CHEGG, INC 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CHEGG, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except for number of shares and par value) (unaudited) September 30, 2020 December 31, 2019 Assets Current assets Cash and cash equivalents $ 527,541 $ 387,520 Short-term investments 723,327 381,074 Accounts receivable, net of allowance of $ 198 and $ 56 at September 30, 2020 and December 31, 2019, respectively 12,487 11,529 Prepaid expenses 15,082 10,538 Other current assets 21,059 16,606 Total current assets 1,299,496 807,267 Long-term investments 521,261 310,483 Textbook library, net 34,575 — Property and equipment, net 113,058 87,359 Goodwill 284,809 214,513 Intangible assets, net 55,386 34,667 Right of use assets 14,124 15,931 Other assets 18,948 18,778 Total assets $ 2,341,657 $ 1,488,998 Liabilities and stockholders' equity Current liabilities Accounts payable $ 5,838 $ 7,362 Deferred revenue 51,941 18,780 Current operating lease liabilities 5,652 5,283 Accrued liabilities 79,524 39,964 Total current liabilities 142,955 71,389 Long-term liabilities Convertible senior notes, net 1,536,984 900,303 Long-term operating lease liabilities 11,661 14,513 Other long-term liabilities 4,665 3,964 Total long-term liabilities 1,553,310 918,780 Total liabilities 1,696,265 990,169 Commitments and contingencies Stockholders' equity: Preferred stock, 0.001 par value – 10,000,000 shares authorized, no shares issued and outstanding — — Common stock, 0.001 par value 400,000,000 shares authorized; 128,654,401 and 121,583,501 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 129 122 Additional paid-in capital 1,092,574 916,095 Accumulated other comprehensive income (loss) 1,333 ( 1,096 ) Accumulated deficit ( 448,644 ) ( 416,292 ) Total stockholders' equity 645,392 498,829 Total liabilities and stockholders' equity $ 2,341,657 $ 1,488,998 See Notes to Condensed Consolidated Financial Statements. 4 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net revenues $ 154,018 $ 94,151 $ 438,617 $ 285,422 Cost of revenues 62,370 22,164 148,284 66,017 Gross profit 91,648 71,987 290,333 219,405 Operating expenses: Research and development 44,041 36,442 123,956 101,199 Sales and marketing 24,625 16,822 60,621 47,334 General and administrative 40,784 23,752 98,221 70,044 Restructuring charges — 28 — 97 Total operating expenses 109,450 77,044 282,798 218,674 (Loss) income from operations ( 17,802 ) ( 5,057 ) 7,535 731 Interest expense, net and other (expense) income, net: Interest expense, net ( 17,468 ) ( 13,548 ) ( 44,320 ) ( 31,294 ) Other (expense) income, net ( 804 ) 7,751 7,396 14,571 Total interest expense, net and other (expense) income, net ( 18,272 ) ( 5,797 ) ( 36,924 ) ( 16,723 ) Loss before provision for income taxes ( 36,074 ) ( 10,854 ) ( 29,389 ) ( 15,992 ) Provision for income taxes 1,066 623 2,875 1,832 Net loss $ ( 37,140 ) $ ( 11,477 ) $ ( 32,264 ) $ ( 17,824 ) Net loss per share, basic and diluted $ ( 0.29 ) $ ( 0.10 ) $ ( 0.26 ) $ ( 0.15 ) Weighted average shares used to compute net loss per share, basic and diluted 126,194 120,085 124,162 118,547 See Notes to Condensed Consolidated Financial Statements. 5 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net loss $ ( 37,140 ) $ ( 11,477 ) $ ( 32,264 ) $ ( 17,824 ) Other comprehensive (loss) income Change in net unrealized (loss) gain on available for sale investments, net of tax ( 1,642 ) ( 73 ) 1,922 379 Change in foreign currency translation adjustments, net of tax 1,125 ( 1,067 ) 507 ( 1,118 ) Other comprehensive (loss) income ( 517 ) ( 1,140 ) 2,429 ( 739 ) Total comprehensive loss $ ( 37,657 ) $ ( 12,617 ) $ ( 29,835 ) $ ( 18,563 ) See Notes to Condensed Consolidated Financial Statements. 6 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited) Three Months Ended September 30, 2020 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) 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 issuance of common stock for 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 Three Months Ended September 30, 2019 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Balances at June 30, 2019 119,336 $ 119 $ 873,104 $ ( 618 ) $ ( 413,034 ) $ 459,571 Issuance of common stock upon exercise of stock options and ESPP 991 1 11,673 — — 11,674 Net issuance of common stock for settlement of equity awards 319 1 ( 8,825 ) — — ( 8,824 ) Issuance of common stock in connection with prior acquisition 23 — 1,843 — — 1,843 Share-based compensation expense — — 16,865 — — 16,865 Other comprehensive loss — — — ( 1,140 ) — ( 1,140 ) Net loss — — — — ( 11,477 ) ( 11,477 ) Balances at September 30, 2019 120,669 $ 121 $ 894,660 $ ( 1,758 ) $ ( 424,511 ) $ 468,512 7 Table of Contents Nine Months Ended September 30, 2020 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Balances at December 31, 2019 121,584 $ 122 $ 916,095 $ ( 1,096 ) $ ( 416,292 ) $ 498,829 Cumulative-effect adjustment to accumulated deficit related to adoption of ASU 2016-13 — — — — ( 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 issuance of common stock for 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 Nine Months Ended September 30, 2019 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Balances at December 31, 2018 115,500 $ 116 $ 818,113 $ ( 1,019 ) $ ( 406,576 ) $ 410,634 Cumulative-effect adjustment to accumulated deficit related to adoption of ASU 2016-02 — — — — ( 111 ) ( 111 ) Equity component of 2026 convertible senior notes, net of issuance costs — — 206,747 — — 206,747 Purchase of convertible senior notes capped call — — ( 97,200 ) — — ( 97,200 ) Repurchase of common stock ( 504 ) ( 1 ) ( 19,999 ) — — ( 20,000 ) Issuance of common stock upon exercise of stock options and ESPP 2,545 3 27,717 — — 27,720 Net issuance of common stock for settlement of equity awards 3,064 3 ( 91,076 ) — — ( 91,073 ) Issuance of common stock in connection with prior acquisition 64 — 3,003 — — 3,003 Share-based compensation expense — — 47,355 — — 47,355 Other comprehensive loss — — — ( 739 ) — ( 739 ) Net loss — — — — ( 17,824 ) ( 17,824 ) Balances at September 30, 2019 120,669 $ 121 $ 894,660 $ ( 1,758 ) $ ( 424,511 ) $ 468,512 See Notes to Condensed Consolidated Financial Statements. 8 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities Net loss $ ( 32,264 ) $ ( 17,824 ) Adjustments to reconcile net loss to net cash provided by operating activities: Print textbook depreciation expense 10,699 — Other depreciation and amortization expense 33,088 21,369 Share-based compensation expense 59,409 47,355 Amortization of debt discount and issuance costs 42,910 30,114 Repayment of convertible senior notes attributable to debt discount ( 14,912 ) — Loss on early extinguishment of debt 3,315 — Loss from write-off of property and equipment 1,057 832 Loss from impairment of strategic equity investment 10,000 — Gain on textbook library, net ( 2,028 ) — Deferred income taxes ( 17 ) 59 Operating lease expense, net of accretion 3,400 3,284 Other non-cash items ( 85 ) ( 370 ) Change in assets and liabilities, net of effect of acquisition of business: Accounts receivable 106 ( 850 ) Prepaid expenses and other current assets ( 6,178 ) ( 20,741 ) Other assets ( 2,638 ) 1,989 Accounts payable ( 1,634 ) ( 3,983 ) Deferred revenue 32,239 10,039 Accrued liabilities 34,276 18,095 Other liabilities ( 2,088 ) ( 2,793 ) Net cash provided by operating activities 168,655 86,575 Cash flows from investing activities Purchases of property and equipment ( 57,457 ) ( 31,520 ) Purchases of textbooks ( 49,641 ) — Proceeds from disposition of textbooks 7,012 — Purchases of investments ( 968,106 ) ( 822,869 ) Proceeds from sale of investments — 53,261 Maturities of investments 412,046 190,744 Purchase of strategic equity investment ( 2,000 ) — Acquisition of business, net of cash acquired ( 92,796 ) — Net cash used in investing activities ( 750,942 ) ( 610,384 ) Cash flows from financing activities Proceeds from common stock issued under stock plans, net 9,236 27,723 Payment of taxes related to the net share settlement of equity awards ( 65,224 ) ( 91,076 ) Proceeds from issuance of convertible senior notes, net of issuance costs 984,096 780,180 Purchase of convertible senior notes capped call ( 103,400 ) ( 97,200 ) Repayment of convertible senior notes ( 159,677 ) — Proceeds from exercise of convertible senior notes capped call 57,414 — Repurchase of common stock — ( 20,000 ) Net cash provided by financing activities 722,445 599,627 Net increase in cash, cash equivalents and restricted cash 140,158 75,818 Cash, cash equivalents and restricted cash, beginning of period 389,432 375,945 Cash, cash equivalents and restricted cash, end of period $ 529,590 $ 451,763 Nine Months Ended September 30, 2020 2019 Supplemental cash flow data: Cash paid during the period for: Interest $ 1,546 $ 901 Income taxes $ 2,450 $ 1,492 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 5,174 $ 3,847 Right of use assets obtained in exchange for lease obligations: Operating leases $ 1,713 $ 2,638 Non-cash investing and financing activities: Accrued purchases of long-lived assets $ 6,102 $ 4,452 Accrued escrow related to acquisition $ 7,451 $ — Issuance of common stock related to prior acquisition $ — $ 3,003 Issuance of common stock related to repayment of convertible senior notes $ 327,141 $ — September 30, 2020 2019 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 527,541 $ 450,457 Restricted cash included in other current assets 313 125 Restricted cash included in other assets 1,736 1,181 Total cash, cash equivalents and restricted cash $ 529,590 $ 451,763 See Notes to Condensed Consolidated Financial Statements. 9 Table of Contents 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. Chegg is a Smarter Way to Student. As the leading direct-to-student learning platform, we strive to improve educational outcomes by putting the student first in all our decisions. We support students on their journey from high school to college and into their career with tools designed to help them pass their test, pass their class, and save money on required materials. Our services are available online, anytime and anywhere, so we can reach students when they need us most. Basis of Presentation The accompanying condensed consolidated balance sheet as of September 30, 2020, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss, and the condensed consolidated statements of stockholder's equity for the three and nine months ended September 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019, 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, 2020, our results of operations, results of comprehensive loss, and stockholder's equity for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2020 and 2019. Our results of operations, results of comprehensive loss, stockholder's equity, and cash flows for the nine months ended September 30, 2020 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, 2019 as 2019. 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, 2019 (the Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC). Except for our policies on investments, textbook library, convertible senior notes, net, revenue recognition and deferred revenue, and cost of revenues, 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. Investments We hold investments in commercial paper, corporate debt securities, U.S. treasury securities, and agency bonds. We classify our investments as available-for-sale based on the nature of each security that are either short or long-term based on the remaining contractual maturity of the investment. Our available-for-sale investments are carried at estimated fair value with any unrealized gains and losses unrelated to credit loss factors, net of taxes, included in other comprehensive (loss) income in our condensed consolidated statements of stockholders’ equity. Beginning in 2020, unrealized losses related to credit loss factors are now recorded through an allowance for credit losses in other (expense) income, net in our condensed consolidated statements of operations, rather than as a reduction to the amortized cost basis in other comprehensive (loss) income, when a decline in fair value has resulted from a credit loss. We determine realized gains or losses on the sale of investments on a specific identification method, and record such gains or losses as other (expense) income, net in our condensed consolidated statements of operations. Textbook Library Beginning in January 2020, we began our transition back to print textbook ownership by purchasing print textbooks to establish our textbook library. We consider our print textbook library to be a long-term productive asset and, as such, classify it as a non-current asset in our condensed consolidated balance sheets. All print textbooks in our textbook library are stated at cost, which includes the purchase price less accumulated depreciation. We write down textbooks on a book-by-book basis for lost, damaged, or excess print textbooks. 10 Table of Contents We depreciate our print textbooks, less an estimated salvage value, over an estimated useful life of four years using an accelerated method of depreciation, as we estimate this method most accurately reflects the actual pattern of decline in their economic value. The salvage value considers the historical trend and projected proceeds for print textbooks. The useful life is determined based on the estimated time period in which the print textbooks are held and rented. We review the estimated salvage value and useful life of our print textbook library on an ongoing basis. Write-downs for print textbooks, print textbook depreciation expense, the gain or loss on print textbooks liquidated, and the net book value of print textbooks purchased by students at the end of the term or on a just-in-time basis are recorded in cost of revenues in our condensed consolidated statements of operations and classified as adjustments to cash flows from operating activities. Cash outflows for the acquisition of print textbooks net of changes in related accounts payable and accrued liabilities, and cash inflows received from the proceeds from the disposition of print textbooks net of changes in related accounts receivable, are classified as cash flows from investing activities in our condensed consolidated statements of cash flows. As of September 30, 2020, our net print textbook library of $ 34.6 million consisted of gross print textbook library of approximately $ 44.8 million net of accumulated depreciation and write-downs of approximately $ 9.2 million and $ 1.0 million, respectively. During the three and nine months ended September 30, 2020, print textbook depreciation expense was approximately $ 3.6 million and $ 10.7 million, respectively, and our net gain on textbook library was approximately $ 0.6 million and $ 2.0 million, respectively. 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.” In accounting for their issuance, we separated the notes into liability and equity components, as the notes represent convertible instruments with a cash conversion feature. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the carrying amount of the liability component from the par value of the notes. The difference represents the debt discount, recorded as a reduction of the convertible senior notes on our consolidated balance sheet, and is amortized to interest expense over the term of the notes using the effective interest rate method. The carrying amount of the liability component is classified as a long-term liability as we have the election to settle conversion requests in shares of our common stock. The carrying amount of the equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. Issuance costs attributable to the liability component are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the notes. The issuance costs attributable to the equity component are recorded as a reduction of the equity component within additional paid-in capital. In accounting for extinguishment of the notes, we allocated the consideration transferred between the liability and equity components in a similar manner as upon issuance. The liability component for extinguished notes is then compared to the carrying amount of the respective extinguished notes and a gain or loss is recorded in other (expense) income, net in our condensed consolidated statements of operations. Revenue Recognition and Deferred Revenue We recognize revenues when the control of 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. Revenues are presented net of sales tax collected from customers to be remitted to governmental authorities and net of allowances for estimated cancellations and customer returns, which are based on historical data. Customer refunds from cancellations and returns are recorded as a reduction to revenues. We determine revenue recognition through the following steps: • Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract 11 Table of Contents • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, we satisfy a performance obligation We generate revenues from our Chegg Services product line which primarily includes Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, Thinkful, and Mathway. Revenues from Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, and Mathway are primarily recognized ratably over the respective weekly or monthly subscription period. Revenues from Thinkful, our skills-based learning platform, are recognized either ratably over the term of the course, generally six months, or upon completion of the lessons, depending on the instruction type of the course. Revenues from our Required Materials product line includes revenues from print textbooks that we own or that are owned by a partner as well as revenues from eTextbooks. Beginning in 2020, our Required Materials product line includes operating leases with students for the rental of print textbooks that we own. Operating lease income is recognized as the total transaction amount, paid upon commencement of the lease, ratably over the lease term which is generally a two - to five-month lease period. Students generally have the option to extend the term of their rental or purchase the print textbook at the end of the term otherwise the print textbook is returned to our print textbook library for future rental. If a student chooses to purchase or not return the print textbook at the end of their rental term, we charge the student for the book and recognize the revenues immediately. Additionally, we provide students the ability to purchase print textbooks on a just-in-time basis and recognize revenues immediately upon shipment. Revenues from print textbooks owned by a partner are recognized as a revenue share on the total transactional amount of a rental or sale transaction immediately when a print textbook ships to a student. Shipping and handling activities are expensed as incurred. Revenues from eTextbooks are recognized ratably over the contractual period, generally a two - to five-month period. Some of our customer arrangements include multiple performance obligations. We have determined these performance obligations qualify as distinct performance obligations, as the customer can benefit from the service on its own or together with other resources that are readily available to the customer, and our promise to transfer the service is separately identifiable from other promises in the contract. For these arrangements that contain multiple performance obligations, we allocate the transaction price based on the relative standalone selling price (SSP) method by comparing the SSP of each distinct performance obligation to the total value of the contract. We determine the SSP based on our historical pricing and discounting practices for the distinct performance obligation when sold separately. If the SSP is not directly observable, we estimate the SSP by considering information such as market conditions, and information about the customer. Additionally, we limit the amount of revenues recognized for delivered promises to the amount that is not contingent on future delivery of services or other future performance obligations. Some of our customer arrangements may include an amount of variable consideration in addition to a fixed revenue share that we earn. This variable consideration can either increase or decrease the total transaction price depending on the nature of the variable consideration. We estimate the amount of variable consideration that we will earn at the inception of the contract, adjusted during each period, and include an estimated amount each period. For sales of third-party products, we evaluate whether we are acting as a principal or an agent, and therefore would record the gross sales amount as revenues and related costs or the net amount earned as a revenue share from the sale of third-party products. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. In relation to print textbooks owned by a partner, we recognize revenues on a net basis based on our role in the transaction as an agent as we have concluded that we do not control the use of the print textbooks, and therefore record only the net revenue share we earn. We have concluded that we control our Chegg Services, print textbooks that we own for rental, purchase at the end of the rental term, or sale on a just-in-time basis, and eTextbook service and therefore we recognize revenues and cost of revenues on a gross basis. Contract assets are contained within other current assets and other assets on our condensed consolidated balance sheets. Contract assets represent the goods or services that we have transferred to a customer before invoicing the customer. Contract receivables are contained within accounts receivable, net on our condensed consolidated balance sheets and represent unconditional consideration that will be received solely due to the passage of time. Contract liabilities are contained within deferred revenue on our condensed consolidated balance sheets. Deferred revenue primarily consists of advanced payments from students related to rental and subscription performance obligations that have not been satisfied and estimated variable consideration. Deferred revenue related to rental and subscription performance obligations is recognized as revenues ratably over the term for subscriptions or when the services are provided and all other revenue recognition criteria have been met. Deferred revenue related to variable consideration is recognized as revenues during each reporting period based on the estimated amount we believe we will earn over the life of the contract. 12 Table of Contents We have elected a practical expedient to record incremental costs to obtain or fulfill a contract when the amortization period would have been one year or less as incurred. These incremental costs primarily relate to sales commissions costs and are recorded in sales and marketing expense in our condensed consolidated statements of operations. Cost of Revenues Our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and services. Cost of revenues primarily consists of publisher content fees for eTextbooks, content amortization expense related to content that we develop, licenses from publishers for which we pay one-time license fees, or acquire through acquisitions, write-downs for print textbooks, the gain or loss on print textbooks liquidated, the net book value of print textbooks purchased by students at the end of the term or on a just-in-time basis, print textbook depreciation expense, payment processing costs, the payments made to tutors through our Chegg Tutors service, personnel costs and other direct costs related to providing products or services. In addition, cost of revenues includes allocated information technology and facilities costs. 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. Significant estimates, assumptions, and judgments are used for, but not limited to: revenue recognition, recoverability of accounts receivable, share-based compensation expense including estimated forfeitures, accounting for income taxes, textbook library, useful lives assigned to long-lived assets for depreciation and amortization, impairment of goodwill and long-lived assets, the valuation of acquired intangible assets, the valuation of our convertible senior notes, internal-use software and website development costs, operating lease right of use (ROU) assets, and operating lease liabilities. 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. Recent Accounting Pronouncements Recently Issued Accounting Pronouncements Not Yet Adopted In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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, by reducing the number of accounting separation models for convertible instruments, amends the guidance in ASC 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity, for certain contracts in an entity's own equity that are currently accounted for as derivatives, and requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share (EPS) calculation. Early adoption is permitted, but no earlier than annual periods beginning after December 15, 2020, and the guidance allows for a modified retrospective or fully retrospective method of transition. We currently plan to adopt the guidance on January 1, 2021. At this time, we are continuing to refine the quantitative impact of early adopting this guidance and we initially believe the most significant impacts will be an increase in liabilities on our condensed consolidated balance sheets as a result of removing the accounting separation model for convertible instruments with a cash conversion feature, a significant reduction of non-cash interest expense on our condensed consolidated statements of operations, and an increase in the number of shares included in our diluted EPS calculations. We will continue to evaluate the impacts of this guidance, including method of transition, as we near our adoption date. In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting . ASU 2020-04 provides temporary optional expedients and exceptions for applying reference rate reform to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance can be applied immediately and only applies to contract modifications made or hedging relationships entered into or evaluated before December 31, 2022. While we do not have any hedging relationships and currently do not believe we have material contracts impacted by reference rate reform, we are in the process of evaluating the impact of this guidance. 13 Table of Contents Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 key changes include hybrid tax regimes, intraperiod tax allocation exception, and interim-period accounting for enacted changes in tax law. We early adopted ASU 2019-12 during the second quarter of 2020 under the prospective method of adoption. As a result of adoption, there was no modification required to the first quarter of 2020 results of operations as previously presented. The FASB issued four ASUs related to ASC 326, Financial Instruments - Credit Losses . In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . On January 1, 2020, we adopted ASC 326, which replaces the existing incurred loss impairment model for financial assets, including trade receivables, with an expected loss model which requires the use of forward-looking information to calculate expected credit loss estimates. Additionally, the concept of other-than-temporary impairment for available-for-sale investments is eliminated and instead requires us to focus on determining whether any unrealized loss is a result of a credit loss or other factors. We adopted ASC 326 under the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after adoption are presented under ASC 326 while we have not changed previously disclosed amounts or provided additional disclosures for comparative periods. We recorded an immaterial cumulative-effect adjustment to trade receivables to the opening balance of accumulated deficit in our condensed consolidated balance sheet. We adopted ASC 326 under the prospective transition approach for available-for-sale investments which resulted in no change to amortized cost basis before and after adoption. Credit losses related to available-for-sale investments will now be recorded through an allowance for credit losses with immediate recognition to our condensed consolidated statement of operations rather than as a reduction to the amortized cost basis and recognition to our condensed consolidated statements of comprehensive loss. See above within Note 1, “Background and Basis of Presentation”, for updates to our significant accounting policies impacted by our adoption of ASC 326 as well as Note 4, “Cash and Cash Equivalents, and Investments” for more information. In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with existing guidance contained within subtopic 350-40 to develop or obtain internal-use software. We adopted ASU 2018-15 on January 1, 2020 under the prospective method of adoption. 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, most significantly the revenue share we earn from our print textbook partners, being recognized at the point in time when print textbooks are shipped to students. 14 Table of Contents 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 2020 2019 $ % Chegg Services $ 118,895 $ 69,304 $ 49,591 72 % Required Materials 35,123 24,847 10,276 41 Total net revenues $ 154,018 $ 94,151 $ 59,867 64 Nine Months Ended September 30, Change 2020 2019 $ % Chegg Services $ 345,258 $ 224,903 $ 120,355 54 % Required Materials 93,359 60,519 32,840 54 Total net revenues $ 438,617 $ 285,422 $ 153,195 54 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, 2019, we recognized $ 15.7 million and $ 16.0 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, 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, 2019, we recognized $ 2.2 million and $ 2.7 million, respectively, of previously deferred revenues recognized from performance obligations satisfied in previous periods related to variable consideration recognized from our agreement with our Required Materials print textbook partner. 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. The aggregate amount of unsatisfied performance obligations is approximately $ 51.9 million as of September 30, 2020, which are expected to be recognized as revenues over the next year. Contract Balances The following table presents our accounts receivable, net, deferred revenue, and contract assets balances (in thousands, except percentages): Change September 30, 2020 December 31, 2019 $ % Accounts receivable, net $ 12,487 $ 11,529 $ 958 8 % Deferred revenue 51,941 18,780 33,161 177 Contract assets 8,214 3,531 4,683 133 During the nine months ended September 30, 2020, our accounts receivable, net balance increased by $ 1.0 million, or 8 %, primarily due to timing of billings and seasonality of our business. During the nine months ended September 30, 2020, our deferred revenue balance increased by $ 33.2 million, or 177 %, primarily due to increased bookings driven by the seasonality of our business as well as from print textbooks that we own that are recognized ratably rather than immediately. During the nine months ended September 30, 2020, our contract assets balance increased by $ 4.7 million, or 133 %, primarily due to deferred payment arrangements for Thinkful. Note 3. Net Loss Per Share Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including stock options, restricted stock units (RSUs), performance-based restricted stock units (PSUs), and shares related to convertible senior notes, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential common shares outstanding would have been anti-dilutive. 15 Table of Contents The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Numerator: Net loss $ ( 37,140 ) $ ( 11,477 ) $ ( 32,264 ) $ ( 17,824 ) Denominator: Weighted average shares used to compute net loss per share, basic and diluted 126,194 120,085 124,162 118,547 Net loss per share, basic and diluted $ ( 0.29 ) $ ( 0.10 ) $ ( 0.26 ) $ ( 0.15 ) The following potential weighted-average shares of common stock outstanding were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Options to purchase common stock 865 2,122 977 2,715 RSUs and PSUs 3,394 3,831 3,425 4,952 Shares related to convertible senior notes 8,721 4,098 4,422 3,709 Employee stock purchase plan 9 7 4 3 Total common stock equivalents 12,989 10,058 8,828 11,379 Shares related to convertible senior notes during the three and nine months ended September 30, 2020 represents the dilutive and anti-dilutive impact of our 2023 notes and 2025 notes as the average price of our common stock was higher than the conversion price of $ 26.95 and $ 51.56 , respectively, and the conditions for conversion had been met. Shares related to convertible senior notes during the three and nine months ended September 30, 2019 represents the dilutive and anti-dilutive impact of our 2023 notes as the average price of our common stock was higher than the conversion price and the conditions for conversion had been met. While these shares are anti-dilutive during the three and nine months ended September 30, 2020 and 2019, they may be dilutive in periods we report net income. However, as a result of the capped call transactions, there will be no economic dilution from the 2023 notes and 2025 notes up to $ 40.68 and $ 79.32 , respectively, as exercise of the capped call instruments will reduce dilution that would have otherwise occurred when the average price of our common stock exceeds the conversion price. None of the shares related to our 2025 notes were dilutive or anti-dilutive during the three and nine months ended September 30, 2019 as a result of the conditions for conversion not being met. None of the shares related to our 2026 notes were dilutive or anti-dilutive during the three and nine months ended September 30, 2020 as a result of the conditions for conversion not being met. For further information on the notes see Note 8, “Convertible Senior Notes.” 16 Table of Contents 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, 2020 and December 31, 2019 (in thousands): September 30, 2020 Adjusted Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 17,346 $ — $ — $ 17,346 U.S. treasury securities 307,673 — — 307,673 Money market funds 202,522 — — 202,522 Total cash and cash equivalents $ 527,541 $ — $ — $ 527,541 Short-term investments: Commercial paper $ 204,044 $ 38 $ ( 24 ) $ 204,058 Corporate securities 516,682 2,644 ( 57 ) 519,269 Total short-term investments $ 720,726 $ 2,682 $ ( 81 ) $ 723,327 Long-term investments: Corporate securities $ 456,774 $ 602 $ ( 635 ) $ 456,741 Agency bonds 64,495 25 — 64,520 Total long-term investments $ 521,269 $ 627 $ ( 635 ) $ 521,261 December 31, 2019 Adjusted Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 241,355 $ — $ — $ 241,355 Money market funds 146,165 — — 146,165 Total cash and cash equivalents $ 387,520 $ — $ — $ 387,520 Short-term investments: Commercial paper $ 7,489 $ — $ — $ 7,489 Corporate securities 318,946 425 ( 78 ) 319,293 U.S. treasury securities 44,251 39 ( 4 ) 44,286 Agency bonds 10,000 6 — 10,006 Total short-term investments $ 380,686 $ 470 $ ( 82 ) $ 381,074 Long-term investments: Corporate securities $ 295,103 $ 533 $ ( 158 ) $ 295,478 Agency bonds 14,999 6 — 15,005 Total long-term investments $ 310,102 $ 539 $ ( 158 ) $ 310,483 The following table shows our cash equivalents and investments' adjusted cost and fair value by contractual maturity as of September 30, 2020 (in thousands): Adjusted Cost Fair Value Due in 1 year or less $ 1,028,399 $ 1,031,000 Due in 1-2 years 521,269 521,261 Investments not due at a single maturity date 202,522 202,522 Total $ 1,752,190 $ 1,754,783 Investments not due at a single maturity date in the preceding table consisted of money market funds. 17 Table of Contents As of September 30, 2020, we did not consider the declines in market value of our investment portfolio to be 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 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-, a weighted average maturity of less than 12 months, and our investment policy limits the amount of credit exposure to any one issuer or industry sector. The policy requires investments generally 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, 2020, we did not recognize any losses on our investments due to credit related factors. During the three and nine months ended September 30, 2019, we did not recognize any impairment charges. Restricted Cash As of September 30, 2020 and December 31, 2019, we had approximately $ 2.0 million and $ 1.9 million, respectively, of restricted cash that primarily consists of security deposits for our corporate offices. These amounts are classified in either other current assets or other assets on our condensed consolidated balance sheets based upon the term of the remaining restrictions. Strategic Investments In March 2020, we completed an investment of $ 2.0 million in TAPD, Inc., also known as Frank, a U.S.-based service that helps students access financial aid. In October 2018, we completed an investment of $ 10.0 million in WayUp, Inc. (WayUp), a U.S.-based job site and mobile application for college students and recent graduates. Additionally, we previously invested $ 3.0 million in a foreign entity to explore expanding our reach internationally. During the three months ended September 30, 2020, we recorded a $ 10.0 million impairment charge on our investment in WayUp included within general and administrative expense on our condensed consolidated statements of operations. Our impairment assessment was the result of the uncertainty around WayUp's ability to raise additional funding to support their future operations. We did not record any impairment charges on our other strategic investments during the three and nine months ended September 30, 2020 and 2019, 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, 2020 and 2019. 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. 18 Table of Contents Financial instruments measured and recorded at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 are classified based on the valuation technique level in the tables below (in thousands): September 30, 2020 Total Level 1 Level 2 Assets: Cash equivalents: U.S. treasury securities $ 307,673 $ 307,673 $ — Money market funds 202,522 202,522 — Short-term investments: Commercial paper 204,058 — 204,058 Corporate securities 519,269 — 519,269 Long-term investments: Corporate securities 456,741 — 456,741 Agency bonds 64,520 — 64,520 Total assets measured and recorded at fair value $ 1,754,783 $ 510,195 $ 1,244,588 December 31, 2019 Total Level 1 Level 2 Assets: Cash equivalents: Money market funds $ 146,165 $ 146,165 $ — Short-term investments: Commercial paper 7,489 — 7,489 Corporate securities 319,293 — 319,293 U.S. treasury securities 44,286 44,286 — Agency bonds 10,006 — 10,006 Long-term investments: Corporate securities 295,478 — 295,478 Agency bonds 15,005 — 15,005 Total assets measured and recorded at fair value $ 837,722 $ 190,451 $ 647,271 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 and U.S. treasury securities, 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 financial instruments 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 see Note 8, “Convertible Senior Notes.” 19 Table of Contents The carrying amounts and estimated fair values of the notes as of September 30, 2020 and December 31, 2019 are as follows (in thousands): September 30, 2020 December 31, 2019 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value 2026 notes $ 751,349 $ 1,000,000 $ — $ — 2025 notes 631,061 1,208,800 602,611 831,000 2023 notes 154,574 462,358 297,692 523,538 Convertible senior notes, net $ 1,536,984 $ 2,671,158 $ 900,303 $ 1,354,538 The carrying amount of the 2026 notes, 2025 notes and 2023 notes as of September 30, 2020 was net of unamortized debt discount of $ 236.8 million, $ 158.1 million and $ 16.5 million, respectively, and unamortized issuance costs of $ 11.8 million, $ 10.9 million and $ 2.0 million, respectively. The carrying amount of the 2025 notes and 2023 notes as of December 31, 2019 was net of unamortized debt discount of $ 184.7 million and $ 42.3 million, respectively, and unamortized issuance costs of $ 12.7 million and $ 5.0 million, respectively. Note 6. Acquisitions On June 4, 2020, we completed our acquisition of Mathway, LLC (Mathway), an online, on-demand math problem solving company that provides a vast range of subject areas in mathematics, including pre-algebra, algebra, trigonometry, pre-calculus, calculus, and linear algebra, and related disciplines. This acquisition helps to strengthen our existing Chegg Math Solver service with the addition of new subjects, languages, and international reach. The total fair value of the purchase consideration was $ 101.0 million, of which $ 93.5 million was paid in cash on the acquisition date and $ 7.5 million, included within other long-term liabilities, was held in escrow as security for general representations and warranties and potential post-closing adjustments. Any remaining escrow amount will be released 15 months after the acquisition date. The Mathway purchase agreement provides for additional payments of up to $ 15.0 million subject to the achievement of specified milestones and continued employment of the sellers. These payments are not included in the fair value of the purchase consideration but rather are expensed ratably as acquisition-related compensation costs classified as research and development and general and administrative expenses, based on the seller's job function, on our condensed consolidated statement of operations. We have recorded approximately $ 1.7 million as of September 30, 2020, included within accrued liabilities on our condensed consolidated balance sheet for these payments. The following table presents the preliminary total allocation of purchase consideration recorded on our condensed consolidated balance sheet as of the acquisition date (in thousands): Mathway Cash $ 712 Accounts receivable 1,132 Other acquired assets 779 Acquired intangible assets 30,320 Total identifiable assets acquired 32,943 Deferred revenue ( 1,423 ) Liabilities assumed ( 727 ) Net identifiable assets acquired 30,793 Goodwill 70,167 Total fair value of purchase consideration $ 100,960 Goodwill is primarily attributable to the potential for enhancing our existing offerings and expanding our reach by providing additional mathematics support for students and helping them through their academic journey. The amounts recorded for intangible assets and goodwill are deductible for tax purposes. 20 Table of Contents The following table presents the details of the allocation of purchase consideration to the acquired intangible assets (in thousands, except weighted-average amortization period): Mathway Amount Weighted-Average Amortization Period (in months) Domain names $ 220 18 Trade name 520 18 Customer lists 6,220 48 Developed technology 23,360 84 Total acquired intangible assets $ 30,320 75 During the nine months ended September 30, 2020, we incurred $ 3.1 million of acquisition-related expenses associated with our acquisition of Mathway, which have been included in general and administrative expense on our condensed consolidated statement of operations. We have recorded immaterial amounts of revenue and earnings from Mathway since the acquisition date. The following unaudited supplemental pro forma net loss is for informational purposes only and presents our combined results as if the acquisition of Mathway had occurred on January 1, 2019. The unaudited supplemental pro forma information includes the historical combined operating results adjusted for acquisition-related compensation costs, amortization of intangible assets, share-based compensation expense and acquisition-related expenses and does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of our future consolidated results. During the three and nine months ended September 30, 2020, our supplemental pro forma net loss would have been $ 37.3 million and $ 32.3 million, respectively. During the three and nine months ended September 30, 2019, our supplemental pro forma net loss would have been $ 14.1 million and $ 33.3 million, respectively. Revenues from Mathway were immaterial during the three and nine months ended September 30, 2020 and 2019 and therefore we have not presented pro forma revenues. Note 7. Goodwill and Intangible Assets Goodwill consists of the following (in thousands): Nine Months Ended September 30, 2020 Year Ended December 31, 2019 Beginning balance $ 214,513 $ 149,524 Additions due to acquisitions 70,167 65,181 Foreign currency translation adjustment 417 ( 192 ) Measurement period adjustments related to prior acquisition ( 288 ) — Ending balance $ 284,809 $ 214,513 21 Table of Contents Intangible assets consist of the following (in thousands, except weighted-average amortization period): September 30, 2020 Weighted-Average Amortization Period (in months) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Developed technologies and content library 72 $ 66,628 $ ( 25,392 ) $ 41,236 Customer lists 47 16,190 ( 9,718 ) 6,472 Trade and domain names 44 11,613 ( 7,467 ) 4,146 Non-compete agreements 31 2,018 ( 1,962 ) 56 Indefinite-lived trade name — 3,600 — 3,600 Foreign currency translation adjustment — ( 124 ) — ( 124 ) Total intangible assets 64 $ 99,925 $ ( 44,539 ) $ 55,386 December 31, 2019 Weighted-Average Amortization Period (in months) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Developed technologies and content library 66 $ 43,268 $ ( 18,395 ) $ 24,873 Customer lists 47 9,970 ( 8,210 ) 1,760 Trade and domain names 46 10,873 ( 6,169 ) 4,704 Non-compete agreements 31 2,018 ( 1,890 ) 128 Indefinite-lived trade name — 3,600 — 3,600 Foreign currency translation adjustment — ( 398 ) — ( 398 ) Total intangible assets 58 $ 69,331 $ ( 34,664 ) $ 34,667 During the three and nine months ended September 30, 2020, amortization expense related to our finite-lived intangible assets totaled approximately $ 4.4 million and $ 9.9 million, respectively. During the three and nine months ended September 30, 2019, amortization expense related to our finite-lived intangible assets totaled approximately $ 1.5 million and $ 5.0 million, respectively. As of September 30, 2020, the estimated future amortization expense related to our finite-lived intangible assets is as follows (in thousands): Remaining three months of 2020 $ 4,404 2021 13,320 2022 10,889 2023 8,760 2024 5,707 Thereafter 8,706 Total $ 51,786 Note 8. Convertible Senior Notes 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). The aggregate principal amount of the 2023 notes includes $ 45 million from the initial purchasers fully exercising their option to purchase 22 Table of Contents 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. Concurrently with the offering of the 2026 notes, 2025 notes and 2023 notes, we used $ 103.4 million, $ 97.2 million and $ 39.2 million, respectively, of the net proceeds to enter into privately negotiated capped call transactions. 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 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. Of the $ 501.7 million consideration, we allocated $ 156.1 million and $ 345.6 million to the liability and equity components of the exchanged 2023 notes, respectively. The fair value of the liability component was calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the liability component of the 2023 notes subject to the exchange was $ 152.8 million resulting in a $ 3.3 million loss on early extinguishment of debt which was recorded in other (expense) income, net in our condensed consolidated statements of operations. Additionally, we terminated 2023 notes capped call transactions underlying 6,380,815 shares of our common stock and received cash proceeds of $ 57.4 million. As of September 30, 2020, $ 173.0 million of aggregate principal amount of the 2023 notes remain outstanding and 6,419,850 shares remain underlying the 2023 notes capped call transactions. 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 bear interest of 0.25 % per year which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2018. The 2023 notes will mature on May 15, 2023, unless repurchased, redeemed or converted in accordance with their terms prior to such date. 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 will initially be convertible into 37.1051 shares of our common stock. This is equivalent to an initial conversion price of approximately $ 26.95 per share, which is 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, December 15, 2024 for the 2025 notes and February 15, 2023 for the 2023 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, June 30, 2019 for the 2025 notes, and June 30, 2018 for the 2023 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. 23 Table of Contents On or after June 1, 2026 for the 2026 notes, December 15, 2024 for the 2025 notes and February 15, 2023 for the 2023 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. 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 allowing holders of the 2025 notes to convert was met during the three months ended September 30, 2020 and therefore, the 2025 notes are convertible starting October 1, 2020 through December 31, 2020. The first circumstance allowing holders of the 2023 notes to convert was met during the three months ended September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, June 30, 2019, and March 31, 2019 and therefore, the 2023 notes were and are convertible starting April 1, 2019 through September 30, 2019 and from January 1, 2020 through December 31, 2020. During the three and nine months ended September 30, 2020, aside from the exchange of $ 172.0 million aggregate principal amount of the 2023 notes discussed above, we received immaterial requests for conversion of the 2023 notes which we settled in cash during the three and nine months ended September 30, 2020. In accounting for their issuance, we separated the notes into liability and equity components. The carrying amount of the liability components for the 2026 notes, 2025 notes and 2023 notes of approximately $ 758.7 million, $ 588.0 million and $ 280.8 million, respectively, was calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the equity components for the 2026 notes, 2025 notes and 2023 notes of approximately $ 241.3 million, $ 212.0 million and $ 64.2 million, respectively, representing the conversion option, was determined by deducting the carrying amount of the liability components from the principal amount of the notes. This difference between the principal amount of the notes and the liability components represents the debt discount, presented as a reduction to the notes on our condensed consolidated balance sheets, and is amortized to interest expense using the effective interest method over the remaining term of the notes. The equity components of the notes are included in additional paid-in capital on our condensed consolidated balance sheets and are not remeasured as long as they continue to meet the conditions for equity classification. We incurred issuance costs related to the 2026 notes, 2025 notes and 2023 notes of approximately $ 15.9 million, $ 19.8 million, $ 9.4 million, respectively. In accounting for the issuance costs, we allocated the total amount incurred to the liability and equity components using the same proportions determined above for the notes. Issuance costs attributable to the liability components for the 2026 notes, 2025 notes and 2023 notes of approximately $ 12.1 million, $ 14.6 million and $ 7.6 million, respectively, were recorded as debt issuance cost, presented as a reduction to the notes on our condensed consolidated balance sheets, and are amortized to interest expense using the effective interest method over the term of the notes. The issuance costs attributable to the equity components for the 2026 notes, 2025 notes and 2023 notes were approximately $ 3.8 million, $ 5.3 million and $ 1.7 million, respectively, and were recorded as a reduction to the equity component included in additional paid-in capital. The net carrying amount of the liability component of the notes is as follows (in thousands): September 30, 2020 December 31, 2019 2026 Notes 2025 Notes 2023 Notes 2025 Notes 2023 Notes Principal $ 1,000,000 $ 800,000 $ 173,018 $ 800,000 $ 345,000 Unamortized debt discount ( 236,809 ) ( 158,077 ) ( 16,484 ) ( 184,698 ) ( 42,280 ) Unamortized issuance costs ( 11,842 ) ( 10,862 ) ( 1,960 ) ( 12,691 ) ( 5,028 ) Net carrying amount (liability) $ 751,349 $ 631,061 $ 154,574 $ 602,611 $ 297,692 24 Table of Contents The net carrying amount of the equity component of the notes is as follows (in thousands): September 30, 2020 December 31, 2019 2026 Notes 2025 Notes 2023 Notes 2025 Notes 2023 Notes Debt discount for conversion option $ 241,300 $ 212,000 $ 32,193 $ 212,000 $ 64,193 Issuance costs ( 3,838 ) ( 5,253 ) ( 877 ) ( 5,253 ) ( 1,749 ) Net carrying amount (equity) $ 237,462 $ 206,747 $ 31,316 $ 206,747 $ 62,444 As of September 30, 2020, the remaining lives of the 2026 notes, 2025 notes and 2023 notes were approximately 5.9 years, 4.5 years and 2.6 years, respectively. Based on the closing price of our common stock of $ 71.44 on September 30, 2020, the if-converted value of the 2026 notes was approximately $ 664.2 million, which was less than the principal amount of $ 1.0 billion by approximately $ 335.8 million, the if-converted value of the 2025 notes was approximately $ 1,108.5 million, which exceeds the principal amount of $ 800 million by approximately $ 308.5 million and the if-converted value of the 2023 notes was approximately $ 458.6 million, which exceeds the principal amount of $ 173 million by approximately $ 285.6 million. The effective interest rates of the liability components for the 2026 notes, 2025 notes and 2023 notes are 4.63 %, 5.40 % and 4.34 %, respectively, and each is based on the interest rate of similar debt instruments, at the time of our offering, that do not have associated convertible features. The following tables set forth the total interest expense recognized related to the notes (in thousands): Three Months Ended September 30, 2020 2019 2026 Notes 2025 Notes 2023 Notes 2025 Notes 2023 Notes Contractual interest expense $ — $ 252 $ 169 $ 252 $ 217 Amortization of debt discount 4,491 8,938 2,458 8,939 3,161 Amortization of issuance costs 225 614 292 614 375 Total interest expense $ 4,716 $ 9,804 $ 2,919 $ 9,805 $ 3,753 Nine Months Ended September 30, 2020 2019 2026 Notes 2025 Notes 2023 Notes 2025 Notes 2023 Notes Contractual interest expense $ — $ 750 $ 599 $ 517 $ 645 Amortization of debt discount 4,491 26,621 8,709 18,363 9,377 Amortization of issuance costs 225 1,829 1,035 1,262 1,112 Total interest expense $ 4,716 $ 29,200 $ 10,343 $ 20,142 $ 11,134 Capped Call Transactions Concurrently with the offering of the 2026 notes, 2025 notes and 2023 notes, we used $ 103.4 million, $ 97.2 million and $ 39.2 million, respectively, of the net proceeds to enter into privately negotiated capped call transactions which are expected to generally reduce or offset potential dilution to holders of our common stock upon conversion of the notes and/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 cover 9,297,800 , 15,516,480 and 6,419,850 shares of our common stock for the 2026 notes, 2025 notes and 2023 notes, respectively, and are intended to effectively increase the overall conversion price from $ 107.55 to $ 156.44 per share for the 2026 notes, $ 51.56 to $ 79.32 per share for the 2025 notes and $ 26.95 to $ 40.68 per share for the 2023 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. 25 Table of Contents Note 9. 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 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. Pursuant to the CID, the FTC has requested responses to interrogatories and the production of documents pertaining to data breach incidents and our data security and privacy practices generally. Efforts are currently underway to collect the documents and information requested after reaching an agreement with the FTC on the order and timing of our responses. On May 12, 2020, we received notice that 15,107 arbitration demands were filed against us by individuals represented by the same legal counsel, each alleging to have suffered more than $ 25,000 in damages as a result of 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. We dispute that these claimants have a valid basis for seeking arbitration and assert that they have acted in bad faith. We have filed a motion seeking modification of the Court's order to arbitrate. On March 3, 2020, Ingram Hosting Holdings LLC (IHH) filed a complaint in the U.S. District Court for the Middle District of Tennessee alleging that Chegg breached its various contracts with IHH and other Ingram group entities, seeking damages in the amount of $ 17 million. An answer was filed on March 31, 2020. Chegg and Ingram have now dismissed the litigation after reaching an amicable settlement of the dispute which includes an immaterial undisclosed payment from Ingram. On November 5, 2018, NetSoc, LLC (NetSoc) filed a complaint against us in the U.S. District Court for the Southern District of New York for patent infringement alleging that the Chegg Tutors service infringes U.S. Patent No. 9.978,107 and seeking unspecified compensatory damages. A responsive pleading was filed on February 19, 2019. On January 13, 2020, the Court issued an order dismissing the case as to Chegg. On January 30, 2020, NetSoc appealed the dismissal. On April 21, 2020, the Court granted Chegg's motion to hold the appeal in abeyance pending outcome of an appeal in the litigation above. We have not recorded any amounts related to the above matters, as we do not believe that a loss is probable in these 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 may 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 10. 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 minimal. We have not recorded any liabilities for these agreements as of September 30, 2020. 26 Table of Contents Note 11. Stockholders' Equity Securities Repurchase Program In June 2020, our board of directors approved a securities repurchase program pursuant to which we may, from time to time, repurchase up to $ 500.0 million 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. The repurchase program will end on December 31, 2021. There were no securities repurchased during the three months ended September 30, 2020. 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, 2020 2019 2020 2019 Cost of revenues $ 262 $ 96 $ 644 $ 295 Research and development 8,433 5,741 23,044 15,876 Sales and marketing 2,431 1,843 7,053 5,405 General and administrative 10,403 9,185 28,668 25,779 Total share-based compensation expense $ 21,529 $ 16,865 $ 59,409 $ 47,355 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, 2019 6,909,530 $ 24.04 Granted 2,462,160 43.54 Released ( 3,591,076 ) 18.89 Canceled ( 409,544 ) 30.57 Balance at September 30, 2020 5,371,070 $ 35.92 As of September 30, 2020, our total unrecognized share-based compensation expense related to RSUs and PSUs was approximately $ 122.8 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.0 years. Note 12. Income Taxes We recorded an income tax provision of approximately $ 1.1 million and $ 2.9 million during the three and nine months ended September 30, 2020, respectively, primarily due to state and foreign income tax expense. We recorded an income tax provision of approximately $ 0.6 million and $ 1.8 million during the three and nine months ended September 30, 2019, respectively, primarily due to state and foreign income tax expense. Note 13. 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, 2020, we purchased $ 0.3 million and $ 1.1 million, respectively, and during the three and nine months ended September 30, 2019, we purchased $ 0.4 million and $ 1.9 million, respectively, of services 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 revenues during the three and nine months ended September 30, 27 Table of Contents 2019 from Adobe. We had $ 0.1 million and $ 0.2 million of payables as of September 30, 2020 and December 31, 2019, respectively, to Adobe. We had no outstanding receivables as of September 30, 2020 and December 31, 2019 from Adobe. 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, 2020, we incurred payment processing fees of $ 0.5 million and $ 1.5 million, respectively, and during the three and nine months ended September 30, 2019, we incurred payment processing fees of $ 0.4 million and $ 1.2 million, respectively, to PayPal. One of our board members is also a member of the Board of Directors of Synack, Inc. (Synack). We had no purchases of services from Synack during the three months ended September 30, 2020 and $ 0.1 million during the nine months ended September 30, 2020. During the three and nine months ended September 30, 2019, we purchased $ 0.1 million and $ 0.4 million, respectively, of services from Synack.