138) | ||||||||||||||||||||||||||||||
| Issuance of common stock in connection with equity offering, net of offering costs | 10,975 | 11 | 1,091,455 | — | — | 1,091,466 | |||||||||||||||||||||||||||||
| Equity component on conversions of 2023 notes and 2025 notes | — | — | (236,920) | — | — | (236,920) | |||||||||||||||||||||||||||||
| Issuance of common stock upon conversion of 2023 notes | 2,983 | 3 | 235,518 | — | — | 235,521 | |||||||||||||||||||||||||||||
| Net proceeds from capped call related to conversions and extinguishments of 2023 notes and 2025 notes | — | — | 67,769 | — | — | 67,769 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and ESPP | 178 | — | 5,371 | — | — | 5,371 | |||||||||||||||||||||||||||||
| Net share settlement of equity awards | 1,421 | 2 | (89,339) | — | — | (89,337) | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 77,996 | — | — | 77,996 | |||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | (3,082) | — | (3,082) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (25,764) | (25,764) | |||||||||||||||||||||||||||||
Balances at September 30, 2021 | 144,901 | $ | 145 | $ | 1,717,421 | $ | (1,552) | $ | (361,497) | $ | 1,354,517 | ||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | Par Value | Additional Paid-In Capital | Accumulated Other Comprehensive (Loss) Income | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
Balances at December 31, 2019 | 121,584 | $ | 122 | $ | 916,095 | $ | (1,096) | $ | (416,292) | $ | 498,829 | ||||||||||||||||||||||||
| — | — | — | — | (88) | (88) | ||||||||||||||||||||||||||||||
| Equity component of 2026 convertible senior notes, net of issuance costs | — | — | 237,462 | — | — | 237,462 | |||||||||||||||||||||||||||||
| Purchase of 2026 convertible senior notes capped call | — | — | (103,400) | — | — | (103,400) | |||||||||||||||||||||||||||||
| Equity component related to conversions of 2023 convertible senior notes | — | — | (345,552) | — | — | (345,552) | |||||||||||||||||||||||||||||
| Issuance of common stock upon conversion of 2023 convertible senior notes | 4,182 | 4 | 327,137 | — | — | 327,141 | |||||||||||||||||||||||||||||
| Proceeds from capped call related to conversions of 2023 convertible senior notes | — | — | 57,414 | — | — | 57,414 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and ESPP | 778 | 1 | 9,233 | — | — | 9,234 | |||||||||||||||||||||||||||||
| Net share settlement of equity awards | 2,110 | 2 | (65,224) | — | — | (65,222) | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 59,409 | — | — | 59,409 | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 2,429 | — | 2,429 | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (32,264) | (32,264) | |||||||||||||||||||||||||||||
Balances at September 30, 2020 | 128,654 | $ | 129 | $ | 1,092,574 | $ | 1,333 | $ | (448,644) | $ | 645,392 | ||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
8
CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities | |||||||||||
| Net loss | $ | (25,764) | $ | (32,264) | |||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
| Print textbook depreciation expense | 9,024 | 10,699 | |||||||||
| Other depreciation and amortization expense | 46,273 | 33,088 | |||||||||
| Share-based compensation expense | 76,157 | 59,409 | |||||||||
| Amortization of debt discount and issuance costs | 4,509 | 42,910 | |||||||||
| Repayment of convertible senior notes attributable to debt discount | — | (14,912) | |||||||||
| Loss on early extinguishment of debt | 78,152 | 3,315 | |||||||||
| Loss on change in fair value of derivative instruments, net | 7,148 | — | |||||||||
| Loss from write-off of property and equipment | 1,857 | 1,057 | |||||||||
| Loss from impairment of strategic equity investment | — | 10,000 | |||||||||
| Gain on sale of strategic equity investments | (12,496) | — | |||||||||
| Loss (gain) on textbook library, net | 8,765 | (2,028) | |||||||||
| Operating lease expense, net of accretion | 4,527 | 3,400 | |||||||||
| Restructuring charges | 1,851 | — | |||||||||
| Other non-cash items | 498 | (102) | |||||||||
| Change in assets and liabilities, net of effect of acquisition of businesses: | |||||||||||
| Accounts receivable | 3,593 | 106 | |||||||||
| Prepaid expenses and other current assets | (31,070) | (6,178) | |||||||||
| Other assets | 9,472 | (2,638) | |||||||||
| Accounts payable | 1,820 | (1,634) | |||||||||
| Deferred revenue | 17,363 | 32,239 | |||||||||
| Accrued liabilities | 10,552 | 34,276 | |||||||||
| Other liabilities | (4,108) | (2,088) | |||||||||
| Net cash provided by operating activities | 208,123 | 168,655 | |||||||||
| Investing activities | |||||||||||
| Purchases of property and equipment | (67,126) | (57,457) | |||||||||
| Purchases of textbooks | (10,666) | (49,641) | |||||||||
| Proceeds from disposition of textbooks | 7,815 | 7,012 | |||||||||
| Purchases of investments | (1,574,060) | (968,106) | |||||||||
| Maturities of investments | 893,315 | 412,046 | |||||||||
| Purchase of strategic equity investment | — | (2,000) | |||||||||
| Proceeds from sale of strategic equity investments | 16,076 | — | |||||||||
| Acquisition of businesses, net of cash acquired | (7,891) | (92,796) | |||||||||
| Net cash used in investing activities | (742,537) | (750,942) | |||||||||
| Financing activities | |||||||||||
| Proceeds from common stock issued under stock plans, net | 5,373 | 9,236 | |||||||||
| Payment of taxes related to the net share settlement of equity awards | (89,339) | (65,224) | |||||||||
| Proceeds from issuance of convertible senior notes, net of issuance costs | — | 984,096 | |||||||||
| Purchase of convertible senior notes capped call | — | (103,400) | |||||||||
| Proceeds from equity offering, net of offering costs | 1,091,466 | — | |||||||||
| Repayment of convertible senior notes | (300,755) | (159,677) | |||||||||
| Proceeds from exercise of convertible senior notes capped call | 69,005 | 57,414 | |||||||||
| Payment of escrow related to acquisition | (7,451) | — | |||||||||
| Net cash provided by financing activities | 768,299 | 722,445 | |||||||||
| Net increase in cash, cash equivalents and restricted cash | 233,885 | 140,158 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 481,715 | 389,432 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 715,600 | $ | 529,590 | |||||||
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Supplemental cash flow data: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | 1,053 | $ | 1,546 | |||||||
| Income taxes, net of refunds | $ | 5,610 | $ | 2,450 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 5,934 | $ | 5,174 | |||||||
| Right of use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | — | $ | 1,713 | |||||||
| Non-cash investing and financing activities: | |||||||||||
| Accrued purchases of long-lived assets | $ | 1,837 | $ | 6,102 | |||||||
| Accrued escrow related to acquisition | $ | — | $ | 7,451 | |||||||
| Issuance of common stock related to repayment of convertible senior notes | $ | 235,521 | $ | 327,141 | |||||||
| September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | 713,837 | $ | 527,541 | |||||||
| Restricted cash included in other current assets | — | 313 | |||||||||
| Restricted cash included in other assets | 1,763 | 1,736 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 715,600 | $ | 529,590 | |||||||
See Notes to Condensed Consolidated Financial Statements.
9
CHEGG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Background and Basis of Presentation
Company and Background
Chegg, Inc. (Chegg, the Company, we, us, or our), headquartered in Santa Clara, California, was incorporated as a Delaware corporation in July 2005. Millions of people Learn with Chegg. We strive to improve educational outcomes by putting the student first. We support students on their journey from high school to college and into their career with tools designed to help them learn their course materials, succeed in their classes, save money on required materials, and learn the most in-demand skills. Our services are available online, anytime and anywhere.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of September 30, 2021, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive income (loss), and the condensed consolidated statements of stockholders' equity for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020, and the related footnote disclosures are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2021, our results of operations, results of comprehensive income (loss), and stockholders' equity for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020. Our results of operations, results of comprehensive income (loss), stockholders' equity, and cash flows for the nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year.
We operate in a single segment. Our fiscal year ends on December 31 and in this report we refer to the year ended December 31, 2020 as 2020.
The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC).
Except for our policies on convertible senior notes, net, share-based compensation expense, and net income (loss) per share, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K. Our policies on convertible senior notes, net and net income (loss) per share were updated as a result of our adoption of Accounting Standards Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity on January 1, 2021 under the modified retrospective method. For further information on ASU 2020-06, see the section below titled “Recent Accounting Pronouncements” of this Note 1, “Background and Basis of Presentation.”
Convertible Senior Notes, net
In August 2020, we issued $1.0 billion in aggregate principal amount of 0% convertible senior notes due in 2026 (2026 notes). In March 2019, we issued $700 million in aggregate principal amount of 0.125% convertible senior notes due in 2025 (2025 notes) and in April 2019, the initial purchasers fully exercised their option to purchase $100 million of additional 2025 notes for aggregate total gross proceeds of $800 million. In April 2018, we issued $345 million in aggregate principal amount of 0.25% convertible senior notes due in 2023 (2023 notes). Collectively, the 2026 notes, 2025 notes, and the 2023 notes are referred to as the “notes.” The notes, including the embedded conversion features, are accounted for under the traditional convertible debt accounting model entirely as a liability net of unamortized issuance costs. The carrying amount of the liability is classified as a current liability if we have committed to settle with current assets; otherwise, we classify it as a long-term liability as we retain the election to settle conversion requests in shares of our common stock. The embedded conversion features are not remeasured as long as they do not meet the separation requirement of a derivative; otherwise, they are classified as derivative instruments and recorded at fair value with changes in fair value recorded in other income (expense), net on our condensed consolidated statements of operations. The fair value of any derivative instruments related to the notes are determined utilizing Level 2 inputs. Issuance costs are amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the notes. In accounting for conversions of the notes, the carrying amount of the converted notes is reduced by the total consideration paid or issued for the respective converted notes and the
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difference is recorded to additional paid-in capital on our condensed consolidated balance sheets. In accounting for extinguishments of the notes, the reacquisition price of the extinguished notes is compared to the carrying amount of the respective extinguished notes and a gain or loss is recorded in other income (expense), net on our condensed consolidated statements of operations.
Share-based Compensation Expense
Share-based compensation expense for restricted stock units (RSUs), performance-based restricted stock units (PSUs) with either a market-based condition or financial performance targets, and the employee stock purchase plan (ESPP) is accounted for under the fair value method based on the grant-date fair value of the award. Share-based compensation expense for RSUs and PSUs with financial performance targets is measured based on the closing fair market value of the Company’s common stock, PSUs with a market-based condition is estimated using a Monte Carlo simulation model, and the ESPP is estimated using the Black-Scholes-Merton option pricing model. We recognize share-based compensation expense, subject to continuing service over the requisite service period, which is generally the vesting period, on a straight-line basis for RSUs and the ESPP and on a graded basis for PSUs. Share-based compensation expense for PSUs with a market-based condition is recognized regardless of whether the market condition is satisfied whereas share-based compensation expense for PSUs with financial performance targets is recognized upon estimated or actual achievement of such targets. These amounts are reduced by estimated forfeitures, which are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by adjusting net income (loss) for all related interest expense and gains and losses recognized during the period, net of tax, and giving effect to all potential shares of common stock, including stock options, PSUs, RSUs, and shares related to convertible senior notes, to the extent dilutive. This assumes that all stock options and dilutive convertible shares were exercised or converted and is computed by applying the treasury stock method for outstanding stock options, PSUs, and RSUs, and the if-converted method for outstanding convertible senior notes. Under the treasury stock method, options, PSUs, and RSUs are assumed to be exercised or vested at the beginning of the period (or at the time of issuance, if later) and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Under the if-converted method, outstanding convertible senior notes are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities; the disclosure of contingent liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience, knowledge of current business conditions, and various other factors we believe to be reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ from these estimates, and such differences could be material to our financial position and results of operations. Except for estimates related to the grant-date fair value of PSUs with a market-based condition, there have been no material changes in our use of estimates during the nine months ended September 30, 2021 as compared to the use of estimates disclosed in Part II, Item 8 “Consolidated Financial Statements and Supplementary Data” contained in our Annual Report on Form 10-K for the year ended December 31, 2020.
Reclassification of Prior Period Presentation
In order to conform with current period presentation, $6.6 million of current operating lease liabilities have been reclassified to accrued liabilities on our condensed consolidated balance sheet as of December 31, 2020. This change in presentation does not affect previously reported results.
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Condensed Consolidated Statements of Operations Details
Other income (expense), net consists of the following (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Loss on early extinguishment of debt(1) | $ | — | $ | (3,315) | $ | (78,152) | $ | (3,315) | |||||||||||||||
Loss on change in fair value of derivative instruments, net(1) | — | — | (7,148) | — | |||||||||||||||||||
Gain on sale of strategic equity investments(2) | 7,158 | — | 12,496 | — | |||||||||||||||||||
| Interest income | 1,485 | 2,539 | 5,385 | 10,588 | |||||||||||||||||||
| Other | 27 | (28) | 801 | 123 | |||||||||||||||||||
Total other income (expense), net | $ | 8,670 | $ | (804) | $ | (66,618) | $ | 7,396 | |||||||||||||||
(1) For further information, see Note 7, “Convertible Senior Notes.”
(2) For further information, see Note 4, “Cash and Cash Equivalents, and Investments.”
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 aims to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange based on the economic substance of the modification or exchange. Early adoption is permitted and the guidance must be applied prospectively to all modifications or exchanges that occur on or after the date of adoption. The guidance is effective for annual periods beginning after December 15, 2021, and we are currently in the process of evaluating the impact of this guidance.
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. ASU 2020-06 simplifies the guidance in Accounting Standards Codification (ASC) 470-20, Debt - Debt with Conversion and Other Options. Under ASU 2020-06, convertible instruments with embedded conversion features, that are not required to be accounted for as a derivative or that do not result in a substantial premium, are no longer required to be separated from the host contract thereby eliminating the cash conversion feature model. Instead, these convertible debt instruments will be accounted for as a single liability measured at amortized cost under the traditional convertible debt accounting model. ASU 2020-06 also requires the if-converted method to be applied for all convertible instruments when calculating diluted earnings per share.
We adopted ASU 2020-06 on January 1, 2021 under the modified retrospective method applied to convertible senior notes outstanding as of January 1, 2021 and have not changed previously disclosed amounts or provided additional disclosures for comparative periods. Adoption of ASU 2020-06 resulted in an increase to convertible senior notes of $378.1 million and a decrease to additional paid-in capital of $465.0 million due to the application of the traditional convertible debt model and no longer separating the embedded conversion feature. Accumulated deficit also decreased by $86.9 million due to the reduction in non-cash interest expense related to the debt discount and we expect interest expense to decrease in future periods. Refer to Note 7, “Convertible Senior Notes” for more information.
Note 2. Revenues
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The majority of our revenues are recognized over time as services are performed, with certain revenues being recognized at a point in time.
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The following tables set forth our total net revenues for the periods shown disaggregated for our Chegg Services and Required Materials product lines (in thousands, except percentages):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Chegg Services | $ | 146,790 | $ | 118,895 | $ | 27,895 | 23 | % | |||||||||||||||
| Required Materials | 25,152 | 35,123 | (9,971) | (28) | |||||||||||||||||||
| Total net revenues | $ | 171,942 | $ | 154,018 | $ | 17,924 | 12 | ||||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Chegg Services | $ | 482,654 | $ | 345,258 | $ | 137,396 | 40 | % | |||||||||||||||
| Required Materials | 86,144 | 93,359 | (7,215) | (8) | |||||||||||||||||||
| Total net revenues | $ | 568,798 | $ | 438,617 | $ | 130,181 | 30 | ||||||||||||||||
During the three and nine months ended September 30, 2021, we recognized $31.3 million and $32.6 million, respectively, of revenues that were included in our deferred revenue balance at the beginning of each reporting period. During the three and nine months ended September 30, 2020, we recognized $25.4 million and $18.0 million, respectively, of revenues that were included in our deferred revenue balance at the beginning of each reporting period. During the three and nine months ended September 30, 2021, we recognized a reduction of revenues of an immaterial amount and $3.4 million, respectively, from performance obligations satisfied in previous periods primarily due to a change in the estimated variable consideration ascribed to Thinkful. During the three and nine months ended September 30, 2020, we recognized an immaterial amount of previously deferred revenues recognized from performance obligations satisfied in previous periods. During the three and nine months ended September 30, 2021, we recognized $6.2 million and $26.9 million, respectively, of operating lease income from print textbook rentals that we own. During the three and nine months ended September 30, 2020, we recognized $12.0 million and $35.4 million, respectively, of operating lease income from print textbook rentals that we own.
Contract Balances
The following table presents our accounts receivable, net, deferred revenue, and contract assets balances (in thousands, except percentages):
| Change | |||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | $ | % | ||||||||||||||||||||
| Accounts receivable, net | $ | 9,302 | $ | 12,913 | $ | (3,611) | (28) | % | |||||||||||||||
| Deferred revenue | 49,983 | 32,620 | 17,363 | 53 | |||||||||||||||||||
| Contract assets | 16,358 | 13,243 | 3,115 | 24 | |||||||||||||||||||
During the nine months ended September 30, 2021, our accounts receivable, net balance decreased by $3.6 million, or 28%, primarily due to timing of billings and seasonality of our business. During the nine months ended September 30, 2021, our deferred revenue balance increased by $17.4 million, or 53%, primarily due to increased bookings and seasonality of our business. During the nine months ended September 30, 2021, our contract assets balance increased by $3.1 million, or 24%, primarily due to our Thinkful service.
Note 3. Net Income (Loss) Per Share
Adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
We adopted ASU 2020-06 on January 1, 2021 under the modified retrospective method applied to convertible senior notes outstanding as of January 1, 2021 and have not changed previously disclosed amounts or provided additional disclosures for comparative periods. ASU 2020-06 requires the if-converted method to be applied for all convertible instruments when calculating diluted earnings per share. Under the if-converted method, outstanding convertible senior notes are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
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The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020(1) | 2021 | 2020(1) | ||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
Net income (loss) | $ | 6,651 | $ | (37,140) | $ | (25,764) | $ | (32,264) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
Weighted average shares used to compute net income (loss) per share, basic | 144,746 | 126,194 | 140,775 | 124,162 | |||||||||||||||||||
Net income (loss) per share, basic | $ | 0.05 | $ | (0.29) | $ | (0.18) | $ | (0.26) | |||||||||||||||
| Diluted | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
Net income (loss), diluted | $ | 6,651 | $ | (37,140) | $ | (25,764) | $ | (32,264) | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
Weighted average shares used to compute net income (loss) per share, basic | 144,746 | 126,194 | 140,775 | 124,162 | |||||||||||||||||||
| Options to purchase common stock | 485 | — | — | — | |||||||||||||||||||
| PSUs and RSUs | 1,462 | — | — | — | |||||||||||||||||||
| Employee stock purchase plan | 6 | — | — | — | |||||||||||||||||||
Weighted average shares used to compute net income (loss) per share, diluted | 146,699 | 126,194 | 140,775 | 124,162 | |||||||||||||||||||
Net income (loss) per share, diluted | $ | 0.05 | $ | (0.29) | $ | (0.18) | $ | (0.26) | |||||||||||||||
(1) As noted above, prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method.
The following potential weighted-average shares of common stock outstanding were excluded from the computation of diluted net income (loss) per share because including them would have been anti-dilutive (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Options to purchase common stock | — | 865 | 515 | 977 | |||||||||||||||||||
| PSUs and RSUs | 849 | 3,394 | 2,210 | 3,425 | |||||||||||||||||||
| Shares related to convertible senior notes | 22,875 | 8,721 | 23,876 | 4,422 | |||||||||||||||||||
| Employee stock purchase plan | — | 9 | 2 | 4 | |||||||||||||||||||
| Total common stock equivalents | 23,724 | 12,989 | 26,603 | 8,828 | |||||||||||||||||||
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Note 4. Cash and Cash Equivalents, and Investments
The following tables show our cash and cash equivalents, and investments’ adjusted cost, unrealized gain, unrealized loss, and fair value as of September 30, 2021 and December 31, 2020 (in thousands):
| September 30, 2021 | |||||||||||||||||||||||
| Adjusted Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||||||||
| Cash | $ | 29,338 | $ | — | $ | — | $ | 29,338 | |||||||||||||||
| Money market funds | 684,499 | — | — | 684,499 | |||||||||||||||||||
| Total cash and cash equivalents | $ | 713,837 | $ | — | $ | — | $ | 713,837 | |||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Commercial paper | $ | 364,098 | $ | 49 | $ | (4) | $ | 364,143 | |||||||||||||||
| Corporate debt securities | 658,525 | 280 | (122) | 658,683 | |||||||||||||||||||
| Agency bonds | 15,501 | 18 | — | 15,519 | |||||||||||||||||||
| Total short-term investments | $ | 1,038,124 | $ | 347 | $ | (126) | $ | 1,038,345 | |||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Corporate debt securities | $ | 813,889 | $ | 142 | $ | (531) | $ | 813,500 | |||||||||||||||
| Total long-term investments | $ | 813,889 | $ | 142 | $ | (531) | $ | 813,500 | |||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Adjusted Cost | Unrealized Gain | Unrealized Loss | Fair Value | ||||||||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||||||||
| Cash | $ | 15,054 | $ | — | $ | — | $ | 15,054 | |||||||||||||||
| Money market funds | 464,799 | — | — | 464,799 | |||||||||||||||||||
| Total cash and cash equivalents | $ | 479,853 | $ | — | $ | — | $ | 479,853 | |||||||||||||||
| Short-term investments: | |||||||||||||||||||||||
| Commercial paper | $ | 204,152 | $ | 24 | $ | (6) | $ | 204,170 | |||||||||||||||
| Corporate debt securities | 459,967 | 1,478 | (48) | 461,397 | |||||||||||||||||||
| Total short-term investments | $ | 664,119 | $ | 1,502 | $ | (54) | $ | 665,567 | |||||||||||||||
| Long-term investments: | |||||||||||||||||||||||
| Corporate debt securities | $ | 484,275 | $ | 605 | $ | (283) | $ | 484,597 | |||||||||||||||
| Agency bonds | 38,995 | 36 | — | 39,031 | |||||||||||||||||||
| Total long-term investments | $ | 523,270 | $ | 641 | $ | (283) | $ | 523,628 | |||||||||||||||
The following table shows our cash equivalents and investments' adjusted cost and fair value by contractual maturity as of September 30, 2021 (in thousands):
| Adjusted Cost | Fair Value | ||||||||||
| Due in 1 year or less | $ | 1,038,124 | $ | 1,038,345 | |||||||
| Due in 1-2 years | 813,889 | 813,500 | |||||||||
| Investments not due at a single maturity date | 684,499 | 684,499 | |||||||||
| Total | $ | 2,536,512 | $ | 2,536,344 | |||||||
Investments not due at a single maturity date in the preceding table consisted of money market funds.
As of September 30, 2021, we determined that the declines in the market value of our investment portfolio were not driven by credit related factors. When evaluating whether an investment's unrealized losses are related to credit factors, we review factors such as the extent to which fair value is below its cost basis, any changes to the credit rating of the security, adverse conditions specifically related to the security, changes in market interest rates and our intent to sell, or whether it is
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more likely than not we will be required to sell, before recovery of cost basis. We invest in highly rated securities with a minimum credit rating of A- and a weighted average maturity of less than twelve months. In addition, our investment policy limits the amount of our credit exposure to any one issuer or industry sector. The policy requires investments to be investment grade, with the primary objective of preserving capital and maintaining liquidity. Fair values were determined for each individual security in the investment portfolio. During the three and nine months ended September 30, 2021 and 2020, we did not recognize any losses on our investments due to credit related factors.
Strategic Investments
We previously invested $2.0 million in TAPD, Inc., also known as Frank; a U.S.-based service that helps students access financial aid. In September 2021, we sold our investment in Frank for total consideration of $9.2 million, resulting in a $7.2 million gain included within other income (expense), net on our condensed consolidated statements of operations. We received a cash payment of $9.0 million included within cash flows from investing activities on our condensed consolidated statements of cash flows.
We also previously invested $3.0 million in a foreign entity to explore expanding our reach internationally. In March 2021, we sold our investment in that foreign entity for total consideration of $8.3 million, resulting in a $5.3 million gain included within other income (expense), net on our condensed consolidated statements of operations. We received a cash payment, net of taxes withheld, of $7.1 million included within cash flows from investing activities on our condensed consolidated statements of cash flows.
Aside from a $10.0 million impairment charge previously recorded in 2020 on our strategic investment in WayUp, Inc., we did not record any other impairment charges on our strategic investments during the three and nine months ended September 30, 2021 and 2020, as there were no other significant identified events or changes in circumstances that would be considered an indicator for impairment. We considered general market conditions as a result of the COVID-19 pandemic in our impairment analysis. There were no observable price changes in orderly transactions for the identical or similar investments of the same issuers during the three and nine months ended September 30, 2021 and 2020. As of September 30, 2021, we had no amounts related to strategic investments on our condensed consolidated balance sheet.
Note 5. Fair Value Measurement
We have established a fair value hierarchy used to determine the fair value of our financial instruments as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value; the inputs require significant management judgment or estimation.
A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
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Financial instruments measured and recorded at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 are classified based on the valuation technique level in the tables below (in thousands):
| September 30, 2021 | |||||||||||||||||
| Total | Level 1 | Level 2 | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash equivalents: | |||||||||||||||||
| Money market funds | $ | 684,499 | $ | 684,499 | $ | — | |||||||||||
| Short-term investments: | |||||||||||||||||
| Commercial paper | 364,143 | — | 364,143 | ||||||||||||||
| Corporate debt securities | 658,683 | — | 658,683 | ||||||||||||||
| Agency bonds | 15,519 | — | 15,519 | ||||||||||||||
| Long-term investments: | |||||||||||||||||
| Corporate debt securities | 813,500 | — | 813,500 | ||||||||||||||
| Total assets measured and recorded at fair value | $ | 2,536,344 | $ | 684,499 | $ | 1,851,845 | |||||||||||
| December 31, 2020 | |||||||||||||||||
| Total | Level 1 | Level 2 | |||||||||||||||
| Assets: | |||||||||||||||||
| Cash equivalents: | |||||||||||||||||
| Money market funds | $ | 464,799 | $ | 464,799 | $ | — | |||||||||||
| Short-term investments: | |||||||||||||||||
| Commercial paper | 204,170 | — | 204,170 | ||||||||||||||
| Corporate debt securities | 461,397 | — | 461,397 | ||||||||||||||
| Long-term investments: | |||||||||||||||||
| Corporate debt securities | 484,597 | — | 484,597 | ||||||||||||||
| Agency bonds | 39,031 | — | 39,031 | ||||||||||||||
| Total assets measured and recorded at fair value | $ | 1,653,994 | $ | 464,799 | $ | 1,189,195 | |||||||||||
We value our investments based on quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. Other than our money market funds, we classify our fixed income available-for-sale investments as having Level 2 inputs. The valuation techniques used to measure the fair value of our investments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. We do not hold any investments valued with a Level 3 input.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
We report our financial instruments at fair value with the exception of the notes. The estimated fair value of the notes was determined based on the trading price of the notes as of the last day of trading for the period. We consider the fair value of the notes to be a Level 2 measurement due to the limited trading activity. For further information on the notes, refer to Note 7, “Convertible Senior Notes.”
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The carrying amounts and estimated fair values of the notes as of September 30, 2021 and December 31, 2020 are as follows (in thousands):
| September 30, 2021 | December 31, 2020 (1) | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
| 2026 notes | $ | 987,027 | $ | 984,880 | $ | 761,930 | $ | 1,129,370 | |||||||||||||||
| 2025 notes | 689,722 | 1,011,050 | 640,614 | 1,456,800 | |||||||||||||||||||
| 2023 notes | — | — | 104,378 | 376,949 | |||||||||||||||||||
| Convertible senior notes, net | $ | 1,676,749 | $ | 1,995,930 | $ | 1,506,922 | $ | 2,963,119 | |||||||||||||||
(1) Prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method. Refer to Note 7, “Convertible Senior Notes” for more information.
The carrying amount of the 2026 notes and 2025 notes as of September 30, 2021 was net of unamortized issuance costs of $13.0 million and $10.3 million, respectively, and there is no carrying amount of the 2023 notes as we settled the principal amount of the 2023 notes during the nine months ended September 30, 2021. The carrying amount of the 2026 notes, 2025 notes, and 2023 notes as of December 31, 2020 was net of unamortized debt discount of $226.7 million, $149.1 million and $10.0 million, respectively, and unamortized issuance costs of $11.3 million, $10.2 million and $1.2 million, respectively.
Note 6. Acquisition
On February 22, 2021, we completed an acquisition, accounted for as a business combination, of 100% of the outstanding shares of a company for a technology that will strengthen our content creation abilities for a purchase consideration of $8.0 million in cash. Our preliminary total allocation of purchase consideration included acquired assets of $0.4 million, acquired developed technology intangible asset of $3.3 million and goodwill of $5.8 million less assumed liabilities of $1.5 million. This acquisition did not have a material impact on our condensed consolidated financial statements and is not expected to have a material impact in future periods.
Note 7. Convertible Senior Notes
Adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
We adopted ASU 2020-06 on January 1, 2021 under the modified retrospective method applied to convertible senior notes outstanding as of January 1, 2021 and have not changed previously disclosed amounts or provided additional disclosures for comparative periods. Under ASU 2020-06, convertible instruments with embedded conversion features, that are not required to be accounted for as a derivative or that do not result in a substantial premium, are no longer required to be separated from the host contract thereby eliminating the cash conversion feature model. Instead, these convertible debt instruments will be accounted for as a single liability measured at amortized cost under the traditional convertible debt accounting model.
In August 2020, we issued $1.0 billion in aggregate principal amount of 0% convertible senior notes due in 2026 (2026 notes). The aggregate principal amount of the 2026 notes includes $100 million from the initial purchasers fully exercising their option to purchase additional notes. In March 2019, we issued $700 million in aggregate principal amount of 0.125% convertible senior notes due in 2025 (2025 notes) and in April 2019, the initial purchasers fully exercised their option to purchase $100 million of additional 2025 notes for aggregate total principal amount of $800 million. In April 2018, we issued $345 million in aggregate principal amount of 0.25% convertible senior notes due in 2023 (2023 notes and together with the 2026 notes and the 2025 notes, the notes). The aggregate principal amount of the 2023 notes included $45 million from the initial purchasers fully exercising their option to purchase additional notes. The notes were issued in private placements to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended.
The total net proceeds from the notes are as follows (in thousands):
| 2026 Notes | 2025 Notes | 2023 Notes | |||||||||||||||
| Principal amount | $ | 1,000,000 | $ | 800,000 | $ | 345,000 | |||||||||||
| Less initial purchasers’ discount | (15,000) | (18,998) | (8,625) | ||||||||||||||
| Less other issuance costs | (904) | (822) | (757) | ||||||||||||||
| Net proceeds | $ | 984,096 | $ | 780,180 | $ | 335,618 | |||||||||||
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During the nine months ended September 30, 2021, we settled $115.6 million of aggregate principal amount of the 2023 notes, consisting of $24.7 million related to requests for conversions and $90.9 million pursuant to our election of our option to redeem the remaining outstanding 2023 notes, for a total aggregate consideration of $351.1 million, consisting of $115.6 million in cash and 2,983,011 shares of our common stock with a value of $235.5 million. The carrying amount of the 2023 notes was $114.2 million, resulting in a $236.9 million difference that was recorded in additional paid-in capital on our condensed consolidated balance sheet. Additionally, we entered into 2023 notes capped call privately-negotiated transactions which terminated capped call transactions underlying 4,288,459 shares of our common stock and received aggregate cash proceeds of $45.2 million. As of September 30, 2021, no amounts of our 2023 notes remain outstanding and no shares remain underlying the 2023 notes capped call transactions.
In March 2021, in connection with our securities repurchase program, we extinguished $100.0 million aggregate principal amount of the 2025 notes in privately-negotiated transactions for aggregate consideration of $184.9 million, which was paid in cash. Upon execution, we concluded that the 2025 notes embedded conversion features no longer met the derivative scope exception and, as a result, initially recorded a derivative liability of $176.5 million, related to the fair value of extinguished 2025 notes. We settled the derivative liability for aggregate consideration of $184.9 million resulting in a $8.4 million loss on change in fair value. The carrying amount of the 2025 notes subject to the extinguishment was $98.3 million resulting in a $78.2 million loss on early extinguishment of debt. Additionally, we entered into 2025 notes capped call privately-negotiated transactions which terminated capped call transactions underlying 1,939,560 shares of our common stock and received aggregate cash proceeds of $23.9 million. Upon execution, we concluded that the capped call transactions no longer met the derivative scope exception and, as a result recorded a derivative liability of $22.6 million related to the fair value of terminated 2025 notes capped call transactions. We settled the capped call transactions for aggregate consideration of $23.9 million resulting in a $1.3 million gain on change in fair value.
The notes are our senior, unsecured obligations and are governed by indenture agreements by and between us and Wells Fargo Bank, National Association, as Trustee (the indentures). The 2026 notes bear no interest and will mature on September 1, 2026, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The 2025 notes bear interest of 0.125% per year which is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019. The 2025 notes will mature on March 15, 2025, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The 2023 notes bore interest of 0.25% per year which was payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2018.
Each $1,000 principal amount of the 2026 notes will initially be convertible into 9.2978 shares of our common stock. This is equivalent to an initial conversion price of approximately $107.55 per share, which is subject to adjustment in certain circumstances. Each $1,000 principal amount of the 2025 notes will initially be convertible into 19.3956 shares of our common stock. This is equivalent to an initial conversion price of approximately $51.56 per share, which is subject to adjustment in certain circumstances. Each $1,000 principal amount of the 2023 notes was initially convertible into 37.1051 shares of our common stock. This was equivalent to an initial conversion price of approximately $26.95 per share, which was subject to adjustment in certain circumstances.
Prior to the close of business on the business day immediately preceding June 1, 2026 for the 2026 notes and December 15, 2024 for the 2025 notes, the notes are convertible at the option of holders only upon satisfaction of the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 for the 2026 notes and June 30, 2019 for the 2025 notes, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the respective conversion price for the notes on each applicable trading day;
•during the five-business day period after any 10 consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
•if we call any or all of the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
•upon the occurrence of certain specified corporate events described in the indentures.
On or after June 1, 2026 for the 2026 notes and December 15, 2024 for the 2025 notes until the close of business on the second scheduled trading day immediately preceding the respective maturity dates, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the notes may be settled in shares of our common stock, cash or a combination of cash and shares of our common stock, at our election.
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If we undergo a fundamental change, as defined in the indentures, prior to the respective maturity dates, subject to certain conditions, holders of the notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events, described in the indentures, occur prior to the respective maturity dates, we will also increase the conversion rate for a holder who elects to convert their notes in connection with such specified corporate events.
The conditions allowing holders of the 2026 notes to convert were not met and therefore the 2026 notes are not convertible. The first circumstance noted above allowing holders of the 2025 notes to convert was met during the three months ended September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020 and September 30, 2020 and therefore, the 2025 notes were and are convertible starting October 1, 2020 through December 31, 2021. Aside from the extinguishment of $100.0 million aggregate principal amount of the 2025 notes discussed above, during the three and nine months ended September 30, 2021, we received immaterial requests for conversion of the 2025 notes which we settled or intend to settle in cash. During the year ended December 31, 2020, in connection with our issuance of the 2026 notes, we exchanged $172.0 million aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $501.7 million, consisting of $174.6 million in cash and 4,182,320 shares of our common stock with a value of $327.1 million.
The net carrying amount of the notes is as follows (in thousands):
| September 30, 2021 | December 31, 2020 (1) | ||||||||||||||||||||||||||||
| 2026 Notes | 2025 Notes | 2026 Notes | 2025 Notes | 2023 Notes | |||||||||||||||||||||||||
| Principal | $ | 1,000,000 | $ | 699,989 | $ | 1,000,000 | $ | 800,000 | $ | 115,576 | |||||||||||||||||||
| Unamortized debt discount | — | — | (226,732) | (149,138) | (9,953) | ||||||||||||||||||||||||
| Unamortized issuance costs | (12,973) | (10,267) | (11,338) | (10,248) | (1,245) | ||||||||||||||||||||||||
| Net carrying amount | $ | 987,027 | $ | 689,722 | $ | 761,930 | $ | 640,614 | $ | 104,378 | |||||||||||||||||||
(1) As noted above, prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method.
The following tables set forth the total interest expense recognized related to the notes (in thousands):
| Three Months Ended September 30, | |||||||||||||||||||||||||||||
| 2021 | 2020 (1) | ||||||||||||||||||||||||||||
| 2026 Notes | 2025 Notes | 2026 Notes | 2025 Notes | 2023 Notes | |||||||||||||||||||||||||
| Contractual interest expense | $ | — | $ | 221 | $ | — | $ | 252 | $ | 169 | |||||||||||||||||||
| Amortization of debt discount | — | — | 4,491 | 8,938 | 2,458 | ||||||||||||||||||||||||
| Amortization of issuance costs | 663 | 749 | 225 | 614 | 292 | ||||||||||||||||||||||||
| Total interest expense | $ | 663 | $ | 970 | $ | 4,716 | $ | 9,804 | $ | 2,919 | |||||||||||||||||||
(1) As noted above, prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method.
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 (1) | ||||||||||||||||||||||||||||||||||
| 2026 Notes | 2025 Notes | 2023 Notes | 2026 Notes | 2025 Notes | 2023 Notes | ||||||||||||||||||||||||||||||
| Contractual interest expense | $ | — | $ | 676 | $ | 78 | $ | — | $ | 750 | $ | 599 | |||||||||||||||||||||||
| Amortization of debt discount | — | — | — | 4,491 | 26,621 | 8,709 | |||||||||||||||||||||||||||||
| Amortization of issuance costs | 1,970 | 2,297 | 242 | 225 | 1,829 | 1,035 | |||||||||||||||||||||||||||||
| Total interest expense | $ | 1,970 | $ | 2,973 | $ | 320 | $ | 4,716 | $ | 29,200 | $ | 10,343 | |||||||||||||||||||||||
(1) As noted above, prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method.
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Capped Call Transactions
Concurrently with the offering of the 2026 notes and 2025 notes, we used $103.4 million and $97.2 million, respectively, of the net proceeds to enter into privately negotiated capped call transactions which are expected to reduce or offset potential dilution to holders of our common stock upon conversion of the notes or offset the potential cash payments we would be required to make in excess of the principal amount of any converted notes. The capped call transactions automatically exercise upon conversion of the notes and as of September 30, 2021, cover 9,297,800 and 13,576,706 shares of our common stock for the 2026 notes and 2025 notes, respectively. These are intended to effectively increase the overall conversion price from $107.55 to $156.44 per share for the 2026 notes and $51.56 to $79.32 per share for the 2025 notes. The effective increase in conversion price as a result of the capped call transactions serves to reduce potential dilution to holders of our common stock and/or offset the cash payments we are required to make in excess of the principal amount of any converted notes. As these transactions meet certain accounting criteria, they are recorded in stockholders’ equity as a reduction of additional paid-in capital on our condensed consolidated balance sheets and are not accounted for as derivatives. The fair value of the capped call instrument is not remeasured each reporting period. The cost of the capped call is not expected to be deductible for tax purposes.
Note 8. Commitments and Contingencies
From time to time, third parties may assert patent infringement claims against us in the form of letters, litigation, or other forms of communication. In addition, we may from time to time be subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, and other intellectual property rights; employment claims; and general contract or other claims. We may also, from time to time, be subject to various legal or government claims, disputes, or investigations. Such matters may include, but not be limited to, claims, disputes, or investigations related to warranty, refund, breach of contract, employment, intellectual property, government regulation, or compliance or other matters.
On September 13, 2021, Pearson Education, Inc. (Pearson) filed a complaint captioned Pearson Education, Inc. v. Chegg, Inc. (Pearson Complaint) in the United States District Court for the District of New Jersey against the Company (Case 2:21-cv-16866), alleging infringement of Pearson’s registered copyrights and exclusive rights under copyright in violation of the United States Copyright Act. Pearson is seeking injunctive relief, monetary damages, costs, and attorneys’ fees. The Company’s answer to the Pearson Complaint is due by November 19, 2021. The Company disputes these claims and intends to vigorously defend itself in this matter.
On December 1, 2020, we received notice that a class action lawsuit was filed against Chegg in New York alleging violations of the American with Disabilities Act. The claim asserted that one of Chegg’s websites is not compatible with software used by vision-impaired individuals. During the nine months ended September 30, 2021, we settled this matter for an immaterial amount.
On August 18, 2020, we received notice that a class action lawsuit was filed against Chegg in California alleging violations of the Unruh Civil Rights Act. The claim asserted that one of Chegg’s websites is not compatible with software used by vision-impaired individuals. During the nine months ended September 30, 2021, we settled this matter for an immaterial amount.
On July 21, 2020, VitalSource Technologies LLC (VST), which is wholly owned by Ingram Industries Inc., filed a complaint against Chegg alleging that Chegg breached its contract with VST involving the development of an eTextbook reader and eTextbook reader platform. The suit sought uncertain damages, but the complaint alleged that they exceeded $75 thousand. During the nine months ended September 30, 2021, we settled this matter for an immaterial amount.
On June 18, 2020, we received a Civil Investigative Demand (CID) from the Federal Trade Commission (FTC) to determine whether we may have violated Section 5 of the FTC Act or the Children's Online Privacy Protection Act (COPPA), as they relate to deceptive or unfair acts or practices related to consumer privacy and/or data security. We have provided the FTC with the requested responses to interrogatories and follow-up questions and have produced documents pertaining to data breach incidents and our data security and privacy practices generally.
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On May 12, 2020, we received notice that 15,107 arbitration demands were filed against us by individuals all represented by the same legal counsel, each individual claimant alleging to have suffered more than $25 thousand in damages as a result of the unauthorized access of certain items of their user data in April 2018 (the 2018 Data Incident). On July 1, 2020, an additional 1,007 arbitration demands were filed by the same counsel. On August 12, 2020, an additional 577 arbitration demands were filed by the same counsel; cases have been filed by the same counsel in Maryland and California. We dispute that these claimants have a valid basis for seeking arbitration, assert that they have acted in bad faith and are working with the Maryland and California courts and plaintiffs’ counsel on resolution of these claims. On August 22, 2021, Chegg and the claimaints' legal counsel, on behalf of its clients, entered into a settlement agreement (Settlement Agreement), pursuant to which each eligible claimant that signs a release agreement agrees, among other things, to dismiss with prejudice all claims against Chegg that such claimant currently maintains in exchange for such claimant's pro rata portion of the settlement amount. Claimants have until January 26, 2022 to sign their release agreements. In March 2021, we recorded a loss contingency accrual and a corresponding insurance loss recovery, the net impact of which did not materially impact our condensed consolidated statements of operations.
On November 5, 2018, NetSoc, LLC (NetSoc) filed a complaint against us captioned NetSoc, LLC v. Chegg, Inc., (Civil Action No. 1:18-CV-10262-RAC) in the U.S. District Court for the Southern District of New York (SDNY) for patent infringement alleging that the Chegg Tutors service infringes U.S. Patent No. 9,978,107 (the NetSoc Patent) and seeking unspecified compensatory damages. A responsive pleading was filed on February 19, 2019. On January 13, 2020, the SDNY issued an order dismissing the case as to Chegg. On January 30, 2020, NetSoc appealed the dismissal to the United States Court of Appeals for the Federal Circuit (the Federal Circuit). On September 24, 2021, the Federal Circuit dismissed NetSoc's appeal of the SDNY dismissal. On December 2, 2020, the U.S. Patent and Trademark Office determined that the NetSoc Patent is invalid based on two Inter Partes Review (IPR) proceedings instituted in part by Chegg, and on January 4, 2021, NetSoc filed a Notice of Appeals at the Federal Circuit appealing the IPR decisions. On October 18, 2021, Chegg filed a motion to dismiss NetSoc's appeal of the IPR decisions.
Aside from the loss contingency accrual for the 2018 Data Incident matter, we have not recorded any additional amounts related to the above matters as we do not believe that a loss is probable in these remaining matters. We are not aware of any other pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on our condensed consolidated financial position, results of operations, or cash flows. However, our analysis of whether a claim will proceed to litigation cannot be predicted with certainty, nor can the results of litigation be predicted with certainty. Nevertheless, defending any of these actions, regardless of the outcome, may be costly, time consuming, distract management personnel and have a negative effect on our business. An adverse outcome in any of these actions, including a judgment or settlement, may cause a material adverse effect on our future business, operating results and/or financial condition.
Note 9. Guarantees and Indemnifications
We have agreed to indemnify our directors and officers for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon termination of employment, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. We have a directors’ and officers’ insurance policy that limits our potential exposure up to the limits of our insurance coverage. In addition, we also have other indemnification agreements with various vendors against certain claims, liabilities, losses, and damages. The maximum amount of potential future indemnification is unlimited.
We believe the fair value of these indemnification agreements is immaterial. We have not recorded any liabilities for these agreements as of September 30, 2021.
Note 10. Stockholders' Equity
Equity Offering
In February 2021, we entered into an underwriting agreement pursuant to which we agreed to issue and sell 10,974,600 shares of our common stock at a public offering price of $102.00 per share generating aggregate net proceeds of $1,091.5 million, after deducting underwriting discounts and commissions of $26.9 million and offering expenses of $1.1 million.
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Securities Repurchase Program
In November 2021, our board of directors approved a $500.0 million increase to our existing securities repurchase program authorizing the repurchase of up to $1.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements. The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors. During the nine months ended September 30, 2021, we repurchased $100.0 million of aggregate principal amount of the 2025 notes in privately-negotiated transactions for an aggregate consideration of $184.9 million. $665.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.
Share-based Compensation Expense
Total share-based compensation expense recorded for employees and non-employees is as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Cost of revenues | $ | 393 | $ | 262 | $ | 1,174 | $ | 644 | |||||||||||||||
| Research and development | 8,917 | 8,433 | 25,976 | 23,044 | |||||||||||||||||||
| Sales and marketing | 3,051 | 2,431 | 9,625 | 7,053 | |||||||||||||||||||
| General and administrative | 12,151 | 10,403 | 39,382 | 28,668 | |||||||||||||||||||
| Total share-based compensation expense | $ | 24,512 | $ | 21,529 | $ | 76,157 | $ | 59,409 | |||||||||||||||
During the three and nine months ended September 30, 2021, we capitalized share-based compensation expense of $0.6 million and $1.8 million, respectively.
2021 PSU Grants with Market-Based Conditions
In March 2021, we granted PSUs under the 2013 Equity Incentive Plan (the 2013 Plan) with market-based conditions to certain of our key employees. The number of shares of our common stock that may be issued to settle these PSUs range from 50% at the threshold level to 150% at the maximum level of the 100% target level of the award depending on achieving a maximum average market value of the per share price of our common stock, for a period of 60 consecutive trading days, over a three-year performance period ending on the third anniversary of the date of grant. No payout will be made for performance below the 50% threshold level. The market value of the per share price of our common stock must reach $123.81, $148.58, or $173.34 at the threshold, target, or maximum levels, respectively, for achievement of the award, which could result in issuance of 244,086, 488,173, or 732,260 shares of our common stock at each respective payout level. These PSUs will vest over a four-year period, with the initial vesting of 50% of the award occurring in March 2024. The number of PSUs granted totaled 732,260 shares, which represents the maximum number of shares, and had a grant date fair value of $68.55 per share, determined under the Monte Carlo simulation approach described further below. As of September 30, 2021, the market-based conditions have not been met.
Fair Value of PSUs with Market-Based Conditions
PSUs with market-based conditions are converted into shares of our common stock upon vesting on a one-for-one basis. Vesting is subject to the achievement of certain per share price of our common stock targets and the employee's continuing service to us. If the targets are achieved, the awards vest over a four-year period. We estimate the fair value of the PSUs using a Monte Carlo simulation approach, which utilizes the fair value of our common stock based on an active market and requires input on the following subjective assumptions:
Expected Term. The expected term for the awards is the performance period of three years.
Expected Volatility. The expected volatility is based on the historical average volatility of our stock price over the expected term.
Expected Dividends. The dividend assumption is based on our historical experience. To date we have not paid any dividends on our common stock.
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Risk-Free Interest Rate. The risk-free interest rate used in the valuation method is the implied yield currently available on the U.S. treasury zero-coupon issues, with a remaining term equal to the expected term.
The following table summarizes the key assumptions used to determine the fair value of the awards:
| Expected term (years) | 3.00 | ||||
| Expected volatility | 49.04 | % | |||
| Expected dividends | — | % | |||
| Risk-free interest rate | 0.27 | % | |||
2021 PSU Grants with Financial and Strategic Performance Targets
In March 2021, we granted PSUs under the 2013 Plan to certain of our key executives. These PSUs entitle the executives to receive a certain number of shares of our common stock based on our satisfaction of certain financial and strategic performance targets during 2021. These PSUs will vest over a three-year period, with the initial vesting occurring in March 2022. The number of shares underlying these March 2021 PSUs granted totaled 278,644 shares and had a grant date fair value of $99.05 per share. As of September 30, 2021, the performance-based milestones are expected to be partially achieved during 2021.
PSUs with Financial and Strategic Performance Targets and RSUs
PSUs with financial and strategic performance targets and RSUs are converted into shares of our common stock upon vesting on a one-for-one basis. Vesting of PSUs is subject to our achievement of specified financial and strategic performance targets in addition to the employee's continuing service to us while vesting of RSUs is subject to the employee’s continuing service to us. PSUs typically vest over three years while RSUs typically vest over or four years. We assess the achievement of financial and strategic performance targets on a quarterly basis and adjust our share-based compensation expense as appropriate.
RSU and PSU Activity
Activity for RSUs and PSUs is as follows:
| RSUs and PSUs Outstanding | |||||||||||
| Shares Outstanding | Weighted Average Grant Date Fair Value | ||||||||||
| Balance at December 31, 2020 | 4,816,000 | $ | 37.82 | ||||||||
| Granted | 2,216,327 | 86.60 | |||||||||
| Released | (2,391,951) | 33.81 | |||||||||
| Forfeited | (430,325) | 44.84 | |||||||||
| Balance at September 30, 2021 | 4,210,051 | $ | 65.06 | ||||||||
As of September 30, 2021, our total unrecognized share-based compensation expense related to RSUs and PSUs was approximately $170.2 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.1 years.
Note 11. Related-Party Transactions
Our Chief Executive Officer is a member of the Board of Directors of Adobe Systems Incorporated (Adobe). During the three and nine months ended September 30, 2021, we purchased $0.9 million and $1.9 million, respectively, of services from Adobe and during the three and nine months ended September 30, 2020, we purchased $0.3 million and $1.1 million, respectively, of services from Adobe. We had no revenues during the three and nine months ended September 30, 2021 from Adobe. We had no revenues during the three months ended September 30, 2020 and $0.1 million of revenues during the nine months ended September 30, 2020 from Adobe. We had no payables as of September 30, 2021 and $0.1 million of payables as of December 31, 2020 to Adobe. We had no outstanding receivables as of September 30, 2021 and December 31, 2020 from Adobe.
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The immediate family of one of our board members is a member of the Board of Directors of PayPal Holdings, Inc. (PayPal). During the three and nine months ended September 30, 2021, we incurred payment processing fees of $0.7 million and $2.1 million, respectively, and during the three and nine months ended September 30, 2020, we incurred payment processing fees of $0.5 million and $1.5 million, respectively, to PayPal.
One of our board members is also a member of the Board of Directors of Zuora, Inc. (Zuora). During the three and nine months ended September 30, 2021, we purchased $1.4 million and $1.8 million, respectively, of services from Zuora and during the three and nine months ended September 30, 2020, we purchased $0.8 million and $1.2 million, respectively, of services from Zuora. We had $0.1 million of payables as of September 30, 2021 and no payables as of December 31, 2020 to Zuora.
Note 12. Restructuring Charges
In September 2021, we changed our go-to-market strategy for our Thinkful product offering which we believe will have the most growth potential to serve learners. This resulted in a management approved restructuring plan that impacted approximately 60 full-time employees and 120 part-time employees in the United States. During the three months ended September 30, 2021, we recorded restructuring charges of $1.9 million related to one-time employee termination benefits classified on our condensed consolidated statements of operations based on the employees' job function. As of September 30, 2021, no payments have been made and the $1.9 million liability is included within accrued liabilities on our condensed consolidated balance sheets. We expect the total cost of the restructuring plan to be approximately $2.2 million and for it to be completed by the end of the second quarter of fiscal year 2022. We expect cost savings from the restructuring plan to be reinvested in future growth opportunities.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes included in Part I, Item 1, “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See the section titled “Note about Forward-Looking Statements” for additional information. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q.
Overview
Millions of people Learn with Chegg. We strive to improve educational outcomes by putting the student first. We support students on their journey from high school to college and into their career with tools designed to help them learn their course materials, succeed in their classes, save money on required materials, and learn the most in-demand skills. Our services are available online, anytime and anywhere.
Students subscribe to our subscription services, which we collectively refer to as Chegg Services. Our primary Chegg Services include Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Mathway, and Thinkful. Our Chegg Study subscription service provides “Expert Questions and Answers” and step-by-step “Textbook Solutions,” helping students with their course work. When students need writing help, including plagiarism detection scans and creating citations for their papers, they can use our Chegg Writing subscription service. Our Chegg Math Solver subscription service helps students understand math by providing a step-by-step math solver and calculator, and we expect to incorporate Mathway into Chegg Math Solver. We also offer our Chegg Study Pack as a premium subscription bundle of our Chegg Study, Chegg Writing, and Chegg Math Solver services. Our Thinkful skills-based learning platform offers professional courses focused on the most in-demand technology skills.
Required Materials includes our print textbook and eTextbook offerings, which help students save money compared to the cost of buying new. We offer an extensive print textbook library primarily for rent and also for sale both on our own and through our print textbook partners. We partner with a variety of third parties to source print textbooks and eTextbooks directly or indirectly from publishers in the United States, including Cengage Learning, Pearson, McGraw Hill, Sage Publications, and John Wiley & Sons, Inc.
During the three and nine months ended September 30, 2021, we generated net revenues of $171.9 million and $568.8 million, respectively, and in the same periods had net income of $6.7 million and net loss of $25.8 million, respectively. During the three and nine months ended September 30, 2020, we generated net revenues of $154.0 million and $438.6 million, respectively, and in the same periods had net loss of $37.1 million and $32.3 million, respectively.
Our long-term strategy is centered upon our ability to utilize Chegg Services to increase student engagement with our learning platform. We plan to continue to invest in the expansion of our Chegg Services to provide a more compelling and personalized solution and deepen engagement with students. In addition, we believe that the investments we have made to achieve our current scale will allow us to drive increased operating margins over time that, together with increased contributions of Chegg Services, will enable us to sustain profitability and remain cash-flow positive in the long-term. Our ability to achieve these long-term objectives is subject to numerous risks and uncertainties, including our ability to attract, retain, and increasingly engage the student population, reduced traffic to our services, intense competition in our markets, the ability to achieve sufficient contributions to revenue from Chegg Services, and other factors, such as the COVID-19 pandemic, which continues to evolve and affect our business and results of operations. The COVID-19 pandemic subjects our business to numerous risks and uncertainties, most of which are beyond our control and cannot be predicted, including when colleges will resume in-person classes or how well they will overcome the impacts of the COVID-19 pandemic on enrollment and other factors. These risks and uncertainties are described in greater detail in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
We have presented revenues for our two product lines, Chegg Services and Required Materials, based on how students view us and the utilization of our products by them. More detail on our two product lines is discussed in the next two sections titled “Chegg Services” and “Required Materials.”
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Chegg Services
Our Chegg Services product line for students primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Mathway, and Thinkful. Students typically pay to access Chegg Services on a monthly basis. We also work with leading brands to provide students with discounts, promotions, and other products that, based on student feedback, delight them.
In the aggregate, Chegg Services revenues were 85% of net revenues during both the three and nine months ended September 30, 2021, respectively and 77% and 79% of net revenues during the three and nine months ended September 30, 2020, respectively.
Required Materials
Our Required Materials product line includes revenues from print textbooks and eTextbooks. Revenues from print textbooks that we own are primarily recognized as the total transaction amount ratably over the rental term, generally a two- to five-month period. Revenues from print textbooks owned by a partner are recognized as a revenue share on the total transactional amount immediately when a print textbook ships to a student. Additionally, Required Materials includes revenues from eTextbooks, which are primarily recognized ratably over the contractual period, generally a two- to five-month period.
In the aggregate, Required Materials revenues were 15% of net revenues during both the three and nine months ended September 30, 2021, respectively, and 23% and 21% of net revenues during the three and nine months ended September 30, 2020.
Seasonality of Our Business
Revenues from Chegg Services, print textbooks that we own, and eTextbooks are primarily recognized ratably over the term a student subscribes to our Chegg Services, rents a print textbook or has access to an eTextbook. This has generally resulted in our highest revenues and profitability in the fourth quarter as it reflects more days of the academic year. Our variable expenses related to cost of revenues and marketing activities remain highest in the first and third quarters such that our profitability may not provide meaningful insight on a sequential basis.
As a result of these factors, the most concentrated periods for our revenues and expenses do not necessarily coincide, and comparisons of our historical quarterly results of operations on a sequential basis may not provide meaningful insight into our overall financial performance.
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Results of Operations
The following table summarizes our historical condensed consolidated statements of operations (in thousands, except percentage of total net revenues):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Net revenues | $ | 171,942 | 100 | % | $ | 154,018 | 100 | % | $ | 568,798 | 100 | % | $ | 438,617 | 100 | % | |||||||||||||||||||||||||||||||
Cost of revenues(1) | 67,102 | 39 | 62,370 | 40 | 199,194 | 35 | 148,284 | 34 | |||||||||||||||||||||||||||||||||||||||
| Gross profit | 104,840 | 61 | 91,648 | 60 | 369,604 | 65 | 290,333 | 66 | |||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
Research and development(1) | 43,269 | 25 | 44,041 | 29 | 130,995 | 23 | 123,956 | 28 | |||||||||||||||||||||||||||||||||||||||
Sales and marketing(1) | 27,239 | 16 | 24,625 | 16 | 75,139 | 13 | 60,621 | 14 | |||||||||||||||||||||||||||||||||||||||
General and administrative(1) | 33,971 | 20 | 40,784 | 26 | 111,560 | 20 | 98,221 | 22 | |||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 104,479 | 61 | 109,450 | 71 | 317,694 | 56 | 282,798 | 64 | |||||||||||||||||||||||||||||||||||||||
| Income (loss) from operations | 361 | — | (17,802) | (11) | 51,910 | 9 | 7,535 | 2 | |||||||||||||||||||||||||||||||||||||||
| Total interest expense, net and other income (expense), net | 7,037 | 4 | (18,272) | (12) | (71,881) | (13) | (36,924) | (8) | |||||||||||||||||||||||||||||||||||||||
| Income (loss) before provision for income taxes | 7,398 | 4 | (36,074) | (23) | (19,971) | (4) | (29,389) | (6) | |||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | 747 | — | 1,066 | (1) | 5,793 | (1) | 2,875 | (1) | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 6,651 | 4 | % | $ | (37,140) | (24) | % | $ | (25,764) | (5) | % | $ | (32,264) | (7) | % | |||||||||||||||||||||||||||||||
(1) Includes share-based compensation expense as follows: | |||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenues | $ | 393 | $ | 262 | $ | 1,174 | $ | 644 | |||||||||||||||||||||||||||||||||||||||
| Research and development | 8,917 | 8,433 | 25,976 | 23,044 | |||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | 3,051 | 2,431 | 9,625 | 7,053 | |||||||||||||||||||||||||||||||||||||||||||
| General and administrative | 12,151 | 10,403 | 39,382 | 28,668 | |||||||||||||||||||||||||||||||||||||||||||
| Total share-based compensation expense | $ | 24,512 | $ | 21,529 | $ | 76,157 | $ | 59,409 | |||||||||||||||||||||||||||||||||||||||
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Three and Nine Months Ended September 30, 2021 and 2020
Net Revenues
The following table sets forth our total net revenues for the periods shown for our Chegg Services and Required Materials product lines (in thousands, except percentages):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Chegg Services | $ | 146,790 | $ | 118,895 | $ | 27,895 | 23 | % | |||||||||||||||
| Required Materials | 25,152 | 35,123 | (9,971) | (28) | |||||||||||||||||||
| Total net revenues | $ | 171,942 | $ | 154,018 | $ | 17,924 | 12 | ||||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Chegg Services | $ | 482,654 | $ | 345,258 | $ | 137,396 | 40 | % | |||||||||||||||
| Required Materials | 86,144 | 93,359 | (7,215) | (8) | |||||||||||||||||||
| Total net revenues | $ | 568,798 | $ | 438,617 | $ | 130,181 | 30 | ||||||||||||||||
Chegg Services revenues increased $27.9 million, or 23%, and $137.4 million or 40%, during the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, primarily due to our efforts to reduce account sharing, increased global awareness and penetration and the introduction of enhanced offerings, including our acquisition of Mathway, which closed in June 2020. Chegg Services revenues were 85% of net revenues during both the three and nine months ended September 30, 2021, respectively, and 77% and 79% of net revenues during three and nine months ended September 30, 2020, respectively. Required Materials revenues decreased $10.0 million, or 28%, and $7.2 million, or 8% during the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020 primarily due to lower unit volumes. Required Materials revenues were 15% of net revenues during both the three and nine months ended September 30, 2021, respectively, and 23% and 21% during the three and nine months ended September 30, 2020, respectively.
As students returned to school, we started to see a slowdown in the education market, which resulted in a decline in traffic to education technology services, such as the ones we provide. As a result, we are experiencing a decline in the growth rates of our services and revenues that we believe will continue into fiscal year 2022.
Cost of Revenues
The following table sets forth our cost of revenues for the periods shown (in thousands, except percentages):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
Cost of revenues(1) | $ | 67,102 | $ | 62,370 | $ | 4,732 | 8 | % | |||||||||||||||
(1) Includes share-based compensation expense of: | $ | 393 | $ | 262 | $ | 131 | 50 | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
Cost of revenues(1) | $ | 199,194 | $ | 148,284 | $ | 50,910 | 34 | % | |||||||||||||||
(1) Includes share-based compensation expense of: | $ | 1,174 | $ | 644 | $ | 530 | 82 | % | |||||||||||||||
Cost of revenues increased $4.7 million, or 8%, during the three months ended September 30, 2021, compared to the same period in 2020. The increase was primarily attributable to higher other depreciation and amortization expense of $5.4 million, higher net loss on textbook library of $5.2 million primarily due to increased write-downs, higher web hosting fees of $2.4 million, transitional logistics charges of $2.3 million incurred in conjunction with the transition of our print textbooks to a new third party logistics provider, partially offset by lower order fulfillment fees of $8.8 million and lower cost
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of textbooks purchased by students of $1.5 million. Gross margins increased to 61% during the three months ended September 30, 2021, from 60% during the same period in 2020.
Cost of revenues increased $50.9 million, or 34%, during the nine months ended September 30, 2021, compared to the same period in 2020. The increase was primarily attributable to higher other depreciation and amortization expense of $16.4 million, higher net loss on textbook library of $10.8 million primarily due to increased write-downs, transitional logistics charges of $6.5 million incurred in conjunction with the transition of our print textbooks to a new third party logistics provider, higher web hosting fees of $5.1 million, higher cost of textbooks purchased by students of $4.3 million, higher payment processing fees of $4.0 million, higher employee-related expenses, including share-based compensation expense, of $3.1 million, and higher customer support fees of $2.5 million, partially offset by lower order fulfillment fees of $1.8 million. Gross margins decreased to 65% during the nine months ended September 30, 2021, from 66% during the same period in 2020.
Operating Expenses
The following table sets forth our total operating expenses for the periods shown (in thousands, except percentages):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
Research and development(1) | $ | 43,269 | $ | 44,041 | $ | (772) | (2) | % | |||||||||||||||
Sales and marketing(1) | 27,239 | 24,625 | 2,614 | 11 | |||||||||||||||||||
General and administrative(1) | 33,971 | 40,784 | (6,813) | (17) | |||||||||||||||||||
| Total operating expenses | $ | 104,479 | $ | 109,450 | $ | (4,971) | (5) | % | |||||||||||||||
(1) Includes share-based compensation expense of: | |||||||||||||||||||||||
| Research and development | $ | 8,917 | $ | 8,433 | $ | 484 | 6 | % | |||||||||||||||
| Sales and marketing | 3,051 | 2,431 | 620 | 26 | |||||||||||||||||||
| General and administrative | 12,151 | 10,403 | 1,748 | 17 | |||||||||||||||||||
| Share-based compensation expense | $ | 24,119 | $ | 21,267 | $ | 2,852 | 13 | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
Research and development(1) | $ | 130,995 | $ | 123,956 | $ | 7,039 | 6 | % | |||||||||||||||
Sales and marketing(1) | 75,139 | 60,621 | 14,518 | 24 | |||||||||||||||||||
General and administrative(1) | 111,560 | 98,221 | 13,339 | 14 | |||||||||||||||||||
| Total operating expenses | $ | 317,694 | $ | 282,798 | $ | 34,896 | 12 | % | |||||||||||||||
(1) Includes share-based compensation expense of: | |||||||||||||||||||||||
| Research and development | $ | 25,976 | $ | 23,044 | $ | 2,932 | 13 | % | |||||||||||||||
| Sales and marketing | 9,625 | 7,053 | 2,572 | 36 | |||||||||||||||||||
| General and administrative | 39,382 | 28,668 | 10,714 | 37 | |||||||||||||||||||
| Share-based compensation expense | $ | 74,983 | $ | 58,765 | $ | 16,218 | 28 | % | |||||||||||||||
Research and Development
Research and development expenses decreased $0.8 million, or 2%, during the three months ended September 30, 2021 compared to the same period in 2020, remaining relatively flat. Research and development expenses as a percentage of net revenues were 25% during the three months ended September 30, 2021 compared to 29% during the same period in 2020.
Research and development expenses increased $7.0 million, or 6%, during the nine months ended September 30, 2021 compared to the same period in 2020, which was primarily attributable to higher employee-related expenses, including share-based compensation expense, of $8.1 million. Research and development expenses as a percentage of net revenues were 23% during the nine months ended September 30, 2021 compared to 28% during the same period in 2020.
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Sales and Marketing
Sales and marketing expenses increased by $2.6 million, or 11%, during the three months ended September 30, 2021, compared to the same period in 2020. The increase was primarily attributable to increased marketing spend, including expansion in international markets, of $1.6 million and higher employee-related expenses, including share-based compensation expense, of $0.7 million. Sales and marketing expenses as a percentage of net revenues were flat at 16% during the three months ended September 30, 2021 and 2020.
Sales and marketing expenses increased by $14.5 million, or 24%, during the nine months ended September 30, 2021, compared to the same period in 2020. The increase was primarily attributable to increased marketing spend, including expansion in international markets, of $7.5 million and higher employee-related expenses, including share-based compensation expense, of $4.8 million. Sales and marketing expenses as a percentage of net revenues were 13% during the nine months ended September 30, 2021 compared to 14% during the same period in 2020.
General and Administrative
General and administrative expenses decreased $6.8 million, or 17%, during the three months ended September 30, 2021 compared to the same period in 2020. The decrease was primarily due to a 2020 impairment charge on our investment in WayUp of $10.0 million partially offset by higher employee-related expenses, including share-based compensation expense, of $1.4 million. General and administrative expenses as a percentage of net revenues were 20% during the three months ended September 30, 2021 compared to 26% during the same period in 2020.
General and administrative expenses increased $13.3 million, or 14%, during the nine months ended September 30, 2021 compared to the same period in 2020. The increase was primarily due to higher employee-related expenses, including share-based compensation expense, of $13.2 million and higher professional fees of $4.5 million, partially offset by a 2020 impairment charge on our investment in WayUp of $10.0 million. General and administrative expenses as a percentage of net revenues were 20% during the nine months ended September 30, 2021 compared to 22% during the same period in 2020.
Interest Expense and Other Income (Expense), Net
The following table sets forth our interest expense and other income (expense), net, for the periods shown (in thousands, except percentages):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Interest expense, net | $ | (1,633) | $ | (17,468) | $ | 15,835 | n/m | ||||||||||||||||
| Other income (expense), net | 8,670 | (804) | 9,474 | n/m | |||||||||||||||||||
| Total interest expense, net and other income (expense), net | $ | 7,037 | $ | (18,272) | $ | 25,309 | n/m | ||||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Interest expense, net | $ | (5,263) | $ | (44,320) | $ | 39,057 | n/m | ||||||||||||||||
| Other income (expense), net | (66,618) | 7,396 | (74,014) | n/m | |||||||||||||||||||
| Total interest expense, net and other income (expense), net | $ | (71,881) | $ | (36,924) | $ | (34,957) | n/m | ||||||||||||||||
*n/m - not meaningful
Interest expense, net decreased $15.8 million and $39.1 million during the three and nine months ended September 30, 2021, respectively, compared to the same periods in 2020, due to the reduction in non-cash interest expense related to the debt discount as a result of the adoption of ASU 2020-06 on January 1, 2021.
Other income (expense), net increased $9.5 million during the three months ended September 30, 2021, compared to the same period in 2020, due to the $7.2 million gain on the sale of our strategic equity investment and absence of the $3.3 million loss on early extinguishment of debt related to the partial exchange of the 2023 notes. Other income (expense), net, decreased $74.0 million during the nine months ended September 30, 2021, compared to the same period in 2020, primarily as a result of the $78.2 million loss on early extinguishment of debt related to the 2025 notes, $7.1 million net loss on the change in fair value
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of derivative instruments, and $5.2 million of lower interest income earned on our investments partially offset by the $12.5 million gain on the sale of our strategic equity investments and absence of the $3.3 million loss on early extinguishment of debt related to the partial exchange of the 2023 notes.
See Note 7, “Convertible Senior Notes,” of our accompanying Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q for additional information on changes to interest expense, net related to the adoption of ASU 2020-06 and other income (expense), net related to the losses on early extinguishment of debt and the change in fair value of derivative instruments.
Provision for Income Taxes
The following tables set forth our provision for income taxes for the periods shown (in thousands, except percentages):
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Provision for income taxes | $ | 747 | $ | 1,066 | $ | (319) | (30) | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||
| Provision for income taxes | $ | 5,793 | $ | 2,875 | $ | 2,918 | 101 | % | |||||||||||||||
Provision for income taxes decreased $0.3 million, or 30%, during the three months ended September 30, 2021 compared to the same period in 2020 primarily as a result of releasing a portion of our foreign uncertain tax position reserve. Provision for income taxes increased $2.9 million, or 101%, during the nine months ended September 30, 2021, compared to the same period in 2020 primarily due to an increase in foreign profits and the withholding taxes related to the March 2021 sale of our strategic equity investment.
Liquidity and Capital Resources
As of September 30, 2021, our principal sources of liquidity were cash, cash equivalents, and investments totaling $2.6 billion, which were held for working capital purposes. The substantial majority of our net revenues are from e-commerce transactions with students, which are settled immediately through payment processors, as opposed to our accounts payable, which are settled based on contractual payment terms with our suppliers.
In November 2021, our board of directors approved a $500.0 million increase to our existing securities repurchase program authorizing the repurchase of up to $1.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements. The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors. Through September 30, 2021, we have repurchased $57.4 million and $100.0 million of aggregate principal amount of the 2023 notes and 2025 notes, respectively, in privately negotiated transactions for an aggregate consideration of $149.6 million and $184.9 million, respectively. $665.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.
In February 2021, we completed an equity offering in which we raised net proceeds of $1,091.5 million, after deducting underwriting discounts and commissions and offering expenses (2021 equity offering). In August 2020 and March/April 2019, we closed offerings of our 2026 notes and 2025 notes, generating net proceeds of approximately $984.1 million and $780.2 million, respectively, in each case after deducting the initial purchasers’ discount and estimated offering expenses payable by us. The 2026 notes and 2025 notes mature on September 1, 2026 and March 15, 2025, respectively, unless converted, redeemed or repurchased in accordance with their terms prior to such dates.
As of September 30, 2021, we have incurred cumulative losses of $361.5 million from our operations and we may incur additional losses in the future. Our operations have been financed primarily by our initial public offering of our common stock (IPO), our 2017 follow-on public offering, our convertible senior notes offerings, our 2021 equity offering, and cash generated from operations.
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We believe that our existing sources of liquidity will be sufficient to fund our operations and debt service obligations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, our investments in research and development activities, our acquisition of new products and services, and our sales and marketing activities. To the extent that existing cash and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, operating cash flows and financial condition.
Most of our cash, cash equivalents, and investments are held in the United States. As of September 30, 2021, our foreign subsidiaries held an insignificant amount of cash in foreign jurisdictions. We currently do not intend or foresee a need to repatriate some of these foreign funds; however, as a result of the Tax Cuts and Jobs Act, we anticipate the U.S. federal impact to be minimal if these foreign funds are repatriated. In addition, based on our current and future needs, we believe our current funding and capital resources for our international operations are adequate.
The following table sets forth our cash flows (in thousands):
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
Condensed Consolidated Statements of Cash Flows Data: | |||||||||||
| Net cash provided by operating activities | $ | 208,123 | $ | 168,655 | |||||||
| Net cash used in investing activities | (742,537) | (750,942) | |||||||||
| Net cash provided by financing activities | 768,299 | 722,445 | |||||||||
Cash Flows from Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2021 was $208.1 million. Our net loss of $25.8 million was offset by significant non-cash operating expenses including the loss on early extinguishment of debt of $78.2 million, share-based compensation expense of $76.2 million, other depreciation and amortization expense of $46.3 million, print textbook depreciation expense of $9.0 million, the net loss on textbook library of $8.8 million, which was primarily due to increased write-downs, the net loss on the change in fair value of derivative instruments of $7.1 million, operating lease expense, net of accretion of $4.5 million, and amortization of debt issuance costs of $4.5 million, partially offset by the gain on sale of our strategic equity investments of $12.5 million.
Net cash provided by operating activities during the nine months ended September 30, 2020 was $168.7 million. Our net loss of $32.3 million was increased by the change in our accrued liabilities of $34.3 million and deferred revenue of $32.2 million. Additionally, we had significant non-cash operating expenses including share-based compensation expense of $59.4 million, the amortization of debt discount and issuance costs related to the notes of $42.9 million, other depreciation and amortization expense of $33.1 million, print textbook depreciation expense of $10.7 million, the loss from impairment of strategic equity-investment of $10.0 million and the loss on early extinguishment of debt of $3.3 million, partially offset by repayment of convertible senior notes attributable to debt discount of $14.9 million and gain on textbook library, net of $2.0 million.
Cash Flows from Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2021 was $742.5 million and was related to the purchases of investments of $1,574.1 million, the purchases of property and equipment of $67.1 million, the purchases of textbooks of $10.7 million and the acquisition of a business of $7.9 million, partially offset by the maturity of investments of $893.3 million, proceeds from the sale of our strategic equity investments of $16.1 million, and proceeds from the disposition of textbooks of $7.8 million.
Net cash used in investing activities during the nine months ended September 30, 2020 was $750.9 million and was related to the purchases of investments of $968.1 million, the acquisition of a business of $92.8 million, the purchases of property and equipment of $57.5 million, the purchases of textbooks of $49.6 million, and the purchase of a strategic equity investment of $2.0 million, partially offset by the maturity of investments of $412.0 million and proceeds from the disposition of textbooks of $7.0 million.
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Cash Flows from Financing Activities
Net cash provided by financing activities during the nine months ended September 30, 2021 was $768.3 million and was related to the net proceeds from our equity offering of $1,091.5 million, proceeds from 2023 notes and 2025 notes capped call instruments of $69.0 million, and proceeds from the issuance of common stock under stock plans of $5.4 million, partially offset by the repayment of a portion of our 2023 notes and 2025 notes of $300.8 million, payment of $89.3 million in taxes related to the net share settlement of equity awards and payment of escrow related to an acquisition of $7.5 million.
Net cash provided by financing activities during the nine months ended September 30, 2020 was $722.4 million and was related to the proceeds from issuance of 2026 notes, net of issuance costs, of $984.1 million, proceeds from 2023 notes capped call instruments of $57.4 million, and proceeds from the issuance of common stock under stock plans of $9.2 million, partially offset by repayment of a portion of our 2023 notes of $159.7 million, purchase of the convertible senior notes capped call instruments related to our 2026 notes of $103.4 million and payment of $65.2 million in taxes related to the net share settlement of equity awards.
Contractual Obligations and Other Commitments
During the nine months ended September 30, 2021, we extinguished $100.0 million aggregate principal amount of the 2025 notes and settled $115.6 million of aggregate principal amount of the 2023 notes. See Note 7, “Convertible Senior Notes,” of our accompanying Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.
There were no other material changes in our commitments under contractual obligations, as disclosed in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2020.
Off-Balance Sheet Arrangements
Through September 30, 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies, Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. The current COVID-19 pandemic has caused uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained. Our actual results may differ from these estimates under different assumptions or conditions.
Except for our critical accounting policy on share-based compensation expense, there have been no material changes in our critical accounting policies and estimates during the nine months ended September 30, 2021 as compared to the critical accounting policies and estimates disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2020.
Share-based Compensation Expense
We measure and recognize share-based compensation expense for all awards made to employees, directors and consultants, including restricted stock units (RSUs), performance-based RSUs (PSUs) with either a market-based condition or financial and strategic performance target and our employee stock purchase plan (ESPP) based on estimated fair values.
We estimate a forfeiture rate to calculate the share-based compensation expense related to our awards. Estimated forfeitures are determined based on historical data and management’s expectation of exercise behaviors. We continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other
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factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our share-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the share-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in the financial statements.
Share-based compensation expense for PSUs with a market-based condition is recognized regardless of whether the market condition is satisfied subject to continuing service over the requisite service period. Share-based compensation expense recognized related to PSUs with a financial and strategic performance target is subject to the achievement of performance objectives and requires significant judgment by management in determining the current level of attainment of such performance objectives. Management may consider factors such as the latest revenue forecasts and general business trends in the assessment of whether or not a PSU award will be obtained. Subsequent changes to these considerations may have a material impact on the amount of share-based compensation expense recognized in the period related to PSU awards, which may lead to volatility of share-based compensation expense period-to-period. If the performance objectives are not met or service is no longer provided, no share-based compensation expense will be recognized, and any previously recognized share-based compensation expense will be reversed.
We will continue to use judgment in evaluating the assumptions related to our share-based compensation expense on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates, which could materially impact our future share-based compensation expense.
Recent Accounting Pronouncements
For relevant recent accounting pronouncements, see Note 1, “Background and Basis of Presentation,” of our accompanying Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no other material changes in our market risk during the nine months ended September 30, 2021, compared to the disclosures in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” contained in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
(b)Changes in Internal Control over Financial Reporting
During the three and nine months ended September 30, 2021, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We continue to monitor the impact of the COVID-19 pandemic and, despite many of our employees working remotely, have not experienced any changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, third parties may assert patent infringement claims against us in the form of letters, litigation, or other forms of communication. In addition, we may from time to time be subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, and other intellectual property rights; employment claims; and general contract or other claims. We may also, from time to time, be subject to various legal or government claims, disputes, or investigations. Such matters may include, but not be limited to, claims, disputes, or investigations related to warranty, refund, breach of contract, employment, intellectual property, government regulation, or compliance or other matters. See Note 8, “Commitments and Contingencies,” of our accompanying Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock. There have been no material changes in our risk factors from our Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Unregistered Sales of Equity Securities
None.
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ITEM 6. EXHIBITS
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit | Form | File No | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | X | ||||||||||||||||||||||||||||||||||||
| ** | This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. | ||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHEGG, INC. | |||||||||||
| November 1, 2021 | By: | /S/ ANDREW BROWN | |||||||||
| Andrew Brown | |||||||||||
| Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) | |||||||||||
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