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) March 31, 2023 December 31, 2022 Assets Current assets Cash and cash equivalents $ 281,302 $ 473,677 Short-term investments 277,864 583,973 Accounts receivable, net of allowance of $ 344 and $ 394 at March 31, 2023 and December 31, 2022, respectively 22,000 23,515 Prepaid expenses 25,486 28,481 Other current assets 30,832 34,754 Total current assets 637,484 1,144,400 Long-term investments 613,863 216,233 Property and equipment, net 201,305 204,383 Goodwill 622,679 615,093 Intangible assets, net 73,086 78,333 Right of use assets 29,770 18,838 Deferred tax assets 163,776 167,524 Other assets 19,824 20,612 Total assets $ 2,361,787 $ 2,465,416 Liabilities and stockholders' equity Current liabilities Accounts payable $ 13,058 $ 12,367 Deferred revenue 58,568 56,273 Accrued liabilities 68,026 70,234 Total current liabilities 139,652 138,874 Long-term liabilities Convertible senior notes, net 1,189,650 1,188,593 Long-term operating lease liabilities 23,064 13,375 Other long-term liabilities 2,662 7,985 Total long-term liabilities 1,215,376 1,209,953 Total liabilities 1,355,028 1,348,827 Commitments and contingencies (Note 6) 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; 119,628,297 and 126,473,827 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively 120 126 Additional paid-in capital 1,120,344 1,244,504 Accumulated other comprehensive loss ( 45,338 ) ( 57,488 ) Accumulated deficit ( 68,367 ) ( 70,553 ) Total stockholders' equity 1,006,759 1,116,589 Total liabilities and stockholders' equity $ 2,361,787 $ 2,465,416 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 March 31, 2023 2022 Net revenues $ 187,601 $ 202,244 Cost of revenues 49,150 55,085 Gross profit 138,451 147,159 Operating expenses: Research and development 46,907 52,415 Sales and marketing 37,017 42,498 General and administrative 58,973 46,870 Total operating expenses 142,897 141,783 (Loss) income from operations ( 4,446 ) 5,376 Interest expense, net and other income, net: Interest expense, net ( 1,268 ) ( 1,597 ) Other income, net 12,076 6,180 Total interest expense, net and other income, net 10,808 4,583 Income before provision for income taxes 6,362 9,959 Provision for income taxes ( 4,176 ) ( 4,217 ) Net income $ 2,186 $ 5,742 Net income per share Basic $ 0.02 $ 0.04 Diluted $ 0.02 $ 0.04 Weighted average shares used to compute net income per share Basic 123,710 132,162 Diluted 124,304 133,270 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 March 31, 2023 2022 Net income $ 2,186 $ 5,742 Other comprehensive income (loss) Change in net unrealized gain (loss) on investments, net of tax 3,812 ( 12,917 ) Change in foreign currency translation adjustments, net of tax 8,338 ( 18,671 ) Other comprehensive income (loss) 12,150 ( 31,588 ) Total comprehensive income (loss) $ 14,336 $ ( 25,846 ) 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 March 31, 2023 Common Stock Shares Par Value Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Balances at December 31, 2022 126,474 $ 126 $ 1,244,504 $ ( 57,488 ) $ ( 70,553 ) $ 1,116,589 Repurchases of common stock ( 7,600 ) ( 7 ) ( 151,304 ) — — ( 151,311 ) Issuance of common stock upon exercise of stock options 18 — 144 — — 144 Net share settlement of equity awards 736 1 ( 7,736 ) — — ( 7,735 ) Share-based compensation expense — — 34,736 — — 34,736 Other comprehensive income — — — 12,150 — 12,150 Net income — — — — 2,186 2,186 Balances at March 31, 2023 119,628 $ 120 $ 1,120,344 $ ( 45,338 ) $ ( 68,367 ) $ 1,006,759 Three Months Ended March 31, 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 ( 10,725 ) ( 11 ) ( 300,439 ) — — ( 300,450 ) Issuance of common stock upon exercise of stock options 54 — 455 — — 455 Net share settlement of equity awards 401 1 ( 7,467 ) — — ( 7,466 ) Share-based compensation expense — — 34,911 — — 34,911 Other comprehensive loss — — — ( 31,588 ) — ( 31,588 ) Net income — — — — 5,742 5,742 Balances at March 31, 2022 126,682 $ 127 $ 1,176,765 $ ( 36,922 ) $ ( 331,449 ) $ 808,521 See Notes to Condensed Consolidated Financial Statements. 7 Table of Contents CHEGG, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended March 31, 2023 2022 Cash flows from operating activities Net income $ 2,186 $ 5,742 Adjustments to reconcile net income to net cash provided by operating activities: Share-based compensation expense 33,746 33,084 Other depreciation and amortization expense 25,543 20,285 Deferred income taxes 3,441 ( 746 ) Operating lease expense, net of accretion 1,496 1,640 Amortization of debt issuance costs 1,057 1,382 Gain on foreign currency remeasurement of purchase consideration — ( 4,628 ) Print textbook depreciation expense — 1,521 Loss from write-off of property and equipment 120 626 Gain on textbook library, net — ( 610 ) Other non-cash items ( 5 ) 9 Change in assets and liabilities, net of effect of acquisition of business: Accounts receivable 1,578 292 Prepaid expenses and other current assets 8,485 21,722 Other assets 2,803 8,342 Accounts payable ( 336 ) ( 7,534 ) Deferred revenue 2,012 8,554 Accrued liabilities ( 2,569 ) ( 7,555 ) Other liabilities ( 6,397 ) ( 2,091 ) Net cash provided by operating activities 73,160 80,035 Cash flows from investing activities Purchases of property and equipment ( 17,166 ) ( 29,533 ) Purchases of textbooks — ( 3,692 ) Proceeds from disposition of textbooks — 2,499 Purchases of investments ( 497,372 ) ( 273,280 ) Maturities of investments 407,759 342,059 Acquisition of business, net of cash acquired — ( 401,125 ) Net cash used in investing activities ( 106,779 ) ( 363,072 ) Cash flows from financing activities Proceeds from common stock issued under stock plans, net 145 456 Payment of taxes related to the net share settlement of equity awards ( 7,736 ) ( 7,467 ) Repurchases of common stock ( 151,311 ) ( 300,450 ) Net cash used in financing activities ( 158,902 ) ( 307,461 ) Effect of exchange rate changes 187 4,628 Net decrease in cash, cash equivalents and restricted cash ( 192,334 ) ( 585,870 ) Cash, cash equivalents and restricted cash, beginning of period 475,854 855,893 Cash, cash equivalents and restricted cash, end of period $ 283,520 $ 270,023 Three Months Ended March 31, 2023 2022 Supplemental cash flow data: Cash paid during the period for: Interest $ 437 $ 437 Income taxes, net of refunds $ 2,017 $ 1,101 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 2,866 $ 1,852 Right of use assets obtained in exchange for lease obligations: Operating leases $ 12,407 $ 2,715 Non-cash investing and financing activities: Accrued purchases of long-lived assets $ 3,941 $ 5,778 March 31, 2023 2022 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 281,302 $ 267,731 Restricted cash included in other current assets 63 70 Restricted cash included in other assets 2,155 2,222 Total cash, cash equivalents and restricted cash $ 283,520 $ 270,023 See Notes to Condensed Consolidated Financial Statements. 8 Table of Contents CHEGG, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Background and Basis of Presentation Company and Background Chegg, Inc. (“we,” “us,” “our,” “Company” or “Chegg”), 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 March 31, 2023, our results of operations, results of comprehensive income (loss), stockholders' equity and cash flows for the three months ended March 31, 2023 and 2022. Our results of operations, results of comprehensive income (loss), stockholders' equity, and cash flows for the three months ended March 31, 2023 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, 2022 (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 three months ended March 31, 2023 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, 2022. Reclassification of Prior Period Presentation In order to conform with current period presentation, $ 0.7 million of deferred tax assets during the three months ended March 31, 2022 has been reclassified from other non-cash items on our condensed consolidated statements of cash flows. This change in presentation does not affect previously reported results. Leases During the three months ended March 31, 2023, we extended our existing lease agreement related to our corporate headquarters in Santa Clara and reassessed lease terms related to office spaces internationally in India, resulting in the recording of $ 12.4 million of right of use assets in exchange for lease liabilities. 9 Table of Contents The aggregate future minimum lease payments and reconciliation to operating lease liabilities as of March 31, 2023, are as follows (in thousands): March 31, 2023 Remaining nine months of 2023 $ 6,388 2024 7,875 2025 6,625 2026 5,940 2027 5,515 Thereafter 1,902 Total future minimum lease payments 34,245 Less imputed interest ( 4,322 ) Total lease liabilities $ 29,923 Condensed Consolidated Statements of Operations Details Other income, net consists of the following (in thousands): Three Months Ended March 31, 2023 2022 Interest income $ 11,263 $ 1,477 Gain on foreign currency remeasurement of purchase consideration — 4,628 Other 813 75 Total other income, net $ 12,076 $ 6,180 Recent Accounting Pronouncements Recently Issued Accounting Pronouncements Not Yet Adopted There were no accounting pronouncements issued during the three months ended March 31, 2023 that would have a material impact on our financial statements. Recently Adopted Accounting Pronouncements We did not adopt any new standards or updates issued during the three months ended March 31, 2023 that had a material impact on our financial statements. 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. We have changed our revenue disaggregation to Subscription Services and Skills and Other to better reflect the nature and timing of revenue and cash flows. Subscription Services includes revenues from our Chegg Study Pack, Chegg Study, Chegg Writing, Chegg Math, and Busuu offerings. Skills and Other includes revenues from our Skills, advertising services, print textbooks and eTextbooks offerings. We no longer present our Required Materials product line separately as we no longer have significant revenue from our print textbook and eTextbooks offerings. 10 Table of Contents The following table sets forth our total net revenues for the periods shown disaggregated for our Subscription Services and Skills and Other product lines (in thousands, except percentages): Three Months Ended March 31, Change 2023 2022 $ % Subscription Services $ 168,440 $ 173,037 $ ( 4,597 ) ( 3 ) % Skills and Other 19,161 29,207 ( 10,046 ) ( 34 ) Total net revenues $ 187,601 $ 202,244 $ ( 14,643 ) ( 7 ) During the three months ended March 31, 2023 and 2022, we recognized revenues of $ 39.1 million and $ 30.9 million, respectively, that were included in our deferred revenue balance at the beginning of each respective reporting period. Contract Balances The following table presents our accounts receivable, net, contract assets and deferred revenue balances (in thousands, except percentages): Change March 31, 2023 December 31, 2022 $ % Accounts receivable, net $ 22,000 $ 23,515 $ ( 1,515 ) ( 6 ) % Contract assets 11,505 11,946 ( 441 ) ( 4 ) Deferred revenue 58,568 56,273 2,295 4 During the three months ended March 31, 2023 our accounts receivable, net balance decreased by $ 1.5 million, or 6 %, primarily due to timing of billings and seasonality of our business. During the three months ended March 31, 2023, our contract assets balance decreased by $ 0.4 million, or 4 %, primarily due to our Thinkful service. During the three months ended March 31, 2023, our deferred revenue balance increased by $ 2.3 million, or 4 %, primarily due to timing of bookings and seasonality of our business. 11 Table of Contents Note 3. Net Income Per Share The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts): Three Months Ended March 31, 2023 2022 Basic Numerator: Net income $ 2,186 $ 5,742 Denominator: Weighted average shares used to compute net income per share, basic 123,710 132,162 Net income per share, basic $ 0.02 $ 0.04 Diluted Numerator: Net income $ 2,186 $ 5,742 Denominator: Weighted average shares used to compute net income per share, basic 123,710 132,162 Shares related to stock plan activity 594 1,108 Weighted average shares used to compute net income per share, diluted 124,304 133,270 Net income per share, diluted $ 0.02 $ 0.04 The following potential weighted-average shares of common stock outstanding were excluded from the computation of diluted net income per share because including them would have been anti-dilutive (in thousands): Three Months Ended March 31, 2023 2022 Shares related to stock plan activity 6,283 2,300 Shares related to convertible senior notes 18,226 22,875 Total common stock equivalents 24,509 25,175 12 Table of Contents Note 4. Cash and Cash Equivalents, 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 March 31, 2023 and December 31, 2022 (in thousands except for fair value levels): March 31, 2023 Fair Value Level Adjusted Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 31,393 $ — $ — $ 31,393 Money market funds Level 1 149,731 — — 149,731 Commercial paper Level 2 100,216 — ( 38 ) 100,178 Total cash and cash equivalents $ 281,340 $ — $ ( 38 ) $ 281,302 Short-term investments: Corporate debt securities Level 2 $ 214,883 $ — $ ( 2,435 ) $ 212,448 U.S. treasury securities Level 1 30,190 — ( 21 ) 30,169 Agency bonds Level 2 35,253 — ( 6 ) 35,247 Total short-term investments $ 280,326 $ — $ ( 2,462 ) $ 277,864 Long-term investments: Corporate debt securities Level 2 $ 364,729 $ 1,003 $ ( 366 ) $ 365,366 U.S. treasury securities Level 1 99,424 470 ( 54 ) 99,840 Agency bonds Level 2 148,669 74 ( 86 ) 148,657 Total long-term investments $ 612,822 $ 1,547 $ ( 506 ) $ 613,863 December 31, 2022 Fair Value Level Adjusted Cost Unrealized Gain Unrealized Loss Fair Value Cash and cash equivalents: Cash $ 33,532 $ — $ — $ 33,532 Money market funds Level 1 440,145 — — 440,145 Total cash and cash equivalents $ 473,677 $ — $ — $ 473,677 Short-term investments: Commercial paper Level 2 $ 11,744 $ — $ ( 29 ) $ 11,715 Corporate debt securities Level 2 491,459 — ( 4,130 ) 487,329 U.S. treasury securities Level 1 85,271 — ( 342 ) 84,929 Total short-term investments $ 588,474 $ — $ ( 4,501 ) $ 583,973 Long-term investments: Corporate debt securities Level 2 $ 125,735 $ 158 $ ( 909 ) $ 124,984 U.S. treasury securities Level 1 30,633 122 — 30,755 Agency bonds Level 2 60,635 — ( 141 ) 60,494 Total long-term investments $ 217,003 $ 280 $ ( 1,050 ) $ 216,233 As of March 31, 2023, we determined that the unrealized losses on our investments were not driven by credit related factors. During the three months ended March 31, 2023 and 2022, we did not recognize any losses on our investments due to credit related factors. During the three months ended March 31, 2023 and 2022, our realized gains and losses on investments were not significant. 13 Table of Contents The following table shows our cash equivalents and investments' adjusted cost and fair value by contractual maturity as of March 31, 2023 (in thousands): Adjusted Cost Fair Value Due within one year $ 380,542 $ 378,042 Due after one year through three years 612,822 613,863 Investments not due at a single maturity date 149,731 149,731 Total $ 1,143,095 $ 1,141,636 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 March 31, 2023, 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 March 31, 2023. 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 March 31, 2023 and December 31, 2022 was $ 393.1 million and $ 385.0 million, respectively. The estimated fair value of the 2025 notes as of March 31, 2023 and December 31, 2022 was $ 617.7 million and $ 640.5 million, respectively. For further information on the notes, refer to Note 5, “Convertible Senior Notes.” Note 5. 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 $ 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. 14 Table of Contents 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. During the three months ended March 31, 2023, 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. The net carrying amount of the notes is as follows (in thousands): March 31, 2023 December 31, 2022 2026 Notes 2025 Notes 2026 Notes 2025 Notes Principal $ 500,000 $ 699,979 $ 500,000 $ 699,979 Unamortized issuance costs ( 4,512 ) ( 5,817 ) ( 4,837 ) ( 6,549 ) Net carrying amount $ 495,488 $ 694,162 $ 495,163 $ 693,430 15 Table of Contents The following table sets forth the total interest expense recognized related to the notes (in thousands): Three Months Ended March 31, 2023 2022 2026 notes: Contractual interest expense $ — $ — Amortization of issuance costs 325 650 Total 2026 notes interest expense $ 325 $ 650 2025 notes: Contractual interest expense $ 216 $ 215 Amortization of issuance costs 732 732 Total 2025 notes interest expense $ 948 $ 947 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 March 31, 2023, 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 6. 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. On March 1, 2023, Plaintiff Shiva Stein, derivatively on behalf of Chegg, filed a stockholder derivative complaint in the Court of Chancery of the State of Delaware (Case No. 2023-0244-NAC) asserting breach of fiduciary duty, unjust enrichment, and waste of corporate asset claims against members of Chegg’s Board and certain Chegg officers. The matter is stayed. The Company disputes these claims and intends to vigorously defend itself in this matter. On February 14, 2023, Plaintiff Brian Stansell, individually and on behalf of other similarly situated stockholders of Chegg, filed a putative class action complaint in the Court of Chancery of the State of Delaware (Case No. 2023-0180) on behalf of all Chegg stockholders who were eligible to vote at Chegg's 2022 Annual Stockholders' Meeting, asserting breach of fiduciary duty claims against the members of Chegg's Board. The Company disputes these claims and intends to vigorously defend itself in this matter. On December 27, 2022, Plaintiff Sheri Moyer, individually and on behalf of all others similarly situated, filed a putative consumer class action in the United States District Court for the Northern District of California (Case No. 22-cv-09123) on behalf of all purchasers of a Chegg product or service as part of an automatic renewal plan or continuous service offer within the past four years. The Company disputes these claims and intends to vigorously defend itself in this matter. On November 9, 2022, Plaintiff Joshua Keller, individually and on behalf of all others similarly situated, filed a putative class action in the United States District Court for the Northern District of California (Case No. 22-cv-06986) on behalf of 16 Table of Contents individuals whose data was allegedly impacted by past data breaches. The Company disputes these claims and intends to vigorously defend itself in this matter. 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 violations of securities laws and breaches of fiduciary duties. On February 22, 2023, Plaintiff filed an Amended Shareholder Derivative Complaint. This matter has been consolidated with Choi, below, and both matters are stayed. 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 violations of securities laws, breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. On February 22, 2023, Plaintiff filed an Amended Shareholder Derivative Complaint. This matter has been consolidated with Robinson, above, and both matters are stayed. The Company disputes these claims and intends to vigorously defend itself in this matter. On December 22, 2021, Steven Leventhal, individually and on behalf of all others similarly situated, filed a purported 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. On September 7, 2022, KBC Asset Management and The Pompano Beach Police & Firefighters Retirement System were appointed as lead plaintiff in the case. On December 8, 2022, Plaintiff filed his Amended Complaint and 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. Pearson’s June 29, 2022 Motion for Leave to File Amended Complaint seeking to add Bedford, Freeman & Worth Publishing Group, LLC d/b/a Macmillan Learning as a plaintiff was denied. 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) regarding certain alleged deceptive or unfair acts or practices related to consumer privacy and/or data security. On October 31, 2022, the FTC published the parties’ agreed-upon consent order regarding Chegg’s privacy and data security practices. On January 27, 2023, the FTC finalized its order ("Final Order") requiring Chegg to implement a comprehensive information security program, limit the data the Company can collect and retain, offer users multifactor authentication to secure their accounts, and allow users to request access to and delete their data. No monetary penalties or fines were included in the Final Order. 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, 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 7. 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. 17 Table of Contents We believe the fair value of these indemnification agreements is immaterial. We have not recorded any liabilities for these agreements as of March 31, 2023. Note 8. Stockholders' Equity Share Repurchases On February 23, 2023, we entered into an accelerated share repurchase (ASR) agreement with a financial institution (2023 ASR). We accounted for the 2023 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 $ 150.0 million and received an initial delivery of 7,599,747 shares of our common stock, which were retired immediately. The initial delivery of shares of our common stock represented approximately 80 percent of the fixed amount paid of $ 150.0 million, which was based on the share price of our common stock on the date of execution. The 2023 ASR, along with $ 1.3 million in associated costs, primarily consisting of an estimated 1 % excise tax, were recorded as a reduction to additional paid in capital on our condensed consolidated statements of stockholders’ equity. On February 22, 2022 and December 3, 2021, we entered into ASR agreements with financial institutions. During the year ended December 31, 2022, we received a total of 11,562,475 shares of our common stock from these ASR agreements, which were retired immediately. Additionally, during the year ended December 31, 2022, we repurchased 1,146,803 shares of our common stock in open market transactions. 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. As of March 31, 2023, we had $ 492.6 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. Share-based Compensation Expense Total share-based compensation expense recorded for employees and non-employees is as follows (in thousands): Three Months Ended March 31, 2023 2022 Cost of revenues $ 527 $ 623 Research and development 10,914 11,776 Sales and marketing 2,499 4,386 General and administrative 19,806 16,299 Total share-based compensation expense $ 33,746 $ 33,084 During the three months ended March 31, 2023 and 2022, we capitalized share-based compensation expense of $ 1.0 million and $ 1.8 million, respectively. As of March 31, 2023, our total unrecognized share-based compensation expense related to RSUs and PSUs was approximately $ 207.0 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.2 years. 18 Table of Contents Activity for RSUs and PSUs is as follows: RSUs and PSUs Outstanding Shares Outstanding Weighted Average Grant Date Fair Value Balance at December 31, 2022 9,155,680 $ 36.03 Granted 1,631,910 16.63 Released ( 1,192,925 ) 37.50 Forfeited ( 447,107 ) 34.03 Balance at March 31, 2023 9,147,558 32.48 Note 9. Subsequent Event In May 2023, we entered into a $ 15.0 million commitment to invest in Sound Ventures AI Fund, L.P., a limited partnership that invests in artificial intelligence companies. The initial accounting for the investment is in process as of the issuance date of our financial statements and therefore we are unable to make any additional disclosures. 19 Table of Contents