What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-22 · 113 added, 124 removed, 235 unchanged (50% of the section changed)

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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.

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, 2020, filed with the SEC on February 22, 2021, 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.

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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.”

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.

Millions of people all around the world Learn with Chegg.

Our mission is to improve learning and learning outcomes by putting students first.

We support life-long learners starting with their academic journey and extending into their careers.

The Chegg platform provides products and services to support learners to help them better understand their academic course materials, and also provides personal and professional development skills training, to help them achieve their learning goals.

Students subscribe to our subscription services, collectively referred to as our Chegg Services, which can be accessed internationally through our websites and on mobile devices.

Our primary Chegg Services include Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Busuu, Mathway and Thinkful.

Our Chegg Study subscription service provides “Expert Questions and Answers” and step-by-step “Textbook Solutions,” helping students with their course work.

When students need writing help, including plagiarism detection scans and creating citations for their papers, they can use our Chegg Writing 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.

When students need writing help, including plagiarism detection scans and creating citations for their papers, they can use our Chegg Writing subscription service.

Our Chegg Math Solver and Mathway subscription services help students understand math by providing a step-by-step math solver and calculator.

We also offer our Chegg Study Pack as a premium subscription bundle of our Chegg Study, Chegg Writing, and Chegg Math Solver services, which also includes additional features such as flashcards, concept videos, and practice questions and quizzes.

Our Thinkful skills-based learning platform offers professional courses focused on the most in-demand technology skills.

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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.

We partner with a variety of third parties to source print textbooks and eTextbooks directly or indirectly from publishers.

In January 2022, we completed our acquisition of Busuu Online S.L.

(Busuu), an online language learning company that offers a comprehensive solution through a combination of self-paced lessons, live classes with expert tutors and the ability to learn and practice with members of the Busuu language learning community.

During the years ended December 31, 2021, and 2020, we generated net revenues of $776.3 million and $644.3 million, respectively, and in the same periods had net losses of $1.5 million and $6.2 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.

As students returned to school in the fall of 2021, we started to see a slowdown in the education industry as a result of the COVID-19 pandemic, which resulted in a decline in traffic to education technology services, such as the ones we provide.

A combination of variants, increased employment opportunities and compensation, along with fatigue, all led to significantly fewer enrollments than expected.

Those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments.

As a result, we are experiencing a deceleration in the growth rates of our services and revenues that may continue.

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

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revenue from Chegg Services, uncertainty around online learning and potential restrictions imposed by traditional institutions, and other factors.

In addition, we believe that the investments we have made to achieve our current scale will allow us to drive increased operating margins over time that, together with increased contributions of Chegg Services, will enable us to sustain profitability and remain cash-flow positive in the long-term.

Our ability to achieve these long-term objectives is subject to numerous risks and uncertainties, including our ability to attract, retain, and increasingly engage the student population, reduced traffic to our services, intense competition in our markets, the

ability to achieve sufficient contributions to revenue from Chegg Services, and other factors, such as the COVID-19 pandemic, which continues to evolve and affect our business and results of operations.

The COVID-19 pandemic subjects our business to numerous risks and uncertainties, most of which are beyond our control and cannot be predicted, including when colleges will resume in-person classes or how well they will overcome the impacts of the COVID-19 pandemic on enrollment and other factors.

These risks and uncertainties are described in greater detail in Part I, Item 1A, “Risk Factors.”

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Chegg Services

Our Chegg Services product line for students primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Thinkful, and Mathway.

Our Chegg Services product line for students primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Busuu, Mathway and Thinkful.

Students typically pay to access Chegg Services on a monthly basis.

We also work with leading brands to provide students with discounts, promotions, and other products that, based on student feedback, delight them.

In the aggregate, Chegg Services revenues were 81% of net revenues during each of the years ended December 31, 2020 and 2019.

In the aggregate, Chegg Services revenues were 86% and 81% of net revenues during the years ended December 31, 2021 and 2020, respectively.

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.

Revenues from print textbooks that we own are primarily recognized as the total transaction amount ratably over the rental term, generally a two- to five-month period.

Revenues from print textbooks owned by a partner are recognized as a revenue share on the total transactional amount immediately when a print textbook ships to a student.

Additionally, Required Materials includes revenues from eTextbooks, which are primarily recognized ratably over the contractual period, generally a two-to five-month period.

In the aggregate, Required Materials revenues were 14% and 19% of net revenues during the years ended December 31, 2021 and 2020, respectively.

Seasonality of Our Business

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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 our Chegg Services product line primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Mathway and Thinkful.

Revenues from Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, and Mathway are primarily recognized ratably over the 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.

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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

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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 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.

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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.

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, web hosting fees, customer support fees, payment processing costs, amortization of acquired intangible assets, 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.

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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.

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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.

Research and development costs also include technology costs to support our research and development, and outside services.

We expense substantially all of our research and development expenses as they are incurred.

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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.

We incur salaries, benefits and share-based compensation expenses for our employees engaged in marketing, business development and sales and sales support functions, and amortization of acquired intangible assets.

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.

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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.

In addition, general and administrative expenses include outside services, legal and accounting services, and depreciation expense.

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.

Interest expense, net consists primarily of interest expense on the amortization of debt issuance costs related to the convertible senior notes.

Other income, net consists primarily of interest income, losses on early extinguishment of the convertible senior notes, loss on the change in fair value of derivative instruments and gains on the sale of our strategic equity investments.

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.

Provision for income taxes consists primarily of state income taxes in the United States, the withholding taxes related to the sale of our strategic equity investment, 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.

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159,019 20 129,349 20

Restructuring charges — — 97 —

Total operating expenses 443,254 57 382,168 59

Income from operations 78,107 10 56,753 9

Total interest expense, net and other income, net (57,614) (9) (24,788) (6)

Loss before provision for income taxes (861) — (6,971) (1)

Total interest expense, net and other (expense) income, net (72,368) (9) (57,614) (9)

Income (loss) before provision for income taxes 5,739 1 (861) —

Provision for income taxes 7,197 (1) 5,360 (1)

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Total share-based compensation expense $ 108,846 $ 84,055

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Years Ended December 31, 2021 and 2020

Net revenues during the year ended December 31, 2021 increased $131.9 million, or 20%, compared to the same period in 2020.

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 2021

Change in 2019

2021 2020 $ %

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Total net revenues $ 776,265 $ 644,338 $ 131,927 20

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 increased by $148.7 million, or 29%, during the year ended December 31, 2021, compared to the same period in 2020.

The increase was primarily due to our efforts to reduce account sharing, increased global awareness and penetration and the introduction of enhanced offerings, including our acquisition of Mathway, which closed in June 2020.

Chegg Services revenues represented 86% and 81% of net revenues during the years ended December 31, 2021 and 2020, 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 decreased by $16.7 million, or 14%, during the year ended December 31, 2021 compared to the same period in 2020.

The decrease was primarily due to lower unit volumes driven by decreased college enrollments and various print textbook logistics challenges.

Required Materials revenues represented 14% and 19% of net revenues during the years ended December 31, 2021 and 2020, respectively.

Years Ended December 31, 2020 and 2019

Cost of Revenues

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$ 1,621 $ 950 $ 671 71 %

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

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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.

Cost of revenues during the year ended December 31, 2021 increased by $49.5 million, or 24%, compared to the same period in 2020.

The increase was primarily attributable to higher other depreciation and amortization expense of $21.5 million, higher net loss on textbook library of $12.4 million primarily due to increased write-downs, higher web hosting fees of $7.5 million, transitional logistics charges of $7.3 million incurred in conjunction with the transition of our print textbooks to a new third party logistics provider, higher payment processing fees of $4.3 million, higher cost of textbooks purchased by students of $3.5 million, higher employee-related expenses, including share-based compensation expense, of $2.0 million, and higher customer support fees of $1.7 million, partially offset by lower order fulfillment fees of $5.4 million and lower print textbook depreciation of $4.5 million.

Gross margins decreased to 67% in the year ended December 31, 2021, from 68% during the same period in 2020.

Operating Expenses

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159,019 129,349 29,670 23

Restructuring charges — 97 (97) n/m

Total operating expenses $ 443,254 $ 382,168 $ 61,086 16

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Share-based compensation expense $ 107,225 $ 83,105 $ 24,120 29

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Research and Development

Research and development expenses during the year ended December 31, 2021 increased by $7.9 million, or 5%, compared to the same period in 2020.

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.

The increase was primarily attributable to higher employee-related expenses, including share-based compensation expense, of $9.0 million.

Research and development expenses as a percentage of net revenues were 23% during the year ended December 31, 2021 compared to 26% of net revenues during the same period in 2020.

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Sales and marketing expenses during the year ended December 31, 2021 increased by $23.5 million, or 29%, compared to the same period in 2020.

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.

The increase was primarily attributable to increased marketing spend, including expansion in international markets, of $15.1 million and higher employee-related expenses, including share-based compensation expense, of $6.2 million.

Sales and marketing expenses as a percentage of net revenues were 14% during the year ended December 31, 2021 compared to 13% of net revenues during the same period in 2020.

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General and administrative expenses in the year ended December 31, 2021 increased by $29.7 million, or 23%, compared to the same period in 2020.

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.

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The increase was primarily due to higher employee-related expenses, including share-based compensation expense, of $23.9 million and increased professional fees of $11.9 million, partially offset by a one-time 2020 impairment charge on our investment in WayUp of $10.0 million.

General and administrative expenses as a percentage of net revenues were flat at 20% during the years ended December 31, 2021 and 2020.

Interest Expense, Net and Other Income, Net

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Interest expense, net $ (6,896) $ (66,297) $ 59,401 (90) %

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.

Other (expense) income, net (65,472) 8,683 (74,155) n/m

Total interest expense, net and other (expense) income, net $ (72,368) $ (57,614) $ (14,754) 26

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Interest expense, net decreased by $59.4 million, or 90%, during the year ended December 31, 2021, compared to the same period in 2020.

The decrease was primarily due to the reduction in non-cash interest expense related to the debt discount as a result of the adoption of ASU 2020-06 on January 1, 2021.

Other income, net, decreased by $74.2 million during the year ended December 31, 2021, compared to the same period in 2020.

The decrease was primarily due to the $78.2 million loss on early extinguishment of debt related to the 2025 notes, $7.1 million net loss on the change in fair value of derivative instruments, and $6.1 million of lower interest income earned on our investments partially offset by the $12.5 million gain on the sale of our strategic equity investments and absence of the $4.3 million loss on early extinguishment of debt related to the partial exchange of the 2023 notes.

See Note 10, “Convertible Senior Notes,” 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 for additional information on changes to interest expense, net related to the adoption of ASU 2020-06 and other (expense) income, net related to the losses on early extinguishment of debt and the change in fair value of derivative instruments.

Provision for Income Taxes

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Provision for income taxes $ 7,197 $ 5,360 $ 1,837 34 %

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.

The provision for income taxes increased during the year ended December 31, 2021, compared to the same period in 2020.

The increase was primarily due to an increase in foreign profits and the withholding taxes related to the March 2021 sale of our strategic equity investment, partially offset by foreign deferred tax benefit.

Liquidity and Capital Resources

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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.

In January 2022, we completed our acquisition of Busuu Online S.L.

In November 2021, our board of directors approved a $500.0 million increase to our existing securities repurchase program authorizing the repurchase of up to $1.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements.

The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors.

Through 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.

During the year ended December 31, 2021, we entered into an accelerated share repurchase program for $300.0 million and repurchased $100.0 million of aggregate principal amount of the 2025 notes in privately-negotiated transactions for an aggregate consideration of $184.9 million.

During the year ended December 31, 2020, we repurchased $57.4 million of aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $149.6 million.

As of December 31, 2021, $365.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.

In February 2021, we completed an equity offering in which we raised net proceeds of $1,091.5 million, after deducting underwriting discounts, commissions and offering expenses (2021 equity offering).

In August 2020 and March/April 2019, we closed offerings of our 2026 notes and 2025 notes, generating net proceeds of approximately $984.1 million and $780.2 million, respectively, in each case after deducting the initial purchasers’ discount and estimated offering expenses payable by us.

The 2026 notes and 2025 notes mature on September 1, 2026 and March 15, 2025, respectively, unless converted, redeemed, or repurchased in accordance with their terms prior to such dates.

As of December 31, 2021, we have incurred cumulative losses of $337.2 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.

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Our operations have been financed primarily by our initial public offering of our common stock (IPO), our 2017 follow-on public offering, our convertible senior notes offerings, our 2021 equity offering, and cash generated from operations.

The following table is a summary of our contractual obligations and other commitments as of December 31, 2021 (in thousands):

Less than More than

Total 1 Year 1-3 Years 3-5 Years 5 Years

Convertible senior notes (1)

$ 1,703,044 $ 875 $ 1,750 $ 1,700,419 $ —

Purchase obligations (2)

79,624 41,326 35,638 2,660 —

Operating lease obligations (3)

21,035 7,435 8,158 3,692 1,750

Total contractual obligations $ 1,803,703 $ 49,636 $ 45,546 $ 1,706,771 $ 1,750

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(1) Includes semi-annual cash interest payments of $0.4 million.

Our convertible senior notes are recorded on our consolidated balance sheets at the carrying amount of $1,678.2 million as of December 31, 2021.

(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 $4.9 million related to uncertain tax positions as of December 31, 2021.

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.

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.

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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.

Most of our cash, cash equivalents, and investments are held in the United States.

As of December 31, 2021, our foreign subsidiaries held an insignificant amount of cash in foreign jurisdictions.

We currently do not intend or foresee a need to repatriate some of these foreign funds, however, as a result of the Tax Cuts and Jobs Act we anticipate the U.S.

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.

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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.

Although we incurred net losses during the years ended December 31, 2021 and 2020, our net losses were fully offset by non-cash expenditures, such as depreciation and amortization expense, share-based compensation expense, loss on extinguishments of debt, and amortization of debt discount and issuance costs.

Net cash provided by operating activities during the year ended December 31, 2021 was $273.2 million.

Our net loss of $1.5 million was offset by significant non-cash operating expenses including share-based compensation expense of $108.8 million, the loss on early extinguishment of debt of $78.2 million, other depreciation and amortization expense of $63.3 million, the net loss on textbook library of $11.0 million, which was primarily due to increased write-downs, print textbook depreciation expense of $10.9 million, the net loss on the change in fair value of derivative instruments of $7.1 million, operating lease expense, net of accretion, of $6.0 million, and amortization of debt issuance costs of $5.9 million, partially offset by the gain on sale of our strategic equity investments of $12.5 million.

Net cash provided by operating activities during the 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, 2021 was $365.8 million and was related to the purchases of investments of $1.7 billion, purchases of property and equipment of $94.2 million, purchases of textbooks of $10.9 million, and the acquisition of business of $7.9 million, offset by the maturity of investments of $1.2 billion, proceeds from sale of investments of $206.0 million, proceeds from the sale of our equity investments of $16.1 million and proceeds from disposition of textbooks of $8.7 million.

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.

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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.

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 convertible senior 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, 2021 was $466.7 million and was related to the net proceeds from our equity offering of $1,091.5 million, proceeds from 2023 notes and 2025 notes capped call instruments of $69.0 million, and the proceeds from the issuance of common stock under stock plans of $8.9 million, offset by the repayment of a portion of our convertible senior notes of $300.8 million, repurchase of common stock of $300.0 million, payment of $94.4 million in taxes related to the net share settlement of equity awards, and payment of escrow related to an acquisition of $7.5 million.

Net cash provided by financing activities during the 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

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(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

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The current COVID-19 pandemic has caused uncertainty and disruption in the global economy and financial markets.

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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.

We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities.

These estimates may change as new events occur and additional information is obtained.

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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.

For sales of third-party products, we evaluate whether we are acting as a principal or an agent.

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.

Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer.

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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.

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.

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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 measure and recognize share-based compensation expense for all awards made to employees, directors and consultants, including restricted stock units (RSUs), performance-based RSUs (PSUs) with either a market-based condition or financial and strategic performance target and our employee stock purchase plan (ESPP) based on estimated fair values.

We estimate a forfeiture rate to calculate the share-based compensation expense related to our awards.

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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

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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.

If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in the financial statements.

Share-based compensation expense for PSUs with a market-based condition is recognized regardless of whether the market condition is satisfied subject to continuing service over the requisite service period.

Share-based compensation expense recognized related to PSUs with a financial and strategic performance target is subject to the achievement of performance objectives and requires significant judgment by management in determining the current level of attainment of such performance objectives.

Management may consider factors such as the latest revenue forecasts and general business trends in the assessment of whether or not a PSU award will be obtained.

Subsequent changes to these considerations may have a material impact on the amount of share-based compensation expense recognized in the period related to PSU awards, which may lead to volatility of share-based compensation expense period-to-period.

If the performance objectives are not met or service is no longer provided, no share-based compensation expense will be recognized, and any previously recognized share-based compensation expense will be reversed.

We will continue to use judgment in evaluating the assumptions related to our share-based compensation expense on a prospective basis.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis