CHEGG, INC 10-Q

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CHEGG, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except for number of shares and par value) (unaudited) September 30, 2022 December 31, 2021 Assets Current assets Cash and cash equivalents $ 69,349 $ 854,078 Short-term investments 871,408 691,781 Accounts receivable, net of allowance of $ 298 and $ 153 at September 30, 2022 and December 31, 2021, respectively 22,187 17,850 Prepaid expenses 33,441 35,093 Other current assets 35,196 23,846 Total current assets 1,031,581 1,622,648 Long-term investments 286,781 745,993 Textbook library, net — 11,241 Property and equipment, net 202,362 169,938 Goodwill 589,702 289,763 Intangible assets, net 80,646 40,566 Right of use assets 18,144 18,062 Deferred tax assets 166,965 1,365 Other assets 21,680 19,670 Total assets $ 2,397,861 $ 2,919,246 Liabilities and stockholders' equity Current liabilities Accounts payable $ 14,902 $ 11,992 Deferred revenue 60,475 35,143 Accrued liabilities 68,096 67,209 Total current liabilities 143,473 114,344 Long-term liabilities Convertible senior notes, net 1,187,513 1,678,155 Long-term operating lease liabilities 12,347 12,447 Other long-term liabilities 7,996 7,383 Total long-term liabilities 1,207,856 1,697,985 Total liabilities 1,351,329 1,812,329 Commitments and contingencies (Note 9) Stockholders' equity: Preferred stock, $ 0.001 par value per share, 10,000,000 shares authorized, no shares issued and outstanding — — Common stock, $ 0.001 par value per share: 400,000,000 shares authorized; 125,423,860 and 136,951,956 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively 125 137 Additional paid-in capital 1,220,688 1,449,305 Accumulated other comprehensive loss ( 101,870 ) ( 5,334 ) Accumulated deficit ( 72,411 ) ( 337,191 ) Total stockholders' equity 1,046,532 1,106,917 Total liabilities and stockholders' equity $ 2,397,861 $ 2,919,246 See Notes to Condensed Consolidated Financial Statements. 4 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net revenues $ 164,739 $ 171,942 $ 561,704 $ 568,798 Cost of revenues 45,203 67,102 145,972 199,194 Gross profit 119,536 104,840 415,732 369,604 Operating expenses: Research and development 45,426 43,269 150,321 130,995 Sales and marketing 31,803 27,239 109,580 75,139 General and administrative 53,742 33,971 154,547 111,560 Total operating expenses 130,971 104,479 414,448 317,694 (Loss) income from operations ( 11,435 ) 361 1,284 51,910 Interest expense, net and other income (expense), net: Interest expense, net ( 1,525 ) ( 1,633 ) ( 4,738 ) ( 5,263 ) Other income (expense), net 97,258 8,670 105,247 ( 66,618 ) Total interest expense, net and other income (expense), net 95,733 7,037 100,509 ( 71,881 ) Income (loss) before benefit from (provision for) income taxes 84,298 7,398 101,793 ( 19,971 ) Benefit from (provision for) income taxes 167,264 ( 747 ) 162,987 ( 5,793 ) Net income (loss) $ 251,562 $ 6,651 $ 264,780 $ ( 25,764 ) Net income (loss) per share Basic $ 1.99 $ 0.05 $ 2.07 $ ( 0.18 ) Diluted $ 1.23 $ 0.05 $ 1.31 $ ( 0.18 ) Weighted average shares used to compute net income (loss) per share Basic 126,132 144,746 128,166 140,775 Diluted 148,045 146,699 151,221 140,775 See Notes to Condensed Consolidated Financial Statements. 5 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income (loss) $ 251,562 $ 6,651 $ 264,780 $ ( 25,764 ) Other comprehensive loss Change in net unrealized loss on investments, net of tax ( 1,946 ) ( 455 ) ( 17,196 ) ( 1,974 ) Change in foreign currency translation adjustments, net of tax ( 31,056 ) ( 127 ) ( 79,340 ) ( 1,108 ) Other comprehensive loss ( 33,002 ) ( 582 ) ( 96,536 ) ( 3,082 ) Total comprehensive income (loss) $ 218,560 $ 6,069 $ 168,244 $ ( 28,846 ) See Notes to Condensed Consolidated Financial Statements. 6 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited) Three Months Ended September 30, 2022 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Balances at June 30, 2022 126,344 $ 126 $ 1,211,506 $ ( 68,868 ) $ ( 323,973 ) $ 818,791 Repurchases of common stock ( 1,147 ) ( 1 ) ( 23,077 ) — — ( 23,078 ) Net share settlement of equity awards 227 — ( 2,555 ) — — ( 2,555 ) Share-based compensation expense — — 34,814 — — 34,814 Other comprehensive loss — — — ( 33,002 ) — ( 33,002 ) Net income — — — — 251,562 251,562 Balances at September 30, 2022 125,424 $ 125 $ 1,220,688 $ ( 101,870 ) $ ( 72,411 ) $ 1,046,532 Three Months Ended September 30, 2021 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Balances at June 30, 2021 144,621 $ 145 $ 1,706,855 $ ( 970 ) $ ( 368,148 ) $ 1,337,882 Issuance of common stock upon exercise of stock options and ESPP 14 — 106 — — 106 Net share settlement of equity awards 266 — ( 14,697 ) — — ( 14,697 ) Share-based compensation expense — — 25,157 — — 25,157 Other comprehensive loss — — — ( 582 ) — ( 582 ) Net income — — — — 6,651 6,651 Balances at September 30, 2021 144,901 $ 145 $ 1,717,421 $ ( 1,552 ) $ ( 361,497 ) $ 1,354,517 Nine Months Ended September 30, 2022 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Balances at December 31, 2021 136,952 $ 137 $ 1,449,305 $ ( 5,334 ) $ ( 337,191 ) $ 1,106,917 Repurchases of common stock ( 12,709 ) ( 13 ) ( 323,515 ) — — ( 323,528 ) Issuance of common stock upon exercise of stock options and ESPP 319 — 4,557 — — 4,557 Net share settlement of equity awards 862 1 ( 12,776 ) — — ( 12,775 ) Share-based compensation expense — — 103,117 — — 103,117 Other comprehensive loss — — — ( 96,536 ) — ( 96,536 ) Net income — — — — 264,780 264,780 Balances at September 30, 2022 125,424 $ 125 $ 1,220,688 $ ( 101,870 ) $ ( 72,411 ) $ 1,046,532 7 Table of Contents Nine Months Ended September 30, 2021 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Balances at December 31, 2020 129,344 $ 129 $ 1,030,577 $ 1,530 $ ( 422,601 ) $ 609,635 Cumulative-effect adjustment related to adoption of ASU 2020-06 — — ( 465,006 ) — 86,868 ( 378,138 ) Issuance of common stock in connection with equity offering, net of offering costs 10,975 11 1,091,455 — — 1,091,466 Equity component on conversions of 2023 notes and 2025 notes — — ( 236,920 ) — — ( 236,920 ) Issuance of common stock upon conversions of 2023 notes 2,983 3 235,518 — — 235,521 Net proceeds from capped call related to conversions of 2023 notes and 2025 notes — — 67,769 — — 67,769 Issuance of common stock upon exercise of stock options and ESPP 178 — 5,371 — — 5,371 Net share settlement of equity awards 1,421 2 ( 89,339 ) — — ( 89,337 ) Share-based compensation expense — — 77,996 — — 77,996 Other comprehensive loss — — — ( 3,082 ) — ( 3,082 ) Net loss — — — — ( 25,764 ) ( 25,764 ) Balances at September 30, 2021 144,901 $ 145 $ 1,717,421 $ ( 1,552 ) $ ( 361,497 ) $ 1,354,517 See Notes to Condensed Consolidated Financial Statements. 8 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities Net income (loss) $ 264,780 $ ( 25,764 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Print textbook depreciation expense 1,610 9,024 Other depreciation and amortization expense 64,295 46,273 Share-based compensation expense 98,341 76,157 Amortization of debt issuance costs 4,084 4,509 Gain on foreign currency remeasurement of purchase consideration ( 4,628 ) — Impairment on lease related assets 3,411 — (Gain) loss on early extinguishment of debt ( 93,519 ) 78,152 Loss on change in fair value of derivative instruments, net — 7,148 Loss from write-off of property and equipment 3,117 1,857 Tax benefit related to release of valuation allowance ( 174,601 ) — Deferred income taxes 6,376 563 Gain on sale of strategic equity investment — ( 12,496 ) (Gain) loss on textbook library, net ( 4,976 ) 8,765 Operating lease expense, net of accretion 4,746 4,527 Restructuring charges — 1,851 Other non-cash items 619 ( 65 ) Change in assets and liabilities, net of effect of acquisition of businesses: Accounts receivable ( 2,259 ) 3,593 Prepaid expenses and other current assets 13,251 ( 31,070 ) Other assets 15,926 9,472 Accounts payable ( 1,728 ) 1,820 Deferred revenue 11,434 17,363 Accrued liabilities ( 23,323 ) 10,552 Other liabilities ( 5,240 ) ( 4,108 ) Net cash provided by operating activities 181,716 208,123 Cash flows from investing activities Purchases of property and equipment ( 79,242 ) ( 67,126 ) Purchases of textbooks ( 3,815 ) ( 10,666 ) Proceeds from disposition of textbooks 2,503 7,815 Purchases of investments ( 534,008 ) ( 1,574,060 ) Maturities of investments 783,912 893,315 Purchase of strategic equity investment ( 6,000 ) — Proceeds from sale of strategic equity investment — 16,076 Acquisition of businesses, net of cash acquired ( 401,125 ) ( 7,891 ) Net cash used in investing activities ( 237,775 ) ( 742,537 ) Cash flows from financing activities Proceeds from common stock issued under stock plans, net 4,558 5,373 Payment of taxes related to the net share settlement of equity awards ( 12,776 ) ( 89,339 ) Proceeds from equity offering, net of offering costs — 1,091,466 Repayment of convertible senior notes ( 401,203 ) ( 300,755 ) Proceeds from exercise of convertible senior notes capped call — 69,005 Repurchases of common stock ( 323,528 ) — Payment of escrow related to acquisition — ( 7,451 ) Net cash (used in) provided by financing activities ( 732,949 ) 768,299 Effect of exchange rate changes 4,628 — Net (decrease) increase in cash, cash equivalents and restricted cash ( 784,380 ) 233,885 Cash, cash equivalents and restricted cash, beginning of period 855,893 481,715 Cash, cash equivalents and restricted cash, end of period $ 71,513 $ 715,600 Nine Months Ended September 30, 2022 2021 Supplemental cash flow data: Cash paid during the period for: Interest $ 875 $ 1,053 Income taxes, net of refunds $ 5,530 $ 5,610 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 6,908 $ 5,934 Right of use assets obtained in exchange for lease obligations: Operating leases $ 7,603 $ — Non-cash investing and financing activities: Accrued purchases of long-lived assets $ 4,101 $ 1,837 Issuance of common stock related to repayment of convertible senior notes $ — $ 235,521 September 30, 2022 2021 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 69,349 $ 713,837 Restricted cash included in other current assets 63 — Restricted cash included in other assets 2,101 1,763 Total cash, cash equivalents and restricted cash $ 71,513 $ 715,600 See Notes to Condensed Consolidated Financial Statements. 9 Table of Contents CHEGG, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Background and Basis of Presentation Company and Background Chegg, Inc. (Chegg, the Company, we, us, or our), headquartered in Santa Clara, California, was incorporated as a Delaware corporation in July 2005. 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. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated financial statements include the results of Chegg, Inc. and its wholly-owned subsidiaries. Significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2022, our results of operations, results of comprehensive income (loss), and stockholders' equity for the three and nine months ended September 30, 2022 and 2021 and cash flows for the nine months ended September 30, 2022 and 2021. Our results of operations, results of comprehensive income (loss), stockholders' equity, and cash flows for the nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year. We have a single operating and reportable segment and operating unit structure. The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the Annual Report on Form 10-K) filed with the SEC. There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities; the disclosure of contingent liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience, knowledge of current business conditions, and various other factors we believe to be reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ from these estimates, and such differences could be material to our financial position and results of operations. There have been no material changes in our use of estimates during the nine months ended September 30, 2022 as compared to the use of estimates disclosed in Part II, Item 8 “Consolidated Financial Statements and Supplementary Data” contained in our Annual Report on Form 10-K for the year ended December 31, 2021. 10 Table of Contents Condensed Consolidated Statements of Operations Details Other income (expense), net consists of the following (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Gain (loss) on early extinguishment of debt (1) $ 93,519 $ — $ 93,519 $ ( 78,152 ) Loss on change in fair value of derivative instruments, net — — — ( 7,148 ) Gain on sale of strategic equity investments — 7,158 — 12,496 Gain on foreign currency remeasurement of purchase consideration (2) — — 4,628 — Interest income 3,737 1,485 7,246 5,385 Other 2 27 ( 146 ) 801 Total other income (expense), net $ 97,258 $ 8,670 $ 105,247 $ ( 66,618 ) (1) For further information, see Note 8, “Convertible Senior Notes.” (2) For further information, see Note 5, “Acquisition.” Impairment of Lease Related Assets Right of use (ROU) assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During the nine months ended September 30, 2022, we announced the closure of our San Francisco office and determined that the carrying amount of the ROU asset was not recoverable. As a result, we recorded an impairment charge of $ 3.4 million, consisting of a $ 2.0 million impairment of a ROU asset and $ 1.4 million write-off of leasehold improvements, included in general and administrative expense on our condensed consolidated statement of operations. Our intent and ability to sublease the office as well as the local market conditions were factored in when measuring the amount of impairment. Recent Accounting Pronouncements Recently Issued Accounting Pronouncements Not Yet Adopted There were no accounting pronouncements issued during the nine months ended September 30, 2022 that would have an impact on our financial statements. Recently Adopted Accounting Pronouncements In October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-08, Business Combinations-Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). The new guidance requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Accounting Standards Codification (ASC) Topic 606 as if the acquirer had originated the contracts. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. We early adopted ASU 2021-08 on January 1, 2022 and applied it to our acquisition of Busuu. The most significant impacts were an increase in contract liabilities, contained within deferred revenue, and goodwill. In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 aims to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange based on the economic substance of the modification or exchange. Early adoption is permitted and the guidance must be applied prospectively to all modifications or exchanges that occur on or after the date of adoption. The guidance is effective for annual periods beginning after December 15, 2021. We adopted ASU 2021-04 on January 1, 2022 under the prospective method of adoption and there was no impact to our results of operations as we did not modify or exchange any freestanding equity-classified written call options. 11 Table of Contents Note 2. Revenues Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The majority of our revenues are recognized over time as services are performed, with certain revenues being recognized at a point in time. The following tables set forth our total net revenues for the periods shown disaggregated for our Chegg Services and Required Materials product lines (in thousands, except percentages): Three Months Ended September 30, Change 2022 2021 $ % Chegg Services $ 159,264 $ 146,790 $ 12,474 8 % Required Materials 5,475 25,152 ( 19,677 ) ( 78 ) Total net revenues $ 164,739 $ 171,942 $ ( 7,203 ) ( 4 ) Nine Months Ended September 30, Change 2022 2021 $ % Chegg Services $ 533,152 $ 482,654 $ 50,498 10 % Required Materials 28,552 86,144 ( 57,592 ) ( 67 ) Total net revenues $ 561,704 $ 568,798 $ ( 7,094 ) ( 1 ) During the three and nine months ended September 30, 2022, we recognized $ 35.2 million and $ 33.8 million, respectively, of revenues that were included in our deferred revenue balance at the beginning of each respective reporting period. During the three and nine months ended September 30, 2021 we recognized $ 31.3 million and $ 32.6 million, respectively, of revenues that were included in our deferred revenue balance at the beginning of each respective reporting period. During the three and nine months ended September 30, 2022, we recognized no operating lease income and $ 5.1 million of operating lease income, respectively, from print textbook rentals that we owned. During the three and nine months ended September 30, 2021, we recognized $ 6.2 million and $ 26.9 million, respectively, of operating lease income from print textbook rentals that we owned. The decreases in operating lease income are primarily due to the transition of our Required Materials product line. For further information, refer to Note 7, “Required Materials Transition.” Contract Balances The following table presents our accounts receivable, net, contract assets and deferred revenue balances (in thousands, except percentages): Change September 30, 2022 December 31, 2021 $ % Accounts receivable, net $ 22,187 $ 17,850 $ 4,337 24 % Contract assets 12,710 14,231 ( 1,521 ) ( 11 ) Deferred revenue 60,475 35,143 25,332 72 During the nine months ended September 30, 2022 our accounts receivable, net balance increased by $ 4.3 million, or 24 %, primarily due to timing of billings and seasonality of our business. During the nine months ended September 30, 2022, our contract assets balance decreased by $ 1.5 million, or 11 %, primarily due to our Thinkful service. During the nine months ended September 30, 2022, our deferred revenue balance increased by $ 25.3 million, or 72 %, primarily due to acquired deferred revenue in conjunction with our acquisition of Busuu, increased bookings, and seasonality of our business. 12 Table of Contents Note 3. Net Income (Loss) Per Share The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Basic Numerator: Net income (loss) $ 251,562 $ 6,651 $ 264,780 $ ( 25,764 ) Denominator: Weighted average shares used to compute net income (loss) per share, basic 126,132 144,746 128,166 140,775 Net income (loss) per share, basic $ 1.99 $ 0.05 $ 2.07 $ ( 0.18 ) Diluted Numerator: Net income (loss) $ 251,562 $ 6,651 $ 264,780 $ ( 25,764 ) Convertible senior notes activity, net of tax (1) ( 69,042 ) — ( 66,630 ) — Net income (loss), diluted $ 182,520 $ 6,651 $ 198,150 $ ( 25,764 ) Denominator: Weighted average shares used to compute net income (loss) per share, basic 126,132 144,746 128,166 140,775 Shares related to stock plan activity 504 1,953 674 — Shares related to convertible senior notes 21,409 — 22,381 — Weighted average shares used to compute net income (loss) per share, diluted 148,045 146,699 151,221 140,775 Net income (loss) per share, diluted $ 1.23 $ 0.05 $ 1.31 $ ( 0.18 ) (1) Includes the gain on early extinguishment on our 2026 notes and interest expense on our notes, net of tax. For further information, see Note 8, “Convertible Senior Notes.” The following potential weighted-average shares of common stock outstanding were excluded from the computation of diluted net income (loss) per share because including them would have been anti-dilutive (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Shares related to stock plan activity 7,534 849 4,148 2,727 Shares related to convertible senior notes — 22,875 — 23,876 Total common stock equivalents 7,534 23,724 4,148 26,603 13 Table of Contents Note 4. Cash and Cash Equivalents, and Investments and Fair Value Measurements The following tables show our cash and cash equivalents, and investments’ fair value level classification, adjusted cost, unrealized gain, unrealized loss and fair value as of September 30, 2022 and December 31, 2021 (in thousands except for fair value levels): September 30, 2022 Fair Value Level Adjusted Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 35,131 $ — $ — $ 35,131 Money market funds Level 1 34,218 — — 34,218 Total cash and cash equivalents $ 69,349 $ — $ — $ 69,349 Short-term investments: Commercial paper Level 2 $ 11,720 $ — $ ( 114 ) $ 11,606 Corporate debt securities Level 2 770,221 ( 12,945 ) 757,276 U.S. treasury securities Level 1 104,671 — ( 2,145 ) 102,526 Total short-term investments $ 886,612 $ — $ ( 15,204 ) $ 871,408 Long-term investments: Corporate debt securities Level 2 $ 156,687 $ — $ ( 4,065 ) $ 152,622 U.S. treasury securities Level 1 101,890 — ( 1,907 ) 99,983 Agency bonds Level 2 34,119 57 — 34,176 Total long-term investments $ 292,696 $ 57 $ ( 5,972 ) $ 286,781 December 31, 2021 Fair Value Level Adjusted Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 30,324 $ — $ — $ 30,324 Money market funds Level 1 823,754 — — 823,754 Total cash and cash equivalents $ 854,078 $ — $ — $ 854,078 Short-term investments: Commercial paper Level 2 $ 124,211 $ 2 $ ( 33 ) $ 124,180 Corporate debt securities Level 2 552,609 36 ( 546 ) 552,099 Agency bonds Level 2 15,500 2 — 15,502 Total short-term investments $ 692,320 $ 40 $ ( 579 ) $ 691,781 Long-term investments: Corporate debt securities Level 2 $ 724,517 $ — $ ( 3,277 ) $ 721,240 U.S. treasury securities Level 1 24,860 — ( 107 ) 24,753 Total long-term investments $ 749,377 $ — $ ( 3,384 ) $ 745,993 As of September 30, 2022, we determined that the declines in the market value of our investment portfolio were not driven by credit related factors. During the three and nine months ended September 30, 2022 and 2021 we did not recognize any losses on our investments due to credit related factors. During the three and nine months ended September 30, 2022 and 2021, our realized gains and losses on investments were not significant. 14 Table of Contents The following table shows our cash equivalents and investments' adjusted cost and fair value by contractual maturity as of September 30, 2022 (in thousands): Adjusted Cost Fair Value Due in 1 year or less $ 886,612 $ 871,408 Due in 1-2 years 292,696 286,781 Investments not due at a single maturity date 34,218 34,218 Total $ 1,213,526 $ 1,192,407 Investments not due at a single maturity date in the preceding table consisted of money market funds. Strategic Investment In July 2022, we completed an investment of $ 6.0 million in Knack Technologies, Inc. (Knack), a privately held U.S. based peer-to-peer tutoring platform for higher education institutions. We do not have the ability to exercise significant influence over Knack's operating and financial policies and have elected to account for our investment at cost as it does not have a readily determinable fair value. We did not record any impairment charges during the three months ended September 30, 2022, as there were no significant identified events or changes in circumstances that would be considered an indicator for impairment. There were no observable price changes in orderly transactions for the identical or similar investments of the same issuer during the three months ended September 30, 2022. Financial Instruments Not Recorded at Fair Value on a Recurring Basis We report our financial instruments at fair value with the exception of the notes. The estimated fair value of the notes was determined based on the trading price of the notes as of the last day of trading for the period. We consider the fair value of the notes to be a Level 2 measurement due to the limited trading activity. The estimated fair value of the 2026 notes as of September 30, 2022 and December 31, 2021 was $ 370.0 million and $ 840.0 million, respectively. The estimated fair value of the 2025 notes as of September 30, 2022 and December 31, 2021 was $ 595.0 million and $ 682.2 million, respectively. For further information on the notes, refer to Note 8, “Convertible Senior Notes.” 15 Table of Contents Note 5. Acquisition On January 13, 2022, we completed our acquisition of 100 % of the outstanding shares of Busuu Online S.L (Busuu) in cash, 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. The acquisition helps to expand our existing offerings and global reach through language learning, allowing us to drive further into international markets. The following table presents the preliminary allocation of purchase consideration recorded on our condensed consolidated balance sheet as of the acquisition date (in thousands): Busuu Cash and cash equivalents $ 20,525 Accounts receivable 2,446 Right of use assets 2,715 Other acquired assets 3,710 Acquired intangible assets 71,600 Total identifiable assets acquired 100,996 Accounts payable ( 5,174 ) Accrued liabilities (1) ( 21,964 ) Deferred revenue ( 16,761 ) Long term operating lease liabilities ( 2,038 ) Other long-term liabilities (1) ( 1,646 ) Net identifiable assets acquired 53,413 Goodwill 368,237 Total fair value of purchase consideration $ 421,650 (1) During the three months ended June 30, 2022, we recorded a $ 0.8 million decrease to accrued liabilities and a $ 1.7 million increase to other long-term liabilities as a result of measurement period adjustments to the fair value of the initial liabilities related to taxes. The estimates and assumptions regarding the fair value of certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes, and goodwill are subject to change as we obtain additional information during the measurement period, which usually lasts for up to one year from the acquisition date. Goodwill is primarily attributable to the potential for expanding our offerings to include an online language learning platform and global reach allowing us to drive further into international markets. Substantially all of the amounts recorded for intangible assets and goodwill are deductible for tax purposes. The following table presents the details of the allocation of purchase consideration to the acquired intangible assets (in thousands, except weighted-average amortization period): Busuu Amount Weighted-Average Amortization Period (in months) Trade name $ 4,600 72 Customer lists 18,000 24 Developed technology 49,000 84 Total acquired intangible assets $ 71,600 68 During the nine months ended September 30, 2022 and year ended December 31, 2021, we incurred acquisition-related expenses of $ 0.6 million and $ 5.3 million, respectively, associated with our acquisition of Busuu, which have been included in general and administrative expense on our condensed consolidated statement of operations. 16 Table of Contents The purchase consideration was paid in Euros, which is different from our functional currency of United States Dollars. We initially funded an equivalent of $ 417.0 million that was remeasured at $ 421.7 million at closing, which is included in our statement of cash flows as a cash outflow from investing activities net of cash acquired, resulting in a $ 4.6 million gain included in other income (expense), net on our condensed consolidated statement of operations. The Busuu purchase agreement provides for additional payments of up to approximately $ 25.5 million, subject to the continued employment of certain key employees. These payments are not included in the fair value of the purchase consideration but rather are expensed ratably as acquisition-related compensation costs and classified based on the employees' job function, on our condensed consolidated statement of operations. As of September 30, 2022, we have recorded approximately $ 5.3 million within accrued liabilities on our condensed consolidated balance sheets for these payments. Since the acquisition date, we have recorded revenues and net loss from Busuu of $ 29.0 million and $ 28.7 million, respectively. These results should not be taken as representative of future results of operations of the combined company. The following unaudited supplemental pro forma revenues and earnings is for informational purposes only and presents our combined results as if the acquisition of Busuu had occurred on January 1, 2021. During the three and nine months ended September 30, 2022, our unaudited supplemental pro forma revenues would have been $ 164.7 million and $ 562.4 million, respectively. During the three and nine months ended September 30, 2021, our unaudited supplemental pro forma revenues would have been $ 184.2 million and $ 601.5 million, respectively. During the three and nine months ended September 30, 2022, our unaudited supplemental pro forma earnings would have been a net income of $ 253.6 million and $ 267.3 million, respectively. During the three and nine months ended September 30, 2021, our unaudited supplemental pro forma earnings would have been a net loss of $ 3.9 million and $ 55.6 million, respectively. The unaudited supplemental pro forma earnings information includes the historical combined operating results adjusted for acquisition-related compensation costs, amortization of intangible assets, share-based compensation expense and acquisition-related expenses and does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of our future consolidated results. Note 6. Goodwill and Intangible Assets Goodwill consists of the following (in thousands): Nine Months Ended September 30, 2022 Beginning balance $ 289,763 Initial addition due to acquisition 367,376 Foreign currency translation adjustment ( 68,298 ) Measurement period adjustments related to prior acquisition (1) 861 Ending balance $ 589,702 (1) For further information, see Note 5, “Acquisition.” Intangible assets consist of the following (in thousands, except weighted-average amortization period): September 30, 2022 Weighted-Average Amortization Period (in months) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Adjustment Net Carrying Amount Developed technologies 80 $ 106,703 $ ( 41,306 ) $ ( 8,638 ) $ 56,759 Content libraries 60 12,230 ( 8,670 ) — 3,560 Customer lists 35 34,190 ( 19,527 ) ( 2,385 ) 12,278 Trade and domain names 52 16,213 ( 10,928 ) ( 836 ) 4,449 Indefinite-lived trade name — 3,600 — — 3,600 Total intangible assets, net 67 $ 172,936 $ ( 80,431 ) $ ( 11,859 ) $ 80,646 17 Table of Contents December 31, 2021 Weighted-Average Amortization Period (in months) Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Adjustment Net Carrying Amount Developed technologies 76 $ 57,521 $ ( 31,790 ) $ — $ 25,731 Content libraries 60 12,230 ( 6,836 ) — 5,394 Customer lists 47 16,190 ( 12,432 ) — 3,758 Trade and domain names 44 11,613 ( 9,530 ) — 2,083 Indefinite-lived trade name — 3,600 — — 3,600 Total intangible assets, net 65 $ 101,154 $ ( 60,588 ) $ — $ 40,566 During the three and nine months ended September 30, 2022, amortization expense related to our finite-lived intangible assets totaled approximately $ 6.5 million and $ 19.7 million, respectively. During the three and nine months ended September 30, 2021, amortization expense related to our finite-lived intangible assets totaled approximately $ 3.0 million and $ 10.7 million, respectively. As of September 30, 2022, the estimated future amortization expense related to our finite-lived intangible assets is as follows (in thousands): Remaining three months of 2022 $ 5,950 2023 22,844 2024 12,757 2025 10,688 2026 10,340 Thereafter 14,467 Total $ 77,046 Note 7. Required Materials Transition In April 2022, we entered into definitive agreements regarding the sale of our print textbook library and partnership with GT Marketplace, LLC (GT) for our Required Materials product line. We will continue to offer our Required Materials offering on our website and maintain relationships with the students, however, GT has purchased our existing print textbook library for $ 14 million, subject to payment terms and certain adjustments, and will continue to make print textbook investments and provide fulfillment logistics for print textbook transactions. We expect that we will continue to fulfill eTextbook transactions through the end of 2022, at which point GT will fulfill eTextbook transactions. Upon board of directors approval of the transaction with GT in April 2022, our net textbook library and unrecognized deferred revenue related to print textbook transactions met the criteria to be classified as a held for sale asset group which had a carrying amount of $ 7.7 million. During the three months ended June 30, 2022, we subsequently sold the held for sale asset group to GT at a gain of $ 4.4 million, subject to certain adjustments, included in cost of revenues on our condensed consolidated statement of operations. Subsequent to April 2022, we no longer recognize operating lease income from print textbooks that we own ratable on a gross basis. In relation to print textbooks owned by GT, we recognize revenues immediately on a net basis, representing the margin earned, 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. Note 8. Convertible Senior Notes In August 2020, we issued $ 1.0 billion in aggregate principal amount of 0 % convertible senior notes due in 2026 (2026 notes). The aggregate principal amount of the 2026 notes includes $ 100 million from the initial purchasers fully exercising their option to purchase additional notes. In March 2019, we issued $ 700 million in aggregate principal amount of 0.125 % convertible senior notes due in 2025 (2025 notes, together with the 2026 notes, the notes) and in April 2019, the initial purchasers fully exercised their option to purchase $ 100 million of additional 2025 notes for aggregate total principal amount of 18 Table of Contents $ 800 million. The notes were issued in private placements to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended. The total net proceeds from the notes are as follows (in thousands): 2026 Notes 2025 Notes Principal amount $ 1,000,000 $ 800,000 Less initial purchasers’ discount ( 15,000 ) ( 18,998 ) Less other issuance costs ( 904 ) ( 822 ) Net proceeds $ 984,096 $ 780,180 The notes are our senior, unsecured obligations and are governed by indenture agreements by and between us and Computershare Trust Company, National Association (as successor to Wells Fargo Bank, National Association), as Trustee (the indentures). The 2026 notes bear no interest and will mature on September 1, 2026, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The 2025 notes bear interest of 0.125 % per year which is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019. The 2025 notes will mature on March 15, 2025, unless repurchased, redeemed or converted in accordance with their terms prior to such date. Each $1,000 principal amount of the 2026 notes will initially be convertible into 9.2978 shares of our common stock. This is equivalent to an initial conversion price of approximately $ 107.55 per share, which is subject to adjustment in certain circumstances. Each $1,000 principal amount of the 2025 notes will initially be convertible into 19.3956 shares of our common stock. This is equivalent to an initial conversion price of approximately $ 51.56 per share, which is subject to adjustment in certain circumstances. Prior to the close of business on the business day immediately preceding June 1, 2026 for the 2026 notes and December 15, 2024 for the 2025 notes, the notes are convertible at the option of holders only upon satisfaction of the following circumstances: • during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 for the 2026 notes and June 30, 2019 for the 2025 notes, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the respective conversion price for the notes on each applicable trading day; • during the five -business day period after any 10 consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; • if we call any or all of the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or • upon the occurrence of certain specified corporate events described in the indentures. On or after June 1, 2026 for the 2026 notes and December 15, 2024 for the 2025 notes until the close of business on the second scheduled trading day immediately preceding the respective maturity dates, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the notes may be settled in shares of our common stock, cash or a combination of cash and shares of our common stock, at our election. If we undergo a fundamental change, as defined in the indentures, prior to the respective maturity dates, subject to certain conditions, holders of the notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100 % of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events, described in the indentures, occur prior to the respective maturity dates, we will also increase the conversion rate for a holder who elects to convert their notes in connection with such specified corporate events. In September 2022, in connection with our securities repurchase program, we extinguished $ 500.0 million aggregate principal amount of the 2026 notes in privately-negotiated transactions for $ 399.9 million, which was paid to the holders in cash. We also incurred approximately $ 1.3 million in fees resulting in total consideration of $ 401.2 million. The carrying amount of the extinguished 2026 notes was $ 494.7 million resulting in a $ 93.5 million gain on early extinguishment of debt. We elected to reacquire and not cancel the extinguished 2026 notes and left the associated capped call transactions outstanding. As of September 30, 2022, we had 9,297,800 shares remaining underlying the 2026 notes capped call transactions. 19 Table of Contents During the three months ended September 30, 2022, the conditions allowing holders of the 2026 notes and 2025 notes to convert were not met and therefore the 2026 notes and 2025 notes are not convertible the following quarter. During the year ended December 31, 2021, we issued 2,983,011 shares of our common stock related to the redemption of our 2023 notes. The net carrying amount of the notes is as follows (in thousands): September 30, 2022 December 31, 2021 2026 Notes 2025 Notes 2026 Notes 2025 Notes Principal $ 500,000 $ 699,979 $ 1,000,000 $ 699,982 Unamortized issuance costs ( 5,169 ) ( 7,297 ) ( 12,309 ) ( 9,518 ) Net carrying amount $ 494,831 $ 692,682 $ 987,691 $ 690,464 The following tables set forth the total interest expense recognized related to the notes (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 2026 notes: Contractual interest expense $ — $ — $ — $ — Amortization of issuance costs 556 663 1,863 1,970 Total 2026 notes interest expense $ 556 $ 663 $ 1,863 $ 1,970 2025 notes: Contractual interest expense $ 220 $ 221 $ 654 $ 676 Amortization of issuance costs 749 749 2,221 2,297 Total 2025 notes interest expense $ 969 $ 970 $ 2,875 $ 2,973 2023 notes: Contractual interest expense $ — $ — $ — $ 78 Amortization of issuance costs — — — 242 Total 2023 notes interest expense $ — $ — $ — $ 320 Capped Call Transactions Concurrently with the offering of the 2026 notes and 2025 notes, we used $ 103.4 million and $ 97.2 million, respectively, of the net proceeds to enter into privately negotiated capped call transactions which are expected to reduce or offset potential dilution to holders of our common stock upon conversion of the notes or offset the potential cash payments we would be required to make in excess of the principal amount of any converted notes. The capped call transactions automatically exercise upon conversion of the notes and as of September 30, 2022, cover 9,297,800 and 13,576,513 shares of our common stock for the 2026 notes and 2025 notes, respectively. These are intended to effectively increase the overall conversion price from $ 107.55 to $ 156.44 per share for the 2026 notes and $ 51.56 to $ 79.32 per share for the 2025 notes. The effective increase in conversion price as a result of the capped call transactions serves to reduce potential dilution to holders of our common stock and/or offset the cash payments we are required to make in excess of the principal amount of any converted notes. As these transactions meet certain accounting criteria, they are recorded in stockholders’ equity as a reduction of additional paid-in capital on our condensed consolidated balance sheets and are not accounted for as derivatives. The fair value of the capped call instrument is not remeasured each reporting period. The cost of the capped call is not expected to be deductible for tax purposes. Note 9. Commitments and Contingencies We may from time to time be subject to certain legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, patents, copyrights, and other intellectual property rights; employment claims; and general contract or other claims. We may also, from time to time, be subject to various legal or government claims, demands, disputes, investigations, or requests for information. Such matters may include, but not be limited to, claims, disputes, or investigations related to warranty, refund, breach of contract, employment, intellectual property, government regulation, or compliance or other matters. 20 Table of Contents On March 30, 2022, Joseph Robinson, derivatively on behalf of Chegg, filed a shareholder derivative complaint against Chegg and certain of its current and former directors and officers in the United States District Court for the Northern District of California, alleging breaches of fiduciary duties, among others (the “Robinson Matter”). The Robinson Matter has been consolidated with the Choi Matter (described below) and has been stayed on the same terms. The Company disputes these claims and intends to vigorously defend itself in this matter. On January 12, 2022, Rak Joon Choi, derivatively on behalf of Chegg, filed a shareholder derivative complaint against Chegg and certain of its current and former directors and officers in the United States District Court for the Northern District of California, alleging breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets, among others (the “Choi Matter”). The Company disputes these claims and intends to vigorously defend itself in this matter. On March 1, 2022, the court entered an order deeming the Choi Matter related to the Leventhal Matter (described below). On March 29, 2022, the Court entered an order staying the Choi Matter during the pendency of the Leventhal Matter. On December 22, 2021, Steven Leventhal, individually and on behalf of all others similarly situated, filed a putative securities fraud class action on behalf of all purchasers of Chegg common stock between May 5, 2020 and November 1, 2021, inclusive, against Chegg and certain of its current and former officers in the United States District Court for the Northern District of California (Case No. 5:21-cv-09953), alleging that Chegg and several of its officers made materially false and misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Leventhal Matter”). On September 7, 2022, Judge Edward J. Davila appointed the lead plaintiff and approved lead counsel in this matter. The parties agreed upon a scheduling for amending the complaint and motion to dismiss briefing in early 2023, and with a hearing slated for June 2023. The plaintiff in this matter seeks unspecified compensatory damages, costs, and expenses, including counsel and expert fees. The Company disputes these claims and intends to vigorously defend itself in this matter. On September 13, 2021, Pearson Education, Inc. (Pearson) filed a complaint captioned Pearson Education, Inc. v. Chegg, Inc. (Pearson Complaint) in the United States District Court for the District of New Jersey against the Company (Case 2:21-cv-16866), alleging infringement of Pearson’s registered copyrights and exclusive rights under copyright in violation of the United States Copyright Act. Pearson is seeking injunctive relief, monetary damages, costs, and attorneys’ fees. The Company filed its answer to the Pearson Complaint on November 19, 2021. On June 29, 2022, Pearson filed a Motion for Leave to File Amended Complaint which seeks to add Bedford, Freeman & Worth Publishing Group, LLC d/b/a Macmillan Learning (“Macmillan Learning”) as a plaintiff, add an additional claim for relief on behalf of both Pearson and Macmillan Learning for copyright infringement, and add allegations regarding Pearson’s original complaint. The Company disputes these claims and intends to vigorously defend itself in this matter. On June 18, 2020, we received a Civil Investigative Demand (CID) from the Federal Trade Commission (FTC) to determine whether we may have violated Section 5 of the FTC Act or the Children's Online Privacy Protection Act (COPPA), as they relate to deceptive or unfair acts or practices related to consumer privacy and/or data security. We have provided the FTC with the requested responses to interrogatories and follow-up questions and have produced documents pertaining to data breach incidents and our data security and privacy practices generally. We have agreed to enter into a Consent Order with the FTC related to consumer privacy and data security, which has been announced by the FTC but has not yet been published on the Federal Register. No COPPA provisions nor monetary fines are included in the Consent Order. On May 12, 2020, we received notice that 15,107 arbitration demands were filed against us on April 30, 2020 by individuals all represented by the same legal counsel. Each individual claimant claimed to have suffered more than $ 25 thousand in damages as a result of the unauthorized access of certain items of their user data in April 2018. On July 1, 2020, an additional 1,007 arbitration demands were filed by the same counsel, making identical allegations. On August 12, 2020, an additional 577 arbitration demands were filed by the same counsel, making identical allegations. Related cases were filed by the same counsel in Maryland and California. We disputed that these claimants had a valid basis for seeking arbitration, asserted that they have acted in bad faith and have been working with the Maryland and California courts and plaintiffs’ counsel on resolution of these claims. The Maryland case is now closed. On August 22, 2021, Chegg and the claimants' legal counsel, on behalf of its clients, entered into a settlement agreement, pursuant to which each eligible claimant that signs a release agreement agrees, among other things, to dismiss with prejudice all claims against Chegg that such claimant currently maintains in exchange for such claimant's pro rata portion of the settlement amount. Claimants had until January 26, 2022 to sign their release agreements. As a result of the settlement, all but four petitions to compel arbitration in the California action were dismissed with prejudice. We have not recorded any loss contingency accruals related to the above matters as we do not believe that a loss is probable in these matters. We are not aware of any other pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on our consolidated financial position, results of operations, or cash flows. However, our analysis of whether a claim will proceed to litigation cannot be predicted with certainty, nor can the results of litigation be predicted with certainty. Nevertheless, defending any of these actions, regardless of the outcome, may be costly, 21 Table of Contents time consuming, distract management personnel and have a negative effect on our business. An adverse outcome in any of these actions, including a judgment or settlement, may cause a material adverse effect on our future business, operating results and/or financial condition. Note 10. Guarantees and Indemnifications We have agreed to indemnify our directors and officers for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon termination of employment, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. We have a directors’ and officers’ insurance policy that limits our potential exposure up to the limits of our insurance coverage. In addition, we also have other indemnification agreements with various vendors against certain claims, liabilities, losses, and damages. The maximum amount of potential future indemnification is unlimited. We believe the fair value of these indemnification agreements is immaterial. We have not recorded any liabilities for these agreements as of September 30, 2022. Note 11. Stockholders' Equity Securities Repurchase Program In June 2022, our board of directors approved a $ 1.0 billion increase to our existing securities repurchase program authorizing the repurchase of up to $ 2.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements. The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors. During the three months ended September 30, 2022, we repurchased $ 500.0 million aggregate principal amount of the 2026 notes in privately-negotiated transactions for $ 399.9 million. Additionally, we repurchased 1,146,803 shares of our common stock in open market transactions for $ 23.1 million. As of September 30, 2022, we had $ 642.6 million remaining 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. Accelerated Share Repurchases On February 22, 2022, we entered into an accelerated share repurchase (ASR) agreement with a financial institution (2022 ASR). We accounted for the 2022 ASR as two separate transactions, a repurchase of our common stock and an equity-linked contract indexed to our common stock that met certain accounting criteria for classification in stockholders' equity. Upon execution, we paid a fixed amount of $ 300.0 million and received an initial delivery of 8,562,255 shares of our common stock over the following three business days, which were retired immediately. The initial delivery of shares of our common stock represented approximately 80 percent of the fixed amount paid of $ 300.0 million, which was based on the share price of our common stock on the date of execution. The 2022 ASR was recorded as a reduction to additional paid in capital on our condensed consolidated statements of stockholders’ equity. The 2022 ASR settled during the three months ended June 30, 2022 and we received an additional delivery of 837,001 shares of our common stock, which were retired immediately. The 2022 ASR resulted in a total repurchase of 9,399,256 shares of our common stock at a volume-weighted-average price, less an agreed upon discount, $ 31.9174 per share. We were not required to make any additional cash payments or delivery of common stock to the financial institutions upon settlement. On December 3, 2021, we entered into an ASR agreement with a financial institution (2021 ASR) to repurchase $ 300.0 million of our outstanding common stock. The 2021 ASR settled during the three months ended March 31, 2022 and we received an additional delivery of 2,163,219 shares of our common stock. 22 Table of Contents Share-based Compensation Expense Total share-based compensation expense recorded for employees and non-employees is as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cost of revenues $ 653 $ 393 $ 1,945 $ 1,174 Research and development 9,172 8,917 30,954 25,976 Sales and marketing 2,771 3,051 11,176 9,625 General and administrative 21,574 12,151 54,266 39,382 Total share-based compensation expense $ 34,170 $ 24,512 $ 98,341 $ 76,157 During the three and nine months ended September 30, 2022, we capitalized share-based compensation expense of $ 0.7 million and $ 4.8 million, respectively. During the three and nine months ended September 30, 2021, we capitalized share-based compensation expense of $ 0.6 million and $ 1.8 million, respectively. RSU and PSU Activity Activity for RSUs and PSUs is as follows: RSUs and PSUs Outstanding Shares Outstanding Weighted Average Grant Date Fair Value Balance at December 31, 2021 8,171,462 $ 46.36 Granted 4,570,547 28.36 Released ( 1,356,059 ) 63.12 Forfeited ( 1,612,877 ) 39.31 Balance at September 30, 2022 9,773,073 $ 36.80 As of September 30, 2022, our total unrecognized share-based compensation expense related to RSUs and PSUs was approximately $ 238.0 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.4 years. Note 12. Income Taxes During the three and nine months ended September 30, 2022, we recorded a benefit from income taxes of $ 167.3 million and $ 163.0 million, respectively. During the three and nine months ended September 30, 2021, we recorded a provision for income taxes of $ 0.7 million and $ 5.8 million, respectively. During the three and nine months ended September 30, 2022, the benefit from income taxes was primarily due to the $ 174.6 million release of the valuation allowance as a discrete non-cash income tax benefit on certain U.S. and state deferred tax assets. Previously, we maintained a valuation allowance against our deferred tax assets until we expected that it would be more-likely-than not that they would be realized. The release of the valuation allowance is the result of our expectation that our domestic operations will continue to be profitable and is based on a detailed evaluation of all available evidence. The principal indicator leading to the release is the recent cumulative earnings of U.S. and certain state jurisdictions and the forecasted earnings in these jurisdictions. We continue to maintain a valuation allowance against our California deferred tax assets and our anticipated capital loss temporary differences. We will continue to quarterly assess the need for such valuation allowance. 23 Table of Contents