CHEGG, INC 10-K

ITEM 7. 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 audited consolidated financial statements and the related notes included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Aside from net revenues during the year ended December 31, 2019 compared to the same period in 2018 as discussed in the Results of Operations section of Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations”, we have omitted discussion of the earliest of the three years of financial condition and results of operations and this information can be found in Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 20, 2020, which is available free of charge on the SEC's website at sec.gov and on our website at investor.chegg.com. 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 Annual Report on Form 10-K, particularly in Part I, Item 1A, “Risk Factors.” Overview Chegg: A Smarter Way to Student ® . 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 careers 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, Thinkful, and Mathway. 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 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. In June 2020, we completed our acquisition of Mathway, an online, on-demand math problem solving company that covers a vast range of subject areas in mathematics, including pre-algebra, algebra, trigonometry, pre-calculus, calculus, and linear algebra and related disciplines. During the years ended December 31, 2020, and 2019, we generated net revenues of $644.3 million and $410.9 million, respectively, and in the same periods had net losses of $6.2 million and $9.6 million, respectively. During the year ended December 31, 2020, the COVID-19 pandemic had a positive impact to our business and results of operations as we saw an increase in the acceleration of subscriber growth and engagement with our learning platform. However, the COVID-19 pandemic also 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. 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 become profitable 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, intense competition in our markets, the ability to achieve sufficient contributions to 33 T a b l e o f C o n t e n t s revenue from Chegg Services, uncertainty around online learning and potential restrictions imposed by traditional institutions, and other factors. These risks and uncertainties are described in greater detail in Part I, Item 1A, “Risk Factors.” 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.” Chegg Services Our Chegg Services product line for students primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Thinkful, and Mathway. 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 81% of net revenues during each of the years ended December 31, 2020 and 2019. Required Materials Our Required Materials product line includes revenues from print textbooks and eTextbooks. Revenues from print textbooks that we own are 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 of a rental or sale transaction immediately when a print textbook ships to a student. Additionally, Required Materials includes revenues from eTextbooks, which are recognized ratably over the contractual period, generally a two-to five-month period. In the aggregate, Required Materials revenues were 19% of net revenues during each of the years ended December 31, 2020 and 2019. 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. Components of Results of Operations Net Revenues We recognize revenues from our Chegg Services and Required Materials product lines, net of allowances for refunds or charge backs from our payment processors who process payments from credit cards, debit cards, and PayPal. Revenues from our Chegg Services product line primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Thinkful, and Mathway. Revenues from Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, and Mathway are primarily recognized ratably over the respective weekly or monthly subscription period. Revenues from Thinkful 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 or rental term, generally a two- to five-month period. Additionally, we provide students the ability to purchase print textbooks and recognize revenues immediately upon shipment. Revenues from print textbooks owned by a partner are recognized as a revenue share on the total transaction amount of a rental or sale transaction immediately when a print textbook ships to a 34 T a b l e o f C o n t e n t s 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. When deciding the most appropriate basis for presenting revenues or costs of revenues, both the legal form and substance of the agreement between us and our business partners are reviewed to determine each party’s respective role in the transaction. Where our role in a transaction is that of principal, revenues are recognized on a gross basis. This requires revenue to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as a cost of revenues. Where our role in a transaction is that of an agent, revenues are recognized on a net basis with revenues representing the margin earned. 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. In relation to print textbook rental and sale agreements with our partners, we recognize revenues on a net basis based on our role in the transaction as an agent. 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 content amortization expense related to content that we develop, license from publishers for which we pay one-time license fees, or acquire through acquisitions, payment processing costs, order fulfillment fees primarily related to outbound shipping and fulfillment as well as publisher content fees for eTextbooks, 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, personnel costs and other direct costs related to providing content or services. In addition, cost of revenues includes allocated information technology and facilities costs. Operating Expenses We classify our operating expenses into three categories: research and development, sales and marketing, and general and administrative. One of the most significant components of our operating expenses is employee-related costs, which include salaries, benefits, and share-based compensation expenses. We expect to continue to hire new employees in order to support our current and anticipated growth. In any particular period, the timing of additional hires could materially affect our operating expenses, both in absolute dollars and as a percentage of revenues. Our operating expenses also contain information technology expenses such as technology costs to support our research and development, sales and marketing expenses, depreciation expenses, amortization of acquired intangible assets except content libraries, and outside services. We allocate certain costs to each expense category, primarily based on the headcount in each group at the end of a period. As our business grows, our operating expenses may increase over time to expand capacity and sustain our workforce. Research and Development Our research and development expenses consist of salaries, benefits, and share-based compensation expense for employees on our product, engineering, and technical teams who are responsible for maintaining our website, developing new products, and improving existing products. Research and development costs also include depreciation expense, technology costs to support our research and development, outside services, and allocated information technology and facilities expenses. We expense substantially all of our research and development expenses as they are incurred. In the past three years, our research and development expenses have increased to support new products and services as well as to expand our infrastructure capabilities to support back-end processes associated with our revenue transactions and internal systems. We intend to continue making significant investments in developing new products and services and enhancing the functionality of existing products and services. Sales and Marketing Our sales and marketing expenses consist of user and advertiser-facing marketing and promotional expenditures through a number of targeted online marketing channels, sponsored search, display advertising, email marketing campaigns, and other initiatives. We incur salaries, benefits and share-based compensation expenses for our employees engaged in marketing, business development and sales and sales support functions, amortization of acquired intangible assets, and allocated information technology, and facilities costs. Our marketing expenses are largely variable and to the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we could see a corresponding change in our sales and marketing expenses. 35 T a b l e o f C o n t e n t s General and Administrative Our general and administrative expenses consist of salaries, benefits and share-based compensation expense for certain executives as well as our finance, legal, human resources and other administrative employees. In addition, general and administrative expenses include outside services, legal and accounting services, depreciation expense, and allocated information technology and facilities costs. Interest Expense, Net and Other Income, Net Interest expense, net consists primarily of interest expense on the amortization of debt discount and issuance costs related to the convertible senior notes. Other income, net consists primarily of interest income on our cash and cash equivalents and investment balances and losses on early extinguishment of the convertible senior notes. Provision for Income Taxes Provision for income taxes consists primarily of state income taxes in the United States and income taxes in foreign jurisdictions in which we conduct business. Due to the uncertainty as to the realization of the benefits of our domestic deferred tax assets, we have recorded a full valuation allowance against such assets. We intend to continue to maintain a full valuation allowance on our domestic deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Results of Operations The following table summarizes our historical consolidated statements of operations (in thousands, except percentage of total net revenues): Years Ended December 31, 2020 2019 Net revenues $ 644,338 100 % $ 410,926 100 % Cost of revenues (1) 205,417 32 92,182 22 Gross profit 438,921 68 318,744 78 Operating expenses: Research and development (1) 170,905 26 139,772 34 Sales and marketing (1) 81,914 13 63,569 15 General and administrative (1) 129,349 20 97,489 24 Restructuring charges — — 97 — Total operating expenses 382,168 59 300,927 73 Income from operations 56,753 9 17,817 5 Total interest expense, net and other income, net (57,614) (9) (24,788) (6) Loss before provision for income taxes (861) — (6,971) (1) Provision for income taxes 5,360 (1) 2,634 (1) Net loss $ (6,221) (1) % $ (9,605) (2) % (1) Includes share-based compensation expense as follows: Cost of revenues $ 950 $ 426 Research and development 31,588 22,229 Sales and marketing 9,606 7,380 General and administrative 41,911 34,874 Total share-based compensation expense $ 84,055 $ 64,909 36 T a b l e o f C o n t e n t s Years Ended December 31, 2020, 2019, and 2018 Net Revenues Net revenues during the year ended December 31, 2020 increased $233.4 million, or 57%, compared to the same period in 2019. Net revenues during the year ended December 31, 2019, increased $89.8 million, or 28%, compared to the same period in 2018. 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): Years Ended December 31, Change in 2020 Change in 2019 2020 2019 2018 $ % $ % Chegg Services $ 521,228 $ 332,221 $ 253,985 $ 189,007 57 % $ 78,236 31 % Required Materials 123,110 78,705 67,099 44,405 56 11,606 17 Total net revenues $ 644,338 $ 410,926 $ 321,084 $ 233,412 57 $ 89,842 28 Chegg Services revenues increased by $189.0 million, or 57%, during the year ended December 31, 2020, compared to the same period in 2019, primarily due to a 67% increase in subscriber growth driven by increased global penetration, our efforts to reduce account sharing, the widespread transition to remote learning as a result of the COVID-19 pandemic, and subscribers from our recent acquisitions. We currently expect to continue to see growth in Chegg Services revenues in the near term as a result of the aforementioned drivers in subscriber growth, most significantly from the contribution of international subscribers, however, we expect such drivers to become less pronounced. Chegg Services revenues represented 81% of net revenues during each of the years ended December 31, 2020 and 2019. Required Materials revenues increased by $44.4 million, or 56%, during the year ended December 31, 2020 compared to the same period in 2019, primarily due to revenues from print textbooks that we own which are recognized as the total transaction amount ratably over the lease term as opposed to a revenue share on the total transaction amount of a rental or sale transaction immediately when a print textbook ships to a student. Required Materials revenues represented 19% of net revenues during each of the years ended December 31, 2020 and 2019. We currently expect the contribution of Required Materials revenues as a percentage of net revenues to decline in the near term as Chegg Services revenues continue to grow. Chegg Services revenues increased by $78.2 million, or 31%, during the year ended December 31, 2019, compared to the same period in 2018 primarily due to a 29% increase in subscriber growth as more students turned to our services and we expanded the subject matter content that drives our offerings. Chegg Services revenues represented 81% and 79% of net revenues during the years ended December 31, 2019 and 2018, respectively. Required Materials revenues increased by $11.6 million, or 17%, during the year ended December 31, 2019 compared to the same period in 2018, primarily due to better performance from our Required Materials print textbook partners as well as recognition of deferred variable consideration. Required Materials revenues represented 19% and 21% of net revenues during the years ended December 31, 2019 and 2018, respectively. Years Ended December 31, 2020 and 2019 Cost of Revenues The following table sets forth our cost of revenues for the periods shown (in thousands, except percentages): Years Ended December 31, Change in 2020 2020 2019 $ % Cost of revenues (1) $ 205,417 $ 92,182 $ 113,235 123 % (1) Includes share-based compensation expense of: $ 950 $ 426 $ 524 123 % Cost of revenues during the year ended December 31, 2020 increased by $113.2 million, compared to the same period in 2019. The increase was primarily attributable to higher order fulfillment fees of $50.9 million, which included increased fees from third parties related to shipping surcharges and labor costs as a result of the COVID-19 pandemic, higher depreciation of print textbooks of $15.4 million and higher cost of print textbooks purchased by students of $10.6 million, which were as a 37 T a b l e o f C o n t e n t s result of our transition to print textbook ownership, higher amortization of content of $9.2 million, higher employee-related expenses of $8.9 million, higher customer support fees of $6.8 million, and higher payment processing of $6.0 million, which were as a result of increased volumes. Gross margins decreased to 68% in the year ended December 31, 2020, from 78% during the same period in 2019 primarily as a result of increased shipping and logistics costs associated with our ownership of print textbooks. Operating Expenses The following table sets forth our total operating expenses for the periods shown (in thousands, except percentages): Years Ended December 31, Change in 2020 2020 2019 $ % Research and development (1) $ 170,905 $ 139,772 $ 31,133 22 % Sales and marketing (1) 81,914 63,569 18,345 29 General and administrative (1) 129,349 97,489 31,860 33 Restructuring charges — 97 (97) n/m Total operating expenses $ 382,168 $ 300,927 $ 81,241 27 (1) Includes share-based compensation expense of: Research and development $ 31,588 $ 22,229 $ 9,359 42% Sales and marketing 9,606 7,380 2,226 30 General and administrative 41,911 34,874 7,037 20 Share-based compensation expense $ 83,105 $ 64,483 $ 18,622 29 _______________________________________ n/m - not meaningful Research and Development Research and development expenses during the year ended December 31, 2020 increased by $31.1 million, or 22%, compared to the same period in 2019. The increase was primarily attributable to higher employee-related expenses of $14.2 million, higher technology costs to support our research and development of $10.0 million, higher share-based compensation expense of $9.4 million, compared to the same period in 2019. Research and development expenses as a percentage of net revenues were 26% during the year ended December 31, 2020 compared to 34% of net revenues during the same period in 2019. Sales and Marketing Sales and marketing expenses during the year ended December 31, 2020 increased by $18.3 million, or 29%, compared to the same period in 2019. The increase was attributable to higher streaming radio and display advertisement marketing expense, including our international marketing spend, of $10.7 million, higher employee-related expenses of $4.1 million, and higher share-based compensation expense of $2.2 million, compared to the same period in 2019. Sales and marketing expenses as a percentage of net revenues were 13% during the year ended December 31, 2020 compared to 15% of net revenues during the same period in 2019. General and Administrative General and administrative expenses in the year ended December 31, 2020 increased by $31.9 million, or 33%, compared to the same period in 2019. The increase was primarily attributable to an impairment charge on our investment in WayUp of $10.0 million, which was the result of the uncertainty around WayUp's ability to raise additional funding to support their future operations, higher share-based compensation expense of $7.0 million, higher employee-related expenses of $5.5 million, and higher professional fees of $3.7 million, compared to the same period in 2019. General and administrative expenses as a percentage of net revenues were 20% during the year ended December 31, 2020 compared to 24% of net revenues during the same period in 2019. The increases in employee-related operating expenses during the year ended December 31, 2020, compared to the same period in 2019, are largely driven by employees from our acquisition of Thinkful. 38 T a b l e o f C o n t e n t s Interest Expense, Net and Other Income, Net The following table sets forth our interest expense, net, and other income, net, for the periods shown (in thousands, except percentages): Years Ended December 31, Change in 2020 2020 2019 $ % Interest expense, net $ (66,297) $ (44,851) $ (21,446) 48 % Other income, net 8,683 20,063 (11,380) (57) Total interest expense, net and other income, net $ (57,614) $ (24,788) $ (32,826) 132 Interest expense, net increased during the year ended December 31, 2020, compared to the same period in 2019, as a result of interest expense related the 2026 notes and 2025 notes. Other income, net, decreased during the year ended December 31, 2020, compared to the same period in 2019, as a result of lower interest income earned on our investments due to lower interest rates and a $4.3 million loss on early extinguishment of debt primarily related to the partial exchange and extinguishments of the 2023 notes. Provision for Income Taxes The following table sets forth our provision for income taxes for the periods shown (in thousands, except percentages): Years Ended December 31, Change in 2020 2020 2019 $ % Provision for income taxes $ 5,360 $ 2,634 $ 2,726 103 % We recorded an income tax provision of approximately $5.4 million and $2.6 million for the years ended December 31, 2020 and 2019, respectively, which was primarily due to state and foreign income tax expense. The provision for income taxes increased during the year ended December 31, 2020, compared to the same period in 2019, and was primarily due to an increase in foreign profits. Liquidity and Capital Resources As of December 31, 2020, our principal sources of liquidity were cash, cash equivalents, and investments totaling $1.7 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 June 2020, our board of directors approved a securities repurchase program authorizing our repurchase of 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. Through December 31, 2020, we have repurchased $57.4 million of aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $149.6 million and have $350.4 million remaining under the repurchase program. The repurchase program will end on December 31, 2021. In August 2020, March/April 2019, and April 2018, we closed offerings of our 2026 notes, 2025 notes, and 2023 notes generating net proceeds of approximately $984.1 million, $780.2 million, and $335.6 million, respectively, in each case after deducting the initial purchasers’ discount and estimated offering expenses payable by us. The 2026 notes, 2025 notes, and 2023 notes mature on September 1, 2026, March 15, 2025, and May 15, 2023, respectively, unless converted, redeemed, or repurchased in accordance with their terms prior to such date. As of December 31, 2020, we have incurred cumulative losses of $422.6 million from our operations and we expect to 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 2023 notes, 2025 notes, and 2026 notes offerings, and cash generated from operations. 39 T a b l e o f C o n t e n t s 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 is held in the United States. As of December 31, 2020, 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): Years Ended December 31, 2020 2019 Consolidated Statements of Cash Flows Data: Net cash provided by operating activities $ 236,442 $ 113,403 Net cash used in investing activities (732,786) (703,425) Net cash provided by financing activities 588,627 603,509 Cash Flows from Operating Activities Although we incurred net losses during the years ended December 31, 2020 and 2019, our net losses were fully offset by non-cash expenditures, such as depreciation and amortization expense, share-based compensation expense, and amortization of debt discount and issuance costs expense. Net cash provided by operating activities during the year ended December 31, 2020 was $236.4 million. Our net loss of $6.2 million was increased by the change in deferred revenue of $12.9 million and accrued liabilities of $22.4 million. Additionally, we had significant non-cash operating expenses including print textbook depreciation expense of $15.4 million, other depreciation and amortization expense of $47.0 million, share-based compensation expense of $84.1 million, the amortization of debt discount and issuance costs of $64.6 million, the loss from impairment of strategic equity investment of $10.0 million, and the loss on early extinguishments of debt of $4.3 million, partially offset by repayment of convertible senior notes attributable to debt discount of $20.4 million. Net cash provided by operating activities during the year ended December 31, 2019 was $113.4 million. Our net loss of $9.6 million was offset by significant non-cash operating expenses, including other depreciation and amortization expense of $30.2 million, share-based compensation expense of $64.9 million, and the amortization of debt discount and issuance costs related to the 2025 notes and 2023 notes of $43.2 million. Cash Flows from Investing Activities Cash flows from investing activities have been primarily related to the purchases of investments, purchases of property and equipment, purchases of textbooks, and acquisition of businesses, offset by proceeds from the sale and maturity of investments and proceeds from the disposition of textbooks. Net cash used in investing activities during the year ended December 31, 2020 was $732.8 million and was related to the purchases of investments of $1.0 billion, the acquisition of business of $92.8 million, purchases of property and equipment of $81.3 million, purchases of textbooks of $58.6 million, and the purchase of strategic equity investment of $2.0 million, offset by the maturity of investments of $539.9 million and proceeds from disposition of textbooks of $7.6 million. Net cash used in investing activities during the year ended December 31, 2019 was $703.4 million and was related to the purchases of investments of $959.9 million, purchases of property and equipment of $42.3 million, and the acquisition of business of $79.1 million, offset by the maturity of investments of $324.7 million and proceeds from the sale of investments of $53.3 million. 40 T a b l e o f C o n t e n t s Cash Flows from Financing Activities Cash flows from financing activities have been primarily related to the issuance of convertible senior notes, net of issuance costs, issuance of common stock under stock plans, proceeds from 2023 notes capped call instruments, offset by the purchases of convertible senior notes capped call instruments, payment of taxes related to the net share settlement of equity awards, repayment of a portion of our convertible senior notes, and repurchases of common stock. Net cash provided by financing activities during the year ended December 31, 2020 was $588.6 million and was related to the proceeds from the issuance of the 2026 notes, net of issuance costs, of $984.1 million, proceeds from 2023 notes capped call instruments of $77.1 million, and the proceeds from the issuance of common stock under stock plans of $15.5 million, offset by the payment of $80.7 million in taxes related to the net share settlement of equity awards, the purchase of capped call instruments related to our 2026 notes of $103.4 million, and the repayment of a portion of our convertible senior notes of $304.0 million. Net cash provided by financing activities during the year ended December 31, 2019 was $603.5 million and was related to the proceeds from the issuance of the 2025 notes, net of issuance costs, of $780.2 million and the proceeds from the issuance of common stock under stock plans of $35.1 million, offset by the payment of $94.6 million in taxes related to the net share settlement of equity awards which became vested during the period, the purchase of capped call instruments related to our 2025 notes of $97.2 million and the repurchase of common stock of $20.0 million done in connection with the issuance of the 2025 notes. Contractual Obligations and Other Commitments The following is a summary of our contractual obligations and other commitments as of December 31, 2020 (in thousands): Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Convertible senior notes (1) $ 1,920,798 $ 1,289 $ 118,009 $ 801,500 $ 1,000,000 Purchase obligations (2) 48,949 28,903 16,669 3,377 — Operating lease obligations (3) 28,896 7,702 13,194 4,382 3,618 Total contractual obligations $ 1,998,643 $ 37,894 $ 147,872 $ 809,259 $ 1,003,618 _____________________________________________________ (1) Includes semi-annual cash interest payments of $0.6 million. Our convertible senior notes are recorded on our consolidated balance sheets at the carrying amount of $1,506.9 million as of December 31, 2020. (2) Represents contractual obligations primarily related to information technology services. (3) Our offices are leased under operating leases, which expire at various dates through 2027. In addition, our other long-term liabilities include $3.6 million related to uncertain tax positions as of December 31, 2020. The timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond one year. As a result, this amount is not included in the above table. Off-Balance Sheet Arrangements Through December 31, 2020, 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 consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). The preparation of these 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 41 T a b l e o f C o n t e n t s 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 and 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. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that assumptions and estimates of the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. For further information on all of our significant accounting policies, see Note 2, “Significant Accounting Policies”, of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Textbook Library We write down textbooks on a book-by-book basis for lost, damaged, or excess print textbooks. Factors considered in the determination of write-downs for print textbooks include historical experience, management’s knowledge of current business conditions, and expectations of future demand. The consideration of these factors requires management to make significant judgments in the determination of our write-down for print textbooks in any given period which could have a material impact on our results of operations. 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. We review the accelerated method of depreciation to ensure consistency with the value of the print textbooks to our customers during their useful life. Based on historical experience, we believe that a print textbook has more value to our customers and us early in its life and therefore an accelerated depreciation method best reflects the actual pattern of decline in economic value and aligns with the print textbooks’ deteriorating condition over time. In addition, we consider the utilization of the print textbooks and the revenues we can earn, recognizing that a used print textbook rents for a lower amount than a new print textbook. Should the actual rental activity or deterioration of print textbooks differ from our estimates, the gain or loss on print textbooks liquidated or the net book value of print textbooks purchased by students at the end of the term could differ in any given period, which could have a material impact to our results of operations. In addition, we evaluate the appropriateness of the estimated salvage value and useful life estimates based on historical transactions with both vendors and customers and by reviewing a blend of actuals and estimates of the lifecycle of each print textbook. Our estimates utilize data from historical experience, including actual proceeds from print textbooks as a percentage of original sourcing costs, channel mix and the projected value of a print textbook in relation to the original source cost over time. As we continue to accumulate additional data related to our print textbook library, we may make refinements in the estimated salvage value, method of depreciation, or useful life. Any potential refinements could impact our print textbook depreciation expense, the gain or loss on print textbooks liquidated, or the net book value of print textbooks purchased by students at the end of the term and could have a material impact to our results of operations. Revenue Recognition and Deferred Revenue 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. There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain substantially all of the remaining benefits from the good or service. 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. 42 T a b l e o f C o n t e n t s 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. 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. In determining this estimate, we consider the single most likely amount in a range of possible amounts. This estimated amount of variable consideration requires management to make a judgment based on the forecasted amount of consideration that we expect we will earn as well as the time period in which we can reasonably rely on the accuracy of the forecast. Our estimate of variable consideration is constrained to only include the amount of variable consideration for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, as the amounts that we could potentially earn in outer years can change significantly based on factors that are out of our control. If our forecasts are inaccurate, the estimated amount of variable consideration could be inaccurate which could impact our revenue recognition in a given period. Impairment of Acquired Intangible Assets and Other Long-Lived Assets We assess the impairment of acquired intangible assets and other long-lived assets at least annually and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Factors that we consider in determining when to perform an impairment review include significant negative industry or economic trends or significant changes or planned changes in the use of the assets. When measuring the recoverability of these assets, we will make assumptions regarding our estimated future cash flows expected to be generated by the assets. If our estimates or related assumptions change in the future, we may be required to impair these assets. We did not record any impairment charges related to acquired intangible assets or other long-lived assets during the years ended December 31, 2020 and 2019. Goodwill and Indefinite Lived Intangible Asset Goodwill and our indefinite lived intangible asset are tested for impairment at least annually or whenever events or changes in circumstances indicate that their carrying values may not be recoverable. We first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. In our qualitative assessment, we consider factors including economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount. Our qualitative assessment requires management to make judgments based on the factors listed above in our determination of whether events or changes in circumstances indicate that the carrying values may not be recoverable. Should we conclude that it is more likely than not that our carrying values have been impaired, we would recognize an impairment charge for the amount by which the carrying amount of goodwill and our indefinite lived intangible asset exceed our fair value. We have not recognized any goodwill or our indefinite lived intangible asset impairment charges since our inception. 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) 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 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 43 T a b l e o f C o n t e n t s 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 recognized related to PSUs 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. 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 2, “Significant Accounting Policies”, of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.