UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20192021
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number 001-36180
CHEGG, INC.INC.
(Exact name of registrant as specified in its charter)
| | 20-3237489 | | | | | | |
| Delaware | | 20-3237489 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
3990 Freedom Circle
Santa Clara,, CA,, 95054
(Address of principal executive offices)
(408) (408) 855-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | CHGG | The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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• | •Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x •Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x •Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ •Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨ •¨ Nox |
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• | Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ Nox
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• | Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No ¨
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• | Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No ¨
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large Accelerated Filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ | | |
•If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
•Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report ☒
•Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No x
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• | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No x
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The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2019,2021, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing price of such stock on such date as reported by the New York Stock Exchange on such date, was approximately $4,479,899,092.$11,839,510,015. Shares of Common Stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
•As of January 31, 2020,2022, the Registrant had 121,890,028134,848,498 outstanding shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the Registrant's 20202022 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the Registrant's fiscal year ended December 31, 2019.2021.
TABLE OF CONTENTS
Unless the context requires otherwise, the words “we,” “us,” “our,” “Company” and “Chegg” refer to Chegg, Inc. and its subsidiaries taken as a whole.
Chegg, Chegg.com, Chegg Study, internships.com, Research Ready, EasyBib, the Chegg “C” logo, Busuu and Thinkful, are some of our trademarks used in this Annual Report on Form 10-K. Solely for convenience, our trademarks, trade names and service marks referred to in this Annual Report on Form 10-K appear without the ®, ™ and SM symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names. Other trademarks appearing in this Annual Report on Form 10-K are the property of their respective holders.
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, and the impact of the ongoing coronavirus (COVID-19) pandemic on our financial condition and results of operations are forward-looking statements. The words “believe,” “may,” “will,” “would,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “project,” “endeavor,” “expect,” “plans to,” “if,” “future,” “likely,” “potentially,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time.time, such as the COVID-19 global pandemic. Many of the risks and uncertainties are currently elevated by, and may or will continue to be elevated by, the current COVID-19 pandemic. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
PART I
ITEM 1. BUSINESS
Overview
CheggMillions of people all around the world Learn with Chegg. Our mission is a Smarter Way to Student. As the leading direct-to-student learning platform, we strive to improve educationallearning and learning outcomes by putting the student first in all our decisions.students first. We support students onlife-long learners starting with their academic journey from high school to college and extending into their career with tools designedcareers. The Chegg platform provides products and services to support learners to help them passbetter understand their test, passacademic course materials, and also provides personal and professional development skills training, to help them achieve their class,learning goals.
Our product and save money on required materials. Our services are available online, anytime and anywhere, so we can reach students when they need us most.
Students subscribe toservice offerings fall into two categories: Chegg Services, which encompasses our subscription services and which we collectively refer to as Chegg Services. Our primary Chegg Services include Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver,can be accessed internationally through our websites and Thinkful. Our Chegg Study subscription service provides “Expert Answers”on mobile devices, and step-by-step “Textbook Solutions,” helping students with their course work. When students need help creating citations for their papers, they can use one of our Chegg Writing properties, including EasyBib, Citation Machine, BibMe,Required Materials, which includes print textbooks and CiteThisForMe. When students need additional help on a subject, they can reach a live tutor online, anytime, anywhere through Chegg Tutors. Our Chegg Math Solver subscription service helps students understand math by providing a step-by-step math solver and calculator.eTextbooks. In October 2019, we completed our acquisition of Thinkful, Inc. (Thinkful), a skills-based learning platform that offers professional courses directly to students across the United States, to expand our offerings. In 2019, over 3.92021, approximately 7.8 million students subscribed to our Chegg Services, an increase of 29%18% year over year from 3.16.6 million in 2018.
We offer Required Materials, which includes an extensive print textbook and eTextbook library for rent and sale, helping students save money compared to the cost of buying new. To deliver services to students, we partner with a variety of third parties. We source print textbooks, eTextbooks, and supplemental materials directly or indirectly from publishers in the United States, including Cengage Learning, Pearson, McGraw Hill, Sage Publications, and MacMillan. In 2019, students rented or bought over 5.2 million textbooks and eTextbooks from Chegg.
Our Offering
We offer products and services that help students improve their outcomes throughout their educational journey. Our offerings fall into two categories:2020. Chegg Services which encompasses our digital productssubscribers include Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, Mathway, and services, and Required Materials, which primarily includes print textbooks and eTextbooks.Thinkful customers who have paid to access the service during the time period. In 2021, we had 30 million monthly average visitors, an increase of 58% year over year from 19 million monthly average visitors in 2020. Monthly average visitors represent the average of unique visitors for all Chegg properties.
Chegg Services
Chegg Study Pack. Our Chegg Study Pack is a premium subscription bundle including our Chegg Study, Chegg Writing, and Chegg Math Solver services, which are described further below. Chegg Study Pack creates an integrated platform of connected academic support services which have millions of pieces of educational learning content and enhanced features, such as concept video walkthroughs, flashcards and practice tests, that are ever-changing and evolving to increase our value proposition to students. We plan to launch instructor-created materials from educators within our Uversity platform as part of the Chegg Study Pack in 2022. Our Uversity platform was created to improve the quality and accessibility of learning materials provided to students around the world. The platform allows educators and faculty to share their educational content, such as study notes, videos, and practice tests, to further support students’ learning and enhance their outcomes.
Chegg Study.Our Chegg Study subscription service helps students master challenging concepts on their own through the use of “Expert Answers,Questions and Answers” and “Textbook Solutions.” “Textbook Solutions,” video content,Our Expert Questions and practice quizzes. We offer our “Expert Answers”Answers service which allows students to ask questions on our website and receive similarly detailed explanations from subject matter experts. For high demand print textbooks and eTextbooks, we offer “TextbookTextbook Solutions,” which are step-by-step explanations to help students learn how to solve the questions at the end of each chapter in their textbooks. As of December 31, 2019, Chegg had an archive of 30 million Expert Answers and 5 million Textbook Solutions, which students can immediately access through their paid subscription. These subscription services are available on our website and on mobile devices through our native application and our mobile website.
Chegg Writing. Our Chegg Writing service consists of a free, ad supported,ad-supported service and a premium paid subscription service. This service providing students with a suite of tools, including plagiarism detection scans, grammar and writing fluency checking, expert personalized writing feedback, and premium citation generation. Students can create citations from over 7,000 citation styles including MLA, APA, and The Chicago Manual of Style. Students can also upload papers to have them scanned for plagiarism by checking against billions of sources and to have them checked for over 200 types of writing and grammar errors. Students can also have a writing professional proofread their papers and receive personalized feedback. Chegg Writing also includes the popular websites such aswebsite properties EasyBib, Citation Machine, BibMe, and CiteThisForMe which provide tools with capabilities such as citation, bibliography, anti-plagiarism, grammar, sentence structure, spell check, and instant feedback to help students revise, edit, and improve their written work. When students need to cite their sources in written work, they can use our writing tools to automatically generate sources in the required formats.CiteThisForMe.
Chegg Tutors. Complementing our other study tools, students can find human help on our learning platform through our network of live tutors. Students can access help online, anywhere, anytime, either synchronously or asynchronously. Instead of paying for expensive, offline tutors that require scheduling and travel time, students can find tutors whenever they need additional help on a subject. Our tutors are qualified to help students with a wide range of topics, including science, technology, engineering, mathematics, business, history, foreign languages, and English literature, as well as test prep and a variety of other highly-requested subjects. Students can subscribe to weekly or monthly packages, or choose to use the service on a pay-as-you-go basis.
Chegg Math Solver.Math. Our Chegg Math Solver subscription service isservices, including Mathway, help students understand math by providing a step-by-step math problem solver and calculator that helpshelp students instantly solve problems in Pre-Algebra, Algebra, Pre-Calculus, Calculus, and Linear Algebra. When students need help solving math problems, they can use our tool to receive guided instructional explanations to better understand the why and how for each step. This subscription service is available on our website and on mobile devices through our native application and our mobile website.step within a range of math topics.
Thinkful.Busuu. In October 2019,January 2022, we completed our acquisition of Busuu Online S.L. (Busuu), an online language learning company that offers a comprehensive solution through a combination of self-paced lessons, live classes with expert tutors and the ability to learn and practice with members of the Busuu language learning community. The Busuu methodology has been developed by leading experts in online language learning pedagogy and can bring students from novice to advanced speakers of a language rapidly and enjoyably. When students want to learn a new language for work, study or personal interest, they can use our service to access comprehensive courses in 13 languages, connect with Busuu’s community of native speakers to practice their conversation and receive expert instruction from our highly qualified teachers. Busuu will expand our existing offerings and global reach through language learning, allowing us to drive further into international markets.
Thinkful.Thinkful ais our skills-based learning platformservice that offers professional courses in software engineering, data science, data analytics, product design,along with networking, interviewing, and product managementcareer services. Thinkful is offered directly through our website and through partners that connect employers with top learning providers to students across the United States.provide employees with upskilling opportunities.
Other Services. We also provide students with other services, such as Chegg Life, Chegg Prep (formerlyand Chegg Flashcards) and Internships.
Required Materials
Print Textbooks and eTextbooks. For students looking to save on the cost of required materials, we rent and sell both print textbooks and eTextbooks. Most of the print textbook transactions are rentals, although we also offer both new and used bookstextbooks for sale at a slight markup to our acquisition cost. In 2014, we implementedWe work with a partnership with Ingram, which we expanded in May 2015, so that Ingram fulfilled all ofthird party logistic provider to provide warehousing and logistic services for our print textbook rentals and sales. In October 2019, we signed a strategic logistics agreement with FedEx Supply Chain, Inc. (FedEx). In January 2020, we began making purchases in our print textbook library and in February 2020, we began to transition logistics and warehousing services from Ingram to FedEx.textbooks. We have also entered into agreements with other partners to provide their textbooks for rental or sale. In participation with certain publishers, we also offer “Instant Access” to eTextbooks as a one-week free trial of our eTextbook service, and allows the student toallow students access the eTextbook while the print copy is in transit. All eTextbooks obtained from Chegg can be accessed anytime and anywhere and are viewed through the VitalSource Bookshelf which provides students with eTextbooks on PCs, tablets and smart phones, providing access anytime, anywhere that students are connected to the Internet and students can save a portion of the book for offline access. Theour eTextbook reader that enables fast and easy navigation, keyword search, text highlighting, note taking and further preserves those notes in an online notepad with the ability to view highlighting and notes across platforms.
Supplemental Materials. We also offer students access to other materials from publishers, professors, students and subject matter experts. These include related materials like study guides, lab manuals or digital services provided by publishers, commonly known as “Whole Course Solutions” or “Integrated Learning Systems.” We tailor our merchandising of these materials based on the student’s core textbook.
Technology and Platform Integration
Our technology is designed to create a direct-to-student learning platform that will continue to enable our growth at scale. We employ technological innovations whenever possible to increase efficiency and scale in our business. Our products rely upon and leverage the information underlying our Student“Student Graph” and “Content Graph Technology” discussed in more detail below. We will continue to invest in building technologies around our data, search and solutions. The key elements of our technology platform are:
Personalization and Merchandising Technology
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We create a personalized experience for each student throughout our learning platform, building awareness of our multiple services and connecting them with opportunities through third-party partners and brands. This personalization and customization results from our Student Graph and our search technology.
Student Graph. Our Student Graph is the accumulation of the collective activity of students in our learning platform. Students generate valuable information each time they engage with our learning platform. Our Student Graph also includes information we access from public and private sources such as textbook information, information about colleges and scholarship data. We can collect, organize and process this information to algorithmically create a personalized experience for each student on our network.
Search. Search is an easy on-ramp for students to discover all of our services. Students can search by book, ISBN, author’s name or course. Many students come to us for textbook rentals, and in our search results we not only provide the relevant textbook, but also begin to build awareness of our other services. For instance, when a student searches for a textbook, we can show relevant Chegg Study solutions and available Chegg Tutors that are knowledgeable about the searched textbook.or Flashcard decks.
Data Sourcing and Content Graph Technology
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Not all information relevant to students on our platform is made available by service, product, list or user-input. Therefore, we have developed proprietary technologies to collect disparate, distributed sets of data. For example, we access data from public and private sources to integrate into our platform to inform our decisions about our textbook catalog and pricing.
Mobile Solutions.
We have mobile applications on Apple iOS and Google Android. Our mobile apps are built as hybrid applications leveraging the Chegg application programming interface (API) and server-side HTML5. We also maintain a mobile version of our website: m.chegg.com.. Taking advantage of capabilities unique to the mobile platform, we offer some functionality on mobile that is not available on our website, such as textbook barcode scanning for price comparisons and Chegg Flashcards.Prep.
Real-time Sourcing and Pricing Technologies
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We have internally developed proprietary pricing and sourcing systems that consider market price, content selection and availability, and other factors, in determining price and origin of content and services we offer to students.
Programmatic Advertising.
Our programmatic advertising technology includes a combination of a deep understanding of programmatic technology trends with data science, engineering and machine learning. The result is an online advertising platform that maximizes the value of the digital impressions we serve.
Infrastructure and Applications
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Our technology resides at a major cloud-hosting provider divided between the U.S. West Coast and U.S. East Coast. We use one region for our test/development/stage/failover environment and the other for our production environment.providers globally. Our architecture consists primarily of front end applications, backend services, operational databases, and reporting subsystems. We use industry standard logging and monitoring tools to ensure uptime. The architecture is also designed to allow for expansion into new international markets.
NetworkInformation Security. Our platform includes encryption, antivirus, firewall, intrusion prevention, and patch-management technologies to help protect our systems distributed across cloud-hosting providers and our business offices. Our existing products and services undergo periodic security assessment. New features are developed according to our secure software development lifecycle process. We also monitor for anomalies relating to authentication, data transfers, system, and user behavior as well as cloud configuration changes.
Internal Management Systems. We rely on third-party technology solutions and products as well as internally developed and proprietary systems, in which we have made substantial investment, to provide rapid, high-quality customer service, internal communication, software development, deployment, and maintenance.
Customers
In 2019, 5.82021, 8.9 million individualscustomers paid for our products and services, up from 5.18.2 million and 4.25.8 million in 20182020 and 2017,2019, respectively.
Sales and Marketing
Students
We use several major direct marketing channels to reach students. We deploy search engine optimization (SEO) techniques designed to increase the visibility of Chegg.com content in organic, unpaid search engine result listings. We supplement our SEO efforts through search engine marketing using keyword simulation and bid management tools to analyze and categorize search keywords, optimize bidding, increase impressions and drive conversion. We also drive brand awareness with streaming radio and display advertising on major online and mobile advertising networks, such as Spotify and Google Display Network. We integrate our textbook services on affiliates’ websites and work with a large advertising network that recruits individual online affiliates in exchange for pre-determinedpredetermined revenue share or commissions. We utilize three types of email marketing campaigns: onboarding programs to drive activation and retention, personalized cross-sell campaigns to deepen engagement, and promotional campaigns to drive sales and interests. We use social media to manage organic and paid programs across top websites, including Facebook, Instagram, TwitterTikTok, and YouTube. We also acquire and engage students through content generated by student bloggers, syndicated through partners, around key student concerns and interests such as admissions, transition to college, picking a major, and resume preparation. Through our campus activation programs, we partner with brands and influencers to bring entertainment events, such as concerts, trial promotions, and product giveaways to students.
Brands
We secure contracts with brands through direct sales by our field sales organization, which sells brand advertising services to large brand advertisers seeking to reach and engage college and high school students. This team has field sales people and marketing support.
Student Advocacy
We are committed to providing a high level of customer service to our students.students and to our brand promise of putting students first. We trust our students, understand the critical role our products and services have in their education,learning journey, and strive to resolve all problems quickly and thoroughly. Our student advocacy team can be reached directly through phone, email, and online chat during business hours. We also proactively monitor social media to identify and solve problems before we are otherwise informed of their existence. We endeavor to respond to students’ concerns within five minutes.
Competition
While we do not have any competitors that compete with us across our business in its entirety, we face significant global competition in each aspect of our business.product and service offerings. Our Chegg Services face competition from different businesses depending on the offering. For Chegg Study, our competitors primarily include platforms that provide study materials and online instructional systems, such as Course Hero, Quizlet, Khan Academy, Bartleby, and Bartleby.Brainly. For Chegg Writing, we primarily face competition from other citation generating and grammar and plagiarism services, such as Grammarly. For Chegg Tutors, we face competition from other online tutoring services such as Wyzant. For Chegg Math Solver and Mathway, we face competition from other equation solver services, such as MathwayPhotomath and Symbolab. For Busuu, our competitors primarily include language learning platforms, such as Duolingo and Babbel. For Thinkful, we face competition from other online learning platforms and online "bootcamp"“skills accelerator” courses such asboth in the direct-to-consumer category, including General Assembly, Galvanize, Inc., Flatiron School, Codecademy, DataCamp, and Lambda, School.Inc., as well as white-label and co-branded providers who compete for adult learners through third party institutions, including 2U, Inc., Simplilearn, and Kenzie Academy. Additionally, the market for textbooks and supplemental materials is intensely competitive and subject to rapid change. We face competition from college bookstores, some of which are operated by Follett and Barnes & Noble Education, online marketplaces such as Amazon.com, providers of eTextbooks, as well as various private textbook rental websites. Many students purchase from multiple textbook providers, are highly price sensitive, and can easily shift spending from one provider or format to another. As a consequence, our Required Materials product line, which includes eTextbooks, competes primarily on price and further on selection and functionality and compatibility of the eTextbook Reader we utilize across a wide variety of desktop and mobile devices.
We believe that we have competitive strengths some of which are discussed above, that position us favorably in each aspect of our business. However, the education industry is evolving rapidly and is increasingly competitive. A variety of business models are being pursued or may be considered for the provision of digital learning tools, print textbooks and eTextbooks, some of which may be more profitable or successful than our business model.
Intellectual Property
We use proprietary technology to operate our business and our success depends, in part, on our ability to protect our technology and intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as contractual restrictions, to establish and protect our intellectual property. We maintain a policy requiring our employees, contractors, consultants and other third parties to enter into confidentiality and proprietary rights agreements to control access to our proprietary information. These laws, procedures and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology.
As of December 31, 2019,2021, we had 3040 issued patents that will expire between 2031 and 20372039 and 1315 patent applications pending in the United States. We ownAs of December 31, 2021, we also owned four U.S. copyrights registrations and havehad unregistered copyrights in our software documentation, marketing materials, and website content that we develop. develop, owned over 700 registered domain names, and owned 25 U.S. trademark registrations and 42 foreign registrations.
We own the registered U.S. trademarks Chegg, Chegg.com, Chegg Study, internships.com, Research Ready, EasyBib, the Chegg “C” logo, Busuu and Thinkful, among others, as well as a variety of service marks. As of December 31, 2019, we owned over 700 registered domain names. We also have a number of pending trademark applications in the United States and foreign jurisdictions and unregistered marks that we use to promote our brand. From time to time we expect to file additional patent, copyright, and trademark applications in the United States and abroad.
Government Regulation
We are subject to a number of laws and regulations in the United States and abroad that affect companies conducting business on the Internet and in the education industry, many of which are still evolving and could be interpreted in ways that could harm our business. The manner in which existing laws and regulations will be applied to the Internet and students in general and how they will relate to our business in particular, are often unclear. For example, we often cannot be certain how existing laws will apply in the e-commerce and online context, including with respect to such topics as privacy, cybersecurity, defamation, pricing, credit card fraud, advertising, taxation, sweepstakes, promotions, content regulation, financial aid, scholarships, student matriculation and recruitment, quality of products and services, and intellectual property ownership and
infringement. In addition, we may be subject to state oversight for Thinkful's skills-based learning programs, including regulatory approvals and licensure for the course content, the faculty members teaching the content, and the recruiting, admissions, and marketing activities associated with the business.
Numerous laws and regulatory schemes have been adopted at the national and state level in the United States, and in some cases internationally, that have a direct impact on our business and operations. For example:
The CAN-SPAM Act of 2003 (CAN-SPAM) establishes requirements for sending commercial email and similar laws adopted by a numberrequires commercial email senders to honor consumers’ requests to not receive email. Violators of states, regulate unsolicited commercial emails, createCAN-SPAM are subject to both civil and potentially criminal penalties for emails containing fraudulent headers, and control other abusive online marketing practices. Similarly, thepenalties. The U.S. Federal Trade Commission (FTC) has guidelines that impose responsibilities on us with respect to communications with consumers and impose fines and liability for failure to comply with rules with respect to advertising or marketing practices it may deem misleading or deceptive. Similarly, several states have enacted laws that prohibit “falsity or deception” in commercial emails and that give recipients of such emails a right of action and ability to seek damages.
The Telephone Consumer Protection Act of 1991 (TCPA) restricts telemarketing and the use of automated telephone equipment.dialing systems. The TCPA limitsregulates the use of artificial or prerecorded voice messages, fax messages, and the use of automatic dialing systems artificial or prerecordedfor both voice messages, SMScalls and sending text messages, and fax machines. It also applies to unsolicited text messages advertising the commercial availability of goods or services.messages. Additionally, a number of states have enacted statutes that address telemarketing. For example, some states, such as California, Illinois,Colorado, Florida, Indiana, Louisiana, Massachusetts, Mississippi, Missouri, Oklahoma, Pennsylvania, Tennessee, Texas and New York,Wyoming, still have created do-not-call lists. Other states, such as Oregon and Washington, have enacted “no rebuttal statutes” that require the telemarketer to end the call when the consumer indicates that he or she is not interested in the product being sold. Restrictions on telephone marketing, including calls and text messages, are enforced by the FTC, the Federal Communications Commission, states, and through the availability of statutory damages and class action lawsuits for violations of the TCPA.
The Credit Card Accountability Responsibility and Disclosure Act of 2009, or CARD Act, and similar laws and regulations adopted by a number of states regulate credit card and gift certificate use fairness, including expiration dates and fees. Our business also requires that we comply with payment card industry data security and other standards. In particular, we are subject to payment card association operating rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, reputational damage, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business and results of operations could be adversely affected.
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| Regulations related to the Program Participation Agreement of the U.S. Department of Education and other similar laws that regulate the recruitment of students to colleges and other institutions of higher learning. |
Regulations related to the Program Participation Agreement of the U.S. Department of Education and other similar laws that regulate the recruitment of students to colleges and other institutions of higher learning.
The Family Educational Rights and Privacy Act (FERPA) protects the privacy of student records and gives students (and their parents in the case of minors), certain rights (such as data correction and data production), with respect to their student records. FERPA restricts the circumstances in which we can disclose student records. In addition, many states have passed student privacy laws, some of which are more restrictive than FERPA, and therefore do not pre-empt FERPA.
The Children’s Online Privacy Protection Act imposes additional restrictions on the ability of online services to collect, use, and disclose personal information from minors. In addition, certain states, including Utah and Massachusetts, have laws that impose criminal penalties on the production and distribution of content that is “harmful to a minor.” Delaware Code 1204C prohibits websites and applications directed at children from marketing or advertising products or services that are inappropriate for children.
California’s Privacy Rights for California Minors in the Digital World Act (Eraser Bill) permits minors to remove or request and obtain removal of content or information posted on our services. The Eraser Bill also has special requirements for marketing and advertising certain products based on personal information specific to a minor or knowingly using, disclosing or compiling or allowing a third party to do so.
California has several laws protecting the literary works read by California residents. The California Reader Privacy Act protects information about the books California residents read from electronic services. Such information cannot be disclosed except pursuant to an individual’s affirmative consent, a warrant or court order with limited exceptions, such as imminent danger of serious injury. California Education Code Section 99122 requires for-profit postsecondary educational institutions to post a social media privacy policy on their website.
The Digital Millennium Copyright Act (DMCA) provides relief for claims of circumvention of copyright protected technologies and includes a safe harbor intended to reduce the liability of online service providers for hosting, listing, or linking to third-party content that infringes copyrights of others.
The Communications Decency Act provides that online service providers will not be considered the publisher or speaker of content provided by others, such as individuals who post content on an online service provider’s website.
The California Consumer Privacy Act (CCPA), which went into effect on January 1, 2020, provides consumers the right to know what personal data companies collect, how it is used, and the right to access, delete, and opt out of the sale of their personal information to third parties. It also expands the definition of personal information and gives consumers increased privacy rights and protections for that information. The CCPA also includes special requirements for California consumers under the age of 16.
EmployeesThe Nevada Online Privacy Law, which went into effect October 1, 2021 provides Nevada residents with the right to know our data practices and the right to opt-out of the sale of certain “covered information.”
The California Privacy Rights Act (CPRA), Virginia Consumer Data Protection Act (CDPA) and Colorado Privacy Act (CPA) all come into effect on January 1, 2023. These laws provide consumers with the right to know what personal data companies collect, how it is used, and the right to access, delete, and opt out of the sale of their personal information to third parties. The CPRA also includes special requirements for California consumers under the age of 16.
The General Data Protection Regulation (GDPR) which went into effect in May 2018 gives European Union (EU) residents, among other things, rights to right to know what personal data we collect from them, how it is used, and the right to access, correct, delete, and opt out of the sale of their personal information to third parties. We are also required to obtain consent from consumers in certain circumstances and adhere to certain data transfer mechanisms to transfer EU personal data to certain other jurisdictions. The Safe Harbor framework that many companies relied on to transfer data was recently found to be invalid. We rely on standard contracts for data transfers from the EU, and the standard contractual clauses were recently substantially revised, and we do not yet fully comply with implementing the new standard contractual clauses. As regulatory authorities continue to issue further guidance on personal data, we could suffer additional costs, complaints or regulatory investigations or fines. The GDPR sets a maximum fine of €20 million or 4% of annual global turnover for infringements – whichever is greater. If we are unable to transfer data between and among countries in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our systems and operations, and could adversely affect our financial results.
The United Kingdom’s Data Protection Act 2018 (Data Protection Act) and UK General Data Protection Regulation (“UK GDPR”) apply to our activities in the United Kingdom. They have similar requirements to those noted above relating to GDPR. The Data Protection Act and UK GDPR set a maximum fine of £17.5 million or 4% of annual global turnover for infringements – whichever is greater – for infringements.
Israel’s Basic Law: Human Dignity and Liberty, 5752 1992 (IBL HDL), the Protection of Privacy Law, 5741-1981 and the regulations promulgated thereunder (collectively, the PPL), and the guidelines of the Israel Privacy Authority (IPA Guidelines) apply to our activities in Israel. PPL gives Israeli residents, among other things, the right to know what personal data we collect from them, how it is used, and the right to access, correct, and erase their personal information to third parties. Under the PPL, we are required to, among other things, register our databases in Israel, take steps to secure personal data and sensitive data such as creating a database settings document, developing an information security policy and training employees. PPL also has strict regulations regarding transferring data outside of Israel. PPL provides for both civil and criminal penalties with a maximum financial penalty of ILS 25,000 and additional fines if the violation is on-going, and a maximum criminal penalty of imprisonment for up to five years.
Human Capital
As of December 31, 2019,2021, we had 1,4011,736 employees, of which 1,613 were full-time employees. We also engage temporary employees and consultants.123 were part-time. Additionally, 851 were located outside the United States. None of our employees are represented by labor unions orworkforce is covered byunder a collective bargaining agreement. We appreciate that our employees are our greatest asset and place a premium on the importance of their retention, growth, and development. We offer competitive compensation, including salary and equity, and benefits packages tailored to each of our locations around the world. All employees are offered training and development opportunities, from leadership training and coaching to career development programs for all levels of employees. We believe that a diverse workforce makes us a stronger company and helps us better serve the needs of our customers. We are focused on understanding our culture, belonging and diversity strengths and opportunities and defining and executing on a strategy to support further progress. We have not experienced anyemployee-driven resource groups that are aligned around creating a culture of belonging and awareness for our diverse workforce. These groups are centered around gender, ethnicity, sexual orientation or other shared attributes, which we believe help build
community and enable opportunities for both personal and professional development. We continue to focus on building a strong talent pipeline to create more opportunities for workplace diversity, support greater representation within the organization, and build a company that is truly reflective of the diverse audience we serve. Please see the Environmental, Social, and Corporate Governance (ESG) section of our investor relations website (www.investor.chegg.com/esg) for relevant metrics and to learn more about Chegg’s efforts around culture, belonging, diversity, and inclusion.
As a result of the COVID-19 pandemic, the majority of our global employee population continues to work stoppagesremotely. This comes with many challenges for our employees which provided us with the opportunity to increase our support programs. To support our employees, we decided to continue our childcare reimbursement program into 2022, provide benefits related to substance abuse issues for employees, and continue to provide flexible time off for employees to deal with the difficulties of an extended remote work environment. We also increased our all employee communications as well as updated our onboarding programs to help employees feel connected in a new virtual world.
Environmental, Social, and Corporate Governance (ESG)
At Chegg, our approach to ESG is tied to our mission to help every learner achieve their best, in school and beyond. We believe our greatest impact is enabling students to succeed and improving the outcome of their education so that they can quickly move from learning to earning. To do this, we focus on listening to their needs, elevating and amplifying their voices, and taking action to provide real life solutions.
Just like our approach with students, we take the same level of care to engage with our stakeholders to help prioritize our ESG efforts, which we categorize into six pillars, as outlined below. This approach is informed by the materiality assessment we conducted in 2021, in which we engaged both internal and external stakeholders to identify the ESG topics that are most relevant to our business and to society.
Focus on People
We focus on people by making Chegg a great place to work. We foster an environment centered on respect for all people, where diversity and inclusion are celebrated, and people have the opportunity to develop and advance their careers. Our employees are one of our biggest competitive advantages, and it's our responsibility to take care of them.
Help Learners
Learners are evolving and so is Chegg. Learners need more flexibility when it comes to education, including affordable, on-demand help that delivers positive learning outcomes. We are extremely proud to have helped so many learners succeed on their learning-to-earning journey.
Give Back
Chegg’s business activities as well as our philanthropic, research and community efforts align with many of the United Nations’ Sustainable Development Goals. We have identified three of these goals where we believe Chegg’s influence is the greatest: #4 – Quality Education, #3 – Good Health and Well-Being, and #2 – Zero Hunger.
Act Responsibly
We understand that to be a true customer champion and to gain and preserve our customers’ trust, we must operate all facets of our business with integrity, including a focus on protecting learners’ data. We hold ourselves to the highest ethical standards and strive for full compliance with applicable laws and regulations.
Govern Effectively
Chegg has a commitment to strong corporate governance practices. Corporate governance is part of our culture and is founded on our daily commitment to living values and principles that recognize our ethical obligations to our employees, customers and stockholders.
Operate Sustainably
Chegg strives to make the planet a better place. To do our part, we are focused on sustainable operations and we considerare committed to finding ways to help reduce our environmental impact. We know that we owe it to our customers, employees, and society to use environmentally sound practices and to find ways to limit our contribution to global climate change.
To learn more about our ESG efforts, please visit the ESG section of our investor relations with our employees to be good.site: www.investor.chegg.com/esg.
Seasonality
Information about seasonality is set forth in the section “Seasonality of Our Business” in Part II, Item 7 of this Annual Report on Form 10-K.
Corporate History
We were incorporated in Delaware in July 2005. We2005 and launched our online print textbook rental business in 2007. We hired our current Chief Executive Officer in 2010, who implemented our current business strategy to create the leading direct-to-student learning platform for students to help them improve their outcomes. Beginning in 2010, we made a series of strategic acquisitions to expand our Chegg Services, including Cramster in 2010 to add Chegg Study, InstaEDU in 2014 to add Chegg Tutors, internships.com in 2014 to add to our Internship service,Chegg Internships, Imagine Easy Solutions in 2016 to add Chegg Writing and programmatic advertising, Cogeon GmbH in 2017 to add Chegg Math Solver, WriteLab in 2018 to add enhanced features to Chegg Writing, StudyBlue in 2018 to add Chegg Prep, (formerly Chegg Flashcards), and Thinkful in 2019 to add aour skills-based learning platform.platform, Mathway in 2020 to strengthen our Chegg Math Solver, and Busuu in 2022 to add a language learning service. We completed our initial public offering (IPO) in November 2013, a follow-on offering in August 2017, and issued convertible senior notes in April 2018, and March/April 2019.2019, and August 2020, and completed an equity offering in February 2021. Our common stock is listed on the New York Stock Exchange under the symbol “CHGG.” Our principal executive offices are located at 3990 Freedom Circle, Santa Clara, California 95054 and our telephone number is (408) 855-5700.
Available Information
Our website address is www.chegg.com and our Investor Relations website address is investor.chegg.com.www.investor.chegg.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are filed with the U.S. Securities and Exchange Commission (SEC), which maintains an Internet site at www.sec.gov to access such reports. We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on our website at investor.chegg.comwww.investor.chegg.com when such reports are available on the SEC’s website. We use our www.chegg.com/mediacenterpress website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor www.chegg.com/mediacenter,press, in addition to following our press releases, SEC filings, and public conference calls and webcasts.
The contents of the websites referred to above and throughout this Annual Report on Form 10-K are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
The risks and uncertainties set forth below, as well as other risks and uncertainties described elsewhere in this Annual Report on Form 10-K including inon our consolidated financial statements and related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or in other filings by Chegg with the SEC, could adversely affect our business, financial condition, results of operations, and the trading price of our common stock. Additional risks and uncertainties that are not currently known to us or that are not currently believed by us to be material may also harm our business operations and financial results. Because of the following risks and uncertainties, as well as other factors affecting our financial condition and results of operations, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Summary of Risk Factors
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Form 10-K and our other filings with the SEC, before making an investment decision regarding our common stock.
•The uncertainty surrounding the evolving educational landscape, the COVID-19 pandemic, the state of the student, and the demand for our evolving offerings make it difficult to predict our operational trends and results of operations.
•Our future revenue and growth depend on our ability to continue to attract new students to, and retain existing students on, our learning platform.
•If our efforts to build and maintain strong brands are not successful, we may not be able to grow our student user base, which could adversely affect our results of operations.
•The COVID-19 pandemic has impacted, and may continue to impact, our business, key metrics, and results of operations in volatile and unpredictable ways.
•We intend to offer new products and services to students to grow our business. If our efforts are not successful, our business, results of operations, and financial condition could be adversely affected.
•Our current operations are international in scope and we plan to expand our international operations, which exposes us to risks inherent in international operations.
•We face competition in all aspects of our business, and we expect such competition to increase.
•We have a history of losses and we may not achieve or sustain profitability in the future.
•We rely on AWS and other third-party software and service providers to provide systems, storage, and services for our website and any disruption of such services or a material change to our arrangements could adversely affect our business.
•If we fail to convince brands of the benefits of advertising on our learning platform, or if platforms such as Google Chrome, Safari, or Firefox limit our access to advertising and marketing audiences, or the data required to effectively reach those audiences, our business could be harmed.
•Government regulation of education and student information is evolving, and unfavorable developments could have an adverse effect on our business, results of operations, and financial condition.
•Colleges and certain governments may restrict online access or access to our website, which could lead to the loss of or slowing of growth in our student user base and their level of engagement with our platform.
•If we become subject to liability for the Internet content that we publish or that is uploaded to our websites by students, our results of operations could be adversely affected.
•Computer malware, viruses, hacking, phishing attacks, and spamming could harm our business and results of operations.
•Our stock price has been and will likely continue to be volatile.
•We may be subject to short selling strategies that may drive down the market price of our common stock.
Risks Related to Our Business and IndustryGrowth
Our limited operating historyThe uncertainty surrounding the evolving educational landscape, the COVID-19 pandemic, the state of the student, and the demand for our evolving digital offerings make it difficult to evaluatepredict our current businessoperational trends and future prospects.results of operations.
Although we began our operations in July 2005, we did not launch our online print textbook rental business until 2007 or begin generating revenues at scale from print textbook rentals until 2010. We completed a transition to a new modelThe uncertainty surrounding the evolving educational landscape, the COVID-19 pandemic, employment opportunities for our Required Materials product line in November 2016 through our strategic partnership with Ingram to accelerate our transition away fromstudents, the more capital-intensive aspectsnumber of classes and the difficulty of the print textbook rental business. We continue to market, use our branding,classes that the students take, and maintain the customer experience around print textbook rentals, while through the end of 2019, Ingram or other partners fund all rental textbook inventorydemand and have title and risk of loss related to textbook rentals for the textbooks they own. Beginning in 2020, we will begin transitioning our textbook rental business whereby we will resume owning textbooks, but will work with FedEx as our vendor for warehousing and fulfillment services.
Since July 2010, we have focused on expanding our offerings, in many instances through the acquisition of other companies, to include supplemental materials, Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, and Thinkful. For example, in October 2019, we acquired Thinkful to provide a skills-based learning platform that offers professional courses in software engineering, data science, data analytics, product design, and product management directly to students across the United States. In June 2018, we launched the Chegg Math Solver to help students with their algebra, pre-calculus, and calculus math problems. Our newer products and services, or any other products and services we may introduce or acquire, may not be integrated effectively into our business, achieve or sustain profitability, or achieve market acceptance at levels sufficient to justify our investment.
Our ability to fully integrate new products and services into our learning platform or achieve satisfactory financial results from them is unproven. Because we have a limited operating history, in particular operating a fully digital platform, and the market for our products and services including newly acquired or developed products and services, is rapidly evolving,make it is difficult for us to predict our operational trends and results of operations, particularly with respect to our newer offerings, and the ultimate market size of the market for our products and services. If the market and demand for a comprehensive learning platform does not develop as we expect, or if we fail to address the needs of this market, our business willand prospects would be harmed.
We face risks, expenses, and difficulties related to our specific business model, as well as those typically encountered by companies in their early stage of development, including but not limited tothe risks more fully described throughout this “Risk Factors” section, which impede our ability to successfully:successfully accomplish the following, among other items:
execute on•enhance and expand our evolving business model,Chegg Services offerings including our transition back to the ownership of print textbooks;
transition fulfillment logistics from Ingram to FedEx;
developdeveloping new products and services, both independentlyservices;
•develop and with developers or other third parties;pursue a profitable business model and pricing strategy;
•acquire complementary products and services to expand our offerings and enhance our learning platform;offerings;
•attract and retain students and increase their engagement with both Chegg Services and Required Materials;
•expand our learning platform;offerings internationally;
•prevent students from stealing accounts, sharing accounts and cheating with other students;
•prevent students from misusing our products and services in ways that violate our terms of services, applicable laws, or the growthcode of our business, including increasing or unforeseen expenses;conduct at their educational institutions; and
•develop and scale a high-performance technology infrastructure to efficiently handle increased usage by students, especially during peak periods prior to each academic term;term.
maintain and manage relationships with strategic partners, including distributors, publishers, wholesalers, colleges, and brands;
ensure our platform remains secure and protects the information of students, tutors and other users;
attract and retain brands to our marketing services;
develop and pursue a profitable business model and pricing strategy;
compete with companies that offer similar services or products;
expand into adjacent markets;
enter into a highly regulated skills-based business;
navigate the ongoing evolution and uncertain application of regulatory requirements, such as privacy laws, to our business, including our new products and services;
integrate and realize synergies from businesses that we acquire; and
expand, operate, and compete in international markets.
We have encounteredanticipate that our ability to accurately forecast financial results for future periods will be most limited at the time we present our second quarter financial results, which will generally occur midsummer and will continue to encounter these risks and ifprecede the “fall rush.” Additionally, we do not manage them successfully, our business, financial condition, results of operations, and prospects may be materially and adversely affected.
Our results of operations are expected to be difficult to predict based on a number of factors.
We expect our results of operations to fluctuate in the future based on a variety of factors, many of which are outside our control and difficult to predict. As a result, period-to-period comparisons of our results of operations may not be a good indicator of our future or long-term performance. The following factors may affect us from period-to-period and may affect our long-term performance:
•our ability to attract, retain and retainengage students and increase their engagement with our learning platform, particularly related to our Chegg Services subscribers;offerings;
•changes to Internet search engines and application marketplaces that drive traffic to our platform;
•the rate of adoption of our offerings;
•price competition and our ability to successfully utilize react appropriately to such competition;
•the information gathered fromstrength of the economy and the availability of attractive employment opportunities for our learning platformstudents;
•the trend of declining college enrollment;
•the types of classes our students are taking and whether they choose to enhancetake those classes pass/fail;
•the number and difficulty of assignments that professors are assigning and the number of assessments that professors are administering;
•changes by our Student Graphcompetitors to their product and service offerings, including price and materials;
•our ability to integrate acquired businesses, including personnel;
•our ability to identify and target sales of complementary products and services to our students;
•changes in demand and pricing for print textbooks and eTextbooks;
•the ability of our logistics partnerspartner to efficiently manage fulfillment processes, including significant volume increases during peak periods and as a result of the potential growth in volume of transactions over time;operate fulfillment;
our transition from Ingram to FedEx for print textbook fulfillment;
our ability to integrate the Chegg and Thinkful businesses;
changes by our competitors to their product and service offerings;
price competition and our ability to react appropriately to such competition;
our ability and Ingram's ability to manage Ingram's textbook library and, commencing in 2020, our ability and FedEx's ability to manage our textbook library;
our ability to execute on our strategic partnerships with our logistics partners;
•disruptions to our internal computer systems and our fulfillment informationpartner’s informational technology infrastructure,systems, particularly during peak periods;
the amount•government regulations, in particular regarding privacy, academic integrity, advertising and timing of taxation policies;
•operating costs and capital expenditures relating to expansion of our business, operations,business; and infrastructure;
our ability to successfully manage the integration of operations, technology and personnel resulting from our acquisitions;
government regulations, in particular regarding privacy and advertising and taxation policies; and
•general macroeconomic conditions, and economic conditions specific to higher education.including as a result of COVID-19.
We have a historyfocused in the past, and expect to continue to focus in the future, on expanding our offerings, in many instances through the acquisition of lossesother companies, such as Busuu, Mathway and weThinkful. Our newer products and services, such as skills-based learning and language learning, may not be integrated effectively into our business, achieve or sustain profitability, in the future.
or achieve market acceptance at levels sufficient to justify our investment. We have experienced significant net losses since our incorporation in July 2005,encountered and we maywill continue to experience net losses in the future. Our net losses for the years ended December 31, 2019, 2018,encounter these risks and 2017 were $9.6 million, $14.9 million, and $20.3 million, respectively. As of December 31, 2019,if we had an accumulated deficit of $416.3 million. We expect to make significant investments in the development and expansion ofdo not manage them successfully, our business, financial condition, results of operations, and prospects may be materially and adversely affected.
Our future revenue and growth depend on our cost of revenues and operating expenses may increase. We may not succeed in increasing our revenues sufficientlyability to offset these higher expenses, and our efforts to grow the business may prove more expensive than we currently anticipate. We may incur significant losses in the future for a number of reasons, including slowing demand for our products and services; increasing competition, particularly for the price of textbooks; decreased spending on education; and other risks described in this Annual Report on Form 10-K. We may encounter unforeseen expenses, challenges, complications, and delays and other unknown factors as we pursue our business plan and our business model continues to evolve. While Chegg Services revenues have grown in recent periods, this growth may not be sustainable and we may not be able to achieve profitability. To achieve profitability, we may need to change our operating infrastructure and scale our operations more efficiently. We also may need to reduce our costs or implement changes in our product offerings to improve the predictability of our revenues. If we fail to implement these changes on a timely basis or are unable to implement them due to factors beyond our control, our business may suffer. If we do achieve profitability, we may not be able to sustain or increase such profitability.
If our effortscontinue to attract new students to, use our products and services and increase student engagement withretain existing students on, our learning platform are not successful, our business and results of operations will be adversely affected. Our future revenues depend on our ability to attract new students, requiring us to invest continuously in marketing to the student population to build brand awareness and loyalty, which we may not be able to accomplish cost-effectively or at all.platform.
The growth of our business depends on our ability to attract new students to use our products and services and to increase the level of engagement by existing students with our learning platform. The substantial majority of our revenues depends on small transactions made by a widely dispersed student population with an inherently high rate of turnover primarily as a result of graduation. Many of the students we desire to attract are accustomed to obtaining textbooks through bookstores or used booksellers. The rate at which we expand our student user base and increase student engagement with our learning platform may decline or fluctuate because of several factors, including:including, among others:
•our ability to engage high school students with our suite of Chegg Writing, Chegg Tutors, Chegg Math Solver, Chegg Prep (formerly Chegg Flashcards),Services and College Admissionsto introduce new products and Scholarship Services;services that are favorably received by students;
•our ability to produce compelling supplemental materials and engaging services, for students to improve their outcomes throughout their educational journey;
our ability to produce engaging mobile applications and websites for students;
•the efficacy of our "Learn with Chegg" initiative and the ability of the enhanced personalization of our content to further retain and engage students to engage withon our learning platform;
•our ability and our fulfillment partner'spartner’s ability to consistently provide students with a convenient, highhigh- quality experience for selecting, receiving, and returning print textbooks;
•our ability to grow our skills partnerships with providers who link us to employers and their learners;
•our ability to accurately forecast and respond to student demand for print textbooks;
•the pricing of our physical textbooks and eTextbooks for rental or sale in relation to other alternatives, including the prices offered by publishers or by other competing textbook rental providers;alternatives;
the quality and prices of our offerings compared to those of our competitors;
•the rate of adoption of eTextbooks and our ability to capture a significant share of that market;
•changes in student spending levels;
changes inlevels or the number of students attending college; and
•the effectiveness of our sales and marketing efforts, including our success in generating word-of-mouth referrals; andreferrals.
our ability to introduce new products and services that are favorably received by students.
If we do not attract more students to our learning platform and the products and services that we offer or if students do not increase their level of engagement with our platform, our revenues may grow more slowly than expected or decline. The student demographic is characterized by rapidly changing tastes, preferences, behavior, brand loyalty, and brand loyalty.price sensitivity. Developing an enduring business model to serve this population is particularly challenging. Our ability to attractAttracting new students depends not only on investment in our brand and our marketing efforts, but also on the perceived value of our products and services versus competing alternatives among our extremely price conscious student user base.alternatives. If our efforts to satisfy our existing student user base are not successful or become less effective, or if the cost of such efforts were to significantly increase, we may not be able to attract new students as successfully or efficiently and aswe may not be able to retain existing students on our platform. As a result, our business, growth, results of operations, and financial condition willcould be adversely affected.
Additionally, even if we succeed in establishing brand awareness and loyalty, we may be unable to maintain and grow our student user base if we are unable tocannot offer competitive prices for our products and services or unable to adequately prevent unauthorized account sharing of our subscription program services. If we fail to maintain and expand our user base, our business, results of operations, and financial condition wouldcould be adversely affected.
AnyIf our efforts to build and maintain strong brands are not successful, we may not be able to grow our student user base, which could adversely affect our results of operations.
We believe our brands are a key asset of our business. Developing, protecting, and enhancing our “Chegg” brands are critical to expanding our student user base and increasing student engagement. Strong brands also help to counteract the significant disruption, includingstudent turnover we experience from year to year as students graduate, and differentiate us from our competitors.
To succeed in our efforts to strengthen our brands’ identities, we must, among other activities:
•maintain our reputation as a trusted technology platform and source of content, services, and textbooks for students;
•maintain and improve the quality of our existing products, services, and technologies;
•introduce compelling products and services;
•adapt to changing technologies and changes in the learning environment;
•protect user data, such as passwords and personally identifiable information;
•adapt to students’ rapidly changing tastes, preferences, behavior, and brand loyalties;
•continue to expand our reach to students in high school, graduate school, and internationally;
•ensure that the student-posted content to our website is reliable and does not infringe on third-party copyrights or violate other applicable laws, our terms of use, or the ethical codes of those students’ colleges;
•protect our trademarks and other intellectual property rights;
•convert and integrate the brands and students that we acquire into the Chegg brand and Chegg.com; and
•maintain and control the quality of our brand.
Our ability to successfully achieve these goals is not entirely within our control and we may not be able to maintain the strength of our brands or do so cost-effectively. Factors that could negatively affect our brands include, among others:
•changes in student sentiment about the quality or usefulness of our products and services;
•technical or other problems that prevent us from providing our products and services reliably or otherwise negatively affect the student experience with our products and services;
•concern from colleges about how students use our content offerings, such as our Expert Questions and Answers service;
•brand conflict between acquired brands and the Chegg brand;
•student concerns related to cybersecurityprivacy and use of data in our products and services;
•the reputation or products and services of competitive companies; and
•students’ misuse of our products and services in ways that violate our terms of services, applicable laws, or the code of conduct at their colleges.
The COVID-19 pandemic has impacted, and may continue to impact, our business, key metrics, and results of operations in volatile and unpredictable ways.
The full effects of the COVID-19 pandemic cannot be predicted because of many uncertainties, including the deployment and long-term efficacy of vaccines and ongoing infection rate surges. Governments and businesses have taken mitigation actions, including school and business closures, travel restrictions, and quarantines. These actions could continue to cause a general slowdown in the U.S. and global economy, adversely impact our customers and partners, disrupt our operations, and cause significant volatility in financial markets.
While our overall business was not materially and adversely affected by the COVID-19 pandemic during the year ended December 31, 2021, the COVID-19 pandemic may still have a material adverse impact on our business and result of operations in the near-term. We are continuously monitoring our business and operations to take appropriate actions to mitigate risks arising from cyber-attacks,the COVID-19 pandemic, but there can be no guarantee that the actions we take will be successful. Should the situation worsen or not improve, or our steps or risk mitigation fail, our business, liquidity, financial condition, results of operations, stock price and prospects may be materially and adversely affected.
Most employees are currently working remotely because of the COVID-19 pandemic. The health of our employees is of primary concern and at this time and we cannot reasonably predict when our employees can return to our computer systems, especiallyoffices. We may need to take further precautionary measures to protect the health of our employees. Additionally, our management team is focused on ongoing planning for and mitigating the risks of COVID-19, which may reduce their time for other initiatives. The COVID-19 pandemic may lead to employee inefficiencies, operational and cybersecurity risks, logistics disruptions, and other circumstances which could have an adverse impact on our business and results of operations.
A significant number of U.S. and international colleges ceased in-person classes during peak periods,2021 in an attempt to ensure the safety of their students. Additionally, according to The New York Times, total undergraduate college enrollment decreased 3.1% from the fall of 2020 to the fall of 2021, bringing the total decline since the fall of 2019 to 6.6% or approximately 1.2 million fewer students. Should the COVID-19 pandemic continue, college enrollment may continue to decline. Our business, growth, results of operations, and financial condition could be adversely affected as a result of a continued decrease in college enrollment.
As students returned to school in the fall of 2021, we started to see a slowdown in the education industry as a result of the COVID-19 pandemic, which resulted in a lossdecline in traffic to education technology services, such as the ones we provide. A combination of variants, increased employment opportunities and compensation, along with fatigue, all led to significantly fewer enrollments than expected. Moreover, those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments. As a result, we experienced a deceleration in the growth rates of our services and revenues that may continue. Any reduction in the number of students and/or brands whichaccessing our learning platform could harm our business and results of operations.
Additionally, uncertainties surrounding the COVID-19 pandemic have forced colleges to pay heightened attention to alternative methods of instruction, including online learning and related concerns, such as proctoring exams. This increase in attention and demand may lead to additional scrutiny from the faculty of more traditional institutions, such as colleges or universities.
We intend to offer new products and services to students to grow our business. If our efforts are not successful, our business, results of operations, and financial condition.
We rely on computer systems housed in six facilities, three located on the East Coast and three located on the West Coast, to manage our operations. We have experienced and expect to continue to experience periodic service interruptions and delays involving our systems. While we maintain a fail-over capability that would allow us to switch our operations from one facility to another in the event of a service outage, that process would still result in service interruptions thatcondition could be significant in duration. These service interruptions could have a disproportionate effectadversely affected.
Our ability to attract and retain students and increase their engagement with our learning platform depends on our operations if they wereability to occur during oneconnect them with appropriate products, people, or services. Part of our peak periods. Our facilities are also vulnerablestrategy is to damageoffer students new products and services in an increasingly relevant and personalized way. We may develop such products and services independently, by acquisition, or interruption from earthquakes, floods, fires, power loss, telecommunications failures,in conjunction with third parties. In the future, we may invest in new products and similar events.
Our facilities and information systems, as well as those of our third-party service providers, also are subject to break-ins, sabotage, intentional acts of vandalism, cybersecurity risks including cyber-attacks such as computer viruses and denial of service attacks, the failure of physical, administrative, and technical security measures, terrorist acts, natural disasters, human error, the financial insolvency of our third-party vendors,services and other unanticipated problems or events. These information systems have periodically experiencedinitiatives, but there is no guarantee these approaches will be successful. The markets for new products and will continue to experience both directed attacks as well as loss of, misuse of, or theft of data. Whileservices may be unproven, and these products may include technologies and business models with which we have implemented physical, technical,little or no prior experience or may significantly change our existing products and administrative safeguards designedservices. In addition, we may be unable to help protectobtain long-term licenses from third-party content providers and/or government regulatory approvals and licenses necessary to allow a new or existing product or service to function. If our systems, in the event of a system interruptionnew or a security exposureenhanced products and services do not engage our students or breach, they may not be as effective as intended andattract new students, or if we cannot obtain desirable third party content, we may not have adequate insurance coveragegrow our student base or generate sufficient revenues, operating margin, or other value to compensate for related losses. To date, unauthorized users have not had a material effect onjustify our company; however, there can be no assurance that attacks will not be successful in the future or that any loss will not be material. In addition, our information systems must be constantly updated, patched,investments, and upgraded to optimize performance and protect against known vulnerabilities, material disruptions, or slowdown.
We also rely on Internet systems and infrastructure to operate our business. The information systems used by our third-party service providers and the Internet generally are vulnerable to these risks as well. In particular, we rely heavily on SaaS enterprise resource planning systems to conduct our e-commerce and financial transactions and reporting. In addition, we utilize third-party cloud computing services in connection with our business operations. Problems faced by us or our third-party hosting and cloud-computing providers, or interruptions in our own systems or in the infrastructurecould be adversely affected.
If Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, student engagement with our website could decline, which may harm our business and results of operations.
We depend in part on various Internet search engines such as Google, Bing, and Yahoo!, to direct a significant amount of traffic to our website. Similarly, we depend on mobile app stores such as iTunesGoogle Play Store and Google Playthe Apple App Store to allow students to locate and download Chegg mobile applications that enable our services. Our ability to maintain the number of students directed to our website is not entirely within our control. Our competitors’ search engine optimization (SEO)SEO efforts may result in their websites receiving a higher search result page ranking than ours, or Internet search engines could revise their methodologies in an attempt to improve their search results, which could adversely affect the placement of our search result page ranking. If search engine companies modify their search algorithms in ways that are detrimental to our search result page ranking or in ways that make it harder for students to find our website, or if our competitors’ SEO efforts are more successful than ours, overall growth could slow, including the number of subscribers to Chegg Services, student engagement could decrease, and fewer students may use our platform. These modifications may be prompted by search engine companies entering the online networking market or aligning with competitors. Our website has experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of students directed to our website could harm our business and results of operations.
Increased activity during peak periods places substantially increased strain onOur current operations are international in scope and we plan to expand our international operations, and any failurewhich exposes us to deliver our products and services during these periods will have an adverse effect on student satisfaction and our results ofrisks inherent in international operations.
We historically experience a disproportionate amountOperating in international markets requires significant resources and management attention and subjects us to regulatory, economic, and political risks that are different from those in the United States. In addition to our employee base in the United States, we have employees in Germany, Israel, India, the United Kingdom and Spain, and we have retained professional employer organizations and staffing agencies to engage personnel in certain additional international locations. Our international operations subject us to the compensation and benefits regulations of activity on our website at the beginning of each academic term as students search our textbook catalog and place orders for course materialsthose jurisdictions, as well as during Sundaysother employer duties and obligations, that differ from the compensation and benefits regulations and duties and obligations in the United States. Further, enrollments of our Chegg Study rush. If too many students access our website within a short periodlearners from other countries requires us to comply with international data privacy and education regulations of time, we may experience system interruptions that make our website unavailable, slowed,those countries. Failure to comply with international regulations or prevent our distribution partner from efficiently fulfilling rental orders, which may reduce the volume of textbooks we are able to rent or sell and may also impactadequately adapt to international markets could harm our ability to sell marketing services to brands. In addition, during peak periods, wesuccessfully operate our business and pursue our distribution partners utilize independent contractors and temporary personnel to supplement our workforces primarily in our student advocacy organizations, our subject matter experts, and in our distribution partners' warehouses. Competition for qualified personnel has historically been intense, any understaffing could lead to an increase in the amount of time required to ship textbooks and process returns or respond to student questions and inquiries. Moreover, the third-party carriers relied on to deliver textbooks to students, and publishers, wholesalers and distributors that ship directly to our students, may be unable to meet our shipping and delivery requirements during peak periods, especially during inclement weather. Any delay or failure to deliver our products and services or respond to student questions could cause our customers to be dissatisfied with our services and have an adverse effect on our results of operations.business goals.
If our efforts to build strong brands are not successful, we may not be able to grow our student user base, which could adversely affect our results of operations.
We believe our brands are a key asset of our business. Developing, protecting and enhancing the “Chegg” brands are critical to our ability to expand our student user base and increase student engagement with our learning platform. Strong
brands also help to counteract the significant student turnover we experience from year to year as students graduate and differentiate us from our competitors.
To succeed in our efforts to strengthen our brands' identity, we must, among other activities:
maintain our reputation as a trusted technology platform and source of content, services, and textbooks for students;
maintain the quality of and improve our existing products, services and, technologies;
introduce products and services that are favorably received;
adapt to changing technologies, including developing and enhancing compelling mobile offerings for our learning platform;
adapt to students’ rapidly changing tastes, preferences, behavior, and brand loyalties;
protect students’, tutors', and educators' data, such as passwords and personally identifiable information;
protect our trademarks and other intellectual property rights;
maintain and control the quality of our brand;
continue to expand our reach to students in high school, graduate school, and internationally;
ensure that the content posted to our website by students is reliable and does not infringe on third-party copyrights or violate other applicable laws, our terms of use, or the ethical codes of those students’ colleges;
adequately address students’ concerns with our products and services; and
convert and fully integrate the brands and students that we acquire, including Thinkful, WriteLab, StudyBlue, Cogeon, the developer of the math application Math 42, Imagine Easy Solutions and internships.com, into the Chegg brand and Chegg.com.
Our ability to successfully achieve these goals is not entirely within our control and we may not be able to maintain the strength of our brands or do so cost-effectively. Factors that could negatively affect our brands include:
changes in student sentiment about the quality or usefulness of our learning platform and our products and services;
problems that prevent our logistics partners from delivering textbooks reliably or timely;
technical or other problems that prevent us from providing our products and services reliably or otherwise negatively affect the student experience on our learning platform;
concern from colleges about the ways students use our content offerings, such as our Expert Answers service;
brand conflict between acquired brands and the Chegg brand;
student concerns related to privacy and the way in which we use student data as part of our products and services;
the reputation or products and services of competitive companies; and
students’ misuse of our products and services in ways that violate our terms of services, applicable laws, or the code of conduct at their colleges.
We intend to offer new products and services to students and expand intoour international markets to grow our business. If our efforts are not successful or we are not able to manage the growth of our business both in terms of scale and complexity, our business, results of operations and financial condition would be adversely affected.
Our ability to attract and retain students and increase their engagement with our learning platform depends on our ability to connect them with the product, person, or service they need to save time, save money, and get smarter. Part of our strategy is to offer students new products and services in an increasingly relevant and personalized way. We may develop such products and services independently, by acquisition or in conjunction with developers and other third parties. For example, in 2016, we acquired our Writing Tools service in the acquisition of Imagine Easy Solutions; in October 2017, we acquired Math 42, in the acquisition of Cogeon GmbH (Cogeon); in June 2018, we acquired flash tools in the acquisition of StudyBlue, Inc.; and in October 2019, we acquired the skills-based learning platform of Thinkful, Inc. The markets for these new products and services may be unproven, and these products may include technologies and business models with which we have little or no prior development or operating experience or may significantly change our existing products and services. In addition, we may be unable to obtain long-term licenses from third-party content providers and/or government regulatory approvals and licenses necessary to allow a product or service, including a new or planned product or service, to function. If our new or enhanced products and services fail to engage our students or attract new students, or if we are unable to obtain content from third parties that students want, we may fail to grow our student base or generate sufficient revenues, operating margin, or other value to justify our investments, and our business would be adversely affected.
In the future, we may invest in new products and services and other initiatives to generate revenues and grow our student user basepresence, and to take advantage of favorable market opportunities, but there is no guarantee these approaches will be
successful. As we grow, the operations and technology infrastructure we use to manage and account for our operations will become more complex, and managing these aspects of our business will become more challenging. Acquisitions of new companies, products, and services create integration risk, while developing and enhancing products and services involves significant time, labor, and expense as well as other challenges, including managing the length of the development cycle, entry into new markets, regulatory compliance, evolution in sales and marketing methods, and maintenance and protection of proprietary rights. Any future expansion will likely place significant demand on our resources, capabilities and systems, and we may need to develop new processes and procedures and expand the size of our infrastructure to respond to these demands. If we are not successful with our new products and services or are not able to manage the growth of our business, we may not be able to maintain or increase our revenues as anticipated or recover any associated acquisition or development costs, and our business, results of operations, and financial condition could be adversely affected.
As part of our business strategy, we may make our products and services available in more countries outside ofinternational markets. However, we have a limited operating history in international jurisdictions and expanding our primary market, the United States. We expect to devote significantinternational operations will require considerable management attention and resources to international expansion, and our ability to expand our business and to attract talented employees and users instudents. Our expansion efforts into international markets willmay not be successful. In addition, we face risks in doing business internationally that could constrain our operations, increase our cost structure, and compromise our growth prospects, including:
•the need to localize and adapt content for specific countries, including translation into foreign languages;
•local laws restricting students from accessing online education platforms such as ours;
•data privacy laws that may require management attentiondata to be handled in a specific manner, including storing, processing, and resources. Our international expansion may subject us to risks that we have not faced beforeencrypting data solely on local servers;
•varying levels of internet technology adoption and infrastructure, and increased or increase risks that we currently face. The marketsvarying network and hosting service provider costs;
•difficulties in staffing and managing foreign operations, including in countries in which foreign employees may become part of labor unions, employee representative bodies, workers’ councils or collective bargaining agreements, and challenges relating to work stoppages or slowdowns;
•different pricing environments, longer sales cycles, longer accounts receivable payment cycles, difficulties in adopting and supporting new and different payment preferences, and collections issues;
•new and different sources of competition and practices which may favor local competitors;
•the ability to protect and enforce intellectual property rights abroad;
•compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, legal systems, alternative dispute systems, including, but not limited to, employment, tax, privacy and data protection, economic sanctions and export controls, U.S. and other anti-boycott authorities, anti-money laundering laws, and anti-bribery laws and regulations such as the U.S. Foreign Corrupt Practices Act, the Office of Foreign Assets Controls, and the U.K. Bribery Act;
•increased financial accounting and reporting burdens, complexities, and commercial infrastructures;
•risks associated with foreign tax regimes, trade tariffs, or similar issues, which could negatively impact international adoption of our offerings;
•fluctuations in currency exchange rates and the requirements of currency control regulations, which might restrict or prohibit conversion of other currencies into U.S. dollars;
•adverse tax consequences, including the potential for required withholding taxes for our overseas employees; and
•regional and economic political conditions.
If we may undertake international expansion may have educational systems, technology, and online industries that are different or less well developed than those in the United States, and if we are unable tocannot address thethese challenges, of operating in international markets, it could have an adverse effect on our business, results of operations, and financial condition.conditions. Our ability to gain market acceptance in any particular market is uncertain and the distraction of our senior management team could have an adverse effect on our business, results of operations, and financial condition.
Our business is seasonal, and increased risk from disruption during peak periods makes our operating results difficult to predict.
We derive a portion of our net revenues from print textbook rentals and, to a lesser extent, sale transactions, which occur in large part during short periods of time around the commencement of the fall, winter, and spring academic terms. In particular, we and our partners experience the largest increase in rental and sales volumes during the last two weeks of August and first two weeks of September and to a lesser degree in December and January. The increased volume of orders that we process during these limited periods of time means that any shortfalls or disruptions in our operations during these peak periods will have a disproportionately large impact on our Required Materials revenues. If our distribution partners limited their service or otherwise suffer from business disruptions during these peak periods, we may not realizebe required to find alternatives for delivery, which may be more expensive, or we may be unable to deliver textbooks timely. If there are delays in the anticipated benefitsdelivery of acquisitions,our textbooks to students, we recognize less revenue from such transactions. Additionally, our students could become dissatisfied with such delays and discontinue their use of our service, which could disruptadversely affect our results of operations.
Revenues from Chegg Services, print textbooks that we own, and eTextbooks are primarily recognized ratably over the term a student subscribes to our Chegg Services, rents a print textbook or has access to an eTextbook. This has generally resulted in our highest revenues and profitability in the fourth quarter as it reflects more days of the academic year. As a result of this seasonality, which corresponds to the academic calendar, our revenues may fluctuate significantly quarter to quarter depending upon the timing of where we are in our “rush” cycle and sequential quarter-over-quarter comparisons of our net revenues and operating results are not likely to be meaningful. In addition, should the current COVID-19 pandemic continue to worsen and colleges cannot withstand a prolonged shutdown, we may experience a shift or reduction in enrollments that could impact the seasonality of our business and harmfurther make our financial condition and results of operations.operations difficult to predict.
We face competition in all aspects of our business, and we expect such competition to increase.
Our products and services compete for students and we expect such competition to increase. Chegg Services faces competition based on the particular offering. For Chegg Study, our competitors primarily include platforms that provide study materials and online instructional systems, such as Course Hero, Quizlet, Khan Academy, Bartleby, and Brainly. For Chegg Writing, we primarily face competition from other citation generating and grammar and plagiarism services, such as Grammarly. For Chegg Math Solver and Mathway, we face competition from other equation solver services, such as Photomath and Symbolab. For Busuu, our competitors primarily include language learning platforms, such as Duolingo and Babbel. For Thinkful, we face competition from other online learning platforms and online “skills accelerator” courses both in the direct-to-consumer category, including General Assembly, Galvanize, Inc., Flatiron School, Codecademy, DataCamp, and Lambda, Inc., as well as white-label and co-branded providers who compete for adult learners through third party institutions, including 2U, Inc., Simplilearn, and Kenzie Academy. Additionally, the market for textbooks is intensely competitive and subject to rapid change. We face competition from college bookstores, some of which are operated by Follett and Barnes & Noble Education, online marketplaces such as Amazon.com, providers of eTextbooks, as well as various private textbook rental websites.
Our industry is evolving rapidly and some of our competitors have adopted, and may continue to adopt, aggressive pricing policies, less stringent standards for user-uploaded content, and devote substantially more resources to marketing, website, and systems development than we do. In addition, a variety of business models are being pursued for the provision of print textbooks, some of which may be more profitable or successful than ours. We also face risks from strategic alliances by other education ecosystem participants. New competition may come from companies with greater brand recognition, and have significantly greater financial, marketing, and other resources than we do. We may, in the future, establish alliances or relationships with other competitors or potential competitors. To the extent such alliances are terminated or new alliances and relationships are established, our business could be harmed.
Our growth strategy includes acquisitions, and we may not be able to execute on our acquisition strategy or integrate acquisitions successfully.
As part of our business strategy, we have made and intend to continue to make acquisitions to add specialized employees, complementary businesses, products, services, operations, or technologies. Realizing the benefits of acquisitions depends, in part, on ourTo be successful, integration ofwe must timely and efficiently integrate acquired companies, including their technologies, products, services, operations, and personnel in a timelypersonnel. Acquired companies can be complex and efficient manner. Wetime consuming to integrate and we may incur significant integration costs integrating acquired companies and if our integration efforts are not successful, we may not be able to offset our acquisition costs. Acquisitions involve many risks that may negatively impact our financial condition and results of operations, including the risks that the acquisitions may:
•require us to incur charges and substantial debt or liabilities;
•cause adverse tax consequences, substantial depreciation, or deferred compensation charges;
•result in acquired in-process research and development expenses or in the future may require the amortization, write-down, or impairment of amounts related to deferred compensation, goodwill, and other intangible assets; and
•give rise to various litigation and regulatory risks, including the increased likelihood of litigation.risks.
In addition:
we may not generate sufficient financial return to offset acquisition costs;
•we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, services, operations, and personnel of any company that we acquire, particularly if key personnel of theto integrate an acquired company decide not to work for us;company;
•an acquisition may disrupt our ongoing business, divert resources, increase our expenses, and distract our management;
•an acquisition may reduce or delay adoption rates or reduceand engagement rates for our acquired products and services and thosebecause of the company acquired by us due to student uncertainty about continuity and effectiveness of service from either company;effectiveness;
we may encounter difficulties in, or may be unable to, successfully sell or otherwise monetize any acquired products and services;
•an acquisition may not ultimately be complementarysubject us to our evolving business model;laws and
an acquisition may involve the entry into geographic or business markets operational challenges in new jurisdictions with which we have little or no prior experience.are unfamiliar;
Acquired companies, businesses, and assets can be complex and time consuming to integrate. For example, •we expanded into writing tools with the acquisitions of Imagine Easy Solutions in 2016 and WriteLab in 2018, math technology with the acquisition of Cogeon in 2017, flash tools with the acquisition of StudyBlue in 2018, and a new offering in skills-based
learning with the acquisition of Thinkful in 2019. We may not successfully transition theseacquired users to the Chegg platform and therefore may not realize the potential benefits of these acquisitions.acquisitions;
•we may incur unforeseen costs as a result of the pre-acquisition activities of businesses and technologies we acquire;
•we may be required to honor the pre-existing contractual relationships of businesses we acquire, which contracts may be on terms that we would not have otherwise accepted;
•it may be difficult to monetize any acquired products and services;
•an acquisition may not ultimately be complementary to our offerings; and
•an acquisition may involve the entry into markets where we have little or no prior experience.
Our ability to acquire and integrate larger or more complex businesses, products, services, operations, or technologies in a successful manner is unproven. We may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. To finance any future acquisitions, we may issue equity or equity-linked securities, which could be dilutive, or debt, which could be costly, potentially dilutive, and requireimpose substantial restrictions on the conduct of our business. If we fail to successfully complete any acquisitions or integrate the services, products, personnel, operations, or technologies associated with such acquisitionsthem into our company, or identify and address liabilities associated with the acquired business or assets,acquisition, our business, results of operations, and financial condition could be adversely affected. Any future acquisitions we complete may not achieve our goals.
We operate in a rapidly changing market and ifIf we do not successfully adapt to known or unforeseen market developments,retain our businesssenior management team and financial condition could be materially and adversely affected.
We have added and plan to continue to add new offerings to our learning platform, including, for example, skills-based learning, writing and math tools, to diversify our sources of revenues, which require us to make substantial investments in the products and services we develop or acquire. New offerings may not achieve market success at levels that recover our investments or contribute to profitability. Because these offerings are not as capital intensive as our print textbook rental service, the barriers to entry for existing and future competitors may be lower and allow for even more rapid changes to the market. Furthermore, the market for these other products and services is relatively new and may not develop as we expect. If the market for our offerings does not develop as we expect, or if we fail to address the needs of this market, our business may be harmed.
We may not be successful in executing on our evolving business model, and if we cannot provide an increasing number of products and services that students and brands find compelling, we will not be able to continue our recent growth, increase our revenues, or achieve and sustain profitability. For all of these reasons, the evolution of our business model is ongoing and the future revenues and profitability potential of our offerings is uncertain.
We purchase and price textbooks based on anticipated levels of demand and other factors that we estimate based on historical experience and various other assumptions. If actual results differ materially from our estimates, our gross margins may decline.
Commencing in 2020, we will begin investing in our print textbook library and transitioning to FedEx for fulfillment services. Our print textbook rental distribution model requires us to make substantial investments in our textbook library based on our expectations regarding numerous factors, including ongoing demand for these titles in print form. To realize a return on these investments, we must rent each purchased textbook multiple times, and as such, we are exposed to the risk of carrying excess or obsolete textbooks. We typically plan our textbook purchases based on factors such as pricing, our demand forecast for the most popular titles, estimated timing of edition changes, estimated utilization levels and planned liquidations of stale, old or excess titles in our textbook library. These factors are highly unpredictable and can fluctuate substantially, especially if pricing competition becomes more intense, as we have seen in recent rush cycles, or demand is reduced due to seasonality or other factors, including increased use of eTextbooks. We rely on a proprietary model to analyze and optimize our purchasing decisions and rely on inputs from third parties including publishers, distributors, wholesalers and colleges to make our decisions. We also rely on students to return print textbooks to us in a timely manner and in good condition so that we can re-rent or sell those textbooks. If the information we receive from third parties is not accurate or reliable, if students fail to return books to us or return damaged books to us, or if we for any other reason anticipate inaccurately and acquire insufficient copies of specific textbooks, we may be unable to satisfy student demand or we may have to incur significantly increased cost in order to do so. Conversely, if we attempt to mitigate this risk and acquire more copies than needed to satisfy student demand, then our textbook utilization rates would decline and our gross margins would be adversely affected.
When deciding whether to offer a textbook for rent and the price we charge for that rental, we must weigh a variety of factors and assumptions, including the expense to acquire a particular textbook, the number of rentals we will be able to achieve with each textbook and at what rental price, and whether we believe it will be profitable to acquire and rent such textbooks. If the textbooks we acquire are lost, determined to be unauthorized copies, or damaged prematurely,key employees, we may not be able to recoversustain our growth or achieve our business objectives.
We depend on the continued contributions of our senior management and other key personnel. In particular, we rely on the contributions of our President, Chief Executive Officer, and Co-Chairperson, Dan Rosensweig. All of our executive officers and key employees are at-will employees, meaning they may terminate their employment relationship at any time. If we lose the services of one or more members of our senior management team or other key personnel, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. Our future success also depends on our ability to identify, attract, and retain highly skilled personnel. Competition for these employees is intense. Qualified individuals are in high demand, particularly in the San Francisco Bay Area where our executive offices are located, and if we cannot attract or retain the personnel we need to succeed, our business may suffer.
We have a history of losses and we may not achieve or sustain profitability in the future.
We have experienced significant net losses since our incorporation in July 2005, and we may continue to experience net losses in the future. Our net losses for the years ended December 31, 2021, 2020, and 2019 were $1.5 million, $6.2 million, and $9.6 million, respectively. As of December 31, 2021, we had an accumulated deficit of $337.2 million. We expect to make significant investments in the development and expansion of our business and, as a result, our cost of revenues and operating
expenses may increase. We may not succeed in increasing our revenues sufficiently to offset these higher expenses, and our efforts to grow the business may be more expensive than we anticipate. We may incur significant losses in the future for a number of reasons, including slowing or lower demand for our products and services, increasing competition, decreased spending on education, and other risks described in this Annual Report on Form 10-K. We may encounter unforeseen expenses, challenges, complications, delays, and other unknown factors, many of which are exacerbated by the effects of the COVID-19 pandemic, as we pursue our business plan. While Chegg Services revenues have grown in recent periods, this growth may not be sustainable and we may not be able to achieve profitability. To achieve profitability, we may need to change our operating infrastructure, scale our operations more efficiently, reduce our costs, or generate revenue on those textbooks.implement changes in our product and services offerings. If we are unable to effectively make decisions about whether to acquire textbooks and the price we charge to rent those textbooks, including if the assumptions upon which our decisions are made prove to be inaccurate, our gross margins may be adversely affected.
Wind-down and reconciliation activities associated with ending our relationship with Ingram may not proceed as planned, may require a long time to complete, or may require us to incur greater costs than anticipated.
Our strategic partnership with Ingram expires in 2020, after which logistics and shipping services will be provided by FedEx. As part of this transition, Ingram business activities related to our print textbook offering will decrease over time while FedEx’s business activities will ramp up. If we experience unexpected challenges during this coordinated transition of our print textbook offering from Ingram to FedEx, if the transition takes a longer time to complete than expected, or if we fail to accurately forecast the transition costs, our business and results of operations will be impacted. Further, during this transition, customers may experience longer shipping periods than they have come to expecttimely implement these changes or the order accuracy may decline, causing increased calls to our customer service team, the need to expedite corrected orders, and the potential loss of customers. Additionally, we are currently engaged in a reconciliation process with Ingram to address open claims between the companies. If we and Ingram are unable to reach agreement on those claims, we may be required to resort to mediation or litigationcannot implement them for resolution.
Delays in shipping, increased costs, and other difficulties that could arise with our distribution partners may have an adverse effect on our business and results of operations.
Our strategic partnership with Ingram expires in 2020. Until the termination of our partnership, we will continue to rely on Ingram to fulfill print textbook rental and sales orders. If our partnership with Ingram is interrupted prior to its expiration or if Ingram experiences disruptions in its business or is not able to perform as anticipated, we may experience operational difficulties, an inability to fulfill print textbook orders, increased costs and a loss of business, that may have an adverse effect on our business, results of operations and financial condition. Furthermore, if we are unable to achieve the financial return targets set forth in our agreement with Ingram, we could be required to make additional payments to Ingram which could adversely affect our results of operations. In addition to our strategic partnership with Ingram, we have entered into agreements with other partners to provide their textbooks for rental or sale through our website for which Ingram provides logistics and fulfillment for all print textbook rental or sale orders. If we are unable to enter into or renew our agreements with our partners or if any of our partners perform significantly below our expectations, we may experience a material adverse effect on our business, results of operations and financial condition. Commencing in 2020, we will begin transitioning fulfillment services from Ingram to FedEx.
In the case of either Ingram or FedEx, we do not control the logistics and distribution process for our print textbooks. As a result, our business could be subject to carrier disruptions and increased costsreason, including due to factors that are beyond our control, including labor difficulties, inclement weather, increased fuel costs and other rising costs of transportation and terrorist activity.our business may suffer. If our distribution partners, or their partners such as delivery companies, were to limit their services or delivery areas, such as by the discontinuation of Saturday delivery service, or otherwise suffer from business disruptions,we do achieve profitability, we may not be requiredable to rely on alternative carriers for delivery and return shipments of textbooks to and from studentssustain or we may be unable to deliver textbooks. If we are unable to sufficiently engage alternative carriers on a timely basis or on terms favorable to us, our ability to timely deliver textbooks could diminish. If textbooks are not delivered on time to students, they could become dissatisfied and discontinue their use of our service, which could adversely affect our results of operations.increase such profitability.
We rely on AWS and other third-party software and service providers including Amazon Web Services (AWS), to provide systems, storage, and services for our website. Any failurewebsite and any disruption of such services or interruption experienced by such third partiesa material change to our arrangements could result in the inability of students to useadversely affect our products and services, result in a loss of revenues, and harm our reputation.business.
We rely on AWS and other third-party software and service providers including AWS, to provide systems, storage, and services, including user log inlogin authentication, for our website. Any technical problem with, cyber-attack on, or loss of access to such third parties’ systems, servers, or technologies could result in the inability of our students to rent or purchase print textbooks, interfere with access to our digital content and other online products and services or result in the theft of end-user personal information.
Our reliance on AWS makes us vulnerable to any errors, interruptions, or delays in their operations. Any disruption in the services provided by third-party providers, including AWS, could harm our reputation or brand, or cause us to lose studentssubscribers or revenues or incur substantial recovery costs and distract management from operating our business. Further, these third-party software and service providers may experience operational difficulties due to the current COVID-19 pandemic, including increased usage of their software and services. If they cannot adapt to the increase in demand or fail to ensure availability of their software and services, our ability to service users’ requests may be impacted, which could have an adverse impact on our result of operations.
AWS may terminate its agreement with us upon 30 days'days’ notice. Upon expiration or termination of our agreement with AWS, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete.
Computer malware, viruses, hacking, phishing attacks, and spamming could harm our business and results of operations.
Computer malware, viruses, hacking, physical or electronic break-ins, spamming, and similar events could lead to disruptions of our website services, our mobile applications, or systems we use and interruptions and delays in our services and operations, as well as loss, misuse, or theft of data. Any such events could harm our business, be expensive to remedy, and damage our reputation or brand. Computer malware, viruses, computer hacking, and phishing attacks against online networking platforms have become more prevalent and may occur on systems we use in the future. We believe that the incidence of hacking among students may increase our risk of being a target for such attacks. These threats are constantly evolving, making it increasingly difficult to successfully defend against them or implement adequate preventative measures.
For instance, in April 2018, an unauthorized party gained access to user data for chegg.com and certain of our family of brands such as EasyBib (the 2018 Data Incident). The information that may have been obtained could include a Chegg user’s name, email address, shipping address, Chegg username, and hashed Chegg password. To date, no social security numbers or financial information such as users' credit card numbers or bank account information were obtained. Additionally, Thinkful, prior to our acquisition of it, discovered an unauthorized party may have gained access to certain Thinkful company credentials (the Thinkful Data Incident). If we, or companies that we acquire, experience compromises to our or our acquired companies’ security that result in website performance or availability problems, the complete shutdown of our websites, or the actual or perceived loss or unauthorized disclosure or use of confidential information, such as credit card information, users may be harmed or lose trust and confidence in us and the companies that we acquire, and decrease the use of our services or stop using our services in their entirety, and we would suffer reputational and financial harm.
As part of our regular cybersecurity efforts, including enhancements to these efforts made following our discovery of these prior events, we have implemented physical, technical, and administrative safeguards designed to help protect our systems. However, these safeguards may not be as effective as intended, and may not prevent future cybersecurity breaches. Efforts to prevent hackers from entering our computer systems are expensive to implement, may limit the functionality of our services, we may need to expend significant additional resources to further enhance our safeguards and protection against security breaches or to redress problems caused by breaches and such efforts may not be fully effective. Additionally, our network security business disruption insurance may not be sufficient to cover significant expenses and losses related to direct attacks on our website or systems we use. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain performance, reliability, security, and availability of our products and services and technical infrastructure, or the actual or perceived loss or unauthorized disclosure or use of the data we collect and develop may lead our users to lose trust and confidence in us or otherwise harm our reputation, brand, and our ability to attract students to our website or may lead them to decrease the use of our services or applications or stop using our services in their entirety. Any significant disruption to our website or computer systems we use could result in a loss of students or advertisers and, particularly if disruptions occur during the peak periods at the beginning of each academic term, could adversely affect our business and results of operations.
If our security measures or those of companies we may acquire are breached or are perceived to have been breached, as a result of third party action, including cyberattacks or other intentional misconduct by computer hackers, employee error, malfeasance, or otherwise, or if third parties obtain unauthorized access to our data, including sensitive customer data, personal information, intellectual property and other confidential business information, we could be required to expend significant capital and other resources to address the problem as well incur significant costs and liabilities including due to litigation, indemnity obligations, damages, penalties, and costs for remediation.
Our reputation and relationships with students, tutors and educators would be harmed if our users’ data, particularly billing data, were to be accessed by unauthorized persons.
We maintain personal data regarding students, tutors, and educators who use our platform through our Thinkful service, including names and, in many cases, mailing addresses, and, in the case of tutors and educators, information necessary for payment and tax filings. We take measures to protect against unauthorized intrusion into our users’ data. However, despite these measures, if we or our payment processing services experience any unauthorized intrusion into our users’ data, current and potential users may become unwilling to provide the information to us necessary for them to engage with our platform, we could face legal claims and our business and reputation could be adversely affected. For instance, the 2018 Data Incident and the Thinkful Data Incident may cause, or may have caused, us reputational harm with our users' that may adversely affect our business. The breach of a third party’s website, resulting in theft of user names and passwords, could result in the fraudulent use of that user login information on our platform.
We rely heavily on our proprietary technology to process deliveries and returns of textbooks and to manage other aspects of our operations. The failure of this technology to operate effectively, particularly during peak periods, could adversely affect our ability to retain and attract student users.
We use complex proprietary software to process deliveries and returns of textbooks and to manage other aspects of our operations, including systems to consider the market price for textbooks, general availability of textbook titles, and other factors to determine how to buy textbooks and set prices for textbooks and other content in real time. We rely on the expertise of our engineering and software development teams to maintain and enhance the software used for our distribution operations. We cannot be sure that the maintenance and enhancements we make to our distribution operations will achieve the intended results or otherwise be of value to students. If we are unable to maintain and enhance our technology to manage the shipping and return of textbooks in a timely and efficient manner, particularly during peak periods, our ability to retain existing students and to add new students may be impaired.
We may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure that our learning platform is accessible and delivers a satisfactory user experience to students.
It is important to our success that students be able to access our learning platform at all times. We have previously experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, third-party service providers, human or software errors, and capacity constraints due to an overwhelming number of students accessing our platform simultaneously. If our learning platform is unavailable when students attempt to access it or it does not load as quickly as they expect, students may seek other services to obtain the information for which they are looking and may not return to our platform as often in the future, or at all. This would negatively impact our ability to attract students and brands and the frequency with which they use our website and mobile applications.
Our platform functions on software that is highly technical and complex and may now or in the future contain undetected errors, bugs, or vulnerabilities. Some errors in our software code may only be discovered after the code has been deployed. Any errors, bugs, or vulnerabilities discovered in our code after deployment, inability to identify the cause or causes of performance problems within an acceptable period of time, or difficultly maintaining and improving the performance of our platform, particularly during peak usage times, could result in damage to our reputation or brand, loss of students, and brands, loss of revenues, or liability for damages, any of which could adversely affect our business and results of operations.
We expect to continue to make significant investments to maintain and improve the availability of our platform and to enable rapid releases of new features and products. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and results of operations may be harmed.
We have a disaster recovery program to transition our operating platform and data to a failover location in the event of a catastrophe and have tested this capability under controlled circumstances, however, there are several factors ranging from human error to data corruption that could materially lengthen the time our platform is partially or fully unavailable to our student user base as a result of the transition. If our platform is unavailable for a significant period of time as a result of such a transition, especially during peak periods, we could suffer damage to our reputation or brand, loss of students and brands, or loss of revenues, any of which could adversely affect our business and results of operations.
Our wide variety of accepted payment methods subjects us to third-party payment processing-related risks.risks, including risks associated with credit card fraud.
We accept payments from students using a variety of methods, including credit cards, debit cards, and PayPal. As we offer new payment options to students, we may be subject to additional regulations, compliance requirements and incidents of fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. For example, we have in the past experienced higher transaction fees from our third-party processors as a result of chargebacks on credit card transactions.
We rely on third parties to provide payment processing services, including the processing and information storage of credit cards and debit cards. If these companies become unwilling or unable to provide these services to us, our business could be disrupted. We are also subject to payment card association operating rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to additional fines and higher transaction fees andfees; lose our ability to accept credit and debit card payments from our students or process electronic funds transfers,transfers; or facilitate other types of online payments, and our business and results of operations could be adversely affected.
In addition, we doWe may experience some loss from fraudulent credit card transactions, including potential liability for not obtainobtaining signatures from students in connection with the use of credit cards by them. Under current credit card practices,or fraudulent payments to the extent we do not obtain cardholders’ signatures, we are liable for fraudulent credit card transactions, even when the associated financial institution approves paymenteducators as part of the orders. From time to time, fraudulent credit cards may be used. We may experience some loss from these fraudulent transactions.Uversity. While we do have safeguards in place, we cannot be certain that other fraudulent schemes will not be successful. A failure to adequately control fraudulent transactions wouldcould harm our business and results of operations.
We face competition in aspects of our business, and we expect such competition to increase.
Our products and services compete for students and we expect such competition to increase. Our Chegg Services face competition from different businesses dependingdepend on the offering. For Chegg Study, our competitors primarily include platforms that provide study materials and online instructional systems such as Course Hero, Quizlet, Khan Academy, and Bartleby. For Chegg Writing, we primarily face competition from other citation generating and grammar and plagiarism services such as Grammarly. For Chegg Tutors, we face competition from other online tutoring services such as Wyzant. For Chegg Math Solver, we face competition from other equation solver services such as Mathway and Symbolab. For Thinkful, we face competition from other online learning platforms and online "bootcamp" courses such as General Assembly, Galvanize, Flatiron School, and Lambda School. Additionally, the market for textbooks and supplemental materials is intensely competitive and subject to rapid change. We face competition from college bookstores, some of which are operated by Follett and Barnes & Noble Education, online marketplaces such as Amazon.com, providers of eTextbooks, as well as various private textbook rental websites. Many students purchase from multiple textbook providers, are highly price sensitive, and can easily shift spending from one provider or format to another. As a consequence, our Required Materials product line, which includes eTextbooks, competes primarily on price and further on selection and functionality and compatibility of the eTextbook Reader we utilize across a wide variety of desktop and mobile devices.
Our industry is evolving rapidly and is becoming increasingly competitive. Some of our competitors have longer operating histories, larger customer bases, greater brand recognition, and significantly greater financial, marketing, and other resources than we do. Some of our competitors have adopted, and may continue to adopt, aggressive pricing policies and devote substantially more resources to marketing, website, and systems development than we do. In addition, a variety of business models are being pursued for the provision of print textbooks, some of which may be more profitable or successful than our business model. In addition, our competitors also may form or extend strategic alliances with publishers that could adversely affect our and our partners' ability to obtain textbooks on favorable terms. We face similar risks from strategic alliances by other participants in the education ecosystem with respect to our newer offerings. We may, in the future, establish alliances or relationships with other competitors or potential competitors. To the extent such alliances are terminated or new alliances and relationships are established, our business could be harmed.
Our business is seasonal and we have increased risk from disruption during peak periods which makes our operating results difficult to predict.
We derive a portion of our net revenues from print textbook rentals and, to a lesser extent, sale transactions, which occur in large part during short periods of time around the commencement of the fall, winter, and spring academic terms. In particular, we and our partners experience the largest increase in rental and sales volumes during the last two weeks of August and first two weeks of September and to a lesser degree in December and in January. The increased volume of orders that we have to process during these limited periods of time means that any shortfalls or disruptions in our operations during these peak periods will have a disproportionately large impact on our annual operating results and the potential future growth of our business.
As a result of this seasonality, which corresponds to the academic calendar, our revenues may fluctuate significantly quarter to quarter depending upon the timing of where we are in our “rush” cycle and sequential quarter-over-quarter comparisons of our net revenuesapp stores and operating results are not likelysystems to be meaningful. In addition, our operating results for any given quarter cannot be used as an accurate indicator of our results for the year. In particular, we anticipate that our ability to accurately forecast financial results for future periods will be most limited at the time we present our second quarter financial results, which will generally occur midsummer and precede the “fall rush.” In addition, our other offerings, in particular services unrelated to textbooks, are relatively new and, as a result, we have limited experience with forecasting revenues from them.
Beginning in 2020, as a result of our ownership of print textbooks in conjunction with the transition to FedEx for print textbook logistics and warehousing, Required Materials will also include revenues from print textbooks that we will own, which will be recognized as the total transaction amount ratably over the term of a rental period, which is generally two to five months. Chegg Services, rental revenues from print textbooks that we own, and eTextbooks revenues are primarily recognized
ratably over the term a student subscribes to our Chegg Services or rents a print textbook or eTextbook. This has generally resulted in our highest revenues and profitability in the fourth quarter as it reflects more days of the academic year.
We base our operating expense budgets on expected net revenue trends. Operating expenses, similar to revenues and cost of revenues, fluctuate significantly quarter to quarter due to the seasonality of our business and are generally higher during the first and third quarters as we incur marketing expense in connection with our peak periods at the beginning of each academic term. Because our revenues are concentrated in the fourth quarter and expenses are concentrated in the first and third quarters, we have experienced operating losses in the first and third quarters and operating income in the fourth quarter. As a result, sequential quarterly comparison of our financial results may not be meaningful. Further, a portion of our expenses, such as office space lease obligations and personnel costs, are largely fixed and are based on our expectations of our peak levels of operations. Nonetheless, we expect to continue to incur significant marketing expenses during peak periods and to have fixed expenses for office space and personnel and as such, we may be unable to adjust spending quickly enough to offset any unexpected revenues shortfall. Accordingly, any shortfall in net revenues may cause significant variation in operating results in any quarter.
Growinggrow our student user base and their engagement with our learning platform through mobile devices depends upon the effective operation of our mobile applications with mobile operating systems, networks, and standards that we do not control.platform.
There is no guarantee that students will use our mobile applications,apps, such as the mobile version of our website, m.chegg.com, Chegg Prep, (formerly Chegg Flashcards), and Chegg Study, rather than competing products. We are dependent on the interoperability of our mobile applicationsapps with popular third-party mobile operating systems that we do not control, such as Google's Android and Apple's iOS, and their placement in popular app stores like the Google Play Store and the Apple App Store, and any changes in such systems that degrade our products’ functionality or give preferential treatment or app store placement to competitive products could adversely affect the access and
usage of our applications on mobile devices. Additionally, in order to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event thatIf it is more difficult for students to access and use our applicationsapps on their mobile devices, or if students choose not to access or use our applications on their mobile devices or use mobile products that do not offer access to our applications, our student growth and student engagement levels could be harmed.
If the third-party eTextbook Reader that we utilize does not remain compatible with third-party operating systems, demand for our eTextbooks may decline and could have an adverse effect on our revenues.
The third-party eTextbook Reader that we utilize is designed to provide students with access to eTextbooks from any device with an Internet connection and an Internet browser, including PCs, iPads, Android tablets, Kindles, and mobile phones. The third-party eTextbook Reader can be used across a variety of third-party operating systems. If this compatibility is not maintained, demand for our eTextbooks could decline and revenues could be adversely affected.
If the transition from print textbooks to eTextbooks does not proceed as we expect, our business and financial condition will be adversely affected.
The textbook distribution market has begun shifting toward digital distribution. If demand for eTextbooks accelerates more rapidly than we expect, we may be unable to realize our expected return on the textbooks in our print textbook library and therefore carry excess and obsolete textbooks. Conversely, if the transition to digital distribution of textbooks does not gain market acceptance as we expect, capital requirements over the long term may be greater than we expect and our opportunities for growth may be diminished. In that case, we may need to raise additional capital, which may not be available on reasonable terms, or at all, and we may not realize the potential long-term benefits of a shift to digital distribution, including greater pricing flexibility and the ability to distribute a larger library of eTextbooks compared to print textbooks.
If publishers refuse to grant us distribution rights to digital content on acceptable terms or terminate their agreements with us, or if we are unable to adequately protect their digital content rights, our business could be adversely affected.
We rely on licenses from publishers to distribute eTextbooks to our customers and to provide some of our other products and services. We do not have long-term contracts or arrangements with most publishers that guarantee the availability of such digital content. If we are unable to secure and maintain rights to distribute, or otherwise use, the digital content upon terms that are acceptable to us, or if publishers terminate their agreements with us, we would not be able to acquire such digital content from other sources and our ability to attract new students and retain existing students could be adversely impacted. Some of our licenses give the publisher the right to withdraw our rights to distribute or use the digital content without cause
and/or give the publisher the right to terminate the entire license agreement without cause. If a publisher exercises such a right, this could adversely affect our business and results of operations. Moreover, to the extent we are able to secure and maintain rights to distribute eTextbooks, our competitors may be able to obtain the same rights on more favorable terms.
In addition, our ability to distribute eTextbooks depends on publishers’ belief that we include effective digital rights management technology to control access to digital content. If the digital rights management technology that we use is compromised or otherwise malfunctions, we could be subject to claims, and publishers may be unwilling to include their content in our service. If users are able to circumvent the digital rights management technology that we use, they may acquire unauthorized copies of the textbooks that they would otherwise rent from us, which could decrease our textbook rental volume and adversely affect our results of operations.
If we fail to convince brands of the benefits of advertising on our learning platform, or if platforms such as Google Chrome, Safari, or Firefox limit our access to advertising and marketing audiences, or the data required to effectively reach those audiences, our business could be harmed.
Our business strategy includes increasing our revenues from brand advertising. Brands may view our learning platform as experimental and unproven. They may not do business with us, or may reduce the amounts they are willing totheir advertising spend to advertise with us, if we do not deliver ads, sponsorships, and other commercial content and marketing programs in an effective manner,effectively, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other alternatives. Additionally, if platforms such as Google Chrome, Safari, or Firefox, take actions which limit our access to or understanding of advertising and marketing audiences, such actionsthey could reduce our advertising rates and ultimately reduce our revenues from brand advertising. For example, the release of iOS 14 on Apple devices brought with it a number of new changes, including the need for app users to opt in before their identifier for advertisers (IDFA) can be accessed by an app. Apple’s IDFA is a string of numbers and letters assigned to Apple devices which advertisers use to identify app users to deliver personalized and targeted advertising. As more users opt out of granting IDFA access, the ability of advertisers to accurately target and measure their advertising campaigns at the user level may become significantly limited and we may experience increased cost per registration. Our ability to grow the number of brands that use our brand advertising, and ultimately to generate advertising and marketing services revenues, depends on a number of factors, including our ability to successfully:
integrate with third-party programmatic advertising platforms;
reduce the exposuresome of actions taken by platforms to limit our access to advertising audiences;
compete for advertising and marketing dollars from brands, online marketing, and media companies and advertisers;
penetrate the market for student-focused advertising;
develop a platform that can deliver advertising and marketing services across multiple channels, including print, email, Internet, mobile applications, and other connected devices;
improve our analytics and measurement solutions to demonstrate the valuewhich are outside of our advertising and marketing services;
retain, grow, and engage our student user base;
strengthen our brand and increase our presence in media reports and with publicity companies that utilize online platforms for advertising and marketing purposes;
create new products that sustain or increase the value of our advertising and marketing services and other commercial content;
manage changes in the way online advertising and marketing services are priced;
weathercontrol, such as the impact of macroeconomic conditions and conditions in the advertising industry and higher education in general; and
manage legal developments relating to data privacy, advertising, or marketing services, legislation and regulation and litigation.
Our core value of putting students first may conflict with the short-term interests of our business.
We believe that adhering to our core value of putting students first is essential to our success and in the best interests of our company and the long-term interests of our stockholders. In the past, we have forgone, and in the future we may forgo, short-term revenue opportunities that we do not believe are in the best interests of students, even if our decision negatively impacts our results of operations in the short term. For example, we offer free services to students that require investment by us, such as our Chegg Internships service, in order to promote a more comprehensive solution. We launched Chegg.org in 2019, which is the umbrella brand for our impact, advocacy, outreach, and research efforts regarding issues facing the modern student. We also developed the Chegg for Good program to connect students and employees with partners to engage them in causes related to education and the environment. Our philosophy of putting students first may cause us to make decisions that could negatively impact our relationships with publishers, colleges, and brands, whose interests may not always be aligned with ours or those of our students. Our decisions may not result in the long-term benefits that we expect, in which case our level of student satisfaction and engagement, business, and results of operations could be harmed.
If we are required to discontinue certain of our current marketing activities, our ability to attract new students may be adversely affected.
Laws or regulations may be enacted which restrict or prohibit use of emails or similar marketing activities that we currently rely on. For example:
the CAN-SPAM Act of 2003 and similar laws adopted by a number of states regulate unsolicited commercial emails, create criminal penalties for emails containing fraudulent headers, and control other abusive online marketing practices;
the FTC has guidelines that impose responsibilities on companies with respect to communications with consumers and impose fines and liability for failure to comply with rules with respect to advertising or marketing practices they may deem misleading or deceptive;
the TCPA restricts telemarketing and the use of automated telephone equipment. The TCPA limits the use of automatic dialing systems, artificial or prerecorded voice messages, and SMS text messages. It also applies to unsolicited text messages advertising the commercial availability of goods or services. Additionally, a number of states have enacted statutes that address telemarketing. For example, some states, such as California, Illinois, and New York, have created do-not-call lists. Other states, such as Oregon and Washington, have enacted “no rebuttal statutes” that require the telemarketer to end the call when the consumer indicates that he or she is not interested in the product being sold. Restrictions on telephone marketing, including calls and text messages, are enforced by the FTC, the Federal Communications Commission, states and through the availability of statutory damages and class action lawsuits for violations of the TCPA; and
the CCPA, which came into effect on January 1, 2020, requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, allows consumers to opt out of certain data sharing with third parties, and provides a new cause of action for data breaches. The burdens imposed by the CCPA and other similar laws that may be enacted at the federal and state level may require us to modify our data processing practices and policies and how we advertise to our users and to incur substantial expenditure in order to comply.
Even if no relevant law or regulation is enacted, we may discontinue use or support of these activities if we become concerned that students or potential students deem them intrusive or they otherwise adversely affect our goodwill and brand. If our marketing activities are curtailed, our ability to attract new students may be adversely affected.
Our business and growth may suffer if we are unable to hire and retain key personnel.
We depend on the continued contributions of our senior management and other key personnel. In particular, we rely on the contributions of our President, Chief Executive Officer and Co-Chairperson, Dan Rosensweig. All of our executive officers and key employees are at-will employees, meaning they may terminate their employment relationship at any time. We compensate our employees through a combination of salary, benefits and equity compensation. Volatility or a decline in our stock price may affect our ability to retain and motivate key employees, each of whom has been granted stock options, RSUs or both. Competition for qualified personnel can be intense, and we may not be successful in retaining and motivating such personnel, particularly to the extent our stock price is volatile or at a depressed level, as equity compensation plays an important role in how we compensate our employees. Such individuals may elect to seek employment with other companies that they believe have better long-term prospects. If we lose the services of one or more members of our senior management team or other key personnel, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. Our future success also depends on our ability to identify, attract and retain highly skilled technical, managerial, finance, legal and media procurement personnel. Qualified individuals are in high demand, particularly in the San Francisco Bay Area where our executive offices are located, and we may incur significant costs to attract them. If we are unable to attract or retain the personnel we need to succeed, our business may suffer.
We may need additional capital, and we cannot be sure that additional financing will be available or on favorable terms.terms, if at all.
Historically, investments in our business have substantially exceeded the cash we have generated from our operations. We have funded our operating losses and capital expenditures through proceeds from equity and debt financings, and cash flow from operations. Although we currently anticipate that our available funds and cash flow from operations will be sufficient to meet our cash needs for the foreseeable future, we may require additional financing, particularly if the investment required to fund our operations is greater than we anticipate or we choose to invest in new technologies or complementary businesses or change our business model. Our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. Additional financing
may not be available to us on favorable terms when required or at all. If we raise additional funds through the issuance of equity, equity-linked, or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience substantial dilution.
Our business depends on general economic conditions and their effect on spending behavior by students and advertising budgets.
Our business is dependent on, among other factors, general economic conditions, which affect student spending and brand advertising. Prior to the COVID-19 pandemic, state and federal funding levels at colleges across the United States remained below historic levels, which led to increased tuition and decreased amounts of financial aid offered to students. The COVID-19 pandemic has adversely affected federal and state budgets for education and caused significant economic volatility. To the extent that these trends continue, students may elect to not attend colleges and universities and reduce the amount they spend on educational content and textbooks. In addition to decreased spending by students, colleges and brands may reduce their spend on our advertising services. Any of the foregoing may have an adverse effect on our business.
If we are not able to manage the growth of our business both in terms of scale and complexity, our business could be adversely affected.
As we grow, the operations and technology infrastructure we use to manage and account for our operations will become more complex, and managing these aspects of our business will become more challenging. Acquisitions of new companies,
products, and services create integration risk, while developing and enhancing products and services involves significant time, labor, and expense as well as other challenges, including managing the length of the development cycle, entering new markets, regulatory compliance, evolution of sales and marketing, and protecting proprietary rights. Any future expansion will likely place significant demand on our resources, capabilities and systems, and we may need to develop new processes and procedures and expand our infrastructure to respond to these demands. If we are not able to manage the growth of our business, we may not be able to maintain or increase our revenues as anticipated or recover any associated acquisition or development costs, and our business could be adversely affected.
Risks Related to Our Industry
Government regulation of education and student information is evolving, and unfavorable developments could have an adverse effect on our results of operations.
We are subject to regulations and laws specific to the education sector because we offer our products and services to students, collect data from students, and offer education and training. Data privacy and security with respect to the collection of personally identifiable information from students continues to be a focus of worldwide legislation and regulation. This includes significant regulation in the European Union, and legislation and compliance requirements in various jurisdictions around the world. Within the United States, several states have enacted legislation that goes beyond any federal requirements relating to the collection and use of personally identifiable information and other data from students. Examples include statutes adopted by the State of California and most other states that require online services to report certain breaches of the security of personal data and a California statute that requires companies to provide choice to California customers about whether their personal data is disclosed to direct marketers or to report to California customers when their personal data has been disclosed to direct marketers. In this regard, there are a large number of legislative proposals before the U.S. Congress and various state legislative bodies regarding privacy issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could harm our business through a decrease in student registrations and revenues. These decreases could be caused by, among other possible provisions, the required use of disclaimers or other requirements before students can utilize our services. We post our privacy policies and practices concerning the use and disclosure of student data on our website. However, any failure by us to comply with our posted privacy policies, FTC requirements or other privacy-related laws and regulations could result in proceedings by governmental or regulatory bodies or by private litigants that could potentially harm our business, results of operations, and financial condition.
Our ability to deliver course content to students enrolled in Thinkful skillsskills-based learning programs may be subject to state oversight including regulatory approvals and licensure for the course content, the faculty members teaching the content, and the recruiting, admissions, and marketing activities associated with the business. Thinkful's efforts to obtain necessary approvals and licenses began prior to our acquisition of Thinkfulthe business and has continuedcontinues following the acquisition. We monitor changes to the state regulatory requirements applicable to our Thinkful business, and to all of Chegg's business activities, including Thinkful; however, any failure toif we do not obtain the appropriate licenses or address evolving state requirements, it may result in governmental or regulatory proceedings or actions by private litigants, which could potentially harm our business, results of operations, and financial condition.
Our business may also be subject to laws specific to students, such as the Family Educational Rights and Privacy Act, the Delaware Higher Education Privacy Act, and a California statute which restricts the access by postsecondary educational institutions of prospective students’ social media account information. Compliance levels includerequires, without limitation, making disclosures, obtaining government licenses, disclosures, consents, transferand restrictions notice and access provisionson transferring data for which we may in the future need to build further infrastructure to further support. We cannot guarantee that we or our acquired companies prior to our acquisition thereof have been or will be fully compliant in every jurisdiction, because it is not entirely cleardue to lack of clarity concerning how existing laws and regulations governing educational institutions affect our business and due to lengthy governmental compliance process timelines.
Moreover, as the education industry continues to evolve, increasing regulation by federal, state, and foreign agencies becomes more likely. Recently,For example, California adopted the Student Online Personal Information Protection Act which prohibits operators of online services used for K-12 school purposes from using or sharing student personal information, Illinois adopted the Student Online Personal Protection Act which went into effect on July 1, 2021 and regulates how we collect and process data, and Colorado adopted House Bill 16-1423 designed to protect the use of student personal data in elementary and secondary school. These acts do not apply to general audience Internet websites but it is not clearunclear how these acts will be interpreted and the breadth of services that will be restricted by them. Other states may adopt similar statutes. Additionally, for-profit postsecondary institutions, many of which provide course offerings predominantly online, remain under intense regulatory and other scrutiny. Allegations of abuse of federal financial aid funds and other statutory violations against for-profit higher education companies, even if unfounded, could negatively impact our opportunity to succeed due to increased regulation or decreased demand for our offerings.
Certain statesjurisdictions have also adopted statutes, such as California Education Code § 66400, which prohibitsprohibit the preparation or sale of material whichthat should reasonably be known will be submitted for academic credit. These statuteslaws and regulations are directed at enterprises selling term papers, theses, dissertations, and the like, which we do not offer, and were not designed for services like ours which are designed to help students understand the relevant subject matter. Although we will continue to work with academic institutions to enforce our honor code and otherwise discourage students from misusing our services, other statesjurisdictions (including international jurisdictions) may adopt similar or broader versions of these types of statutes,laws and regulations, or the interpretation of the existing or future statuteslaws and regulations may impact whether they are cited against us or where we can offer our services.
The adoption of any laws or regulations that adversely affect the popularity or growth in the use of the Internet particularly for educational services, including laws limiting the content and learning programs that we can offer, and the audiences that we can offer that content to, may decrease demand for our service offerings and increase our cost of doing business. Future regulations, or changes in laws and regulations or their existing interpretations or applications, could also
hinder our operational flexibility, raise compliance costs, and result in additional historical or future liabilities for us, resulting in adverse impacts on our business and our results of operations.
While we expect and plan for new laws, regulations, and standards to be adopted over time that will be directly applicable to the Internet and to our student-focused activities, any existing or new legislation applicable to our business could
expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations and potential penalties or fees for non-compliance, and could negatively impact the growth in the use of the Internet for educational purposes and for our services in particular. We may also run the risk of retroactive application of new laws to our business practices that could result in liability or losses. Due to the global nature of the Internet, it is possible that the governments of other states and foreign countries might attempt to change previous regulatory schemes or choose to regulate transmissions or prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified, and new laws may be enacted in the future. Any such developments could harm our business, results of operations, and financial condition.
We collect, process, storeColleges and use personal information and data, which subjects us to governmental regulation and other legal obligations related to privacy and our actualcertain governments may restrict online access or perceived failure to comply with such obligations could harm our business.
In the ordinary course of business, and in particular in connection with merchandising our service to students, we collect, process, store, and use personal information and data supplied by students and tutors. We may enable students to share their personal information with each other and with third parties and to communicate and share information into and across our platform. Other businesses have been criticized by privacy groups and governmental bodies for attempts to link personal identities and other information to data collected on the Internet regarding users’ browsing and other habits. There are numerous federal, state and local laws regarding privacy and the collection, storing, sharing, using, processing, disclosing and protecting of personal information and other user data, the scope of which are changing, subject to differing interpretations, and which may be costly to comply with and may be inconsistent between countries and jurisdictions or conflict with other rules.
We currently face certain legal obligations regarding the manner in which we treat such information. Increased regulation of data utilization practices, including self-regulation or findings under existing laws, or new regulations restricting the collection, use and sharing of information from minors under the age of 18, that limit our ability to use collected data could have an adverse effect on our business. In addition, if unauthorized access to our students’ data werewebsite, which could lead to occurthe loss of or if we were to disclose data aboutslowing of growth in our student users in a manner that was objectionable to them, our business reputation and brand could be adversely affected, and we could face legal claims that could impact our results of operations. Our reputation and brand and relationships with students would be harmed if our billing data were accessed by unauthorized persons.
We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection. However, U.S. federal, U.S. state and international laws and regulations regarding privacy and data protection, including the CCPA, are rapidly evolving and may be inconsistent and we could be deemed out of compliance as such lawsuser base and their interpretation change. In addition, foreign privacy, data protection, and other laws and regulations, particularly in Europe and including the DPD and the GDPR, are often more restrictive than those in the United States. Manylevel of these laws and regulations, including the GDPR, are relatively new and it is not clear how these acts will be interpreted and the breadthengagement with our platform.
The growth of services and the methods of how we conduct or propose to conduct our business that will be restricted or otherwise effected by them. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to our business operations may limit the use and adoption of our services and reduce overall demand for them. Furthermore, foreign court judgments or regulatory actions could impact our ability to transfer, process and/or receive transnational data, including data relating to students or partners outside the United States, or alter our ability to use cookies to deliver advertising and other products to users. Such judgments or actions could affect the manner in which we provide our services or adversely affect our financial results if foreign students and partners are not able to lawfully transfer data to us. For example, in 2015 the European Court of Justice invalidated the U.S.-EU Safe Harbor framework that had been in place since 2000, which allowed companies to meet certain European legal requirements for the transfer of personal data from the European Economic Area to the United States. While other adequate legal mechanisms to lawfully transfer such data remain, the invalidation of the U.S.-EU Safe Harbor framework may result in different European data protection regulators applying differing standards for the transfer of personal data, which could result in increased regulation, cost of compliance and limitations on data transfer for us and our customers. In addition, some countries and states are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services. Any changes in such laws and regulations or a change or differing interpretation or application to our business of the existing laws and regulations, including the recently implemented GDPR, could also hinder our operational flexibility, raise compliance costs and, particularly if our compliance efforts are deemed to be insufficient, result in additional historical or future liabilities for us, resulting in adverse impacts on our business and our resultsbrand depends on the ability of operations.
In addition, we may be subjectstudents to access the Internet and the products and services available on our website, in particular in non-U.S. countries. Colleges that provide students with access to the Internet either through on-campus computer terminals or Internet access points on campus could block or restrict access to our website, content, or services or the Internet generally for a number of reasons, including security, confidentiality, regulatory investigationsconcerns, or litigationif they believe our products or services contradict or violate their policies. If colleges modify their policies in connection with a security breachways that are detrimental to the growth of our student user base or related issue,in ways that make it harder for students to use our website, the overall growth in our student user base would slow, student engagement would decrease and we could also be liable to third parties for these types of breaches. For instance, following the Data Incident, a purported securities class action captioned Shah v. Chegg, Inc. et. al. (Case No. 3:18-cv-05956-CRB) was filedwould lose revenues. Any reduction in the United States District Court for the Northern Districtnumber of California against us and our CEO. The complaint was filed by a purported Chegg stockholder and alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, based on allegedly misleading statements regarding our security measures to protect users’ data and related internal controls and procedures, as well as our second quarter 2018 financial results. For further information on such action, see Part I, Item 3, “Legal Proceedings” below. Such litigation, regulatory investigations and our technical activities intended to prevent future security breaches are likely to require additional management resources and expenditures. If our security measures fail to protect personal information and data supplied by students and tutors adequately, we could be liabledirected to our students and tutors for their losses, we could face regulatory action, and our students and tutors could end their relationships with us, any of which couldwebsite would harm our business and financial results.results of operations.
Any failure
Laws or perceived failure byregulations may be enacted which restrict or prohibit use of emails or similar marketing activities that we currently rely on. For example: CAN-SPAM regulates unsolicited commercial emails and imposes civil and criminal penalties for abusive practices; the FTC imposes penalties on companies for misleading and deceptive marketing practices; TCPA restricts telemarketing and the use of automated telephone equipment; and CCPA requires us to make certain disclosures regarding our marketing practices, allows consumers to opt-out of certain data sharing practices. Newly enacted laws such CDPA and CPA will place additional restrictions on our marketing practices.
Notwithstanding existing laws, we may discontinue use or support of these activities if we become concerned that students or potential students deem them intrusive or they otherwise adversely affect our reputation, goodwill and brand. If our marketing activities are curtailed, our ability to attract new students may be adversely affected.
We are subject to U.S. trade control laws that may impose restrict growth prospects and impose liability if we are non-compliant.
As a U.S. company with U.S. origin software applications, we are required to comply with our privacy policies, our privacyU.S. trade controls. Our activities are subject to U.S. economic sanctions laws and regulations administered by the Department of the Treasury, Office of Foreign Assets Control (OFAC), which prohibit most transactions with embargoed jurisdictions or data-protection obligations to studentsprohibited parties without a specific or other third parties, our privacy or data-protection legal obligations or any compromise of security that results in the unauthorized release or transfer of sensitive information, which may include personally identifiable information or other data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause students to lose trust in us, which could have an adverse effect on our business.general license from OFAC. Additionally, if third parties we work with, such as colleges and brands, violate applicable laws or our policies, such violations may also put our student users’ information at risk and could in turn have an adverse effect on our business.
Public scrutiny of Internet privacy issues may result in increased regulation and different industry standards, which could deter or prevent us from providing our current products and services to students, thereby harming our business.
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, display, processing, transmission and security of personal information by companies offering online services have recently come under increased public scrutiny. The U.S. government, including the White House, the FTC and the U.S. Department of Commerce, are reviewingBureau of Industry and Security (BIS) administers the need for greater regulationExport Administration Regulations (EAR), which restrict exports of software subject to the collectionEAR to embargoed countries and use of information concerning consumer behavior with respect to online services, including regulation aimed at restricting certain targeted advertising practices. The FTC in particular has approved consent decrees resolving complaints and their resulting investigations into the privacy and security practices of a number of online, social media companies. Similar actions may also impact us directly, particularly because high school students who use our Chegg Writing, Chegg Tutors, and Chegg Prep (formerly Chegg Flashcards) services, may be under the age of 18, which subjects our business to laws covering the protection of minors. For example, various U.S. and international laws restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. The FTC has also revised the rules under the Children’s Online Privacy Protection Act effective July 1, 2013.prohibited parties. Although our services are not primarily directed to children under 13, our Chegg Writing service or our Chegg Prep service, in particular, could be used by students as early as in middle school, and the FTC could decide that our site now or in the future haswe have taken inadequate precautions to prevent children under 13our platform, services and software applications from accessingbeing provided in embargoed jurisdictions and to prohibited parties, and we continue to enhance our sitepolicies and providing us information.procedures relating to sanctions and export compliance, we may not be able to prevent all transactions that are noncompliant with U.S. trade controls. Sanctions and export violations can result in significant fines or penalties, as well as reputational harm and loss of business.
In 2012,Our customers outside of the White House published a report calling for a consumer privacy BillUnited States generated approximately 11.1% of Rights thatour net revenues during the year ended December 31, 2021, and our growth strategy includes further expanding our operations and customer base across all major global markets. An escalation in sanctions or export controls against regions where we operate, or the issuance of new sanctions designations or export restrictions against individuals and entities located in various regions, could impact the collection of data,result in decreased ability to provide our platform, services and the Department of Commerce seekssoftware applications to establish a consensus-driven Do-Not-Track standard that could impact on-line and mobile advertising. The State of California and several other states have adopted privacy guidelines with respect to mobile applications. Our business, includingexisting or potential customers. Any limitation on our ability to operate internationally,in various global markets could adversely affect our business performance and growth prospects.
Risks Related to Taxes and Accounting Matters
We may be subject to greater than anticipated liabilities for income, property, sales, and other taxes, and any successful action by federal, state, foreign, or other authorities to collect additional taxes could adversely harm our business.
We are subject to regular review and audit by both U.S. federal and state and foreign tax authorities and such jurisdictions may assess additional taxes against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be adversely affected if legislation or regulations are adopted, interpreted or implementedmaterially different from our historical tax provisions and accruals and could have a negative effect on our financial position and results of operations. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing and allocating income from our intercompany transactions, which could increase our worldwide effective income tax rate. We collect sales taxes in all U.S. states with a manner that is inconsistent withsales tax and most local jurisdictions on our current business practicessales, rentals, and that require changes to these practices, the designdigital services sold through our commerce system including sales and rentals on behalf of our websites, mobile applications,third-party publishers. In June 2018, the U.S. Supreme Court in South Dakota v. Wayfair, Inc. et al ruled that a state can require an online retailer with no in-state property or personnel to collect and remit sales and use tax on sales made to the state’s residents. It is possible that such taxes could be assessed by certain states retroactively for periods before the Wayfair decision on acquired products featuresthat are not sold through our commerce system. Any successful action by federal, state, foreign or other authorities to impose or collect additional income tax or compel us to collect and remit additional sales, use, value-added or similar taxes, either retroactively, prospectively or both, could harm our privacy policy. In particular, the successbusiness, financial condition, and results of operations.
We may not be able to utilize a significant portion of our net operating loss or tax credit carryforwards, which could adversely affect our profitability.
At December 31, 2021, we had federal and state net operating loss carryforwards due to prior period losses of approximately $660 million and $485 million, respectively, which if not utilized will begin to expire in 2028 and 2022 for federal and state purposes, respectively. An immaterial portion of the state net operating loss carryforwards expired in 2021. At December 31, 2021, we also had federal tax credit carryforwards of approximately $21.4 million, which if not utilized will begin to expire in 2030, and state tax credit carryforwards of approximately $15.7 million, which do not expire. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability. For example, we have net operating loss carryforwards of $25.4 million related to our previous operations in Kentucky that will expire unused unless we have similar operations in Kentucky. Additionally, in response to the COVID-19 pandemic, California’s Legislature passed Assembly Bill 85 (A.B. 85), which suspends the use of net operating losses for tax years beginning in 2020, 2021, and 2022 for taxpayers with taxable income of $1.0 million or more before an application of net operating loss. A.B. 85 includes an extended carryover period for the suspended net operating losses with an additional year carryforward for each year of suspension. A.B. 85 also limits the utilization of business has been,incentive tax credits for taxable years 2020, 2021, and we expect2022, requiring that taxpayers can only claim a maximum of $5.0 million in tax credit on an aggregate basis.
The 2017 Tax Act changed both the federal deferred tax value of the net operating loss carryforwards and the rules of utilization of federal net operating loss carryforwards. The 2017 Tax Act lowered the corporate tax rate from 35% to 21% effective for our 2018 financial year. For net operating loss carryforwards generated in years prior to 2018, there is no annual limitation on the utilization and the carryforward period remains at 20 years; net operating loss carryforwards generated in years after 2017 will continueonly be available to offset 80% of future taxable income in any single year but will not expire. However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily repealed the 80% taxable income limitation for tax years beginning before January 1, 2021; net operating loss carried forward from 2018 or later to taxable years beginning after December 31, 2020 will be driven bysubject to the 80% limitation. Also, under the CARES Act, net operating loss arising in 2018, 2019 and 2020 can be carried back five years.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), our ability to responsibly useutilize net operating loss carryforwards or other tax attributes, such as tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As a result of prior equity issuances and other transactions in our stock and the datastock of acquired companies, we have previously experienced “ownership changes” under Section 382 and comparable state tax laws. We may experience ownership changes in the future as a result of future issuances and other transactions of our stock. It is possible that students share with us. Therefore, our businessany future ownership change could be harmed by any significant change to applicable laws, regulations or industry standards or practices regardinghave a material effect on the use of our net operating loss carryforwards or disclosureother tax attributes, which could adversely affect our profitability.
Our effective tax rate may fluctuate as a result of new U.S. and worldwide tax laws and our interpretations of those new tax laws, which are subject to significant judgments and estimates. The ongoing effects of the new tax laws and the refinement of provisional estimates could make our results difficult to predict.
Our effective tax rate may fluctuate in the future as a result of new tax laws. The new tax laws could have a meaningful impact on our provision for income taxes once we release our valuation allowance. Due to the complexities involved in applying the provisions of new tax legislation, we may make reasonable estimates of the effects in our financial statements. As we collect and prepare necessary data and interpret the new tax legislation, we may make adjustments that students choose to share with us or regardingcould affect our financial position and results of operations as well as our effective tax rate in the mannerperiod in which the express or implied consentadjustments are made.
Our earnings are affected by the application of consumers for suchaccounting standards and our critical accounting policies, which involve subjective judgments and estimates by our management. Our actual results could differ from the estimates and assumptions used to prepare our consolidated financial statements.
The accounting standards that we use in preparing our financial statements are often complex and disclosure is obtained. Such changes may require us to modifymake significant estimates and assumptions in interpreting and applying those standards. These estimates and assumptions affect the reported values of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. We make critical estimates and assumptions involving accounting matters including textbook library, revenue recognition, valuation of long-lived assets and goodwill, and share-based compensation expense. These estimates and assumptions involve matters that are inherently uncertain and require us to make subjective and complex judgments. Although we believe we have the experience and processes to enable us to formulate appropriate assumptions and produce reasonably dependable estimates, these assumptions and estimates may change significantly in the future and could result in the reversal of previously recognized revenues and profit. If we used different estimates and assumptions or used different methods to determine these estimates, our products and services, possibly infinancial results could differ, which could have a material manner,negative impact on our financial condition and may limitreported results of operations. For more information about our ability to develop new productscritical accounting policies and services that make use of the data that we collect about our student users.estimates, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies, Significant Judgments and Estimates.”
Risks Related to Intellectual Property
If we become subject to liability for the Internet content that we publish or that is uploaded to our websites by students, our results of operations could be adversely affected.
As a publisher and distributor of online content, we face potential liability for negligence, copyright, or trademark infringement, or other claims based on the nature and content of materials that we publish or distribute. We also may face potential liability for content uploaded by students in connection with our community-related content. If we become liable, then
our business may suffer. Thirdthird parties may initiate litigation against us without warning.and our business may suffer. For example, in June 2017, the Examinations Institute of the American Chemical Societyon September 13, 2021, Pearson Education, Inc. (Pearson) filed a complaint against uscaptioned Pearson Education, Inc. v. Chegg, Inc. (Pearson Complaint) in the U.S.United States District Court for the Northern District of California claiming, among other things, that we infringed theirNew Jersey against the Company (Case 2:21-cv-16866), alleging infringement of Pearson’s registered copyrights by answering and displaying questions uploaded by our users to our Q&A service.exclusive rights under copyright in violation of the United States Copyright Act. Others may send us letters or other communications that make allegations without initiating litigation. We have in the past and may in the future receive such communications, which we assess on a case-by-case basis. We may elect not to respond to the communication if we believe it is without merit or we may attempttry to resolve disputes out-of-court by removing content or services we offer or paying licensing or other fees. If we are unable tocannot resolve such disputes, litigation may result. Litigation to defend these claims could be costly, divert our technical and management personnel, render us unable to use our current website or to market our service or sell our products and therefore harm our results of operations. We may not be adequately insured to cover claims of these types or indemnified for all liability that may be imposed on us. Any adverse publicity resulting from actual or potential litigation may also materially and adversely affect our reputation, which in turn could adversely affect our results of operations.
In addition,We maintain content usage review systems that, through a combination of manual and automated blocks, monitor for and make us aware of potentially infringing content on our platform. Nevertheless, claims may continue to be brought and threatened against us for negligence, intellectual property infringement, or other theories and there is no guarantee that we will be able to resolve any such claims quickly and without damage to our business, our reputation or our operations. From time to time, we have been subject to copyright infringement claims, some of which we have settled. While these settlements have not had a material impact on our financial condition, we may be subject to similar lawsuits in the future and the outcome of any such lawsuits may not be favorable to us and could have a material adverse effect on our financial condition.
Changes in or our failure to comply with the Digital Millennium Copyright Act (DMCA) could harm our business.
The DMCA has provisions that limit, but do not necessarily eliminate, our liability for caching or hosting or for listing or linking to, content or third-party websites that include materials or other content that infringe copyrights or other intellectual property or proprietary rights, provided we comply with the strict statutory requirements of the DMCA. The interpretations of the statutory requirements of the DMCA are constantly being modified by court rulings and industry practice. Accordingly, if we fail to comply with such statutory requirements or if the interpretations of the DMCA change, we may be subject to potential liability for caching or hosting, or for listing or linking to, content or third-party websites that include materials or other content that infringe copyrights or other intellectual property or proprietary rights.
We maintain content usage review systems that, through a combination of manual and automated blocks, monitors for and makes us aware of potentially infringing content on our platform. Nevertheless, claims may continue to be brought and threatened against us for negligence, intellectual property infringement, or other theories based on the nature and content of information, its origin and its distribution and there is no guarantee that we will be able to resolve any such claims quickly and without damage to us, our business model, our reputation or our operations. From time to time, we have been subject to copyright infringement claims, some of which we have settled. While these settlements have not had a material impact on our financial condition, we may be subject to similar lawsuits in the future, including in connection with our other services. The outcome of any such lawsuits may not be favorable to us and could have a material adverse effect on our financial condition.
Failure to protect or enforce our intellectual property and other proprietary rights could adversely affect our business, and financial condition, and results of operations.
Our success and ability to compete depends in part on our intellectual property and our other proprietary business information. We rely and expect to continue to rely on a combination of trademark, copyright, patent, and trade secret protection laws, as well as confidentiality and license agreements with our employees, consultants, and third parties with whom we have relationships to protect our intellectual property and proprietary rights. AsHowever, we may be unable to secure intellectual property protection for all of December 31, 2019,our technology and methodologies or the steps we had 30 issued patentstake to enforce our intellectual property rights may be inadequate. If the protection of our intellectual property and 13 patent applications pendingproprietary rights is inadequate to prevent use or misappropriation by third parties, the value of our brand and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to customers and potential customers may become confused in the United States. We own four U.S. copyright registrationsmarketplace, and have unregistered copyrights in our software documentation, marketing materials, and website content that we develop. We own 34 U.S. trademark registrations and 31 foreign registrations. As of December 31, 2019, we owned over 700 registered domain names. We also have a number of pending trademark applications in the United States and foreign jurisdictions and unregistered marks that we useability to promote our brand. From time to time we expect to file additional patent, copyright, and trademark applications in the United States and abroad. Nevertheless, these applicationsattract customers may not be approved or otherwise provide the full protection we seek. adversely affected.
Third parties may challenge any patents, copyrights, trademarks, and other intellectual property and proprietary rights owned or held by us. Third parties may knowingly or unknowingly infringe, misappropriate, or otherwise violate our patents, copyrights, trademarks, and other proprietary rights and we may not be able to prevent infringement, misappropriation, or other violation without substantial expense to us. Additionally, if we fail to protect our domain names, it could adversely affect our reputation and brand and make it more difficult for students to find our website, our content, and our services.
Furthermore, we cannot guarantee that:
our intellectual property and proprietary rights will provide competitive advantages to us;
our competitors or others will not design around our intellectual property or proprietary rights;
our ability to assert our intellectual property or proprietary rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;
our intellectual property and proprietary rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;
we can acquire or maintain relevant domain names;
any of the patents, trademarks, copyrights, trade secrets or other intellectual property or proprietary rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned; or
we will not lose the ability to assert our intellectual property or proprietary rights against or to license our intellectual property or proprietary rights to others and collect royalties or other payments.
If we pursue litigation to assert our intellectual property or proprietary rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property or proprietary rights, limit the value of our intellectual property or proprietary rights, or otherwise negatively impact our business, financial condition, and results of operations. If the protection of our intellectual property and proprietary rights is inadequate to prevent use or misappropriation by third parties, the value of our brand and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to customers and potential customers may become confused in the marketplace and our ability to attract customers may be adversely affected.
We are a party to a number of third-party intellectual property license agreements. For example, we have entered into agreements with textbook publishers that provide access to textbook questions and other content for our Chegg Study subscription service, for which we often pay an upfront license fee. In addition, we have agreements with certain eTextbook publishers under which we incur non-refundable fees at the time we provide students access to an eTextbook.service. We cannot guarantee that the third-party intellectual property we license will not be licensed to our competitors or others in our industry. In the future, we may need to obtain additional licenses or renew existing license agreements. We are unable tocannot predict whether these license agreements can be obtained or renewed on acceptable terms, or at all. Any failure to obtain or renew such third-party intellectual property license agreements on commercially competitive terms could adversely affect our business and financial results.results of operations.
We are, and may in the future be, subject to intellectual property claims, which are costly to defend and could harm our business, financial condition, and results of operations.
From time to time, third parties have alleged and are likely to allege in the future that we or our business infringes, misappropriates, or otherwise violates their intellectual property or proprietary rights. Many companies, including various “non-practicing entities” or “patent trolls,” are devotingdevote significant resources to developing or acquiring patents that could potentially affect many aspects of our business. For instance, on November 5, 2018, a non-practicing entity (NPE) filed an action against us in the United StatesU.S. District Court for the Southern District of New York captioned NetSoc, LLC v. Chegg, Inc., Civil Action No. 1:18-CV-10262-RAC (the NetSoc Action). The NetSoc Action was one of several patent infringement lawsuits filed by NetSoc asserting its recently-issued patent, U.S. Patent No. 9,978,107 (the ’107 Patent), which allegedly covers certain aspects of social networking. NetSoc alleged that the Chegg Tutors service infringes the ’107 Patent. NetSoc has filed similar lawsuits against other defendants in the Southern District of New York (including, e.g., Yahoo! Inc.), as well as the Northern District of Texas and the Eastern District of Texas (including, e.g., Match Group, LLC). On January 13, 2020, the Court issued an order dismissing the case as to Chegg. On January 30, 2020, NetSoc appealed the dismissal and we are currently awaiting their filing of a brief with the court. For further information on this action, see Note 12, “Commitments and Contingencies,” of our accompanying Notes to Consolidated Financial Statements included in Part I,II, Item 3, “Legal Proceedings” below. There are numerous patents that broadly claim means8, “Consolidated Financial Statements and methodsSupplementary Data” of conducting businessthis Annual Report on the Internet. We have not exhaustively searched patents related to our technology.Form 10-K.
In addition, the publishing industry has been and we expect in the future will continue to be the target of counterfeiting and piracy. We have in the past received and mayexpect to continue to receive, communications alleging that physical textbooks sold or rented by us are counterfeit. For example, in 2016 we formally began cooperating, and continue to cooperate, with a group of publishers in a series of audits which identified several thousand potentially fraudulent textbooks which we removed from our inventory. While our fulfillment partners, Ingram and FedEx beginning in 2020, havepartner has systems for inspecting the physical textbooks in our catalog of books,textbooks, many of the bookstextbooks sold or rented to students are shipped directly from our suppliers, and, despite this inspection, unauthorized or counterfeit textbooks may inadvertently be included in the catalog of bookstextbooks we offer and may be, without our knowledge that they are unauthorized or counterfeit, subsequently sold or rented by us to students, and we may be subject to allegations of
civil or criminal liability. We may implement additional measures in an effort to protect against these potential liabilities that could require us to spend substantial resources. Any costs incurred as a result of liability or asserted liability relating to sales of unauthorized or counterfeit textbooks could harm our business, reputation, and financial condition.
Third parties may initiate litigation against us without warning. Others may send us lettersSome aspects of our technology include open source software, and any failure to comply with the terms of one or other communications that make allegations without initiating litigation. We have in the past and may in the future receive such communications, which we assess on a case-by-case basis. We may elect not to respond to the communication if we believe it is without merit or we may attempt to resolve disputes out-of-court by electing to pay royalties or other fees for licenses. If we are forced to defend ourselves against intellectual property claims, whether they are with or without merit or are determined inmore of these open source licenses could harm our favor, we may face costly litigation, diversion of technical and management personnel, inability to use our current website or inability to market our service or merchandise our products. As a result of a dispute, we may have to develop non-infringing technology,business.
enter into licensing agreements, adjust our merchandising or marketing activities or take other action to resolve the claims. These actions, if required, may be unavailable on terms acceptable to us or may be costly or unavailable. If we are unable to obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices, as appropriate, on a timely basis, our reputation or brand, our business and our competitive position may be affected adversely and we may be subject to an injunction or be required to pay or incur substantial damages and/or fees.
In addition, weWe use open source software in connection with certain of our products and services. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute or use open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. Any requirement to disclose our proprietary source code or pay damages for breach of contract could have a material adverse effect on our business, financial condition and results of operations.
Confidentiality agreements with employeesRisks Related to Data Privacy
Computer malware, viruses, hacking, phishing attacks, and others may not adequately prevent disclosurespamming could harm our business and results of trade secrets and proprietary information.operations.
We have devoted substantial resources to the developmentIf our security measures or those of our service providers or companies we may acquire are breached or are perceived to have been breached, including cyberattacks or other intentional misconduct by computer hackers, employee error, malfeasance, or otherwise, or if third parties obtain unauthorized access to our data, including sensitive customer data, personal information, intellectual property and proprietary rights. In orderother confidential business information, we could be required to expend significant capital and other resources to address the problem. Any such events could harm our business, increase our costs, including due to litigation and enforcement actions, indemnity obligations, damages, penalties and costs for remediation, and damage our reputation or brand. Cyberattacks and security threats are constantly evolving, making it increasingly difficult to successfully defend against them or implement adequate preventative measures.
For instance, in April 2018, an unauthorized party gained access to user data for chegg.com and certain of our family of brands such as EasyBib (the 2018 Data Incident). The information that may have been obtained could include a Chegg user’s name, email address, shipping address, Chegg username, and hashed Chegg password. To date, no social security numbers or financial information such as users’ credit card numbers or bank account information were obtained. Additionally, Thinkful, prior to our acquisition of it, discovered an unauthorized party may have gained access to certain Thinkful company credentials (the Thinkful Data Incident). If we, or companies that we acquire, experience security compromises that result in website performance or availability problems, the complete shutdown of our websites, or the actual or perceived loss or unauthorized disclosure or use of confidential information, such as credit card information, users may be harmed or lose trust and confidence in us, and decrease the use of our services or stop using our services in their entirety, and we would suffer reputational and financial harm, in addition to increased regulatory scrutiny, litigation, fines, and governmental enforcement actions.
As part of our regular cybersecurity efforts, including enhancements to our cybersecurity controls made following our discovery of these prior events, we have implemented physical, technical, and administrative safeguards designed to protect our intellectual propertysystems. However, efforts to prevent hackers from entering our computer systems are expensive to implement, may limit the functionality of our services, and proprietary rights, we rely in part on confidentiality agreements withmay need to expend significant additional resources to further enhance our employees, book vendors, licensees, independent contractors,safeguards and other advisors. These agreementsprotection against security breaches or to redress problems caused by security breaches and such efforts may not effectively prevent disclosure of confidential information andbe fully effective. Additionally, our network security business disruption insurance may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secretsbe sufficient to cover significant expenses and proprietary information and in such caseslosses related to direct attacks on our website or systems we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights anduse. Any failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Our business depends on general economic conditionsperformance, reliability, security, and their effect on spending behavior by students and advertising budgets.
Our business is dependent on, among other factors, general economic conditions, which affect student spending and brand advertising. While the U.S. economy has recovered since the "Great Recession," state and federal funding levels at colleges across the United States remain below historic levels, which has led to increased tuition and decreased amounts of financial aid offered to students. To the extent that these trends continue or the economy stagnates or worsens, students may reduce the amount they spend on textbooks and other educational content, which could have a serious adverse impact on our business. In addition to decreased spending by students, the colleges and brands that use our marketing services have advertising budgets that are often constrained during periods of stagnant or deteriorating economic conditions. In a difficult economic environment, customer spending in eachavailability of our products and services is likelyand technical infrastructure, or the actual or perceived loss or unauthorized disclosure or use of the data we collect and develop may lead our users to lose trust and confidence in us or otherwise harm our reputation, brand, and our ability to attract students to our website or may lead them to decrease whichthe use of our services or applications or stop using our services in their entirety. Any significant disruption to our website or computer systems we use could result in a loss of students or advertisers and, particularly if disruptions occur during the peak periods at the beginning of each academic term, could adversely affect our business and results of operations.
Additionally, depending on the nature of the information compromised, in the event of a security breach or other privacy or security related incident, we may also have obligations to notify affected individuals and regulators about the incident, and we may need to provide some form of remedy, such as a subscription to credit monitoring services, payment of significant fines, or payment of compensation in connection with a class-action settlement (including under the new private right of action under the CCPA). Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another.
Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises our, our users’, our employees’, or other confidential or personal information.
Any significant disruption, including those related to cybersecurity or arising from cyberattacks, to our computer systems, especially during peak periods, could result in a loss of students and/or brands which could harm our business, results of operations, and financial condition. A deterioration
We rely on computer systems housed in six facilities, three located on the East Coast and three located on the West Coast, to manage our operations. We have experienced and expect to continue to experience periodic service interruptions and delays involving our systems. While we maintain a fail-over capability to switch our operations from one facility to another in the event of a service outage, that process would still result in service interruptions that could be significant in duration. Such interruptions could have a disproportionate effect on our operations if they were to occur during one of our peak periods or if multiple of our service facilities experiences outages at the same time. Our facilities are also vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures, and similar events.
Our facilities and information systems, as well as those of our third-party service providers, are also subject to break-ins, sabotage, intentional acts of vandalism, cybersecurity risks including cyberattacks such as computer viruses and denial of service attacks, the failure of physical, administrative, and technical security measures, terrorist acts, natural disasters, human error, the financial insolvency of our third-party vendors, and other unanticipated problems or events. These information systems have periodically experienced and will continue to experience both directed attacks and loss of, misuse of, or theft of data. For example, on or about April 9, 2020, we had a breach in which an outside hacker may have illegally obtained personal information, including name and social security number, from approximately 700 current and former employees. We notified impacted employees and regulatory officials, and made a credit-monitoring service available, at no charge, to impacted current and former employees. Moreover, due to the current economic environmentCOVID-19 pandemic, there is an increased risk that we may alsoexperience cybersecurity related incidents as a result of our employees, service providers, and third parties working remotely on less secure systems. While we have implemented physical, technical, and administrative safeguards designed to help protect our systems, in the event of a system interruption or a security exposure or breach, they may not be as effective as intended and we may not have adequate insurance coverage to compensate for related losses. To date, unauthorized users have not had a material effect on our company; however, there can be no assurance that attacks will not be successful in the future or that any loss will not be material. In addition, our information systems must be constantly updated, patched, and upgraded to optimize performance and protect against known vulnerabilities, material disruptions, or slowdown. The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our customers or our own proprietary information, software, methodologies, and business secrets could result in significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems, products, and services, which could have a material adverse effect on our business, financial condition, or results of operations.
We also rely on Internet systems and infrastructure to operate our business. The information systems used by our third-party service providers and the Internet generally are vulnerable to these risks as well. In particular, we rely heavily on SaaS enterprise resource planning systems to conduct our e-commerce and financial transactions and reporting. In addition, we utilize third-party cloud computing services in connection with our business operations. Problems faced by us or our third-party hosting and cloud-computing providers, or interruptions in our own systems or in the infrastructure of the Internet, including technological or business-related disruptions, as well as cybersecurity threats, could hinder our ability to fundoperate our growthbusiness, damage our reputation or brand and strategicresult in a loss of students or brands which could harm our business, initiatives.results of operations, and financial condition.
Our international operationsWe collect, process, store and use personal information and data, which subjects us to governmental regulation and other legal obligations related to privacy and our actual or perceived failure to comply with such obligations could harm our business.
In the ordinary course of business, we collect, process, store, and use personal information and data supplied by students and tutors. We may enable students to share their personal information with each other and with third parties and to communicate and share information into and across our platform. If we were to disclose data about our student users in a manner that was objectionable to them, our business reputation and brand could be adversely affected, and we could face legal claims that could impact our results of operations. In addition, there are numerous federal, state, and local laws regarding privacy and the collection, storing, sharing, using, processing, disclosing and protecting of personal information and other user data, including from minors under the age of 18, the scope of which are changing, subject to increased challengesdiffering interpretations, and risks.which may be costly to comply with and may be inconsistent between countries and jurisdictions or conflict with other rules.
We have employees in Germany, Israel,strive to comply with all applicable laws, policies, legal obligations, and Indiaindustry codes of conduct relating to privacy and data protection. However, U.S. federal, U.S. state, and international laws and regulations regarding privacy and data protection, including the CCPA and CPRA, are rapidly evolving and may be inconsistent and we indirectly contract with individualscould be deemed out of compliance as such laws and their interpretation change. In addition, foreign privacy, data protection, and other laws and regulations, particularly in Europe and including the General Data Protection Regulation (the GDPR), which became effective in May 2018, are often at least as restrictive as those in the Ukraine. Additionally, we own a minority stake in a learning platform for high schoolUnited States. The costs of compliance with, and college students in Brazil. Although todayother burdens imposed by, such laws and regulations that are applicable to our internationalbusiness operations represent less than 10%may limit the use and adoption of our total consolidated operating expensesservices and we currently do not expectreduce overall demand for them.
Furthermore, foreign court judgments or regulatory actions could impact our international operationsability to materially increase in the near future, we expecttransfer, process, and/or receive transnational data, including data relating to continue to expand our international operations and such operations may expand more quickly than we currently anticipate. However, we have limited operating history as a companystudents or partners outside the United States, andor alter our ability to manageuse cookies to deliver advertising and other products to users. Such judgments or actions could affect the manner in which we provide our services or adversely affect our financial results if foreign students and partners are not able to lawfully transfer data to us. In addition, some countries and states are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services. Any changes in such laws and regulations or a change or differing interpretation or application to our business and conduct our operations internationally requires considerable management attention and resources and is subject toof the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, tax systems, legal systems, alternative dispute systems, regulatory systems, and commercial infrastructures. Operating internationally has required and will continue to require us to invest significant funds and other resources, subjects us to new risks, and may increase the risks that we currently face, including risks associated with:
recruiting and retaining talented and capable employees in foreign countries and maintaining our company culture across all of our offices;
compliance with applicable foreignexisting laws and regulations;
protecting and enforcing intellectual property rights abroad;
compliance with anti-bribery lawsregulations, including without limitation, the Foreign Corrupt Practices Act;
currency exchange rate fluctuations;
additional taxation of internationalGDPR, could also hinder our operational flexibility, raise compliance costs and, intercompany paymentsparticularly if our compliance efforts are deemed to our international subsidiaries associated with the U.S. Tax Cutsbe insufficient, result in additional historical or future liabilities and Jobs Act of 2017 (the 2017 Tax Act);
additional value added taxesregulatory scrutiny for us, resulting in adverse impacts on digital products that are purchased from our website by international customers;
political and economic instability; and
higher costs of doing business internationally.
Colleges and certain governments may restrict access to the Internet or our website, which could lead to the loss of or slowing of growth in our student user base and their level of engagement with our platform.
The growth of our business and our brand dependsresults of operations.
In addition, we may be subject to regulatory investigations or litigation in connection with a security breach or related issue, and we could also be liable to third parties for these types of breaches. For instance, following the 2018 Data Incident, a purported securities class action captioned Shah v. Chegg, Inc. et. al. (Case No. 3:18-cv-05956-CRB) was filed in the U.S. District Court for the Northern District of California against us and our CEO. The complaint was filed by a purported Chegg stockholder and alleges claims under Sections 10(b) and 20(a) of the Exchange Act, as amended, based on allegedly misleading statements regarding our security measures to protect users’ data and related internal controls and procedures, as well as our second quarter 2018 financial results. Such litigation, regulatory investigations, and our technical activities intended to prevent future security breaches are likely to require additional management resources and expenditures.
Additionally, the abilityCCPA provides for a private right of action for security breaches that is expected to increase security breach litigation that could lead to some form of remedy including regulatory scrutiny, fines, private right of action settlements, and other consequences. If our security measures fail to protect personal information and data supplied by students to access the Internet and the products and services available on our website, in particular in non-U.S. countries. Colleges that provide students with access to the Internet either through physical computer terminals on campus or through wired or wireless access points on campustutors adequately, we could block or restrict accessbe liable to our website, content or services or the Internet generallystudents and tutors for a numbertheir losses, we could face regulatory action, and our students and tutors could end their relationships with us, any of reasons including security or confidentiality concerns, regulatory reasons, or concerns that certain of our products and services, such as Chegg Study, may contradict or violate their policies.
If colleges modify their policies in ways that are detrimental to the growth of our student user base or in ways that make it harder for students to use our website, the overall growth in our student user base would slow, student engagement would decrease and we would lose revenues. Any reduction in the number of students directed to our website wouldwhich could harm our business and results of operations.
Our operations are susceptible to earthquakes, floods, rolling blackouts, and other types of power loss. If these or other natural or man-made disasters were to occur, our business and results of operations would be adversely affected.
Our business and operations could be materially adversely affected in the event of earthquakes, blackouts, or other power losses, floods, fires, telecommunications failures, break-ins, acts of terrorism, inclement weather, shelving accidents, or similar events. Our executive offices are located in the San Francisco Bay Area, an earthquake-sensitive area. If floods, fire, inclement weather including extreme rain, wind, heat, or cold, or accidents due to human error were to occur and cause damage to our properties or textbook library, or our distribution partners' ability to fulfill orders for print textbook rentals and sales and our results of operations would suffer, especially if such events were to occur during peak periods. We may not be able to effectively shift our operations due to disruptions arisingfinancial results. Further, on June 18, 2020, we received a CID from the occurrenceFTC to determine whether we may have violated Section 5 of the FTC Act or the COPPA, as they relate to deceptive or unfair acts or practices related to consumer privacy and/or data security. Also, as of October 2020, we have received notices that an aggregate of 16,691 arbitration demands were filed against us by individuals alleging to have suffered damages in connection with the 2018 Data Incident. For further information on such events,actions, see Note 12, “Commitments and our business could be affected adversely as a result. Moreover, damage to or total destructionContingencies,” of our executive offices resulting from earthquakes may not be coveredaccompanying Notes to Consolidated Financial Statements included in wholePart II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Any failure or in partperceived failure by any insurance we may have.
If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy, and timeliness of our financial reporting may be adversely affected.
The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. If we are not ableus to comply with the requirements of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subjectprivacy policies, our privacy or data-protection obligations to sanctions or investigations by The New York Stock Exchange, the SECstudents or other regulatory authorities,third parties, our privacy or data-protection legal obligations, or any compromise of security that results in the unauthorized release or transfer of sensitive information, which would require additional financial and management resources.
If we concludemay include personal information or other data, may result in future periods that our internal control over financial reporting is not effective, we may be required to expend significant time and resources to correct the deficiencygovernmental enforcement actions, litigation, or public statements against us by consumer advocacy groups or others and could be subjectcause students to onelose trust in us, which could have an adverse effect on our business. Additionally, if third parties we work with, such as colleges and brands, violate applicable laws or more investigations or enforcement actions by state or federal regulatory agencies, stockholder lawsuits or otherour policies, such violations may also put our student users’ information at risk and could in turn have an adverse actions requiring us to incur defense costs, pay fines, settlements or judgments and causing investor perceptions to be adversely affected and potentially resulting in a decline in the market price of our stock.
Additionally, our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation. If we are unable to maintain effective internal control over financial reporting to meet the demands placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by law or exchange regulations.
We may be subject to greater than anticipated liabilities for income, property, sales, and other taxes, and any successful action by federal, state, foreign, or other authorities to collect additional taxes could adversely harmeffect on our business.
We are subject to regular reviewprivacy and audit by both U.S. federalcybersecurity laws across multiple jurisdictions which are highly complex, overlapping, and statewhich create compliance challenges that may expose us to substantial costs, liabilities, or loss of customer trust. Our actual or perceived failure to comply with these laws could harm our business.
We have internal and foreign tax authoritiespublicly posted policies regarding our collection, processing, use, disclosure, deletion and such jurisdictions may assess additional taxes against us.security of information. Although we believeendeavor to comply with our tax estimatespolicies and documentation, we may at times fail to do so or be accused of having failed to do so. The publication of our privacy policies and other documentation that provide commitments about data privacy and security can subject us to potential actions if they are reasonable, the final determination of tax audits and any related litigation couldfound to be materially different fromdeceptive, unfair, or otherwise misrepresent our historical tax provisions and accruals and could have a negative effect on our financial position and results of operations. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing and allocating income from our intercompany transactions,actual practices, which could increase our worldwide effective income tax rate. We collect sales taxes in all U.S. states with a sales taxmaterially and most local jurisdictions on our sales, rentals, and digital services sold through our commerce system including sales and rentals on behalf of our third-party publishers. In June 2018, the U.S. Supreme Court in South Dakota v. Wayfair, Inc. et al ruled that a state can require an online retailer with no in-state property or personnel to collect and remit sales and use tax on sales made to the state’s residents. It is possible that such taxes could be assessed by certain states retroactively for periods before the Wayfair decision on acquired products that are not sold through our commerce system. Any successful action by federal, state, foreign or other authorities to impose or collect additional income tax or compel us to collect and remit additional sales, use, value-added or similar taxes, either retroactively, prospectively or both, could harmadversely affect our business, financial condition and results of operations. In addition, compliance with inconsistent or new privacy and cybersecurity laws could impact our business
strategies and the availability of previously useful data, increase our potential liability, increase our compliance costs, require changes in business practices and policies and adversely impact our business.
We
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, display, processing, transmission and security of personal information by companies offering online services have recently come under increased public scrutiny. The U.S. government, including the White House, the FTC and the U.S. Department of Commerce, have reviewed the need for greater regulation of the collection and use of information concerning consumer behavior with respect to online services, including regulation aimed at restricting certain targeted advertising practices. The FTC in particular has approved consent decrees resolving complaints and their resulting investigations into the privacy and security practices of a number of online, and social media companies. On June 18, 2020, we received a CID from the FTC to determine whether we may not be ablehave violated Section 5 of the FTC Act or the COPPA, as they relate to utilize a significant portiondeceptive or unfair acts or practices related to consumer privacy and/or data security, as further described in Note 12, “Commitments and Contingencies,” of our net operating loss or tax credit carryforwards, which could adversely affect our profitability.
At December 31, 2019, we had federalaccompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and state net operating loss carryforwards due to prior period lossesSupplementary Data” of approximately $591 million and $440 million, respectively, which if not utilized will begin to expire in 2028 and 2020 for federal and state purposes, respectively. An immaterial portionthis Annual Report on Form 10-K. Similar actions may also impact us directly, particularly because of the state net operating loss carryforwards expired in 2019. At December 31, 2019, we also had federal tax credit carryforwardscurrent subject of approximately $14.8 million,the CID and because high school students who use our Chegg Writing and Chegg Prep services, may be under the age of 18, which if not utilized will beginsubjects our business to expire in 2030, and state tax credit carryforwardslaws covering the protection of approximately $11.9 million, which do not expire. These net operating loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability.minors. For example, we have net operating loss carryforwardsvarious U.S. and international laws restrict the distribution of $25 million relatedmaterials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. Although our previous operationsservices are not primarily directed to children under 13, our Chegg Writing service or our Chegg Prep service, in Kentucky that will expire unused unless we have similar operationsparticular, could be used by students as early as in Kentucky.
The 2017 Tax Act changed both the federal deferred tax value of the net operating loss carryforwardsmiddle school, and the rules of utilization of federal net operating loss carryforwards. The 2017 Tax Act loweredFTC could decide that our site now or in the corporate tax ratefuture has taken inadequate precautions to prevent children under 13 from 35% to 21% effective foraccessing our 2018 financial year. For net operating loss carryforwards generated in years prior to 2018, there is no annual limitation on the utilizationsite and the carryforward period remains at 20 years. However, net operating loss carryforwards generated in years after 2017 will only be available to offset 80% of future taxable income in any single year but will not expire.providing us information.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code),Our business, including our ability to utilize net operating loss carryforwardsoperate internationally, could be adversely affected if legislation or other tax attributes, such as tax credits,regulations are adopted, interpreted or implemented in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5%a manner that is inconsistent with our current business practices and that require changes to these practices, the design of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. As a result of prior equity issuances and other transactions inwebsites, mobile applications, products, features or our stock and the stock of acquired companies, we have previously experienced “ownership changes” under Section 382 of the Code and comparable state tax laws. We may experience ownership changes in the future as a result of future issuances and other transactions of our stock. It is possible that any future ownershipprivacy policy. Any significant change could have a material effect onto applicable laws, regulations or industry standards or practices regarding the use or disclosure of our net operating loss carryforwardsdata that students choose to share with us or other tax attributes, which could adversely affect our profitability.
U.S. federal income tax reform could adversely affect us.
The 2017 Tax Act, among other things, included changes to U.S. federal tax rates, imposes significant additional limitations onregarding the deductibility of interest, executive compensation, other expenses, and future net operating losses, allows for the expensing of certain capital expenditures, and puts into effect a number of changes impacting operations outside of the United States. In the fourth quarter of 2017, we reduced our net deferred tax asset by approximately $42 million as a result. The revaluation of our deferred tax assets, including U.S. federal net operating losses, is offset by an equal reduction in our valuation allowance and therefore there were no additional changes to our results of operations. In 2018 and 2019 the Internal Revenue Service (IRS) issued guidance on a number of the changes in the 2017 Tax Act which were considered and had no impact on our prior year tax provisions. We will continue to assess the impact of additional guidance related to the 2017 Tax Act on our net deferred tax assets and liabilities including state conformity and will continue to examine the impact this tax legislation may have on our cash taxes and on our business.
Under the 2017 Tax Act, a corporation’s interest expense generally is limited to the business interest income of the corporation and 30% of the corporation’s “adjusted taxable income.” Adjusted taxable income is defined generally as taxable income with certain add-backs, including in years before 2022, any deductions allowable for depreciation and amortization. Interest expense in excess of the above limitation is not deductible by the corporation but carries forward indefinitely. Depending on our future results, it is possible that our deductions for interest expense arising from the notes and the related capped call transactions could be limited, in which case our after-tax cost of borrowing could increase.
Our effective tax rate may fluctuate as a result of new tax laws and our interpretations of those new tax laws, which are subject to significant judgments and estimates. The ongoing effects of the new tax laws and the refinement of provisional estimates could make our results difficult to predict.
Our effective tax rate may fluctuate in the future as a result of the 2017 Tax Act. The 2017 Tax Act will have a meaningful impact on our provision for income taxes once we release our valuation allowance.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Act, we made reasonable estimates of the effects and recorded complete amounts in our financial statements for the year ended December 31, 2018. Subsequent to December 31, 2018 the U.S. Treasury Department, the IRS, and other standard-setting bodies have issued and may continue to issue guidance on how provisions of the 2017 Tax Act will be applied or otherwise administered that is different from our interpretation. As we collect and prepare necessary data and interpret the 2017 Tax Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make adjustments that could affect our financial position and results of operations as well as our effective tax rate in the periodmanner in which the adjustments are made. Further, foreign governmentsexpress or implied consent of consumers for such use and disclosure is obtained may enact local tax lawsrequire us to modify our products and services, possibly in responsea material manner, and may limit our ability to develop new products and services that make use of the 2017 Tax Act which may result in additional changesdata that could materially affectwe collect about our financial position and results of operations.student users.
Our reported financial results mayreputation and relationships with students, tutors, and educators would be harmed if our users’ data, particularly billing data, were to be accessed by changesunauthorized persons.
We maintain personal data regarding students, tutors, and educators, including names and, in many cases, mailing addresses, and, in the accounting principles generally accepted incase of tutors and educators, information necessary for payment and tax filings. We take measures to protect against unauthorized intrusion into our users’ data. However, despite these measures, if we or our payment processing services experience any unauthorized intrusion into our users’ data, current and potential users may become unwilling to provide the United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. For example, in February 2016 the FASB issued ASU 2016-02,
Leases (Topic 842), for which we were required to recognize right of use (ROU) assets and lease liabilities on our consolidated balance sheets. We adopted Topic 842 using the modified retrospective transition method. Other companies in our industry may apply these accounting principles differently than we do, adversely affecting the comparability of our financial statements. See Note 11 to our accompanying financial statements for information about Topic 842.
Risks Related to Ownership of Our Common Stock
Our stock price has been and will likely continue to be volatile.
The trading price of our common stock has been, and is likely to continue to be, volatile. Since shares of our common stock were sold in our IPO in November 2013 at a price of $12.50 per share, our closing stock price has ranged from $3.15 to $45.77 through December 31, 2019. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:including, among others:
actual or anticipated fluctuations in our financial condition and results of operations, including as a result of the seasonality in our business;
•our announcement of actual results for a fiscal period that are higher or lower than projected results or our announcement of revenues or earnings guidance that is higher or lower than expected, including as a result of difficulty forecasting seasonal variations in our financial condition and results of operations;expected;
•issuance of new or updated research or reports by securities analysts, including the publication of unfavorable reports or change in recommendation or downgrading of our common stock;
•announcements by us or our competitors of significant products or features, technical innovations,technologies, acquisitions, strategic relationships and partnerships, joint ventures, or capital commitments;
•actual or anticipated changes in our growth rate relative to our competitors;
•changes in the economic performance or market valuations of companiesactual or perceived by investors to be comparable to us;companies;
•future sales of our common stock by our officers, directors, and existing stockholders or the anticipation of such sales;
•issuances of additional shares of our common stock or convertible instruments in connection with acquisitions;acquisitions and capital raising transactions;
•share price and volume fluctuations attributable to inconsistent trading volume levels of our shares, including any common stock issued upon conversion of the notes;
•lawsuits threatened or filed against us;
•regulatory developments in our target markets affecting us, students, colleges, brands, publishers, or our competitors;
•the U.S. political climate, in the United States, with a focus on cutting or limiting budgets, higher education, and taxation;
•terrorist attacks or natural disasters or other suchsimilar events impacting countries where we have operations;operate; and
international stock market conditions; and
•general economic and market conditions, such as recessions, unemployment rates, the limited availability of consumer credit, interest rate changes, and currency fluctuations.conditions.
Furthermore, both domestic and international stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of companies in general and technology companies in particular. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. We believe our stock price may beTechnology companies have been particularly susceptible to volatility as the stock prices of technology and Internet companies have often been subject to wide fluctuations.price volatility. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have been and may continue to be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
Our management, with the oversight of the board of directors, has broad discretion as to the use of the proceeds from previousbusiness and future sales of securities and we may not use the proceeds effectively.
Our management, with the oversight of the board of directors, has broad discretion in the application of the net proceeds from our past and future sales of securities and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock or with which our stockholders otherwise disagree. The failure of our management to apply these funds effectively could result in unfavorable returns and uncertainty about our prospects, each of which could cause the price of our common stock to decline.operations.
If securities or industry analysts do not report about our business or publish inaccurate or unfavorable research about our business, our stock price could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline. Additionally, individuals or entities with short positions in our stock could seek to depress the share price by publishing inaccurate or incomplete statements, opinions, or research reports regarding our businesses and the laws and regulations applicable to them, as we have seen and may continue to experience in the future.
We may be subject to short selling strategies that may drive down the market price of our common stock.
Short selling occurs when an investor borrows a security and sells it on the open market, with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares. Because it is in the short seller’s best interests for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, its business prospects, and similar matters calculated to or which may create negative market momentum. Although, traditionally, shortShort sellers were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet has allowed short sellers tocan publicly attack a company’s reputation and business on a broader scale.scale via online postings. In the past, the publication of such commentary about us by a disclosed short seller has precipitated a decline in the market price of our common stock, and future similar efforts by other short sellers may have similar effects.
In addition, if we are subject to unfavorable allegations promoted by short sellers, even if untrue, we may have to expend a significant amount of resources to investigate such allegations and defend ourselves from possible shareholder suits prompted by such allegations, which could adversely impact our business, results of operations, and financial condition.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. As a result, our stockholders (including holders of notes who receive any shares of our common stock upon conversion of their notes) may only receive a return on their investment in our common stock if the market price of our common stock increases.
Delaware law and provisions in our restated certificate of incorporation and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:
•our board of directors is classified into three classes of directors with staggered three-year terms and directors can only be removed from office for cause and by the approval of the holders of at least two-thirds of our outstanding common stock;
•subject to certain limitations, our board of directors has the sole right to set the number of directors and to fill a vacancy resulting from any cause or created by the expansion of our board of directors, which prevents stockholders from being able to fill vacancies on our board of directors;
•only our board of directors is authorized to call a special meeting of stockholders;
•our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued, without the approval of the holders of common stock;
•advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;
•our stockholders cannot act by written consent;
•our restated bylaws can only be amended by our board of directors or by the approval of the holders of at least two-thirds of our outstanding common stock; and
•certain provisions of our restated certificate of incorporation can only be amended by the approval of the holders of at least two-thirds of our outstanding common stock.
In addition, our restated certificate of incorporation provides that the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our restated certificate of incorporation, or our bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. This exclusive forum provision will not apply to claims that are vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery of the State of Delaware, or for which the Court of Chancery of the State of Delaware does not have subject matter jurisdiction. For instance, the provision would not preclude the filing of claims brought to enforce any liability or duty created by the Exchange Act or Securities Act of 1933, as amended (Securities Act) or the rules and regulations thereunder in federal court.
Our securities repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.
In November 2021, our board of directors approved a $500.0 million increase to our existing securities repurchase program authorizing the repurchase of up to $1.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements. The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors. During the year ended December 31, 2021, we entered into an accelerated share repurchase (ASR) agreement for $300.0 million and repurchased $100.0 million of aggregate principal amount of the 2025 notes in privately-negotiated transactions for an aggregate consideration of $184.9 million. During the year ended December 31, 2020, we repurchased $57.4 million of aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $149.6 million. As of December 31, 2021 $365.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.
Repurchases pursuant to our securities repurchase program could affect the price of our common stock and increase its volatility. The existence of our securities repurchase program could also cause the price of our common stock to be higher than it would be in the absence of such a program and could reduce the market liquidity for our common stock. Additionally, repurchases under our securities repurchase program will diminish our cash reserves, which could impact our ability to further develop our business and service our indebtedness. There can be no assurance that any repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased such shares. Any failure to repurchase securities after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and may negatively impact our stock price. Although our securities repurchase program is intended to enhance long-term stockholder value, short-term price fluctuations could reduce the program’s effectiveness.
Risks Related to Our Convertible Senior Notes
Servicing our 0.125% convertible senior notes due 2025 (the "2025 notes") and 0.25% convertible senior notes due 2023 (the “2023 notes”) requires a significant amount of cash, and we may not have sufficient cash flow or cash on hand to repay them, settle conversions in cash or to repurchase them upon a fundamental change, and any future debt may contain limitations on our ability to pay our debt.cash upon conversion or repurchase.
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 notes(2025 notes) and in April 2019, the initial purchasers fully exercised their option to purchase $100 million of additional 2025 notes for aggregate total gross proceedsprincipal amount of $800 million. In April 2018, we issued $345 million aggregate principal amount of 2023 notes. Collectively, theThe 2025 notes and 20232026 notes are collectively referred to as the "notes."“notes.” The notes were issued in private placements to qualified institutional buyers pursuant to Rule 144A of the Securities Act . Our ability to make scheduled payments of the principal of, to pay interest on, or to
refinance our indebtedness, including the notes, depends on our future performance, which is subject to many factors, including, economic, financial, competitive and other, beyond our control. We may not be able to generate cash flow from operations, in the foreseeable future, sufficient to service our debt and make necessary capital expenditures and may therefore be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the notes, which may not be redeemed prior to September
2023 for the 2026 notes, March 2022 for the 2025 notes and May 2021 for the 2023 notes subject to certain conditions related to the price of our common stock, will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations, and limit our flexibility in planning for and reacting to changes in our business.
We may not have the ability to raise the funds necessary to settle conversions of the notes in cash or to repurchase the notes upon a fundamental change, and any future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the notes.
Holders of the notes will have the right to require us to repurchase all or a portion of their notes upon the occurrence of a fundamental change before the maturity date at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered therefor or pay cash with respect to notes being converted. If we elect to deliver shares of our common stock to settle such conversion, the issuance of our common stock may cause immediate and significant dilution.
In addition, our ability to repurchase the notes or to pay cash upon conversions of notes may be limited by law, regulatory authority or agreements governing any future indebtedness. Our failure to repurchase the notes at a time when the repurchase is required by the indenture or to pay cash upon conversions of notes as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing any future indebtedness. If the payment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes or to pay cash upon conversions of notes.
The capped call transactionsGeneral Risk Factor
Our operations are susceptible to earthquakes, floods, rolling blackouts and other types of power loss, and public health crises, including the current COVID-19 pandemic. If these or other natural or man-made disasters were to occur, our business and results of operations would be adversely affected.
Our business and operations could be materially adversely affected in the event of earthquakes, blackouts, or other power losses, floods, fires, telecommunications failures, break-ins, acts of terrorism, public health crises, including the current COVID-19 pandemic, inclement weather, shelving accidents, or similar events. Our executive offices are located in the San Francisco Bay Area, an earthquake-sensitive area and susceptible to wildfires. If floods, fire, inclement weather including extreme rain, wind, heat, or cold, or accidents due to human error were to occur and cause damage to our properties or textbook library, or our distribution partners’ ability to fulfill orders for print textbook rentals and sales, our results of operations would suffer, especially if such events were to occur during peak periods. We may affectnot be able to effectively shift our operations due to disruptions arising from the valueoccurrence of the notessuch events, and our common stock.
In connection with the notes, we entered into capped call transactions with certain financial institutions (the option counterparties). The capped call transactions are expected generallybusiness and results of operations could be affected adversely as a result. Moreover, damage to reduce the potential dilution upon any conversion of notes and/or offset any cash payments we are required to make in excess of the principal amount upon conversion of any notes, with such reduction and/or offset subject to a cap.
In connection with establishing their initial hedges of the capped call transactions, the option counterparties and/ or their respective affiliates purchased sharestotal destruction of our common stock and/or entered into various derivative transactions with respect to our common stock. This activity could have increased (or reduced the size of any decrease in) the market price of our common stock or the notes at that time.
In addition, the option counterparties and/or their respective affiliatesexecutive offices resulting from earthquakes may modify their hedge positions by entering intonot be covered in whole or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market transactions (and are likely to do so during any observation period related to a conversion of notes or following any repurchase of notes by us on any fundamental change repurchase date or otherwise). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the notes.
The potential effect, if any, of these transactions and activities on the market price of our common stock or the notes will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of our common stock.by any insurance we may have.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Santa Clara, California and consist of approximately 67,500 square feet of space under a lease that expires in November 2023. We have additional offices in California, Oregon, and New York in the United States and internationally in the United Kingdom, India and Israel, under leases that expire at varying times between 20202022 and 2024.2027. We believe our facilities are adequate for our current needs and for the foreseeable future; however, we will continue to seek additional space as needed to accommodate our growth.
ITEM 3. LEGAL PROCEEDINGS
From time to time, third parties may assert patent infringement claims against us in the form of letters, litigation or other forms of communication. In addition, weWe may from time to time be subject to othercertain 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 investigations.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 September 27, 2018 a purported securities class action captioned Shah v. Chegg, Inc. et. al. (Case No. 3:18-cv-05956-CRB) was filed in the U.S. District Court for the Northern District of California against us For further information on our legal proceedings, see Note 12, “Commitments and our CEO. The complaint was filed by a purported Company shareholder and alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5, based on allegedly misleading statements regarding the Company’s security measures to protect users’ data and related internal controls and procedures, as well as our second quarter 2018 financial results. The suit is purportedly brought on behalf of purchasersContingencies,” of our securities between July 30, 2018accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and September 25, 2018. The complaint seeks unspecified compensatory damages, as well as interest, costs and attorneys’ fees. On November 15, 2018, a second purported securities class action captioned Kurland v. Chegg, Inc. et al. (Case No. 3:18-cv-06714-CRB) was filed in the U.S. District Court for the Northern DistrictSupplementary Data” of California against us, our CEO, and our CFO. The Shah and Kurland actions contain similar allegations, assert similar claims, and seek similar relief, andthis Annual Report on January 24, 2019, the Court consolidated the two actions. On March 29, 2019, the Plaintiffs filed a Lead Plaintiff's Notice of Voluntary Dismissal Without Prejudice.Form 10-K.
On November 5, 2018, NetSoc, LLC (NetSoc) filed a complaint against us in the U.S. District Court for the Southern District of New York for patent infringement alleging that the Chegg Tutors service infringes U.S. Patent No. 9,978,107 and seeking unspecified compensatory damages. A responsive pleading was filed on February 19, 2019. On January 13, 2020, the Court issued an order dismissing the case as to Chegg. On January 30, 2020, NetSoc appealed the dismissal and we are currently awaiting their filing of a brief with the court.
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 may proceed to litigation cannot be predicted with certainty, nor can the results of litigation be predicted with certainty. Nevertheless, defending any of these actions, regardless of the outcome, may be costly, time consuming, distract management personnel and have a negative effect on our business. An adverse outcome in any of these actions, including a judgment or settlement, may cause a material adverse effect on our business, results of operations, and financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the New York Stock Exchange under the symbol “CHGG.”
Stockholders of Record
As of January 31, 20202022, there were 3227 stockholders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We do not intend to declare or pay any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K for more information regarding securities authorized for issuance.
Unregistered Sales of Securities
We had no unregistered sales of our securities during the three months ended December 31, 2021.
Securities Repurchase Program
In March 2019, we issued $700November 2021, our board of directors approved a $500.0 million in aggregate principal amountincrease to our existing securities repurchase program authorizing the repurchase of 2025up to $1.0 billion of our common stock and/or convertible notes, and in April 2019, the initial purchasers fully exercised their option to purchase $100 million of additional notes for an aggregate principal amount of $800 million. The 2025 notes were issued in private placements to qualified institutional buyersthrough open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 144A10b5-1 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 December 31, 2021, $365.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.
Purchases of Securities Actby the Registrant and Affiliated Purchasers
The following table summarizes the securities repurchase activity for the three months ended December 31, 2021 (in thousands, except total number of 1933,securities repurchased):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Securities Repurchased | | Average Price Paid Per Security(1) | | Total Number of Securities Purchased Pursuant to Publicly-Announced Plan | | Total Dollar Amount Purchased Pursuant to Publicly-Announced Plan | | Maximum Dollar Amount Remaining Available for Repurchase Pursuant to Publicly-Announced Plan |
| As of September 30, 2021 | | — | | | $ | — | | | — | | | $ | — | | | $ | 665,491 | |
| October 1 - October 31 | | — | | | — | | | — | | | — | | | 665,491 | |
| November 1 - November 30 | | — | | | — | | | — | | | — | | | 665,491 | |
| December 1 - December 31 | | 8,403,361 | | | $ | — | | | 8,403,361 | | | $ | 300,000 | | | $ | 365,491 | |
(1) On December 3, 2021, we entered into an accelerated share repurchase (ASR) agreement with a financial institution (2021 ASR) to repurchase $300.0 million of our outstanding common stock. In exchange for an upfront payment of $300.0 million, we received an initial
delivery of 8,403,361 shares of our common stock. The average price paid per security is not applicable as amended.settlement did not occur during the three months ended December 31, 2021. The 2025 notes are convertible into2021 ASR settled during the first quarter of 2022 and we received an additional delivery of 2,163,219 shares of our common stock on the terms set forth in the indenture governing the notes. Information relating to the issuanceat a volume-weighted-average price, less an agreed upon discount, of the 2025 notes was provided in a Current Report on Form 8-K filed with the SEC on April 5, 2019 and March 26, 2019.$28.3914 per share. See Note 10, “Convertible Senior Notes”,15, “Stockholders' Equity,” of our consolidated financial statements and related notesaccompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for more information.additional information on the 2021 ASR.
Issuer Repurchases
WeAside from the 2021 ASR, we did not repurchase any of our common stocksecurities during the three months ended December 31, 2019,2021, other than in connection with the forfeiture of common stock by holders of restricted stock units in exchange for payments by the Company of statutory tax withholding amounts on behalf of the holders arising as a result of the vesting of restricted stock units.
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Chegg under the Securities Act or the Exchange Act.
The following graph shows a comparison from December 31, 20142016 through December 31, 20192021 of the cumulative total return for our common stock, the Standard & Poor’s 500 Stock Index (S&P 500) and the Russell 2000NASDAQ Composite Index (Russell 2000)(NASDAQ Composite). The graph assumes that $100 was invested at the market close on December 31, 20142016 in the common stock of Chegg, Inc., the S&P 500 and the Russell 2000NASDAQ Composite and data for the S&P 500 and the Russell 2000NASDAQ Composite assumes reinvestmentsreinvestment of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
ITEM 6. SELECTED FINANCIAL DATA[RESERVED]
The selected financial data set forth below should be read together with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results in any future period.
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (in thousands, except per share amounts) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Total net revenues | $ | 410,926 |
| | $ | 321,084 |
| | $ | 255,066 |
| | $ | 254,090 |
| | $ | 301,373 |
|
| Gross profit | 318,744 |
| | 241,088 |
| | 174,891 |
| | 134,489 |
| | 111,524 |
|
| Net loss | (9,605 | ) | | (14,888 | ) | | (20,283 | ) | | (42,245 | ) | | (59,210 | ) |
| Net loss per share, basic and diluted | $ | (0.08 | ) | | $ | (0.13 | ) | | $ | (0.20 | ) | | $ | (0.47 | ) | | $ | (0.68 | ) |
| Weighted average shares used to compute net loss per share, basic and diluted | 119,204 |
| | 113,251 |
| | 100,022 |
| | 90,534 |
| | 86,818 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (in thousands) |
| Consolidated Balance Sheets Data: | | | | | | | | | |
| Total assets | $ | 1,488,998 |
| | $ | 760,938 |
| | $ | 446,930 |
| | $ | 290,652 |
| | $ | 291,356 |
|
| Deferred revenue | 18,780 |
| | 17,418 |
| | 13,440 |
| | 14,836 |
| | 14,971 |
|
| Convertible senior notes, net | 900,303 |
| | 283,668 |
| | — |
| | — |
| | — |
|
| Common stock and additional paid-in capital | 916,217 |
| | 818,229 |
| | 782,955 |
| | 593,443 |
| | 560,330 |
|
| Total stockholders' equity | 498,829 |
| | 410,634 |
| | 391,062 |
| | 221,939 |
| | 231,075 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. We have omitted discussion of the earliest of the three years of financial condition and results of operations and this information can be found in Part I, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2020, filed with the SEC on February 25, 2019,22, 2021, which is available free of charge on the SEC's website at sec.gov and on our website at investor.chegg.com. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See the section titled “Note about Forward-Looking Statements” for additional information. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, Item 1A, “Risk Factors.”
Overview
CheggMillions of people all around the world Learn with Chegg. Our mission is a Smarter Way to Student. As the leading direct-to-student learning platform, we strive to improve educationallearning and learning outcomes by putting the student first in all our decisions.students first. We support students onlife-long learners starting with their academic journey from high school to college and extending into their career with tools designedcareers. The Chegg platform provides products and services to support learners to help them passbetter understand their test, passacademic course materials, and also provides personal and professional development skills training, to help them achieve their class, and save money on required materials. Our services are available online, anytime and anywhere, so we can reach students when they need us most.
Students subscribe to our subscription services, which we collectively referreferred to as our Chegg Services.Services, which can be accessed internationally through our websites and on mobile devices. Our primary Chegg Services include Chegg Study, Chegg Writing, Chegg Tutors,Math Solver, Chegg Math Solver,Study Pack, Busuu, Mathway and Thinkful. Our Chegg Study subscription service provides “Expert Questions and Answers” and step-by-step “Textbook Solutions,” helping students with their course work. When students need writing help, including plagiarism detection scans and creating citations for their papers, they can use one of our Chegg Writing properties, including EasyBib, Citation Machine, BibMe, and CiteThisForMe. When students need additional help on a subject, they can reach a live tutor online, anytime, anywhere through Chegg Tutors.subscription service. Our Chegg Math Solver and Mathway subscription service helpsservices help students understand math by providing a step-by-step math solver and calculator. We also offer our Chegg Study Pack as a premium subscription bundle of our Chegg Study, Chegg Writing, and Chegg Math Solver services, which also includes additional features such as flashcards, concept videos, and practice questions and quizzes. Our Thinkful skills-based learning platform offers professional courses focused on the most in-demand technology skills.
We offer Required Materials which includes an extensiveour print textbook and eTextbook library for rent and sale, helpingofferings, which help students save money compared to the cost of buying new. To deliver services to students, weWe offer an extensive print textbook library primarily for rent and also for sale both on our own and through our print textbook partners. We partner with a variety of third parties. Weparties to source print textbooks eTextbooks, and supplemental materialseTextbooks directly or indirectly from publishers in the United States, including Cengage Learning, Pearson, McGraw Hill, Sage Publications, and MacMillan.publishers.
In October 2019,January 2022, we acquired Thinkful, a skills-basedcompleted our acquisition of Busuu Online S.L. (Busuu), an online language learning platformcompany that offers professional courses directlya comprehensive solution through a combination of self-paced lessons, live classes with expert tutors and the ability to students acrosslearn and practice with members of the United States to expand our existing offerings by adding affordable and high-quality courses focused on the most in-demand technology skills.Busuu language learning community.
During the years ended December 31, 2019,2021, and 2018,2020, we generated net revenues of $410.9$776.3 million and $321.1$644.3 million, respectively, and in the same periods had net losses of $9.6$1.5 million and $14.9$6.2 million, respectively. We plan
As students returned to continue to invest in our long-term growth, particularly further investmentschool in the fall of 2021, we started to see a slowdown in the education industry as a result of the COVID-19 pandemic, which resulted in a decline in traffic to education technology services, such as the ones we provide. A combination of variants, increased employment opportunities and compensation, along with fatigue, all led to significantly fewer enrollments than expected. Those students who have enrolled are taking fewer and less rigorous classes and are receiving less graded assignments. As a result, we are experiencing a deceleration in the growth rates of our services and revenues that powers our learning platform and the development of additional products and services that serve students.may continue.
Our long-term strategy for achieving profitability is centered upon our ability to utilize Chegg Services to increase student engagement with our learning platform. We plan to continue to invest in the expansion of our Chegg Services to provide a more compelling and personalized solution and deepen engagement with students. In addition, we believe that the investments we have made to achieve our current scale will allow us to drive increased operating margins over time that, together with increased contributions of Chegg Services, will enable us to accomplishsustain profitability and becomeremain cash-flow positive in the long-term. Our ability to achieve these long-term objectives is subject to numerous risks and uncertainties, including our ability to attract, retain, and increasingly engage the student population, reduced traffic to our services, intense competition in our markets, the
ability to achieve sufficient contributions to revenue from Chegg Services, and other factors, such as the COVID-19 pandemic, which continues to evolve and affect our business and results of operations. The COVID-19 pandemic subjects our business to numerous risks and uncertainties, most of which are beyond our control and cannot be predicted, including when colleges will resume in-person classes or how well they will overcome the impacts of the COVID-19 pandemic on enrollment and other factors. These risks and uncertainties are described in greater detail in Part I, Item 1A, “Risk Factors.”
We have presented revenues for our two product lines, Chegg Services and Required Materials, based on how students view us and the utilization of our products by them. More detail on our two product lines is discussed in the next two sections titled "Chegg Services"“Chegg Services” and "Required“Required Materials."”
Chegg Services
Our Chegg Services product line for students primarily includes Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, Chegg Study Pack, Busuu, Mathway and Thinkful, our skills-based learning platform.Thinkful. Students typically pay to access Chegg Services such as Chegg Study on a monthly basis. We also work with leading brands to provide students with discounts, promotions, and other products that, based on student feedback, delight them.
In the aggregate, Chegg Services revenues were 81%86% and 79% and81% of net revenues during the years ended December 31, 20192021 and 2018,2020, respectively.
Required Materials
Our Required Materials product line includes revenues from print textbooks and eTextbooks. Revenues from print textbooks that we own are primarily recognized as the total transaction amount ratably over the rental term, generally a two- to five-month period. Revenues from print textbooks owned by a partner are recognized as a revenue share upon fulfillment, on the total transactional amount ofimmediately when a rental and sale transaction for print textbooks. We have entered into agreements with partnerstextbook ships to provide our customers a wide variety of print textbooks for which they have title and risk of loss. These agreements have allowed us to reduce capital requirements and operating expenses.student. Additionally, Required Materials includes revenues from eTextbooks, which we offer onare primarily recognized ratably over the contractual period, generally a standalone basis or as a rental-equivalent solution and for free to students awaiting the arrival of their print textbook rental for select print textbooks. eTextbooks and supplemental course materials are available from approximately 120 publishers as of December 31, 2019.two-to five-month period.
In the aggregate, Required Materials revenues were 19%14% and 21%19% of net revenues during the years ended December 31, 20192021 and 2018,2020, respectively.
In October 2019, we signed a strategic logistics agreement with FedEx which will transition the logistics and warehousing for print textbooks transactions to FedEx in 2020. In January 2020, we began making purchases of print textbooks for our print textbook library, in which we will have title and risk of loss. Required Materials will also include revenues from print textbooks that we will own, which will be recognized as the total transaction amount ratably over the term of a rental period, which is generally two to five months.
Seasonality of Our Business
Revenues from Chegg Services, rental revenues from print textbooks that we own, and eTextbooks revenues are primarily recognized ratably over the term a student subscribes to our Chegg Services, or rents a print textbook or has access to an eTextbook. This has generally resulted in our highest revenues and profitability in the fourth quarter as it reflects more days of the academic year. Our variable expenses related to cost of revenues and marketing activities remain highest in the first and third quarterquarters such that our profitability may not provide meaningful insight on a sequential basis.
As a result of these factors, the most concentrated periods for our revenues and expenses do not necessarily coincide, and comparisons of our historical quarterly results of operations on a sequential basis may not provide meaningful insight into our overall financial performance.
Components of Results of Operations
Net Revenues
We recognize revenues from our Chegg Services and Required Materials product lines, net of allowances for refunds or charge backs from our payment processors who process payments from credit cards, debit cards, and PayPal.
Revenues from our Chegg Services product line primarily includes Chegg Study, Chegg Writing, Chegg Tutors,Math Solver, Chegg Study Pack, Mathway and Thinkful. Revenues from Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, and Thinkful. Chegg ServicesMathway are offered to students primarily through weekly or monthly subscriptions, and we recognize revenuesrecognized ratably over the respectivemonthly subscription period. Revenues from Thinkful our skills-based learning platform, are recognized either ratably over the term of the course, generally six months, or upon completion of the lessons, depending on the instruction type of the course.Revenues from ourRequired Materials product line includes revenues from print textbooks that we own or that are owned by a partner as well as revenues from eTextbooks. Beginning in 2020, our Required Materials product line includes operating leases with students for the rental of print textbooks that we own. Operating lease income is recognized as the total transaction amount, paid upon commencement of the lease, ratably over the lease term or rental term, generally a two- to five-month period. Additionally, we provide students the ability to purchase print textbooks and recognize
revenues immediately upon shipment. Revenues from print textbooks owned by a partner are recognized as a revenue share upon fulfillment, on the total transactionaltransaction amount of a rental andor sale transaction for print textbooks and revenues from eTextbooks. The revenue share on the rental and sale of print textbooks is recognized immediately when a bookprint textbook ships to thea student. Shipping and handling activities are performed after we recognize revenues and we have elected to account for themexpensed as activities to fulfill a print textbook rental or sale order.incurred. Revenues from the rental of eTextbooks isare recognized ratably over the contractual period, generally twoa two- to five months. Revenues from the sale of eTextbooks is recognized immediately when the eTextbook sale occurs. Beginning in 2020, as a result offive-month period. We have concluded that we control our ownership of print textbooks in conjunction with the transition to
FedEx for print textbook logistics and warehousing, Required Materials will also include revenues fromChegg Services, print textbooks that we will own which will be recognized asfor rental, purchase at the total transaction amount ratably overend of the rental term, ofor sale on a rental period, which is generally two to five months.
When deciding the most appropriatejust-in-time basis, for presentingand eTextbook service and therefore we recognize revenues or costsand cost of revenues both the legal form and substance of the agreement between us and our business partners are reviewed to determine each party’s respective role in the transaction. Where our role in a transaction is that of principal, revenues are recognized on a gross basis. This requires revenue to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as a cost of revenues. Where our role in a transaction is that of an agent, revenues are recognized on a net basis with revenues representing the margin earned. In relation to print textbook rental and sale agreements with our partners, we recognize revenues on a net basis based on our role in the transaction as an agent.
Cost of Revenues
Our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and services. Cost of revenues primarily consists of publisher content fees for eTextbooks, content amortization expense related to content that we develop, license from publishers for which we pay one-time license fees, or acquire through acquisitions, web hosting fees, customer support fees, payment processing costs, amortization of acquired intangible assets, order fulfillment fees primarily related to outbound shipping and fulfillment as well as publisher content fees for eTextbooks, write-downs for print textbooks, the payments made to tutors through our Chegg Tutors service,gain or loss on print textbooks liquidated, the net book value of print textbooks purchased by students at the end of the term or on a just-in-time basis, print textbook depreciation expense, personnel costs and other direct costs related to providing content or services. In addition, cost of revenues includes allocated information technology and facilities costs.
Beginning in 2020, as a result of our ownership of print textbooks in conjunction with our transition to FedEx for print textbook logistics and warehousing, cost of revenues will additionally include, but not limited to, print textbook library depreciation and shipping and other fulfillment costs.
Changes in our cost of revenues may be disproportionate to changes in our revenues because unrecoverable costs, such as outbound shipping and other fulfillment and payment processing fees, are expensed in the period they are incurred while our revenues may be recognized ratably over the subscription or rental term. This effect is particularly pronounced in the first and third quarters, corresponding to the beginning of academic terms.
Operating Expenses
We classify our operating expenses into fourthree categories: research and development, sales and marketing, and general and administrative, and restructuring charges.administrative. One of the most significant components of our operating expenses is employee-related costs, which include salaries, benefits, and share-based compensation expenses. We expect to continue to hire new employees in order to support our current and anticipated growth. In any particular period, the timing of additional hires could materially affect our operating expenses, both in absolute dollars and as a percentage of revenues. Our operating expenses also contain information technology expenses such as technology costs to support our research and development, sales and marketing expenses, depreciation on our infrastructure systems,expenses, amortization of acquired intangible assets, except content libraries, and outside services. We allocate certain costs to each expense category, including cost of revenues, research and development, sales and marketing and general and administrative. The allocation is primarily based on the headcount in each group at the end of a period. As our business grows, our operating expenses may increase over time to expand capacity and sustain our workforce.
Research and Development
Our research and development expenses consist of salaries, benefits, and share-based compensation expense for employees on our product, engineering, and technical teams who are responsible for maintaining our website, developing new products, and improving existing products. Research and development costs also include amortization of acquired intangible assets, depreciation expense, technology costs to support our research and development, and outside services, and allocated information technology and facilities expenses.services. We expense substantially all of our research and development expenses as they are incurred. In the past three years, our research and development expenses have increased to support new products and services as well as to expand our infrastructure capabilities to support back-end processes associated with our revenue transactions and internal systems. We intend to continue making significant investments in developing new products and services and enhancing the functionality of existing products and services.
Sales and Marketing
Our sales and marketing expenses consist of user and advertiser-facing marketing and promotional expenditures through a number of targeted online marketing channels, sponsored search, display advertising, email marketing campaigns, and other initiatives. We incur salaries, benefits and share-based compensation expenses for our employees engaged in marketing, business development and sales and sales support functions, and amortization of acquired intangible assets, and allocated information technology, and facilities costs.assets. Our marketing expenses are largely variable;variable and we tend to incur these in the first and third quarters of the year due to our efforts to target students at the beginning of academic terms. To the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect tocould see a corresponding change in our sales and marketing expense.expenses.
General and Administrative
Our general and administrative expenses consist of salaries, benefits and share-based compensation expense for certain executives as well as our finance, legal, human resources and other administrative employees. In addition, general and administrative expenses include outside services, legal and accounting services, and depreciation expense, and allocated information technology and facilities costs.expense.
Restructuring Charges
Restructuring charges are primarily comprised of severance costs, contract and program termination costs, asset impairments and costs of facility consolidation and closure. Restructuring charges are recorded upon approval of a formal management plan and are included in the results of operations of the period in which such plan is approved and the expense becomes estimable.
Interest Expense, Net and Other Income, Net
Interest expense, net consists primarily of interest expense on the amortization of debt discount and issuance costs related to the convertible senior notes. Other income, net consists primarily of interest income, losses on early extinguishment of the convertible senior notes, loss on the change in fair value of derivative instruments and gains on the sale of our cash and cash equivalents and investment balances.strategic equity investments.
Provision for Income Taxes
Provision for income taxes consists primarily of federal and state income taxes in the United States, the withholding taxes related to the sale of our strategic equity investment, and income taxes in foreign jurisdictions in which we conduct business. Due to the uncertainty as to the realization of the benefits of our domestic deferred tax assets, we have recorded a full valuation allowance against such assets. We intend to continue to maintain a full valuation allowance on our domestic deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
Results of Operations
The following table summarizes our historical consolidated statements of operations (in thousands, except percentage of total net revenues):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | | | 2021 | | 2020 | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net revenues | | | | | | | | | $ | 776,265 | | | 100 | % | | $ | 644,338 | | | 100 | % | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Cost of revenues(1) | | | | | | | | | 254,904 | | | 33 | | | 205,417 | | | 32 | | | | | |
| Gross profit | | | | | | | | | 521,361 | | | 67 | | | 438,921 | | | 68 | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | |
Research and development(1) | | | | | | | | | 178,821 | | | 23 | | | 170,905 | | | 26 | | | | | |
Sales and marketing(1) | | | | | | | | | 105,414 | | | 14 | | | 81,914 | | | 13 | | | | | |
General and administrative(1) | | | | | | | | | 159,019 | | | 20 | | | 129,349 | | | 20 | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | | | | | | | 443,254 | | | 57 | | | 382,168 | | | 59 | | | | | |
| Income from operations | | | | | | | | | 78,107 | | | 10 | | | 56,753 | | | 9 | | | | | |
| Total interest expense, net and other (expense) income, net | | | | | | | | | (72,368) | | | (9) | | | (57,614) | | | (9) | | | | | |
| Income (loss) before provision for income taxes | | | | | | | | | 5,739 | | | 1 | | | (861) | | | — | | | | | |
| Provision for income taxes | | | | | | | | | 7,197 | | | (1) | | | 5,360 | | | (1) | | | | | |
| Net loss | | | | | | | | | $ | (1,458) | | | — | % | | $ | (6,221) | | | (1) | % | | | | |
| | | | | | | | | | | | | | | | | | | |
(1) Includes share-based compensation expense as follows: | | | | | | | | | | | | | | | | | | | |
| Cost of revenues | | | | | | | | | $ | 1,621 | | | | | $ | 950 | | | | | | | |
| Research and development | | | | | | | | | 37,131 | | | | | 31,588 | | | | | | | |
| Sales and marketing | | | | | | | | | 13,887 | | | | | 9,606 | | | | | | | |
| General and administrative | | | | | | | | | 56,207 | | | | | 41,911 | | | | | | | |
| Total share-based compensation expense | | | | | | | | | $ | 108,846 | | | | | $ | 84,055 | | | | | | | |
|
| | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
| Net revenues | $ | 410,926 |
| | 100 | % | | $ | 321,084 |
| | 100 | % |
Cost of revenues(1) | 92,182 |
| | 22 |
| | 79,996 |
| | 25 |
|
| Gross profit | 318,744 |
| | 78 |
| | 241,088 |
| | 75 |
|
| Operating expenses: | | | | | | | |
Research and development(1) | 139,772 |
| | 34 |
| | 114,291 |
| | 36 |
|
Sales and marketing(1) | 63,569 |
| | 15 |
| | 54,714 |
| | 17 |
|
General and administrative(1) | 97,489 |
| | 24 |
| | 77,714 |
| | 24 |
|
| Restructuring charges | 97 |
| | — |
| | 589 |
| | — |
|
| Total operating expenses | 300,927 |
| | 73 |
| | 247,308 |
| | 77 |
|
| Income (loss) from operations | 17,817 |
| | 5 |
| | (6,220 | ) | | (2 | ) |
| Total interest expense, net and other income, net | (24,788 | ) | | (6 | ) | | (7,238 | ) | | (2 | ) |
| Loss before provision for income taxes | (6,971 | ) | | (1 | ) | | (13,458 | ) | | (4 | ) |
| Provision for income taxes | 2,634 |
| | (1 | ) | | 1,430 |
| | (1 | ) |
| Net loss | $ | (9,605 | ) | | (2 | )% | | $ | (14,888 | ) | | (5 | )% |
| | | | | | | | |
(1) Includes share-based compensation expense as follows: | | | | | | | |
| Cost of revenues | $ | 426 |
| | | | $ | 420 |
| | |
| Research and development | 22,229 |
| | | | 17,055 |
| | |
| Sales and marketing | 7,380 |
| | | | 6,703 |
| | |
| General and administrative | 34,874 |
| | | | 27,852 |
| | |
| Total share-based compensation expense | $ | 64,909 |
| | | | $ | 52,030 |
| | |
Years Ended December 31, 20192021 and 20182020
Net Revenues
Net revenues during the year ended December 31, 20192021 increased $89.8$131.9 million, or 28%20%, compared to the same period in 2018.2020.
The following table sets forth our total net revenues for the periods shown for our Chegg Services and Required Materials product lines (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | Change in 2021 | | |
| | 2021 | | 2020 | | | | $ | | % | | | | |
| Chegg Services | $ | 669,894 | | | $ | 521,228 | | | | | $ | 148,666 | | | 29 | % | | | | |
| Required Materials | 106,371 | | | 123,110 | | | | | (16,739) | | | (14) | | | | | |
| Total net revenues | $ | 776,265 | | | $ | 644,338 | | | | | $ | 131,927 | | | 20 | | | | | |
|
| | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change in 2019 |
| | 2019 | | 2018 | | $ | | % |
| Chegg Services | $ | 332,221 |
| | $ | 253,985 |
| | $ | 78,236 |
| | 31 | % |
| Required Materials | 78,705 |
| | 67,099 |
| | 11,606 |
| | 17 |
|
| Total net revenues | $ | 410,926 |
| | $ | 321,084 |
| | $ | 89,842 |
| | 28 |
|
Chegg Services revenues increased by $78.2$148.7 million, or 31%29%, during the year ended December 31, 2019,2021, compared to the same period in 20182020. The increase was primarily due to growthour efforts to reduce account sharing, increased global awareness and penetration and the introduction of enhanced offerings, including our acquisition of Mathway, which closed in Chegg Study and Chegg Writing.June 2020. Chegg Services revenues represented 81%86% and 79%81% of net revenues during the years ended December 31, 20192021 and 2018,2020, respectively. Required Materials revenues increaseddecreased by $11.6$16.7 million, or 17%14%, during the year ended December 31, 20192021 compared to the same period in 2018,2020. The decrease was primarily due to better performance from our Required Materialslower unit volumes driven by decreased college enrollments and various print textbook partners as well as recognition of deferred variable consideration.logistics challenges. Required Materials revenues represented 19%14% and 21%19% of net revenues during the years ended December 31, 20192021 and 2018,2020, respectively.
Beginning in 2020, Required Materials will also include revenues from print textbooks that we will own, which will be recognized as the total transaction amount ratably over the term of a rental period, which is generally two to five months. As such, we expect Required Materials revenues to increase in 2020.
Cost of Revenues
The following table sets forth our cost of revenues for the periods shown (in thousands, except percentages):
| | | | Years Ended December 31, | | Change in 2019 | | Years Ended December 31, | | Change in 2021 | |
| | 2019 | | 2018 | | $ | | % | | 2021 | | 2020 | | | $ | | % | |
Cost of revenues(1) | $ | 92,182 |
| | $ | 79,996 |
| | $ | 12,186 |
| | 15 | % | Cost of revenues(1) | $ | 254,904 | | | $ | 205,417 | | | | $ | 49,487 | | | 24 | % | |
| | | | | | | | | | | | |
(1) Includes share-based compensation expense of: | $ | 426 |
| | $ | 420 |
| | $ | 6 |
| | 1 | % | (1) Includes share-based compensation expense of: | $ | 1,621 | | | $ | 950 | | | | $ | 671 | | | 71 | % | |
Cost of revenues during the year ended December 31, 20192021 increased by $12.2$49.5 million, or 24%, compared to the same period in 2018.2020. The increase was primarily attributable to higher other depreciation and amortization expense of content$21.5 million, higher net loss on textbook library of $7.1$12.4 million primarily due to increased write-downs, higher web hosting fees of $7.5 million, transitional logistics charges of $7.3 million incurred in conjunction with the transition of our print textbooks to a new third party logistics provider, higher payment processing fees of $2.2$4.3 million, higher cost of textbooks purchased by students of $3.5 million, higher employee-related expenses, including share-based compensation expense, of $2.0 million, and higher employee-related expensescustomer support fees of $1.8$1.7 million, partially offset by lower order fulfillment fees of $5.4 million and lower print textbook depreciation of $4.5 million. Gross margins increaseddecreased to 78%67% in the year ended December 31, 2019,2021, from 75%68% during the same period in 2018 as a result2020.
Beginning in 2020, we expect our cost of revenues to increase and gross margins to decrease as a result of costs related to our ownership of print textbooks.
Operating Expenses
The following table sets forth our total operating expenses for the periods shown (in thousands, except percentages):
| | | | Years Ended December 31, | | Change in 2019 | | Years Ended December 31, | | Change in 2021 | |
| | 2019 | | 2018 | | $ | | % | | 2021 | | 2020 | | | $ | | % | |
Research and development(1) | $ | 139,772 |
| | $ | 114,291 |
| | $ | 25,481 |
| | 22 | % | Research and development(1) | $ | 178,821 | | | $ | 170,905 | | | | $ | 7,916 | | | 5 | % | |
Sales and marketing(1) | 63,569 |
| | 54,714 |
| | 8,855 |
| | 16 |
| Sales and marketing(1) | 105,414 | | | 81,914 | | | | 23,500 | | | 29 | | |
General and administrative(1) | 97,489 |
| | 77,714 |
| | 19,775 |
| | 25 |
| General and administrative(1) | 159,019 | | | 129,349 | | | | 29,670 | | | 23 | | |
| Restructuring charges | 97 |
| | 589 |
| | (492 | ) | | (84 | ) | |
| | Total operating expenses | $ | 300,927 |
| | $ | 247,308 |
| | $ | 53,619 |
| | 22 |
| Total operating expenses | $ | 443,254 | | | $ | 382,168 | | | | $ | 61,086 | | | 16 | | |
| | | | | | | | | | | | | | | | | |
(1) Includes share-based compensation expense of: | | | | | | | | (1) Includes share-based compensation expense of: | | | | | | | | | |
| Research and development | $ | 22,229 |
| | $ | 17,055 |
| | $ | 5,174 |
| | 30 | % | Research and development | $ | 37,131 | | | $ | 31,588 | | | | $ | 5,543 | | | 18 | % | |
| Sales and marketing | 7,380 |
| | 6,703 |
| | 677 |
| | 10 |
| Sales and marketing | 13,887 | | | 9,606 | | | | 4,281 | | | 45 | | |
| General and administrative | 34,874 |
| | 27,852 |
| | 7,022 |
| | 25 |
| General and administrative | 56,207 | | | 41,911 | | | | 14,296 | | | 34 | | |
| Share-based compensation expense | $ | 64,483 |
| | $ | 51,610 |
| | $ | 12,873 |
| | 25 |
| Share-based compensation expense | $ | 107,225 | | | $ | 83,105 | | | | $ | 24,120 | | | 29 | | |
Research and Development
Research and development expenses during the year ended December 31, 20192021 increased by $25.5$7.9 million, or 22%5%, compared to the same period in 2018.2020. The increase was primarily attributable to higher employee-related expenses, of $12.6 million, higher technology costs to support our research and development of $5.0 million, higherincluding share-based compensation expense, of $5.2 million, higher employer taxes driven by the increases in our stock price of $1.0 million, higher depreciation and amortization of $1.1 million, and higher outside services of $2.3 million, compared to the same period in 2018.$9.0 million. Research and development expenses as a percentage of net revenues were 34%23% during the year ended December 31, 20192021 compared to 36%26% of net revenues during the same period in 2018.2020.
Sales and Marketing
Sales and marketing expenses during the year ended December 31, 20192021 increased by $8.9$23.5 million, or 16%29%, compared to the same period in 2018.2020. The increase was primarily attributable to higher paidincreased marketing expensespend, including expansion in international markets, of $6.6$15.1 million primarily for streaming radio and display advertisement, higher employee-related expenses, of $0.4 million, higherincluding share-based compensation expense, of $0.7 million, and higher employer taxes driven by the increase in our stock price of $0.3 million, compared to the same period in 2018.$6.2 million. Sales and marketing expenses as a percentage of net revenues were 15%14% during the year ended December 31, 20192021 compared to 17%13% of net revenues during the same period in 2018.2020.
General and Administrative
General and administrative expenses in the year ended December 31, 20192021 increased by $19.8$29.7 million, or 25%23%, compared to the same period in 2018.2020. The increase was primarily attributabledue to higher employee-related expenses, of $6.0 million, higherincluding share-based compensation expense, of $7.0$23.9 million higher employer taxes driven by the increases in our stock price of $1.6 million, higher depreciation and amortization of $1.0 million, higherincreased professional fees of $1.4$11.9 million, higher outside servicespartially offset by a one-time 2020 impairment charge on our investment in WayUp of $0.2 million and higher technology expenses to support our operations of $1.0 million, compared to the same period in 2018.$10.0 million. General and administrative expenses as a percentage of net revenues were flat at 24%20% during the years ended December 31, 20192021 and 2018.2020.
Restructuring Charges
Restructuring charges during the year ended December 31, 2019 were not material to our results of operations. Restructuring charges of $0.6 million during the year ended December 31, 2018 were primarily related to our subtenant filing for bankruptcy and exiting our leased office. Costs incurred to date are expected to be fully paid within two months.
Interest Expense, Net and Other Income, Net
The following table sets forth our interest expense, net, and other income, net, for the periods shown (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change in 2021 | | |
| | 2021 | | 2020 | | | | $ | | % | | | | |
| Interest expense, net | $ | (6,896) | | | $ | (66,297) | | | | | $ | 59,401 | | | (90) | % | | | | |
| Other (expense) income, net | (65,472) | | | 8,683 | | | | | (74,155) | | | n/m | | | | |
| Total interest expense, net and other (expense) income, net | $ | (72,368) | | | $ | (57,614) | | | | | $ | (14,754) | | | 26 | | | | | |
*n/m - not meaningful
|
| | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change in 2019 |
| | 2019 | | 2018 | | $ | | % |
| Interest expense, net | $ | (44,851 | ) | | $ | (11,225 | ) | | $ | (33,626 | ) | | 300 | % |
| Other income, net | 20,063 |
| | 3,987 |
| | 16,076 |
| | 403 |
|
| Total interest expense, net and other income, net | $ | (24,788 | ) | | $ | (7,238 | ) | | $ | (17,550 | ) | | 242 |
|
Interest expense, net increaseddecreased by $59.4 million, or 90%, during the year ended December 31, 2019,2021, compared to the same period in 2018,2020. The decrease was primarily attributabledue to the amortization of debt discount and issuance costs and contractualreduction in non-cash interest expense related to the notes.debt discount as a result of the adoption of ASU 2020-06 on January 1, 2021.
Other income, net, increaseddecreased by $74.2 million during the year ended December 31, 2019,2021, compared to the same period in 2018,2020. The decrease was primarily attributabledue to additionalthe $78.2 million loss on early extinguishment of debt related to the 2025 notes, $7.1 million net loss on the change in fair value of derivative instruments, and $6.1 million of lower interest income earned on our investments purchased with proceeds frompartially offset by the $12.5 million gain on the sale of our strategic equity investments and absence of the $4.3 million loss on early extinguishment of debt related to the partial exchange of the 2023 notes.
See Note 10, “Convertible Senior Notes,” of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for additional information on changes to interest expense, net related to the adoption of ASU 2020-06 and other (expense) income, net related to the losses on early extinguishment of debt and the change in fair value of derivative instruments.
Provision for Income Taxes
The following table sets forth our provision for income taxes for the periods shown (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change in 2021 | | |
| | 2021 | | 2020 | | | | $ | | % | | | | |
| Provision for income taxes | $ | 7,197 | | | $ | 5,360 | | | | | $ | 1,837 | | | 34 | % | | | | |
|
| | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change in 2019 |
| | 2019 | | 2018 | | $ | | % |
| Provision for income taxes | $ | 2,634 |
| | $ | 1,430 |
| | $ | 1,204 |
| | 84 | % |
We recorded an income tax provision of approximately $2.6 million and $1.4 million for the years ended December 31, 2019 and 2018, respectively, which was primarily due to state and foreign income tax expense. The provision for income taxes increased during the year ended December 31, 2019,2021, compared to the same period in 2018, and2020. The increase was primarily due a decreaseto an increase in prior yearforeign profits and the withholding taxes related to the March 2021 sale of our strategic equity investment, partially offset by foreign deferred tax provision driven by the release of uncertain tax provisions.benefit.
Liquidity and Capital Resources
As of December 31, 2019,2021, our principal sources of liquidity were cash, cash equivalents, and investments totaling $1.1$2.3 billion, which were held for working capital purposes. The substantial majority of our net revenues are from e-commerce transactions with students, which are settled immediately through payment processors, as opposed to our accounts payable, which are settled based on contractual payment terms with our suppliers.
In January 2022, we completed our acquisition of Busuu Online S.L. (Busuu), an online language learning company that offers a comprehensive solution through a combination of self-paced lessons, live classes with expert tutors and the ability to learn and practice with members of the Busuu language learning community, for approximately $417.0 million in an all-cash transaction.
In November 2021, our board of directors approved a $500.0 million increase to our existing securities repurchase program authorizing the repurchase of up to $1.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements. The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors. During the year ended December 31, 2021, we entered into an accelerated share repurchase program for $300.0 million and repurchased $100.0 million of aggregate principal amount of the 2025 notes in privately-negotiated transactions for an aggregate consideration of $184.9 million. During the year ended December 31, 2020, we repurchased $57.4 million of aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $149.6 million. As of December 31, 2021, $365.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.
In February 2021, we completed an equity offering in which we raised net proceeds of $1,091.5 million, after deducting underwriting discounts, commissions and offering expenses (2021 equity offering). In August 2020 and March/April 2019, and April 2018, we closed offerings of our 20252026 notes and our 20232025 notes, generating net proceeds of approximately $780.2$984.1 million and $335.6$780.2 million, respectively, in each case after deducting the initial purchasers’ discount and estimated offering expenses payable by us. The 20252026 notes and 20232025 notes mature on September 1, 2026 and March 15, 2025, and May 15, 2023, respectively, unless converted, redeemed, or repurchased in accordance with their terms prior to such date.dates.
As of December 31, 2019,2021, we have incurred cumulative losses of $416.3$337.2 million from our operations and we expect to incur additional losses in the future. Our operations have been financed primarily by our initial public offering of our common stock (IPO), our 2017 follow-on public offering, our 2023convertible senior notes and 2025 notes offerings, our 2021 equity offering, and cash generated from operations.
Beginning
The following table is a summary of our contractual obligations and other commitments as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than | | More than |
| Total | | 1 Year | | 1-3 Years | | 3-5 Years | | 5 Years |
Convertible senior notes (1) | $ | 1,703,044 | | | $ | 875 | | | $ | 1,750 | | | $ | 1,700,419 | | | $ | — | |
Purchase obligations (2) | 79,624 | | | 41,326 | | | 35,638 | | | 2,660 | | | — | |
Operating lease obligations (3) | 21,035 | | | 7,435 | | | 8,158 | | | 3,692 | | | 1,750 | |
| Total contractual obligations | $ | 1,803,703 | | | $ | 49,636 | | | $ | 45,546 | | | $ | 1,706,771 | | | $ | 1,750 | |
(1) Includes semi-annual cash interest payments of $0.4 million. Our convertible senior notes are recorded on our consolidated balance sheets at the carrying amount of $1,678.2 million as of December 31, 2021.
(2) Represents contractual obligations primarily related to information technology services.
(3) Our offices are leased under operating leases, which expire at various dates through 2027.
In addition, our other long-term liabilities include $4.9 million related to uncertain tax positions as of December 31, 2021. The timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of payments in 2020, we expect to purchase approximately $50.0 million of print textbooks, net of proceeds from liquidations of print textbooks,individual years beyond one year. As a result, this amount is not included in conjunction with the transition of logistics and warehousing for print textbooks transactions to FedEx. Purchases of print textbooks will be shown as a cash outflow from investing activities and proceeds from liquidations of print textbooks will be shown as a cash inflow from investing activities.above table.
We believe that our existing sources of liquidity will be sufficient to fund our operations and debt service obligations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, our investments in research and development activities, our acquisition of new products and services and our sales and marketing activities. To the extent that existing cash and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, operating cash flows and financial condition.
Most of our cash, iscash equivalents, and investments are held in the United States. As of December 31, 2019,2021, our foreign subsidiaries held an insignificant amount of cash in foreign jurisdictions. We currently do not intend or foresee a need to repatriate some of these foreign funds,funds; however, as a result of the Tax Cuts and Jobs Act, we anticipate the U.S. federal impact to be minimal if these foreign funds are repatriated. In addition, based on our current and future needs, we believe our current funding and capital resources for our international operations are adequate.
The following table sets forth our cash flows (in thousands):
| | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2021 | | 2020 | | |
| Consolidated Statements of Cash Flows Data: | | | | | |
| Net cash provided by operating activities | $ | 273,224 | | | $ | 236,442 | | | |
| Net cash used in investing activities | (365,768) | | | (732,786) | | | |
| Net cash provided by financing activities | 466,722 | | | 588,627 | | | |
|
| | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
| Consolidated Statements of Cash Flows Data: | | | |
| Net cash provided by operating activities | $ | 113,403 |
| | $ | 75,113 |
|
| Net cash used in investing activities | $ | (703,425 | ) | | $ | (82,549 | ) |
| Net cash provided by financing activities | $ | 603,509 |
| | $ | 256,418 |
|
Cash Flows from Operating Activities
Although we incurred net losses during the years ended December 31, 20192021 and 2018,2020, our net losses were fully offset by non-cash expenditures, such as other depreciation and amortization expense, share-based compensation expense, loss on extinguishments of debt, and amortization of debt discount and issuance costs expense.costs.
Net cash provided by operating activities during the year ended December 31, 20192021 was $113.4$273.2 million. Our net loss of $9.6$1.5 million was offset by significant non-cash operating expenses including share-based compensation expense of $108.8 million, the loss on early extinguishment of debt of $78.2 million, other depreciation and amortization expense of $30.2$63.3 million, share-based compensationthe net loss on textbook library of $11.0 million, which was primarily due to increased write-downs, print textbook depreciation expense of $64.9$10.9 million, the net loss on the change in fair value of derivative instruments of $7.1 million, operating lease expense, net of accretion, of $6.0 million, and the amortization of debt discount and issuance costs related toof $5.9 million, partially offset by the 2025 notes and 2023 notesgain on sale of $43.2our strategic equity investments of $12.5 million.
Net cash provided by operating activities during the year ended December 31, 20182020 was $75.1$236.4 million. Our net loss of $14.9$6.2 million was offsetincreased by the change in deferred revenue of $12.9 million and accrued liabilities of $22.4 million. Additionally, we had significant non-cash operating expenses including print textbook depreciation expense of $15.4 million, other depreciation and amortization expense of $22.8$47.0 million, share-based compensation expense of $52.0$84.1 million, and the amortization of debt discount and issuance costs relatedof $64.6 million, the loss from impairment of strategic equity investment of $10.0 million, and the loss on early extinguishments of debt of $4.3 million, partially offset by repayment of convertible senior notes attributable to the 2023 notesdebt discount of $10.5$20.4 million.
Cash Flows from Investing Activities
Cash flows from investing activities have been primarily related to the purchases of investments, acquisition of businesses, and purchases of property and equipment, purchases of textbooks, and acquisition of businesses, offset by proceeds from the sale and maturity of investments.investments and proceeds from the disposition of textbooks.
Net cash used in investing activities during the year ended December 31, 20192021 was $703.4$365.8 million and was related to the purchases of investments of $959.9 million,$1.7 billion, purchases of property and equipment of $42.3$94.2 million, purchases of textbooks of $10.9 million, and the acquisition of business of $79.1$7.9 million, partially offset by the maturity of investments of $324.7$1.2 billion, proceeds from sale of investments of $206.0 million, and proceeds from the sale of our equity investments of $53.3$16.1 million and proceeds from disposition of textbooks of $8.7 million.
Net cash used in investing activities during the year ended December 31, 20182020 was $82.5$732.8 million and was related to the purchases of investments of $146.9$1.0 billion, the acquisition of business of $92.8 million, purchases of property and equipment of $31.2$81.3 million, the acquisitionpurchases of businessestextbooks of $34.7$58.6 million, and the purchase of a strategic equity investment of $10.0$2.0 million, partially offset by the maturity of investments of $138.4$539.9 million and proceeds from the saledisposition of investmentstextbooks of $1.8$7.6 million.
Cash Flows from Financing Activities
Cash flows from financing activities have been primarily related to the issuance of convertible senior notes, net of issuance costs, issuance of common stock under stock plans, proceeds from convertible senior notes capped call instruments, offset by the purchases of convertible senior notes capped call
instruments, payment of taxes related to the net share settlement of equity awards, repayment of a portion of our convertible senior notes, and repurchases of common stock.
Net cash provided by financing activities during the year ended December 31, 20192021 was $603.5$466.7 million and was related to the net proceeds from the issuanceour equity offering of the$1,091.5 million, proceeds from 2023 notes and 2025 notes netcapped call instruments of issuance costs of $780.2$69.0 million, and the proceeds from the issuance of common stock under stock plans of $35.1$8.9 million, partially offset by the repayment of a portion of our convertible senior notes of $300.8 million, repurchase of common stock of $300.0 million, payment of $94.6$94.4 million in taxes related to the net share settlement of equity awards, which became vested during the period, the purchaseand payment of capped call instrumentsescrow related to our 2025 notesan acquisition of $97.2 million and the repurchase of common stock of $20.0 million done in connection with the issuance of the 2025 notes$7.5 million.
.
Net cash provided by financing activities during the year ended December 31, 20182020 was $256.4$588.6 million and was related to the proceeds from the issuance of the 20232026 notes, net of issuance costs, of $335.6$984.1 million, proceeds from 2023 notes capped call instruments of $77.1 million, and the proceeds from the issuance of common stock under stock plans of $29.1$15.5 million, partially offset by the payment of $49.1$80.7 million in taxes related to the net share settlement of equity awards, which became vested during the period, the purchase of capped call instruments related to our 20232026 notes of $39.2$103.4 million, and the repurchaserepayment of common stocka portion of $20.0 million done in connection with the issuance of the 2023 notes.
Contractual Obligations and Other Commitments
The following is a summary of our contractual obligations and other commitments as of December 31, 2019 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Less than | | More than |
| | Total | | 1 Year | | 1-3 Years | | 3-5 Years | | 5 Years |
Convertible senior notes (1) | $ | 1,153,519 |
| | $ | 1,863 |
| | $ | 3,725 |
| | $ | 347,431 |
| | $ | 800,500 |
|
Purchase obligations (2) | 43,787 |
| | 27,639 |
| | 9,788 |
| | 5,966 |
| | 394 |
|
Operating lease obligations (3) | 21,638 |
| | 6,094 |
| | 11,026 |
| | 4,518 |
| | — |
|
Textbook purchase obligation (4) | 29,404 |
| | 29,404 |
| | — |
| | — |
| | — |
|
| Total contractual obligations | $ | 1,248,348 |
| | $ | 65,000 |
| | $ | 24,539 |
| | $ | 357,915 |
| | $ | 800,894 |
|
(1) Includes semi-annual cash interest payments of $0.9 million. Our convertible senior notes are recorded on our consolidated balance sheets at the carrying amount of $900.3 million as of December 31, 2019.$304.0 million.
(2) Represents contractual obligations primarily related to information technology services.
(3) Our offices are leased under operating leases, which expire at various dates through 2024.
(4) Represents one-time obligation to purchase print textbooks to establish our initial print textbook library.
In addition, our other long-term liabilities include $2.1 million related to uncertain tax positions as of December 31, 2019. The timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond one year. As a result, this amount is not included in the above table.
Off-Balance Sheet Arrangements
Through December 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies, Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. The current COVID-19 pandemic has caused uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities. These estimates may change as new events occur and additional information is obtained. Our actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that
assumptions and estimates of the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. For further information on all of our significant accounting policies, see Note 2, “Significant Accounting Policies”, of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Textbook Library
We write down textbooks on a book-by-book basis for lost, damaged, or excess print textbooks. Factors considered in the determination of write-downs for print textbooks include historical experience, management’s knowledge of current business conditions, and expectations of future demand. The consideration of these factors requires management to make significant judgments in the determination of our write-down for print textbooks in any given period which could have a material impact on our results of operations.
We depreciate our print textbooks, less an estimated salvage value, over an estimated useful life of four years using an accelerated method of depreciation, as we estimate this method most accurately reflects the actual pattern of decline in their economic value. The salvage value considers the historical trend and projected proceeds for print textbooks. The useful life is determined based on the estimated time period in which the print textbooks are held and rented. We review the estimated salvage value and useful life of our print textbook library on an ongoing basis.
We review the accelerated method of depreciation to ensure consistency with the value of the print textbooks to our customers during their useful life. Based on historical experience, we believe that a print textbook has more value to our customers and us early in its life and therefore an accelerated depreciation method best reflects the actual pattern of decline in economic value and aligns with the print textbooks’ deteriorating condition over time. In addition, we consider the utilization of the print textbooks and the revenues we can earn, recognizing that a used print textbook rents for a lower amount than a new print textbook. Should the actual rental activity or deterioration of print textbooks differ from our estimates, the gain or loss on print textbooks liquidated or the net book value of print textbooks purchased by students at the end of the term could differ in any given period, which could have a material impact to our results of operations.
In addition, we evaluate the appropriateness of the estimated salvage value and useful life estimates based on historical transactions with both vendors and customers and by reviewing a blend of actuals and estimates of the lifecycle of each print textbook. Our estimates utilize data from historical experience, including actual proceeds from print textbooks as a percentage of original sourcing costs, channel mix and the projected value of a print textbook in relation to the original source cost over time. As we continue to accumulate additional data related to our print textbook library, we may make refinements in the estimated salvage value, method of depreciation, or useful life. Any potential refinements could impact our print textbook depreciation expense, the gain or loss on print textbooks liquidated, or the net book value of print textbooks purchased by students at the end of the term and could have a material impact to our results of operations.
Revenue Recognition and Deferred Revenue
For sales of third-party products, we evaluate whether we are acting as a principal or an agent, and therefore would recordagent. Where our role in a transaction is that of principal, revenues are recognized on a gross basis. This requires revenue to comprise the gross sales amount as revenues andvalue of the transaction billed to the customer, after trade discounts, with any related costs or the net amount earnedexpenditure charged as a revenue share fromcost of revenues. Where our role in a transaction is that of an agent, revenues are recognized on a net basis with revenues representing the sale of third-party products.margin earned. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain substantially all of the remaining benefits from the good or service. In relation to print textbook rental and sale agreements with our partners,textbooks owned by a partner, we recognize revenues on a net basis based on our role in the transaction as an agent as we have concluded that we do not control the use of the print textbooks, and therefore record only the net revenue share we earn upon the shipment of a print textbook to a student. For the rental or sale of eTextbooks, weearn. We have concluded that we control our Chegg Services, print textbooks that we own for rental, purchase at the end of the rental term, or sale on a just-in-time basis, and eTextbook service and therefore we recognize revenues and cost of revenues on a gross basis ratably over the term the student has access to the eTextbook. Rental revenues from print textbooks that we own will be recognized at the gross amount of the total transaction as a principal as we have concluded that we do control the use of print textbooks that we own.
Some of our customer arrangements include multiple performance obligations. We have determined these performance obligations qualify as distinct performance obligations, as the customer can benefit from the service on its own or together with other resources that are readily available to the customer, and our promise to transfer the service is separately identifiable from
other promises in the contract. For these arrangements that contain multiple performance obligations, we allocate the transaction price based on the relative standalone selling price (SSP) method by comparing the standalone selling price (SSP)SSP of each distinct performance obligation to the total value of the contract. We determine the SSP based on our historical pricing and discounting practices for the distinct performance obligation when sold separately. If the SSP is not directly observable, we estimate the SSP by considering information such as market conditions, and information about the customer.
Our agreements with print textbook partnersSome of our customer arrangements may include an amount of variable consideration in addition to a fixed revenue share that we earn. This variable consideration can either increase or decrease the total transaction price depending on the nature of the variable consideration. We estimate the amount of variable consideration that we will earn at the inception of the contract, adjusted during each period, and include an estimated amount each period. In determining this estimate, we consider the single most likely amount in a range of possible amounts. This estimated amount of variable consideration requires management to make a judgment based on the forecasted amount of consideration that we expect we will earn as well as the time period in which we can reasonably rely on the accuracy of the forecast. Our estimate of variable consideration is constrained to only include three to four years of estimated variable consideration. This is the amount of variable consideration for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, as the amounts that we could potentially earn in the outer years can change significantly based on factors that are out of our control. If our forecasts are inaccurate, the estimated amount of variable consideration could be inaccurate which could impact our revenue recognition in a given period.
Impairment of Acquired Intangible Assets and Other Long-Lived Assets
We assess the impairment of acquired intangible assets and other long-lived assets at least annually and whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Factors that we consider in determining when to perform an impairment review include significant negative industry or economic trends or significant changes or planned changes in the use of the assets. When measuring the recoverability of these assets, we will make assumptions regarding our estimated future cash flows expected to be generated by the assets. If our estimates or related assumptions change in the future, we may be required to impair these assets. We did not record any impairment charges related to acquired intangible assets or other long-lived assets during the years ended December 31, 20192021 and 2018. As of December 31, 2019 and 2018, we had intangible assets, net, of $34.7 million and $25.9 million, respectively and property and equipment, net of $87.4 million and $59.9 million, respectively.2020.
Goodwill and Indefinite Lived Intangible Asset
Goodwill and our indefinite lived intangible asset are tested for impairment at least annually or whenever events or changes in circumstances indicate that their carrying values may not be recoverable. We first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. In our qualitative assessment, we consider factors including economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount. Our qualitative assessment requires management to make judgments based on the factors listed above in our determination of whether events or changes in circumstances indicate that the carrying values may not be recoverable. Should we conclude that it is more likely than not that our carrying values have been impaired, we would recognize an impairment charge for the amount by which the carrying amount of goodwill and our indefinite lived intangible asset exceed our fair value. We have not recognized any impairment of goodwill or our indefinite lived intangible asset impairment charges since our inception. As of December 31, 2019 and 2018, we had goodwill of $214.5 million and $149.5 million, respectively, and an indefinite lived intangible asset related to the internships.com trade name of $3.6 million.
Share-based Compensation Expense
We measure and recognize share-based compensation expense for all awards made to employees, directors and consultants, including restricted stock units (RSUs), performance-based RSUs (PSUs) with either a market-based condition or financial and strategic performance target and our employee stock purchase plan (ESPP) based on estimated fair values.
We estimate a forfeiture rate to calculate the share-based compensation expense related to our awards. Estimated forfeitures are determined based on historical data and management’s expectation of exercise behaviors. We continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our share-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the share-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in the financial statements.
Share-based compensation expense for PSUs with a market-based condition is recognized regardless of whether the market condition is satisfied subject to continuing service over the requisite service period. Share-based compensation expense recognized related to PSUs with a financial and strategic performance target is subject to the achievement of performance objectives and requires significant judgment by management in determining the current level of attainment of such performance objectives. Management may consider factors such as the latest revenue forecasts and general business trends in the assessment of whether or not a PSU award will be obtained. Subsequent changes to these considerations may have a material impact on the amount of share-based compensation expense recognized in the period related to PSU awards, which may lead to volatility of share-based compensation expense period-to-period. If the performance objectives are not met or service is no longer provided, no share-based compensation expense will be recognized, and any previously recognized share-based compensation expense will be reversed.
We will continue to use judgment in evaluating the assumptions related to our share-based compensation expense on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates, which could materially impact our future share-based compensation expense.
Recent Accounting Pronouncements
For relevant recent accounting pronouncements, see Note 2, “Significant Accounting Policies”, of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes to foreign currency exchange rates and interest rates, and inflation.rates.
Foreign Currency Exchange Risk
International revenues have grown during the year ended December 31, 2021, as a percentage ofwe have begun accepting additional foreign currencies from our international customers. This may have an adverse impact on our total net revenues isif there are unfavorable fluctuations in the exchange rate between the U.S. Dollar and foreign currencies in which we conduct sales. International revenues were not significant during the years ended December 31, 2020 and our sales contracts are denominated primarily in U.S. dollars.2019. A portion of our operating expenses are incurred outside of the United States and are denominated in foreign currencies, which are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Indian Rupee. To date, we have not entered into derivatives or hedging strategies as our exposure to foreign currency
exchange rates has not been material to our historical results of operations. There were no significant foreign exchange gains or losses in the years ended December 31, 20192021, 2020 and 2018.2019.
Interest Rate Sensitivity
We had cash and cash equivalents totaling $387.5$854.1 million and $374.7$479.9 million as of December 31, 20192021 and 2018,2020, respectively, and held investments of $691.6 million$1.4 billion and $109.4 million$1.2 billion as of December 31, 20192021 and 2018,2020, respectively. Our cash and cash equivalents consist of cash and money market accounts and commercial paper and investments consist of commercial paper, corporate debt securities, U.S. treasury securities and agency bonds. Our investment policy and strategy are focused on preservation of capital, supporting our liquidity requirements, and delivering competitive returns subject to prevailing market conditions. Changes in U.S. interest rates affect the interest earned on our cash and cash equivalents and investments and the market value of those securities. A hypothetical 100 basis point increase or decrease in interest rates would result in a $6.9$14.2 million and $1.3$11.7 million increase or decline in the fair value of our investments as of December 31, 20192021 and 2018,2020, respectively. Any realized gains or losses resulting from such hypothetical interest rate changes would only occur if we sold the investments prior to maturity. We were not exposed to material risks due to changes in market interest rates given the liquidity of the cash, and money market accountscash equivalents, and investments in which we invested our cash.
We carry our notes at face value less unamortized debt discount and debt issuance costs on our consolidated balance sheets. Because the 20252026 notes and 20232025 notes have a fixed annual interest rate of 0.125%0.0% and 0.25%0.125%, respectively, we do not have any economic interest rate exposure or financial statement risk associated with changes in interest rates. The fair value of the notes, however, may fluctuate when interest rates and the market price of our stock changes. See Note 10, “Convertible Senior Notes,” of the Notes to Consolidated Financial Statements of Part II, Item 8 of this Annual Report on Form 10-K for additional information.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Chegg, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Chegg, Inc. and subsidiaries (the "Company") as of December 31, 20192021 and 2018,2020, the related consolidated statements of operations, comprehensive loss, stockholders’stockholders' equity, and cash flows for each of the three years thenin the period ended December 31, 2021, and the related notes and the schedule listed in the Index at Item 15.2 (collectively, referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years thenin the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2021, based on the criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 20, 202022, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Notes 1 and 2 to the financial statements, the Company has changed its method of accounting for its convertible senior notes in the year ended December 31, 2021 due to the adoption of Accounting Standards Update No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, ona modified retrospective method of transition.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current-period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Convertible Senior Notes -— Refer to Notes 2 5, and 10 to the financial statements
Critical Audit Matter Description
During 2019,As discussed in Notes 2 and 10 to the consolidated financial statements, the Company issued $800adopted Accounting Standards Update 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), on January 1, 2021, under the modified retrospective method applied to convertible senior notes outstanding as of January 1, 2021. Under ASU 2020-06, the Company’s convertible senior notes with certain embedded conversion features are no longer required to be
separated from the host contract thereby eliminating the cash conversion feature model. Instead, these convertible debt instruments will be accounted for as a single liability measured at amortized cost under the traditional convertible debt accounting model.
In addition, after the Company’s adoption of ASU 2020-06 and during the fiscal year ended December 31, 2021, the Company extinguished $100.0 million in aggregate principal amount of the 2025 convertible senior notes (“the2025 notes”) due infor aggregate consideration of $184.9 million. Upon execution, the Company concluded that the 2025 which, if converted, may be settled in cash, sharesnotes embedded conversion features no longer met the derivative scope exception and, as a result, initially recorded a derivative liability of common stock or a combination thereof, at$176.5 million, related to the Company’s election.fair value of extinguished 2025 notes. The Company separatedsettled the notes intoderivative liability and equity components.for aggregate consideration of $184.9 million resulting in an $8.4 million loss on change in fair value. The carrying amount of the liability component2025 notes subject to the extinguishment was calculated by estimating$98.3 million resulting in a $78.2 million loss on early extinguishment of debt.
Auditing the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the carrying amount of the liability component from the principal amount of the notes.
Given the determination of the fair value of the liability component required management to make significant estimates and assumptions regarding the relevant valuation assumptions, auditing the valuation of the liability component requiredfollowing elements involved a highhigher degree of auditor judgment and an increased extent of effort due to the nature and extent of specialized skill and knowledge required of: (i) the Company’s accounting assessment of the adoption of ASU 2020-06, (ii) the Company’s accounting assessment of the extinguishment including the need to involve professionals in our firm having expertise inconclusion that a derivative liability existed, (iii) the valuation of financial instruments, when performing audit procedures to evaluate management’s judgments and conclusions.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the fair valuecalculation of the liability component included the following, among others:
We tested the effectiveness of internal controls over the Company’s determinationrelated loss on extinguishment of the fair value of2025 Notes including the liability component, including controls over the relevant valuation assumptions.derivative liability.
With the assistance of our fair value specialists, we evaluated the appropriateness of the valuation methodology and the reasonableness of the valuation assumptions to determine the fair value of the liability component. Additionally, we:
| |
– | Tested the source information underlying the valuation assumptions used in the model to determine fair value. |
| |
– | Tested the mathematical accuracy of the valuation model. |
| |
– | Developed a range of independent estimates and compared those to the fair value of the liability component determined by management. |
Acquisitions - Thinkful Acquisition - Refer to Notes 2, 7, and 8 to the financial statements
Critical Audit Matter Description
The Company completed the acquisition of Thinkful, Inc. (“Thinkful”) on October 1, 2019. The total fair value of the purchase consideration was $79.2 million. The purchase price was allocated, on a preliminary basis, to the assets acquired and liabilities assumed based on their estimated fair values, including a content library intangible asset of $6.9 million (“content library”). The determination of the fair value of the content library required management to make significant estimates and assumptions related to future expected cash flows from acquired users, useful lives, and discount rates.
Given the significant judgments made by management to estimate the fair value of the content library, performing audit procedures to evaluate the reasonableness of the forecasted revenues and cost of revenues used in the determination of future expected cash flows, especially considering Thinkful’s limited operating history, required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasted revenues and cost of revenues for the content library intangible assetconvertible senior notes included the following, among others:
a.We tested the operating effectiveness of the controls over the Company’s accounting for the adoption of ASU 2020-06 and the extinguishment of the 2025 convertible senior notes.
b.Our testing included reading the underlying agreements and evaluating the Company’s accounting analysis related to the adoption of ASU 2020-06.
c.Our testing included reading the underlying agreements and evaluating the Company’s accounting analysis underlying the accounting of the convertible senior notes, including the determination of the balance sheet classification of each transaction, identification of any derivatives included in the arrangements, and determination that the 2025 convertible senior notes was a debt extinguishment.
d.In addition, we involved a valuation specialist to assist in our evaluation of the significant assumptions and valuation used by the Company specifically for the valuation of the content library intangible asset, including management’s controls over forecasted revenues and cost of revenues.derivative liability.
We evaluated the reasonableness of management’s forecasted revenues and cost of revenues by comparing such forecasted amounts (or as applicable, the implied growth rates and margin assumptions) against various other sources, including:
| |
– | Historical performance of Thinkful. |
| |
– | Industry data and analyst reports. |
| |
– | Internal communications to management and the Board of Directors. |
| |
– | Forecasted information as well as analyst and industry reports for the Company and certain of its peer companies. |
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 20, 202022, 2022
We have served as the Company’s auditor since 2018.
Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Chegg, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal controlscontrol over financial reporting of Chegg, Inc. and subsidiaries (the “Company”) as of December 31, 2019,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on the criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of and for the year ended December 31, 2019,2021, of the Company and our report dated February 20, 202022, 2022, expressed an unqualified opinion on those financial statements.statements and included an explanatory paragraph relating to the Company’s adoption of Accounting Standards Update No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Thinkful, Inc., which was acquired on October 1, 2020 and whose financial statements constituted less than 1% of total assets as of December 31, 2019 and less than 1% of total net revenues for the year then ended. Accordingly, our audit did not include the internal control over financial reporting at Thinkful, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal controlscontrol over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 20, 202022, 2022
Report
To the Stockholders and the Board of Directors of Chegg, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows of Chegg, Inc. (the Company) for the year ended December 31, 2017, and the related notes and the financial statement schedules listed in the Index at Item 15.2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We served as the Company’s auditor from 2009 to 2018.
San Jose, California
February 26, 2018
CHEGG, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Assets |
| |
|
| Current assets | | | |
| Cash and cash equivalents | $ | 387,520 |
| | $ | 374,664 |
|
| Short-term investments | 381,074 |
| | 93,345 |
|
| Accounts receivable, net of allowance for doubtful accounts of $56 and $229 at December 31, 2019 and December 31, 2018, respectively | 11,529 |
| | 12,733 |
|
| Prepaid expenses | 10,538 |
| | 4,673 |
|
| Other current assets | 16,606 |
| | 9,510 |
|
| Total current assets | 807,267 |
| | 494,925 |
|
| Long-term investments | 310,483 |
| | 16,052 |
|
| Property and equipment, net | 87,359 |
| | 59,904 |
|
| Goodwill | 214,513 |
| | 149,524 |
|
| Intangible assets, net | 34,667 |
| | 25,915 |
|
| Right of use assets | 15,931 |
| | — |
|
| Other assets | 18,778 |
| | 14,618 |
|
| Total assets | $ | 1,488,998 |
| | $ | 760,938 |
|
| Liabilities and stockholders' equity | | | |
| Current liabilities | | | |
| Accounts payable | $ | 7,362 |
| | $ | 8,177 |
|
| Deferred revenue | 18,780 |
| | 17,418 |
|
| Current operating lease liabilities | 5,283 |
| | — |
|
| Accrued liabilities | 39,964 |
| | 34,077 |
|
| Total current liabilities | 71,389 |
| | 59,672 |
|
| Long-term liabilities | | | |
| Convertible senior notes, net | 900,303 |
| | 283,668 |
|
| Long-term operating lease liabilities | 14,513 |
| | — |
|
| Other long-term liabilities | 3,964 |
| | 6,964 |
|
| Total long-term liabilities | 918,780 |
| | 290,632 |
|
| Total liabilities | 990,169 |
| | 350,304 |
|
| Commitments and contingencies |
| |
|
| Stockholders' equity: | | | |
| Preferred stock, $0.001 par value – 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2019 and December 31, 2018 | — |
| | — |
|
| Common stock, $0.001 par value – 400,000,000 shares authorized; 121,583,501 and 115,500,418 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively | 122 |
| | 116 |
|
| Additional paid-in capital | 916,095 |
| | 818,113 |
|
| Accumulated other comprehensive loss | (1,096 | ) | | (1,019 | ) |
| Accumulated deficit | (416,292 | ) | | (406,576 | ) |
| Total stockholders' equity | 498,829 |
| | 410,634 |
|
| Total liabilities and stockholders' equity | $ | 1,488,998 |
| | $ | 760,938 |
|
| | | | | | | | | | | |
| December 31, |
| | 2021 | | 2020 |
| Assets | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 854,078 | | | $ | 479,853 | |
| Short-term investments | 691,781 | | | 665,567 | |
| Accounts receivable, net of allowance of $153 at December 31, 2021 and December 31, 2020. | 17,850 | | | 12,913 | |
| Prepaid expenses | 35,093 | | | 12,776 | |
| Other current assets | 23,846 | | | 11,846 | |
| Total current assets | 1,622,648 | | | 1,182,955 | |
| Long-term investments | 745,993 | | | 523,628 | |
| Textbook library, net | 11,241 | | | 34,149 | |
| Property and equipment, net | 169,938 | | | 125,807 | |
| Goodwill | 289,763 | | | 285,214 | |
| Intangible assets, net | 40,566 | | | 51,249 | |
| Right of use assets | 18,062 | | | 24,226 | |
| Other assets | 21,035 | | | 24,030 | |
| Total assets | $ | 2,919,246 | | | $ | 2,251,258 | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities | | | |
| Accounts payable | $ | 11,992 | | | $ | 8,547 | |
| Deferred revenue | 35,143 | | | 32,620 | |
| | | |
| Accrued liabilities | 67,209 | | | 68,565 | |
| Total current liabilities | 114,344 | | | 109,732 | |
| Long-term liabilities | | | |
| Convertible senior notes, net | 1,678,155 | | | 1,506,922 | |
| Long-term operating lease liabilities | 12,447 | | | 19,264 | |
| Other long-term liabilities | 7,383 | | | 5,705 | |
| Total long-term liabilities | 1,697,985 | | | 1,531,891 | |
| Total liabilities | 1,812,329 | | | 1,641,623 | |
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity: | | | |
| Preferred stock, $0.001 par value – 10,000,000 shares authorized, no shares issued and outstanding at December 31, 2021 and December 31, 2020 | — | | | — | |
| Common stock, $0.001 par value – 400,000,000 shares authorized; 136,951,956 and 129,343,524 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively | 137 | | | 129 | |
| Additional paid-in capital | 1,449,305 | | | 1,030,577 | |
| Accumulated other comprehensive (loss) income | (5,334) | | | 1,530 | |
| Accumulated deficit | (337,191) | | | (422,601) | |
| Total stockholders’ equity | 1,106,917 | | | 609,635 | |
| Total liabilities and stockholders’ equity | $ | 2,919,246 | | | $ | 2,251,258 | |
See Notes to Consolidated Financial Statements.
CHEGG, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | | | | | Years Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
| | | | Years Ended December 31, | |
| | 2019 | | 2018 | | 2017 | |
| Net revenues | $ | 410,926 |
| | $ | 321,084 |
| | $ | 255,066 |
| Net revenues | | $ | 776,265 | | | $ | 644,338 | | | $ | 410,926 | |
| | Cost of revenues | 92,182 |
| | 79,996 |
| | 80,175 |
| Cost of revenues | | 254,904 | | | 205,417 | | | 92,182 | |
| Gross profit | 318,744 |
| | 241,088 |
| | 174,891 |
| Gross profit | | 521,361 | | | 438,921 | | | 318,744 | |
| Operating expenses: | | | | | | Operating expenses: | | |
| Research and development | 139,772 |
| | 114,291 |
| | 81,926 |
| Research and development | | 178,821 | | | 170,905 | | | 139,772 | |
| Sales and marketing | 63,569 |
| | 54,714 |
| | 51,240 |
| Sales and marketing | | 105,414 | | | 81,914 | | | 63,569 | |
| General and administrative | 97,489 |
| | 77,714 |
| | 64,411 |
| General and administrative | | 159,019 | | | 129,349 | | | 97,586 | |
| Restructuring charges | 97 |
| | 589 |
| | 1,047 |
| |
| Gain on liquidation of textbooks | — |
| | — |
| | (4,766 | ) | |
| | Total operating expenses | 300,927 |
| | 247,308 |
| | 193,858 |
| Total operating expenses | | 443,254 | | | 382,168 | | | 300,927 | |
| Income (loss) from operations | 17,817 |
| | (6,220 | ) | | (18,967 | ) | |
| Income from operations | | Income from operations | | 78,107 | | | 56,753 | | | 17,817 | |
| Interest expense, net and other income, net: | | | | | | Interest expense, net and other income, net: | | |
| Interest expense, net | (44,851 | ) | | (11,225 | ) | | (74 | ) | Interest expense, net | | (6,896) | | | (66,297) | | | (44,851) | |
| Other income, net | 20,063 |
| | 3,987 |
| | 560 |
| |
| Total interest expense, net and other income, net | (24,788 | ) | | (7,238 | ) | | 486 |
| |
| Loss before provision for income taxes | (6,971 | ) | | (13,458 | ) | | (18,481 | ) | |
| Other (expense) income, net | | Other (expense) income, net | | (65,472) | | | 8,683 | | | 20,063 | |
| Total interest expense, net and other (expense) income, net | | Total interest expense, net and other (expense) income, net | | (72,368) | | | (57,614) | | | (24,788) | |
| Income (loss) before provision for income taxes | | Income (loss) before provision for income taxes | | 5,739 | | | (861) | | | (6,971) | |
| Provision for income taxes | 2,634 |
| | 1,430 |
| | 1,802 |
| Provision for income taxes | | 7,197 | | | 5,360 | | | 2,634 | |
| Net loss | $ | (9,605 | ) | | $ | (14,888 | ) | | $ | (20,283 | ) | Net loss | | $ | (1,458) | | | $ | (6,221) | | | $ | (9,605) | |
| Net loss per share, basic and diluted | $ | (0.08 | ) | | $ | (0.13 | ) | | $ | (0.20 | ) | Net loss per share, basic and diluted | | $ | (0.01) | | | $ | (0.05) | | | $ | (0.08) | |
| Weighted average shares used to compute net loss per share, basic and diluted | 119,204 |
| | 113,251 |
| | 100,022 |
| Weighted average shares used to compute net loss per share, basic and diluted | | 141,262 | | | 125,367 | | | 119,204 | |
See Notes to Consolidated Financial Statements.
CHEGG, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
| | | | Years Ended December 31, | | | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 | | | 2021 | | 2020 | | 2019 |
| Net loss | $ | (9,605 | ) | | $ | (14,888 | ) | | $ | (20,283 | ) | Net loss | | $ | (1,458) | | | $ | (6,221) | | | $ | (9,605) | |
| Other comprehensive loss: | | | | | | |
| Change in unrealized gain (loss) on available for sale investments, net of tax | 668 |
| | 76 |
| | (187 | ) | |
| Other comprehensive (loss) income | | Other comprehensive (loss) income | | |
| Change in net unrealized (loss) gain on investments, net of tax | | Change in net unrealized (loss) gain on investments, net of tax | | (5,729) | | | 1,037 | | | 668 | |
| Change in foreign currency translation adjustments, net of tax | (745 | ) | | (813 | ) | | 81 |
| Change in foreign currency translation adjustments, net of tax | | (1,135) | | | 1,589 | | | (745) | |
| Other comprehensive loss | (77 | ) | | (737 | ) | | (106 | ) | |
| Other comprehensive (loss) income | | Other comprehensive (loss) income | | (6,864) | | | 2,626 | | | (77) | |
| Total comprehensive loss | $ | (9,682 | ) | | $ | (15,625 | ) | | $ | (20,389 | ) | Total comprehensive loss | | $ | (8,322) | | | $ | (3,595) | | | $ | (9,682) | |
See Notes to Consolidated Financial Statements.
CHEGG, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | |
| Shares | | Par
Value | | Additional Paid-In
Capital | | Accumulated Other Comprehensive Loss | | Accumulated
Deficit | | Total Stockholders’ Equity |
| Balances at December 31, 2016 | 91,709 |
| | $ | 92 |
| | $ | 593,351 |
| | $ | (176 | ) | | $ | (371,328 | ) | | $ | 221,939 |
|
| Issuance of common stock in connection with follow-on offering, net of offering costs | 11,500 |
| | 12 |
| | 147,597 |
| | — |
| | — |
| | 147,609 |
|
| Issuance of common stock upon exercise of stock options and ESPP | 3,280 |
| | 3 |
| | 23,653 |
| | — |
| | — |
| | 23,656 |
|
| Net share settlement of equity awards | 3,155 |
| | 3 |
| | (20,115 | ) | | — |
| | — |
| | (20,112 | ) |
| Warrant exercises | 24 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Share-based compensation expense | — |
| | — |
| | 38,359 |
| | — |
| | — |
| | 38,359 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | (106 | ) | | — |
| | (106 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (20,283 | ) | | (20,283 | ) |
| Balances at December 31, 2017 | 109,668 |
| | 110 |
| | 782,845 |
| | (282 | ) | | (391,611 | ) | | 391,062 |
|
| Cumulative-effect adjustment to accumulated deficit related to adoption of ASUs | — |
| | — |
| | — |
| | — |
| | (77 | ) | | (77 | ) |
| Equity component of convertible senior notes, net of issuance costs | — |
| | — |
| | 62,444 |
| | — |
| | — |
| | 62,444 |
|
| Purchase of convertible senior notes capped call | — |
| | — |
| | (39,227 | ) | | — |
| | — |
| | (39,227 | ) |
| Repurchase of common stock | (983 | ) | | (1 | ) | | (19,999 | ) | | — |
| | — |
| | (20,000 | ) |
| Issuance of common stock upon exercise of stock options and ESPP | 3,459 |
| | 4 |
| | 29,109 |
| | — |
| | — |
| | 29,113 |
|
| Net share settlement of equity awards | 3,322 |
| | 3 |
| | (49,089 | ) | | — |
| | — |
| | (49,086 | ) |
| Warrant exercises | 34 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Share-based compensation expense | — |
| | — |
| | 52,030 |
| | — |
| | — |
| | 52,030 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | (737 | ) | | — |
| | (737 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (14,888 | ) | | (14,888 | ) |
| Balances at December 31, 2018 | 115,500 |
| | 116 |
| | 818,113 |
| | (1,019 | ) | | (406,576 | ) | | 410,634 |
|
| Cumulative-effect adjustment to accumulated deficit related to adoption of ASU 2016-02 | — |
| | — |
| | — |
| | — |
| | (111 | ) | | (111 | ) |
| Equity component of convertible senior notes, net of issuance costs | — |
| | — |
| | 206,747 |
| | — |
| | — |
| | 206,747 |
|
| Purchase of convertible senior notes capped call | — |
| | — |
| | (97,200 | ) | | — |
| | — |
| | (97,200 | ) |
| Repurchase of common stock | (504 | ) | | (1 | ) | | (19,999 | ) | | — |
| | — |
| | (20,000 | ) |
| Issuance of common stock upon exercise of stock options and ESPP | 3,276 |
| | 4 |
| | 35,093 |
| | — |
| | — |
| | 35,097 |
|
| Net share settlement of equity awards | 3,248 |
| | 3 |
| | (94,571 | ) | | — |
| | — |
| | (94,568 | ) |
| Issuance of common stock in connection with prior acquisition | 64 |
| | — |
| | 3,003 |
| | — |
| | — |
| | 3,003 |
|
| Share-based compensation expense | — |
| | — |
| | 64,909 |
| | — |
| | — |
| | 64,909 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | (77 | ) | | — |
| | (77 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | (9,605 | ) | | (9,605 | ) |
| Balances at December 31, 2019 | 121,584 |
| | $ | 122 |
| | $ | 916,095 |
| | $ | (1,096 | ) | | $ | (416,292 | ) | | $ | 498,829 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock | | | | | | | | |
| | | | | | Shares | | Par
Value | | Additional Paid-In
Capital | | Accumulated Other Comprehensive (Loss) Income | | Accumulated
Deficit | | Total Stockholders’ Equity |
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| | | | | | | | | | | | | | | | |
| Balances at December 31, 2018 | | | | | | 115,500 | | | $ | 116 | | | $ | 818,113 | | | $ | (1,019) | | | $ | (406,576) | | | $ | 410,634 | |
| Cumulative-effect adjustment to accumulated deficit related to adoption of ASU 2016-02 | | | | | | — | | | — | | | — | | | — | | | (111) | | | (111) | |
| Equity component of 2025 convertible senior notes, net of issuance costs | | | | | | — | | | — | | | 206,747 | | | — | | | — | | | 206,747 | |
| Purchase of 2025 convertible senior notes capped call | | | | | | — | | | — | | | (97,200) | | | — | | | — | | | (97,200) | |
| Repurchase of common stock | | | | | | (504) | | | (1) | | | (19,999) | | | — | | | — | | | (20,000) | |
| Issuance of common stock upon exercise of stock options and ESPP | | | | | | 3,276 | | | 4 | | | 35,093 | | | — | | | — | | | 35,097 | |
| Net share settlement of equity awards | | | | | | 3,248 | | | 3 | | | (94,571) | | | — | | | — | | | (94,568) | |
| Issuance of common stock in connection with prior acquisition | | | | | | 64 | | | — | | | 3,003 | | | — | | | — | | | 3,003 | |
| Share-based compensation expense | | | | | | — | | | — | | | 64,909 | | | — | | | — | | | 64,909 | |
| Other comprehensive loss | | | | | | — | | | — | | | — | | | (77) | | | — | | | (77) | |
| Net loss | | | | | | — | | | — | | | — | | | — | | | (9,605) | | | (9,605) | |
| Balances at December 31, 2019 | | | | | | 121,584 | | | 122 | | | 916,095 | | | (1,096) | | | (416,292) | | | 498,829 | |
| Cumulative-effect adjustment to accumulated deficit related to adoption of ASU 2016-13 | | | | | | — | | | — | | | — | | | — | | | (88) | | | (88) | |
| Equity component of 2026 convertible senior notes, net of issuance costs | | | | | | — | | | — | | | 237,462 | | | — | | | — | | | 237,462 | |
| Purchase of 2026 convertible senior notes capped call | | | | | | — | | | — | | | (103,400) | | | — | | | — | | | (103,400) | |
| Equity component related to conversions of 2023 convertible senior notes | | | | | | — | | | — | | | (442,667) | | | — | | | — | | | (442,667) | |
| Issuance of common stock upon conversion of 2023 convertible senior notes | | | | | | 4,182 | | | 4 | | | 327,137 | | | — | | | — | | | 327,141 | |
| Proceeds from capped call related to conversions of 2023 convertible senior notes | | | | | | — | | | — | | | 77,095 | | | — | | | — | | | 77,095 | |
| Issuance of common stock upon exercise of stock options and ESPP | | | | | | 1,154 | | | 1 | | | 15,480 | | | — | | | — | | | 15,481 | |
| Net share settlement of equity awards | | | | | | 2,424 | | | 2 | | | (80,680) | | | — | | | — | | | (80,678) | |
| | | | | | | | | | | | | | | | |
| Share-based compensation expense | | | | | | — | | | — | | | 84,055 | | | — | | | — | | | 84,055 | |
| Other comprehensive income | | | | | | — | | | — | | | — | | | 2,626 | | | — | | | 2,626 | |
| Net loss | | | | | | — | | | — | | | — | | | — | | | (6,221) | | | (6,221) | |
| 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 | | | | | | — | | | — | | | (236,921) | | | — | | | — | | | (236,921) | |
| Issuance of common stock upon conversion of 2023 notes | | | | | | 2,983 | | | 3 | | | 235,518 | | | — | | | — | | | 235,521 | |
| Net proceeds from capped call related to conversions and extinguishments of 2023 notes and 2025 notes | | | | | | — | | | — | | | 67,770 | | | — | | | — | | | 67,770 | |
| Issuance of common stock upon exercise of stock options and ESPP | | | | | | 413 | | | — | | | 8,885 | | | — | | | — | | | 8,885 | |
| Net share settlement of equity awards | | | | | | 1,640 | | | 2 | | | (94,423) | | | — | | | — | | | (94,421) | |
| Repurchase of common stock | | | | | | (8,403) | | | (8) | | | (299,992) | | | — | | | — | | | (300,000) | |
| | | | | | | | | | | | | | | | |
| Share-based compensation expense | | | | | | — | | | — | | | 111,442 | | | — | | | — | | | 111,442 | |
| Other comprehensive loss | | | | | | — | | | — | | | — | | | (6,864) | | | — | | | (6,864) | |
| Net loss | | | | | | — | | | — | | | — | | | — | | | (1,458) | | | (1,458) | |
| Balances at December 31, 2021 | | | | | | 136,952 | | | $ | 137 | | | $ | 1,449,305 | | | $ | (5,334) | | | $ | (337,191) | | | $ | 1,106,917 | |
See Notes to Consolidated Financial Statements.
CHEGG, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities | | |
| |
|
| Net loss | $ | (9,605 | ) | | $ | (14,888 | ) | | $ | (20,283 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Depreciation and amortization expense | 30,247 |
| | 22,805 |
| | 19,337 |
|
| Share-based compensation expense | 64,909 |
| | 52,030 |
| | 38,359 |
|
| Gain on liquidation of textbooks | — |
| | — |
| | (4,766 | ) |
| Loss from write-offs of textbooks | — |
| | — |
| | 314 |
|
| Loss from write-offs of property and equipment | 1,009 |
| | 93 |
| | 1,368 |
|
| Interest accretion on deferred consideration | — |
| | — |
| | (626 | ) |
| Amortization of debt discount and issuance costs | 43,202 |
| | 10,494 |
| | — |
|
| Deferred income taxes | (39 | ) | | (323 | ) | | — |
|
| Operating lease expense, net of accretion | 4,385 |
| | — |
| | — |
|
| Other, net | (416 | ) | | 65 |
| | 68 |
|
| Change in assets and liabilities net of effect of acquisition of businesses: | | | | |
|
| Accounts receivable | 1,829 |
| | (1,538 | ) | | (175 | ) |
| Prepaid expenses and other current assets | (12,930 | ) | | (4,921 | ) | | 13,550 |
|
| Other assets | (1,494 | ) | | 48 |
| | 1,049 |
|
| Accounts payable | (2,395 | ) | | 893 |
| | 2,649 |
|
| Deferred revenue | (1,682 | ) | | 3,978 |
| | (1,396 | ) |
| Accrued liabilities | (206 | ) | | 3,838 |
| | 2,087 |
|
| Other liabilities | (3,411 | ) | | 2,539 |
| | 15 |
|
| Net cash provided by operating activities | 113,403 |
| | 75,113 |
| | 51,550 |
|
| Cash flows from investing activities | | | | | |
| Proceeds from liquidations of textbooks | — |
| | — |
| | 6,943 |
|
| Purchases of investments | (959,911 | ) | | (146,856 | ) | | (128,247 | ) |
| Proceeds from sale of investments | 53,261 |
| | 1,800 |
| | 16,393 |
|
| Maturities of investments | 324,700 |
| | 138,380 |
| | 9,750 |
|
| Purchases of property and equipment | (42,326 | ) | | (31,223 | ) | | (26,142 | ) |
| Acquisition of businesses, net of cash acquired | (79,149 | ) | | (34,650 | ) | | (14,931 | ) |
| Purchases of strategic equity investment | — |
| | (10,000 | ) | | — |
|
| Net cash used in investing activities | (703,425 | ) | | (82,549 | ) | | (136,234 | ) |
| Cash flows from financing activities | | | | | |
| Common stock issued under stock plans, net | 35,100 |
| | 29,116 |
| | 23,659 |
|
| Payment of taxes related to the net share settlement of equity awards | (94,571 | ) | | (49,089 | ) | | (20,115 | ) |
| Payment of deferred cash consideration related to acquisitions | — |
| | — |
| | (16,939 | ) |
| Proceeds from follow-on offering, net of offering costs | — |
| | — |
| | 147,609 |
|
| Proceeds from issuance of convertible senior notes, net of issuance costs | 780,180 |
| | 335,618 |
| | — |
|
| Purchase of convertible senior notes capped call | (97,200 | ) | | (39,227 | ) | | — |
|
| Repurchase of common stock | (20,000 | ) | | (20,000 | ) | | — |
|
| Net cash provided by financing activities | 603,509 |
| | 256,418 |
| | 134,214 |
|
| Net increase in cash, cash equivalents and restricted cash | 13,487 |
| | 248,982 |
| | 49,530 |
|
| Cash, cash equivalents and restricted cash, beginning of period | 375,945 |
| | 126,963 |
| | 77,433 |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 389,432 |
| | $ | 375,945 |
| | $ | 126,963 |
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities | | | | | |
| Net loss | $ | (1,458) | | | $ | (6,221) | | | $ | (9,605) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | |
| Print textbook depreciation expense | 10,859 | | | 15,397 | | | — | |
| Other depreciation and amortization expense | 63,274 | | | 47,018 | | | 30,247 | |
| Share-based compensation expense | 108,846 | | | 84,055 | | | 64,909 | |
| Amortization of debt discount and issuance costs | 5,922 | | | 64,573 | | | 43,202 | |
| Repayment of convertible senior notes attributable to debt discount | — | | | (20,433) | | | — | |
| Loss on early extinguishments of debt | 78,152 | | | 4,286 | | | — | |
| Loss on change in fair value of derivative instruments, net | 7,148 | | | — | | | — | |
| Loss from write-offs of property and equipment | 2,115 | | | 1,211 | | | 1,009 | |
| Loss from impairment of strategic equity investment | — | | | 10,000 | | | — | |
| Gain on sale of strategic equity investments | (12,496) | | | — | | | — | |
| Loss (gain) on textbook library, net | 10,956 | | | (1,453) | | | — | |
| Operating lease expense, net of accretion | 5,994 | | | 4,901 | | | 4,385 | |
| | | | | |
| Other non-cash items | (973) | | | (227) | | | (455) | |
| Change in assets and liabilities, net of effect of acquisition of businesses: | | | | | |
| Accounts receivable | (5,004) | | | (400) | | | 1,829 | |
| Prepaid expenses and other current assets | (21,854) | | | 5,419 | | | (12,930) | |
| Other assets | 16,387 | | | (4,214) | | | (1,494) | |
| Accounts payable | 3,241 | | | 1,119 | | | (2,395) | |
| Deferred revenue | 2,523 | | | 12,918 | | | (1,682) | |
| Accrued liabilities | 5,199 | | | 22,444 | | | (206) | |
| Other liabilities | (5,607) | | | (3,951) | | | (3,411) | |
| Net cash provided by operating activities | 273,224 | | | 236,442 | | | 113,403 | |
| Cash flows from investing activities | | | | | |
| Purchases of property and equipment | (94,180) | | | (81,317) | | | (42,326) | |
| Purchases of textbooks | (10,931) | | | (58,567) | | | — | |
| Proceeds from disposition of textbooks | 8,714 | | | 7,569 | | | — | |
| Purchases of investments | (1,688,384) | | | (1,045,564) | | | (959,911) | |
| Proceeds from sale of investments | 206,041 | | | — | | | 53,261 | |
| Maturities of investments | 1,204,787 | | | 539,889 | | | 324,700 | |
| Proceeds from sale of strategic equity investments | 16,076 | | | — | | | — | |
| Acquisition of businesses, net of cash acquired | (7,891) | | | (92,796) | | | (79,149) | |
| Purchase of strategic equity investment | — | | | (2,000) | | | — | |
| Net cash used in investing activities | (365,768) | | | (732,786) | | | (703,425) | |
| Cash flows from financing activities | | | | | |
| Proceeds from common stock issued under stock plans, net | 8,887 | | | 15,483 | | | 35,100 | |
| Payment of taxes related to the net share settlement of equity awards | (94,423) | | | (80,680) | | | (94,571) | |
| Proceeds from equity offering, net of offering costs | 1,091,466 | | | — | | | — | |
| Repayment of convertible senior notes | (300,762) | | | (303,967) | | | — | |
| Proceeds from exercise of convertible senior notes capped call | 69,005 | | | 77,095 | | | — | |
| Payment of escrow related to acquisition | (7,451) | | | — | | | — | |
| Repurchase of common stock | (300,000) | | | — | | | (20,000) | |
| Proceeds from issuance of convertible senior notes, net of issuance costs | — | | | 984,096 | | | 780,180 | |
| Purchase of convertible senior notes capped call | — | | | (103,400) | | | (97,200) | |
| Net cash provided by financing activities | 466,722 | | | 588,627 | | | 603,509 | |
| Net increase in cash, cash equivalents and restricted cash | 374,178 | | | 92,283 | | | 13,487 | |
| Cash, cash equivalents and restricted cash, beginning of period | 481,715 | | | 389,432 | | | 375,945 | |
| Cash, cash equivalents and restricted cash, end of period | $ | 855,893 | | | $ | 481,715 | | | $ | 389,432 | |
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Supplemental cash flow data: | | | | | |
| Cash paid during the period for: | | | | | |
| Interest | $ | 1,053 | | | $ | 1,766 | | | $ | 1,332 | |
| Income taxes, net of refunds | $ | 7,388 | | | $ | 3,436 | | | $ | 2,070 | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 7,772 | | | $ | 6,790 | | | $ | 5,297 | |
| Right of use assets obtained in exchange for lease obligations: | | | | | |
| Operating leases | $ | — | | | $ | 13,688 | | | $ | 3,364 | |
| Non-cash investing and financing activities: | | | | | |
| Accrued purchases of long-lived assets | $ | 2,982 | | | $ | 1,588 | | | $ | 10,036 | |
| Accrued escrow related to acquisition | $ | — | | | $ | 7,451 | | | $ | — | |
| Issuance of common stock related to repayment of convertible senior notes | $ | 235,521 | | | $ | 327,141 | | | $ | — | |
| Issuance of common stock related to prior acquisition | $ | — | | | $ | — | | | $ | 3,003 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Supplemental cash flow data: | | | | | |
| Cash paid during the period for: | | | | | |
| Interest | $ | 1,332 |
| | $ | 605 |
| | $ | 85 |
|
| Income taxes | $ | 2,070 |
| | $ | 2,097 |
| | $ | 1,790 |
|
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | (5,297 | ) | | $ | — |
| | $ | — |
|
| Right of use assets obtained in exchange for lease obligations: | | | | | |
| Operating leases | $ | 3,364 |
| | $ | — |
| | $ | — |
|
| Non-cash investing and financing activities: | | | | | |
| Accrued purchases of long-lived assets | $ | 10,036 |
| | $ | 1,210 |
| | $ | 3,573 |
|
| Issuance of common stock related to prior acquisition | $ | 3,003 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 |
| | | |
| |
|
| Reconciliation of cash, cash equivalents and restricted cash: | | | | | |
| Cash and cash equivalents | $ | 387,520 |
| | $ | 374,664 |
| | $ | 126,457 |
|
| Restricted cash included in other current assets | 149 |
| | 84 |
| | 84 |
|
| Restricted cash included in other assets | 1,763 |
| | 1,197 |
| | 422 |
|
| Total cash, cash equivalents and restricted cash | $ | 389,432 |
| | $ | 375,945 |
| | $ | 126,963 |
|
| | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| Reconciliation of cash, cash equivalents and restricted cash: | | | | | |
| Cash and cash equivalents | $ | 854,078 | | | $ | 479,853 | | | $ | 387,520 | |
| Restricted cash included in other current assets | — | | | 122 | | | 149 | |
| Restricted cash included in other assets | 1,815 | | | 1,740 | | | 1,763 | |
| Total cash, cash equivalents and restricted cash | $ | 855,893 | | | $ | 481,715 | | | $ | 389,432 | |
See Notes to Consolidated Financial Statements.
CHEGG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Background and Basis of Presentation
Company and Background
Chegg, Inc. (Chegg, the Company, (“we, us,” “us,” “our,” “Company” or our)“Chegg”), headquartered in Santa Clara, California, was incorporated as a Delaware corporation in July 2005. CheggMillions of people all around the world Learn with Chegg. Our mission is a Smarter Way to Student. As the leading direct-to-student learning platform, we strive to improve educationallearning and learning outcomes by putting the student first in all our decisions.students first. We support students onlife-long learners starting with their academic journey from high school to college and extending into their career with tools designedcareers. The Chegg platform provides products and services to support learners to help them passbetter understand their test, passacademic course materials, and also provides personal and professional development skills training, to help them achieve their class, and save money on required materials. Our services are available online, anytime and anywhere, so we can reach students when they need us most.learning goals.
Basis of Presentation
Our fiscal year ends on December 31 and in this report we refer to the year ended December 31, 2019,2021, December 31, 2018,2020, and December 31, 20172019 as 2019, 2018,2021, 2020, and 2017,2019, respectively.
WeReclassification of Prior Period Presentation
In order to conform with current period presentation, $6.6 million of current operating lease liabilities have changed the captionsbeen reclassified to accrued liabilities on our consolidated statementsbalance sheet as of cash flows from “purchases of marketable securities” to “purchases of investments” and from “maturities of marketable securities” to “maturities of investments.”December 31, 2020. This change in presentation does not impact any current oraffect previously reported results.
Note 2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (U.S. 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. Significant estimates, assumptions, and judgments are used for, but not limited to: revenue recognition, recoverability of accounts receivable, restructuring charges, share-based compensation expense including grant-date fair value of PSUs with a market-based condition and estimated forfeitures, accounting for income taxes, useful lives and salvage value assigned to our textbook library, useful lives assigned to long-lived assets for depreciation and amortization, impairment of goodwill and long-lived assets, the valuation of acquired intangible assets, the valuation of our convertible senior notes,and internal-use software and website development costs, and operating lease right of use (ROU) assets and operating lease liabilities.costs. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Chegg and our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. GAAP.
Cash and Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an original maturity date of three months or less from the date of purchase to be cash equivalents. Our cash and cash equivalents consist of cash and money market accounts and commercial paper at financial institutions, and are stated at cost, which approximates fair value. We classify certain restricted cash balances within other current assets and other assets on the accompanying consolidated balance sheets based upon the term of the remaining restrictions.
Fair Value Measurements
We account for certain assets and liabilities at fair value. We have established a fair value hierarchy used to determine the fair value of our financial instruments as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value; the inputs require significant management judgment or estimation.
A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Investments
We hold investments in commercial paper, corporate debt securities, U.S. treasury securities and agency bonds. We classify our investments as available-for-sale that are either short or long-term based on the nature of each security based on theremaining contractual maturity of the investment when purchased.investment. Our available-for-sale investments are carried at estimated fair value with any unrealized gains and losses, unrelated to credit loss factors, net of taxes, included in other comprehensive loss(loss) income on our consolidated statements of stockholders’ equity. Unrealized losses related to credit loss factors are charged againstrecorded through an allowance for credit losses in other (expense) income, net on our consolidated statements of operations, rather than as a reduction to other comprehensive (loss) income, when a decline in fair value has resulted from a credit loss. When evaluating whether an investment's unrealized losses are related to credit factors, we review factors such as the extent to which fair value is determinedbelow its cost basis, any changes to the credit rating of the security, adverse conditions specifically related to the security, changes in market interest rates and our intent to sell, or whether it is more likely than not we will be required to sell, before recovery of cost basis. We invest in highly rated securities with a weighted average maturity of twelve months or less. In addition, our investment policy limits the amount of our credit exposure to any one issuer or industry sector and requires investments to be other-than-temporary. We did not record any such impairment chargesinvestment grade, with the primary objective of preserving capital and maintaining liquidity. Fair values were determined for each individual security in the periods presented.investment portfolio. We determineddetermine realized gains or losses on the sale of investments on a specific identification method, and recordedrecord such gains or losses as other (expense) income, net. For the years ended December 31, 2019, 2018 and 2017
, the Company's gross realized gains and losses on investments were not significant.
The estimated fair value of our investments are based on quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. Other than our money market funds and U.S. treasury securities, we classify our fixed income available-for-sale investments as having Level 2 inputs. The valuation techniques used to measure the fair value of our investments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. We do not hold any investments valued with a Level 3 input.
Accounts Receivable, Net of Allowance
Accounts receivable are recorded at the invoiced amount and are non-interest bearing. We generally grant uncollateralized credit terms to our customers, which include textbook wholesalers and marketing services customers, andadvertising customers.
We maintain an allowance for doubtful accounts to account for potentially uncollectible receivables.
Allowance for Doubtful Accounts
We assess the creditworthiness of our customers based on multiple sources of information, and analyze such factors as our historical bad debt experience, industry and geographic concentrations of credit risk, economic trends, and customer payment history. This assessment requires significant judgment. Because of this assessment, we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of certain customers to make all of their required payments. In making this estimate, we analyze historical payment performance and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Accounts receivable are written off as a decrease to the allowance for doubtful accounts when all collection efforts have been exhausted and an account is deemed uncollectible.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and investments in highly liquid instruments in accordance with our investment policy. We place the majority of our cash and cash equivalents and restricted cash with financial institutions in the United States that we believe to be of high credit quality, and accordingly minimal credit risk exists with respect to these instruments. Certain of our cash balances held with a financial institution are in excess of Federal Deposit Insurance Corporation limits. Our investment portfolio consists of investments diversified among security types, industries and issuers. Our investments were held and managed by recognized financial institutions that followed our investment policy with the main objective of preserving capital and maintaining liquidity.
Concentrations of credit risk with respect to accounts receivables exist to the full extent of amounts presented in the financial statements. We had one customer, in each year,no customers that represented 11%over 10% of our net accounts receivable balance as of December 31, 20192021 and 2018.we had one customer that represented 10% of our net accounts receivable balance as of December 31, 2020. No customers represented over 10% of net revenues during the years ended December 31, 2019, 20182021, 2020 or 20172019.
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Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and content amortization. Depreciation and content amortization are computed using the straight-line method over the following estimated useful lives of the assets:
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| Classification | | Useful Life |
Computers and equipmentContent | | 3 years |
Internal-use software and website development | | 3 years |
Furniture and fixtures | | Shorter of the licensed content term or the estimated useful life of 5 years |
| Leasehold improvements | | Shorter of the remaining lease term or the estimated useful life of 5 years |
Content | | Shorter of the licensed content term or the estimated useful life of |
| Internal-use software and website development | | 3 years |
| Furniture and fixtures | | 5 years |
| Computers and equipment | | 3 years |
Depreciation and content amortization expense are generally classified within the corresponding cost of revenues and operating expenses categories inon our consolidated statements of operations. Depreciation and content amortization expense during the years ended December 31, 2019, 2018, and 2017 were approximately $24.2 million, $16.8 million, and $13.8 million, respectively.
The cost of maintenance and repairs is expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in income (loss) from operations.
Internal-Use Software and Website Development Costs
We capitalize certain costs associated with software developed or obtained for internal use and website and application development. We capitalize costs when preliminary development efforts are successfully completed, management has authorized and committed project funding and it is probable that the project will be completed and the software will be used as intended. Such costs are amortized on a straight-line basis over a three year estimated useful life of the related asset. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred. Costs incurred for enhancements that are expected to result in additional material functionality are capitalized and amortized over the estimated useful life of the upgrades.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired through a business combination based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets acquired and liabilities assumed is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Goodwill and Indefinite-Lived Intangible Asset
Goodwill represents the excess of the fair value of purchase consideration paid over the estimated fair value of assets acquired and liabilities assumed in a business combination. Our indefinite-lived intangible asset represents the internships.com trade name. Goodwill and our indefinite-lived intangible asset are not amortized but rather tested for impairment at least annually on October 1, or more frequently if certain events or indicators of impairment occur between annual impairment tests. We first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. In our qualitative assessment, we consider factors including economic conditions, industry and market conditions and developments, overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of our reporting unit is less than the carrying amount. We completed our annual impairment test on October 1st of 20192021 and 2018,2020, each of which did not result in any impairment as our qualitative assessment did not indicate that it is more likely than not that the fair value of our reporting unit is less than the carrying amount. As of December 31, 2019 and 2018, we had goodwill of $214.5 million and $149.5 million, respectively, and an indefinite lived intangible asset related to the internships.com trade name of $3.6 million.
Acquired Intangible Assets and Other Long-Lived Assets
Acquired intangible assets with finite useful lives, which include developed technology, content library, customer lists, trade names, domain names, and non-compete agreements, are amortized over their estimated useful lives. We assess the impairment of acquired intangible assets and other long-lived assets when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and operating lease liabilities within current liabilities and long-term liabilities on our consolidated balance sheet.sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Our leases do not provide an implicit rate and therefore we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future minimum lease payments. Our incremental borrowing rate is estimated based on the estimated rate incurred to borrow, on a collateralized basis over a similar term as our leases, an amount equal to the lease payments in a similar economic environment. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. We do not record leases on our consolidated balance sheet with a term of one year or less. We do not separate lease and non-lease components but rather account for each separate component as a single lease component for all underlying classes of assets. Some of our leases include payments that are dependent on an index, such as the Consumer Price Index (CPI), and our minimum lease payments include payments based on the index at inception with any future changes in such indices recognized as an expense in the period of change. Where leases contain escalation clauses, rent abatements,abatement, or concessions, such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line operating lease cost over the lease term.
Strategic Investments
We have entered into strategic investments that are accounteddo not have readily determinable fair values and have elected to account for underthese investments at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the cost method andidentical or a similar investment of the same issuer, if any. Strategic investments are included in other assets on our consolidated balance sheets. We assess our strategic investments for impairment whenever events or changes in circumstances indicate that the strategic investmentsthey may be impaired. The factors we consider in our evaluation include, but are not limited to, a significant deterioration in the earnings performance or business prospects of the investee or factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations or working capital deficiencies. Additionally, starting in 2018 as a result of our adoption of Accounting Standards Update (ASU) 2016-01, we consider whether there have been any observable price changes in orderly transactions for identical or similar investments. During the years ended December 31, 2019, 2018, and 2017, we did not record any impairment charges in our strategic investments. There is a potential for charges in future periods if we determine that our strategic investments are impaired. During the years ended December 31, 2019 and 2018, there were no observable price changes in orderly transactions for the identical or similar investments of the same issuers.
Convertible Senior Notes, net
In August 2020, we issued $1.0 billion in aggregate principal amount of 0% convertible senior notes due in 2026 (2026 notes). In March 2019, we issued $700 million in aggregate principal amount of 0.125% convertible senior notes due in 2025 (2025 notes) and in April 2019, the initial purchasers fully exercised their option to purchase $100 million of additional 2025 notes for aggregate total gross proceeds of $800 million. In April 2018, we issued $345 million in aggregate principal amount
of 0.25% convertible senior notes due in 2023 (2023 notes). Collectively, the 2026 notes, 2025 notes, and the 2023 notes are
referred to as the “notes.” InThe notes, including the embedded conversion features, are accounted for under the traditional convertible debt accounting for theirmodel entirely as a liability net of unamortized issuance we separated the notes into liability and equity components.costs. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the carrying amount of the liability component from the par value of the notes. The difference represents the debt discount, recordedis classified as a reductioncurrent liability if we have committed to settle with current assets; otherwise, we classify it as a long-term liability as we retain the election to settle conversion requests in shares of the convertible senior notes on our consolidated balance sheet, and is amortized to interest expense over the term of the notes using the effective interest rate method.common stock. The equity component isembedded conversion features are not remeasured as long as it continues tothey do not meet the conditions for equity classification. In accounting for the issuance costsseparation requirement of a derivative; otherwise, they are classified as derivative instruments and recorded at fair value with changes in fair value recorded in other (expense) income, net on our consolidated statements of operations. The fair value of any derivative instruments related to the notes we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values.are determined utilizing Level 2 inputs. Issuance costs attributable to the liability component are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the notes. The issuance costs attributableIn accounting for conversions of the notes, the carrying amount of the converted notes is reduced by the total consideration paid or issued for the respective converted notes and the difference is recorded to additional paid-in capital on our consolidated balance sheets. In accounting for extinguishments of the notes, the reacquisition price of the extinguished notes is compared to the equity componentcarrying amount of the respective extinguished notes and a gain or loss is recorded in other (expense) income, net on our consolidated statements of operations.
Textbook Library
Beginning in January 2020, we began our transition back to print textbook ownership by purchasing print textbooks to establish our textbook library. We consider our print textbook library to be a long-term productive asset and, as such, classify it as a non-current asset on our consolidated balance sheets. All print textbooks in our textbook library are stated at cost, which includes the purchase price less accumulated depreciation. We write down textbooks on a book-by-book basis for lost, damaged, or excess print textbooks.
We depreciate our print textbooks, less an estimated salvage value, over an estimated useful life of four years using an accelerated method of depreciation, as we estimate this method most accurately reflects the actual pattern of decline in their economic value. The salvage value considers the historical trend and projected proceeds for print textbooks. The useful life is determined based on the estimated time period in which the print textbooks are held and rented. We review the estimated salvage value and useful life of our print textbook library on an ongoing basis.
Write-downs for print textbooks, print textbook depreciation expense, the gain or loss on print textbooks liquidated, and the net book value of print textbooks purchased by students at the end of the term or on a just-in-time basis are recorded in cost of revenues on our consolidated statements of operations and classified as a reductionadjustments to cash flows from operating activities. Cash outflows for the acquisition of print textbooks net of changes in related accounts payable and accrued liabilities, and cash inflows received from the equity component within additional paid-in capital.proceeds from the disposition of print textbooks net of changes in related accounts receivable, are classified as cash flows from investing activities on our consolidated statements of cash flows.
Revenue Recognition and Deferred Revenue
We recognize revenues from our Chegg Services and Required Materials offerings when the control of the goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenues are presented net of sales tax collected from customers to be remitted to governmental authorities and net of allowances for estimated cancellations and customer returns, which are based on historical data. Customer refunds from cancellations and returns are recorded as a reduction to revenues.
We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy a performance obligation
We generate revenues from our Chegg Services product line which primarily throughincludes Chegg Study, Chegg Writing, Chegg Tutors,Math Solver, Chegg Study Pack, Mathway and Thinkful. Revenues from Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack, and Thinkful. Chegg ServicesMathway are offered to students primarily through weekly or monthly subscriptions, and we recognize revenuesrecognized ratably over the respectivemonthly subscription period. Revenues from Thinkful our skills-based learning platform, are recognized either ratably over the term of the course, generally six months, or upon completion of the lessons, depending on the instruction type of the course.
Revenues from ourRequired Materials product line includes revenues from print textbooks that we own or that are owned by a partner as well as revenues from eTextbooks. Beginning in 2020, our Required Materials product line includes
operating leases with students for the rental of print textbooks that we own. Operating lease income is recognized as the total transaction amount, paid upon commencement of the lease, ratably over the lease term or rental term, generally a two- to five-month period. Students generally have the option to extend the term of their rental or purchase the print textbook at the end of the term otherwise the print textbook is returned to our print textbook library for future rental. If a student chooses to purchase or not return the print textbook at the end of their rental term, we charge the student for the book and recognize the revenues immediately. Additionally, we provide students the ability to purchase print textbooks on a just-in-time basis and recognize revenues immediately upon shipment. Revenues from print textbooks owned by a partner are recognized as a revenue share upon fulfillment, on the total transactionaltransaction amount of a rental andor sale transaction for print textbooks. The revenue share on the rental and sale of print textbooks is recognized immediately when a bookprint textbook ships to thea student. Shipping and handling activities are performed after we recognize revenues and we have elected to account for themexpensed as activities to fulfill a print textbook rental or sale order.incurred. Revenues from the rental of eTextbooks isare recognized ratably over the contractual period, generally a two- to five months. Revenues from the sale of eTextbooks is recognized immediately when the eTextbook sale occurs. Revenues are presented net of sales tax collected from customers to be remitted to governmental authorities and net of allowances for estimated cancellations and customer returns, which are based on historical data. Customer refunds from cancellations and returns are recorded as a reduction to revenues.five-month period.
Some of our customer arrangements include multiple performance obligations. We have determined these performance obligations qualify as distinct performance obligations, as the customer can benefit from the service on its own or together with other resources that are readily available to the customer, and our promise to transfer the service is separately identifiable from other promises in the contract. For these arrangements that contain multiple performance obligations, we allocate the transaction price based on the relative standalone selling price (SSP) method by comparing the standalone selling price (SSP)SSP of each distinct performance obligation to the total value of the contract. We determine the SSP based on our historical pricing and discounting practices for the distinct performance obligation when sold separately. If the SSP is not directly observable, we estimate the SSP by considering information such as market conditions, and information about the customer. Additionally, we limit the amount of revenues recognized for delivered promises to the amount that is not contingent on future delivery of services or other future performance obligations.
Our agreements with print textbook partnersSome of our customer arrangements may include an amount of variable consideration in addition to a fixed revenue share that we earn. This variable consideration can either increase or decrease the total transaction price depending on the nature of the variable consideration. We estimate the amount of variable consideration that we will earn at the inception of the contract, adjusted during each period, and include an estimated amount each period.
For sales of third-party products, we evaluate whether we are acting as a principal or an agent, and therefore would recordagent. Where our role in a transaction is that of principal, revenues are recognized on a gross basis. This requires revenue to comprise the gross sales amount as revenues andvalue of the transaction billed to the customer, after trade discounts, with any related costs or the net amount earnedexpenditure charged as a revenue share fromcost of revenues. Where our role in a transaction is that of an agent, revenues are recognized on a net basis with revenues representing the sale of third-
party products.margin earned. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. When deciding the most appropriate basis for presenting revenues or costs of revenues, both the legal form and substance of the agreement between us and our business partners are reviewed to determine each party’s respective role in the transaction. In relation to print textbook rental and sale agreements with our partners,textbooks owned by a partner, we recognize revenues on a net basis based on our role in the transaction as an agent as we have concluded that we do not control the use of the print textbooks, and therefore record only the net revenue share we earn upon the shipment of a print textbook to a student. For the rental or sale of eTextbooks, weearn. We have concluded that we control our Chegg Services, print textbooks that we own for rental, purchase at the end of the rental term, or sale on a just-in-time basis, and eTextbook service and therefore we recognize revenues and cost of revenues on a gross basis ratably over the term the student has access to the eTextbook.basis.
Contract assets are contained within other current assets and other assets on our consolidated balance sheets. Contract assets represent the goods or services that we have transferred to a customer before invoicing the customer.customer and primarily consist of the income sharing payment arrangements we offer to students for our Thinkful service. Contract receivables are contained within accounts receivable, net on our consolidated balance sheets and represent unconditional consideration that will be received solely due to the passage of time. Contract liabilities are contained within deferred revenue on our consolidated balance sheets. Deferred revenue primarily consists of advanced payments from students related to rental and subscription performance obligations that have not been satisfied and estimated variable consideration. Deferred revenue related to rental and subscription performance obligations is recognized as revenues ratably over the term for subscriptions or when the services are provided and all other revenue recognition criteria have been met. Deferred revenue related to variable consideration is recognized as revenues during each reporting period based on the estimated amount we believe we will earn over the life of the contract.
We have elected a practical expedient to record incremental costs to obtain or fulfill a contract when the amortization period would have been one year or less as incurred. These incremental costs primarily relate to sales commissions costs and are recorded in sales and marketing expense on our consolidated statements of operations.
Cost of Revenues
Our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and services. Cost of revenues primarily consists of publisher content fees for eTextbooks, content amortization expense related to content that we develop, license from publishers for which we pay one-time license fees, or acquire through acquisitions, web hosting fees, customer support fees, payment processing costs, amortization of acquired intangible assets, order fulfillment fees primarily related to outbound shipping and fulfillment as well as publisher content fees for eTextbooks, write-downs for print textbooks, the payments made to tutors through our Chegg Tutors service,gain or loss on print textbooks liquidated, the net book value of print textbooks purchased by students at the end of the term or on a just-in-time basis, print textbook depreciation expense, personnel costs and other direct costs related to providing content or services. In addition, cost of revenues includes allocated information technology and facilities costs.
Research and Development Costs
Our research and development expenses consist of salaries, benefits, and share-based compensation expense for employees on our product, engineering, and technical teams who are responsible for maintaining our website, developing new products, and improving existing products. Research and development costs also include amortization of acquired intangible assets, depreciation expense, technology costs to support our research and development, and outside services, and allocated information technology and facilities expenses.services. We expense substantially all of our research and development expenses as they are incurred.
Advertising Costs
Advertising costs are expensed as incurred and consist primarily of online advertising and marketing promotional expenditures. During the years ended December 31, 2019, 2018,2021, 2020, and 2017,2019, advertising costs were approximately $24.4$45.1 million, $17.9$35.3 million and $16.5$24.4 million, respectively.
Restructuring Charges
Restructuring charges are primarily comprised of severance costs, contract and program termination costs, asset impairments, and costs of facility consolidation and closure. Restructuring charges are recorded upon approval of a formal management plan and are included in the results of operations of the period in which such plan is approved and the expense becomes estimable. To estimate restructuring charges, management utilizes assumptions of the number of employees that would be involuntarily terminated and of future costs to operate and eventually vacate duplicate facilities. Severance and other employee separation costs are accrued when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on our policies and practices and negotiated settlements. Restructuring charges for employee workforce reductions are recorded upon employee notification for employees whose required continuing service period is 60 days or less and ratably over the employee’s continuing service period for employees whose required continuing service period is greater than 60 days.
Share-based Compensation Expense
Share-based compensation expense for stock options, restricted stock units (RSUs), performance-based restricted stock units (PSUs), with either a market-based condition or financial and strategic performance targets, and the employee stock purchase plan (ESPP) areis accounted for under the fair value method which requires us to measure the cost of share-based compensation awards based on the grant-date fair value of the award. Share-based compensation expense for our ESPP is estimated at the date of grant using the Black-Scholes-Merton option pricing model while RSUs and PSUs arewith financial and strategic performance targets is measured based on the closing fair market value of the Company’sour common stock, onPSUs with a market-based condition are estimated using a Monte Carlo simulation model, and ESPP is estimated using the date of grant.Black-Scholes-Merton option pricing model. We recognize share-based compensation expense on a straight-line basis for RSUs and ESPP and on a graded basis for PSUs. Vesting for all awards is subject to continued service over the requisite service period, which is generally the vesting period, onperiod. Vesting of PSUs with a straight-line basis for ESPP and RSUs and on a graded basis for PSUs, contingent onmarket-based condition is also subject to the achievement of certain per share price of our common stock targets and vesting of PSUs with financial and strategic performance conditions.targets is also subject to our achievement of specified financial and strategic performance targets. RSUs and PSUs are converted into shares of our common stock upon vesting on a 1-for-one basis. RSUs typically vest over three or four years, while PSUs with a market-based condition typically vest over a four-year period and PSUs with financial and strategic performance targets typically vest over a three-year period. Share-based compensation expense for PSUs with a market-based condition is recognized regardless of whether the market condition is satisfied whereas share-based compensation expense for PSUs with financial performance targets is recognized upon estimated or actual achievement of such targets. We assess the achievement of financial and strategic performance targets on a quarterly basis and adjust our share-based compensation expense as appropriate. These amounts are reduced by estimated forfeitures, which are estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Income Taxes
We account for income taxes under an asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to an amount that is more likely than not to be realized. We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of technical merits of the position and (2) for those tax positions that meet the more likely than not recognition threshold, we recognize the tax benefit as the largest amount that is cumulative more than 50% likely to be realized upon ultimate settlement with the related tax authority. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted averageweighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by adjusting net loss for all related interest expense and gains and losses recognized during the period, net of tax, and giving effect to all potential shares of common stock, including stock options, PSUs, RSUs, PSUs, and shares related to convertible senior notes, to the extent dilutive. BasicThis assumes that all stock options and diluted net loss per share wasdilutive convertible shares were exercised or converted and is computed by applying the sametreasury stock method for eachoutstanding stock options, PSUs, and RSUs, and the if-converted method for outstanding convertible senior notes. Under the treasury stock method, options, PSUs, and RSUs are assumed to be exercised or vested at the beginning of the period presented(or at the time of issuance, if later) and as the inclusion of all potential common shares outstanding would have been anti-dilutive.
The following table sets forth the computation of historical basic and diluted net loss per share (in thousands, except per share amounts):
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| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Net loss | $ | (9,605 | ) | | $ | (14,888 | ) | | $ | (20,283 | ) |
| Denominator: | | | | | |
| Weighted average shares used to compute net loss per share, basic and diluted | 119,204 |
| | 113,251 |
| | 100,022 |
|
| | | | | | |
| Net loss per share, basic and diluted | $ | (0.08 | ) | | $ | (0.13 | ) | | $ | (0.20 | ) |
The following potential weighted-average shares ofif funds obtained thereby were used to purchase common stock outstanding were excluded fromat the computation of diluted net loss per share because including them would have been anti-dilutive (in thousands):
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Options to purchase common stock | 2,395 |
| | 4,045 |
| | 3,045 |
|
| RSUs and PSUs | 4,699 |
| | 7,946 |
| | 153 |
|
| Shares related to convertible senior notes | 3,526 |
| | — |
| | — |
|
| Employee stock purchase plan | — |
| | — |
| | 5 |
|
| Total common stock equivalents | 10,620 |
| | 11,991 |
| | 3,203 |
|
Shares related toaverage market price during the period. Under the if-converted method, outstanding convertible senior notes represent the anti-dilutive impact of our issuance of $345 million in aggregate principal amount of our 2023 notes as the average price of ourare assumed to be converted into common stock duringat the year ended December 31, 2019 was higher than the conversion price of $26.95. While these shares were anti-dilutive during the year ended December 31, 2019, they may be dilutive in periods we report net income. However, as a resultbeginning of the capped call transactions, there will be no economic dilution fromperiod (or at the 2023 notes up to $40.68, as exercisetime of the capped call instruments will reduce dilution from the 2023 notes that would have otherwise occurred when the average price of our common stock exceeds the conversion price. None of the shares related to our issuance, of $800 million in aggregate principal amount of our 2025 notes were anti-dilutive during the year ended December 31, 2019. The average price of our common stock during the year ended December 31, 2019 was lower than the conversion price of our 2025 notes of $51.56. See Note 10, “Convertible Senior Notes”, for more information about our convertible senior notes.if later).
Foreign Currency Translation
The functional currency of our foreign subsidiaries is the local currency. Adjustments resulting from the translation of foreign currencies into U.S. dollars for balance sheet amounts are based on the exchange rates as of the consolidated balance sheet date. Revenues and expenses are translated at average exchange rates during the period. Foreign currency translation gains or losses are included in accumulated other comprehensive loss(loss) income as a component of stockholders’ equity on the consolidated balance sheets. Gains or losses resulting from the remeasurement of foreign currency transactions, which are denominated in currencies other than the entity’s functional currency, are included in other income, net ingeneral and administrative expense on the consolidated statements of operations and were not material during the years ended December 31, 2019, 20182021, 2020 or 2017.2019.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019,October 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12,2021-08, Income TaxesBusiness Combinations-Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 740): Simplifying805). 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. Early adoption is permitted. We will early adopt ASU 2021-08 on January 1, 2022 and will apply it prospectively to all business combinations for which the acquisition date occurs on or after such date, such as our acquisition of Busuu. The impact on our financial statements will depend on the contract assets and contract liabilities acquired in business combinations after January 1, 2022. We believe the most significant impacts will be an increase in contract liabilities and goodwill on our consolidated balance sheets.
In May 2021, the FASB issued ASU 2021-04, Issuer’s Accounting for Income Taxes.Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2019-12 key changes include hybrid tax regimes, intraperiod tax allocation exception,2021-04 aims to clarify and interim-periodreduce diversity in an issuer’s accounting for enacted changes in tax law.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 including adoption in any interim periodand the guidance must be applied prospectively to all modifications or annual reports for which financial statements have not yet been made available for issuance.exchanges that occur on or after the date of adoption. The guidance is effective for annual periods beginning after December 15, 2020, and we are currently in the process of evaluating the impact of this guidance.
The FASB issued four ASUs related to Accounting Standards Codification (ASC) 326. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 2019-11 provides codification updates to ASU 2016-13. In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. ASU 2019-05 provides entities with an option to irrevocably elect the fair value option for eligible instruments. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 provides codification updates to ASU 2016-01 and ASU 2016-13. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the existing incurred loss impairment model for trade receivables with an expected loss model which requires the use of forward-looking information to calculate expected credit loss estimates. Additionally, the concept of other-than-temporary impairment for available-for-sale investments is eliminated and instead ASU 2016-13 requires an entity to focus on determining whether any impairment is a result of a credit loss or other factors. It also requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction to the amortized cost basis. These changes may result in earlier recognition of credit losses. These guidance updates require for a modified retrospective adoption, though a prospective method of adoption is required for available-for-sale debt securities for which an other-than-temporary impairment had been recognized before the effective date. We will adopt the guidance on January 1, 2020. We expect to record an immaterial cumulative-effect adjustment for trade receivables to the opening balance of accumulated deficit and we do not expect our adoption to have an ongoing material impact to our consolidated statements of operations. Beginning January 1, 2020, we will assess our available-for-sale debt securities for credit losses and recognize an allowance for credit losses with any improvements in estimated credit losses recognized immediately in earnings. These are preliminary estimates that are subject to change as we finalize our adoption.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with existing guidance contained within subtopic 350-40 to develop or obtain internal-use software.2021. We will adopt ASU 2018-152021-04 on January 1, 2020 under the prospective method of adoption. We2022 and do not expect our adoption to have a material impact toon our consolidatedfinancial statements as a result of operations and consolidated balance sheets.the adoption.
Recently Adopted Accounting Pronouncements
The FASB issued four ASUs related to ASC 842. In March 2019,August 2020, the FASB issued ASU 2019-01,2020-06, Leases (Topic 842): Codification Improvements. Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. ASU 2020-06 simplifies the guidance in ASC 470-20, Debt - Debt with Conversion and Other Options. Under ASU 2020-06, convertible instruments with embedded conversion features, that are not required to be accounted for as a derivative or that do not result in a substantial premium, are no longer required to be separated from the host contract thereby eliminating the cash conversion feature model. Instead, these convertible debt instruments will be accounted for as a single liability measured at amortized cost under the traditional convertible debt accounting model. ASU 2020-06 also requires the if-converted method to be applied for all convertible instruments when calculating diluted earnings per share. We adopted ASU 2020-06 on January 1, 2021 under the modified retrospective method applied to convertible senior notes outstanding as of January 1, 2021 and have not changed previously disclosed amounts or provided additional disclosures for comparative periods. Adoption of ASU 2020-06 resulted in an increase to convertible senior notes of $378.1 million and a decrease to additional paid-in capital of $465.0 million due to the application of the traditional convertible debt model and no longer separating the
embedded conversion feature. Accumulated deficit also decreased by $86.9 million due to the reduction in non-cash interest expense related to the debt discount and we expect interest expense to decrease in future periods. Refer to Note 10, “Convertible Senior Notes” for more information.
In July 2018,March 2020, the FASB issued ASU 2018-11,2020-04, Leases (Topic 842): Targeted Improvements and ASU 2018-10, Codification Improvements to Topic 842, LeasesFacilitation of the Effects of Reference Rate Reform on Financial Reporting. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASC 842 requires an entity2020-04 provides temporary optional expedients and exceptions for applying reference rate reform to recognize a right of use (ROU) assetcontracts, hedging relationships, and lease liability for all leases with terms of more than 12 months.other transactions affected by reference rate reform if certain criteria are met. The guidance is required to be applied immediately and only applies to contract modifications made or hedging relationships entered into or evaluated before December 31, 2022. We adopted the guidance on January 1, 2019 under the optional transition method whereby we initially applied the new standard at the adoption date and recognized a cumulative-effect adjustment to the opening balance sheet of accumulated deficit in the period of adoption without restating prior periods. We recorded ROU assets of $17.2 million and lease liabilities of $21.1 million on our consolidated balance sheet. ASC 842 diddo not have aany hedging relationships and currently do not have material impactcontracts impacted by reference rate reform, however, we will continue to our consolidated statements of operations. Adoption of the new standard resulted in changes to our accounting policy for leases. See Note 11, “Leases”, for more information.assess contracts through December 31, 2022.
Note 3. Revenues
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The majority of our revenues are recognized over time as services are performed, with certain revenues most significantly the revenue share we earn from our print textbook partners, being recognized at thea point in time when print textbooks are shipped to students.time.
The following table sets forth our total net revenues for the periods shown disaggregated for our Chegg Services and Required Materials product lines (in thousands, except percentages):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change in 2019 | | Change in 2018 |
| | 2019 | | 2018 | | 2017 | | $ | | % | | $ | | % |
| Chegg Services | $ | 332,221 |
| | $ | 253,985 |
| | $ | 185,683 |
| | $ | 78,236 |
| | 31 | % | | $ | 68,302 |
| | 37 | % |
| Required Materials | 78,705 |
| | 67,099 |
| | 69,383 |
| | 11,606 |
| | 17 |
| | (2,284 | ) | | (3 | ) |
| Total net revenues | $ | 410,926 |
| | $ | 321,084 |
| | $ | 255,066 |
| | $ | 89,842 |
| | 28 |
| | $ | 66,018 |
| | 26 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change in 2021 | | Change in 2020 |
| | 2021 | | 2020 | | 2019 | | $ | | % | | $ | | % |
| Chegg Services | $ | 669,894 | | | $ | 521,228 | | | $ | 332,221 | | | $ | 148,666 | | | 29 | % | | $ | 189,007 | | | 57 | % |
| Required Materials | 106,371 | | | 123,110 | | | 78,705 | | | (16,739) | | | (14) | | | 44,405 | | | 56 | |
| Total net revenues | $ | 776,265 | | | $ | 644,338 | | | $ | 410,926 | | | $ | 131,927 | | | 20 | | | $ | 233,412 | | | 57 | |
During the yearyears ended December 31, 2021, 2020, and 2019, we recognized $32.6 million, $18.3 million and $17.0 million, respectively, of revenues that were included in our deferred revenue balance asat the beginning of December 31, 2018.each respective fiscal year. During the year ended December 31, 2018,2021, we recognized $11.7 milliona reduction of revenues that were includedof $4.9 million from performance obligations satisfied in our deferred revenue balance as ofprevious periods primarily due to a change in the estimated variable consideration ascribed to Thinkful. During the year ended December 31, 2017.2020, we recognized an immaterial amount from performance obligations satisfied in previous periods. During the year ended December 31, 2019, we recognized $3.4 million of previously deferred revenues recognized from performance obligations satisfied in previous periods related to variable consideration recognized from our agreement with our Required Materials print textbook partner. During the yearyears ended December 31, 2018,2021 and 2020, we recognized an immaterial amount$34.6 million and $50.8 million, respectively, of previously deferred revenues recognizedoperating lease income from performance obligations satisfied in previous periods. The aggregate amount of unsatisfied performance obligations is approximately $18.8 million as of December 31, 2019, which are expected to be recognized into revenues over the next year.print textbook rentals that we own.
Contract Balances
The following table presents our accounts receivable, net, contract assets, and deferred revenue and contract asset balances (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Change |
| | 2021 | | 2020 | | $ | | % |
| Accounts receivable, net | $ | 17,850 | | | $ | 12,913 | | | $ | 4,937 | | | 38 | % |
| Contract assets | 14,231 | | | 13,243 | | | 988 | | | 7 | |
| Deferred revenue | 35,143 | | | 32,620 | | | 2,523 | | | 8 | |
|
| | | | | | | | | | | | | | |
| | December 31, | | Change |
| | 2019 | | 2018 | | $ | | % |
| Accounts receivable, net | $ | 11,529 |
| | $ | 12,733 |
| | $ | (1,204 | ) | | (9 | )% |
| Deferred revenue | 18,780 |
| | 17,418 |
| | 1,362 |
| | 8 |
|
| Contract assets | 3,531 |
| | 337 |
| | 3,194 |
| | n/m |
|
n/m - not meaningful
During the year ended December 31, 2019,2021, our accounts receivable, net balance decreasedincreased by $1.2$4.9 million, or 9%38%, primarily due to timing of billings partially offset by an improvement in cash collections. During the year ended December 31, 2019, our deferred revenue balance increased by $1.4 million, or 8%, primarily due to increased bookings for our Chegg Study service and eTextbook rentals driven by the seasonality of our business. During the year ended December 31, 2019,2021, our contract assets balance increased by $3.2$1.0 million or 7%, primarily due to variable considerationour Thinkful service. During the year ended December 31, 2021, our deferred revenue balance increased by $2.5 million, or 8%, primarily due to increased bookings and payment arrangements for Thinkful.seasonality of our business.
Note 4. Net Loss Per Share
Adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
We adopted ASU 2020-06 on January 1, 2021 under the modified retrospective method applied to convertible senior notes outstanding as of January 1, 2021 and have not changed previously disclosed amounts or provided additional disclosures for comparative periods. ASU 2020-06 requires the if-converted method to be applied for all convertible instruments when calculating diluted earnings per share. Under the if-converted method, outstanding convertible senior notes are assumed to be converted into common stock at the beginning of the period (or at the time of issuance, if later).
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2021 | | 2020(1) | | 2019(1) |
| | | | | | | | | |
| Numerator: | | | | | | | | | |
| Net loss | | | | | $ | (1,458) | | | $ | (6,221) | | | $ | (9,605) | |
| Denominator: | | | | | | | | | |
| Weighted average shares used to compute net loss per share, basic and diluted | | | | | 141,262 | | | 125,367 | | | 119,204 | |
| | | | | | | | | |
| Net loss per share, basic and diluted | | | | | $ | (0.01) | | | $ | (0.05) | | | $ | (0.08) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1) As noted above, prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the modified retrospective method.
The following potential weighted-average shares of common stock outstanding were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
| Shares related to stock plan activity | | | | | 2,545 | | | 4,470 | | | 7,094 | |
| | | | | | | | | |
| Shares related to convertible senior notes | | | | | 23,300 | | | 4,942 | | | 3,526 | |
| | | | | | | | | |
| | | | | | | | | |
| Total common stock equivalents | | | | | 25,845 | | | 9,412 | | | 10,620 | |
Note 5. Cash and Cash Equivalents, and Investments and Fair Value Measurements
The following table showstables show our cash and cash equivalents, and investments’ fair value level classification, adjusted cost, unrealized gain, unrealized loss and fair value as of December 31, 20192021 and 20182020 (in thousands)thousands, except for fair value level):
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value |
| Cash and cash equivalents: | | | | | | | |
| Cash | $ | 241,355 |
| | $ | — |
| | $ | — |
| | $ | 241,355 |
|
| Money market funds | 146,165 |
| | — |
| | — |
| | 146,165 |
|
| Total cash and cash equivalents | $ | 387,520 |
| | $ | — |
| | $ | — |
| | $ | 387,520 |
|
| Short-term investments: | | | | | | | |
| Commercial paper | $ | 7,489 |
| | $ | — |
| | $ | — |
| | $ | 7,489 |
|
| Corporate securities | 318,946 |
| | 425 |
| | (78 | ) | | 319,293 |
|
| U.S. treasury securities | 44,251 |
| | 39 |
| | (4 | ) | | 44,286 |
|
| Agency bond | 10,000 |
| | 6 |
| | — |
| | 10,006 |
|
| Total short-term investments | $ | 380,686 |
| | $ | 470 |
| | $ | (82 | ) | | $ | 381,074 |
|
| Long-term investments | | | | | | | |
| Corporate securities | $ | 295,103 |
| | $ | 533 |
| | $ | (158 | ) | | $ | 295,478 |
|
| Agency bond | 14,999 |
| | 6 |
| | — |
| | 15,005 |
|
| Total long-term investments | $ | 310,102 |
| | $ | 539 |
| | $ | (158 | ) | | $ | 310,483 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value |
| Cash and cash equivalents: | | | | | | | |
| Cash | $ | 351,345 |
| | $ | — |
| | $ | — |
| | $ | 351,345 |
|
| Money market funds | 5,052 |
| | — |
| | — |
| | 5,052 |
|
| Commercial paper | 18,267 |
| | — |
| | — |
| | 18,267 |
|
| Total cash and cash equivalents | $ | 374,664 |
| | $ | — |
| | $ | — |
| | $ | 374,664 |
|
| Short-term investments: | | | | | | | |
| Commercial paper | $ | 40,500 |
| | $ | — |
| | $ | (12 | ) | | $ | 40,488 |
|
| Corporate securities | 38,616 |
| | — |
| | (87 | ) | | 38,529 |
|
| U.S. treasury securities | 14,333 |
| | — |
| | (5 | ) | | 14,328 |
|
| Total short-term investments | $ | 93,449 |
| | $ | — |
| | $ | (104 | ) | | $ | 93,345 |
|
| Long-term investments | | | | | | | |
| Corporate securities | $ | 14,429 |
| | $ | 9 |
| | $ | (14 | ) | | $ | 14,424 |
|
| U.S. treasury securities | 1,630 |
| | — |
| | (2 | ) | | 1,628 |
|
| Total long-term investments | $ | 16,059 |
| | $ | 9 |
| | $ | (16 | ) | | $ | 16,052 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Fair Value Level | | Adjusted Cost | | Unrealized Gain | | Unrealized Loss | | Fair Value |
| Cash and cash equivalents: | | | | | | | | | |
| Cash | | | $ | 15,054 | | | $ | — | | | $ | — | | | $ | 15,054 | |
| Money market funds | Level 1 | | 464,799 | | | — | | | — | | | 464,799 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total cash and cash equivalents | | | $ | 479,853 | | | $ | — | | | $ | — | | | $ | 479,853 | |
| Short-term investments: | | | | | | | | | |
| Commercial paper | Level 2 | | $ | 204,152 | | | $ | 24 | | | $ | (6) | | | $ | 204,170 | |
| Corporate debt securities | Level 2 | | 459,967 | | | 1,478 | | | (48) | | | 461,397 | |
| | | | | | | | | |
| | | | | | | | | |
| Total short-term investments | | | $ | 664,119 | | | $ | 1,502 | | | $ | (54) | | | $ | 665,567 | |
| Long-term investments: | | | | | | | | | |
| Corporate debt securities | Level 2 | | $ | 484,275 | | | $ | 605 | | | $ | (283) | | | $ | 484,597 | |
| Agency bonds | Level 2 | | 38,995 | | | 36 | | | — | | | 39,031 | |
| Total long-term investments | | | $ | 523,270 | | | $ | 641 | | | $ | (283) | | | $ | 523,628 | |
As of December 31, 2021, we determined that the declines in the market value of our investment portfolio were not driven by credit related factors. During the years ended December 31, 2021 and 2020 we did not recognize any losses on our investments due to credit related factors. During the years ended December 31, 2021, 2020 and 2019, our gross realized gains and losses on investments were not significant.
The following table shows our cash equivalents and investments' adjusted cost and fair value of investmentsby contractual maturity as of December 31, 2019 by contractual maturity were as follows2021 (in thousands):
| | | | | | | | | | | |
| December 31, 2021 |
| | Cost | | Fair Value |
| Due in 1 year or less | $ | 692,320 | | | $ | 691,781 | |
| Due in 1-2 years | 749,377 | | | 745,993 | |
| Investments not due at a single maturity date | 823,754 | | | 823,754 | |
| Total | $ | 2,265,451 | | | $ | 2,261,528 | |
|
| | | | | | | |
| | December 31, 2019 |
| | Cost | | Fair Value |
| Due in 1 year or less | $ | 380,686 |
| | $ | 381,074 |
|
| Due in 1-2 years | 310,102 |
| | 310,483 |
|
| Investments not due at a single maturity date | 146,165 |
| | 146,165 |
|
| Total | $ | 836,953 |
| | $ | 837,722 |
|
Investments not due at a single maturity date in the preceding table consistconsisted of money market fund deposits.funds.
As of December 31, 2019, we considered the declines in market value of our investment portfolio to be temporary in nature and did not consider any of our investments to be other-than-temporarily impaired. We typically invest in highly-rated securities with a minimum credit rating of A- and a weighted average maturity of nine months, and our investment policy generally limits the amount of credit exposure to any one issuer or industry sector. The policy requires investments generally to be investment grade, with the primary objective of preserving capital and maintaining liquidity. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment’s cost basis. During the years ended December 31, 2019, 2018, and 2017 we did not recognize any other-than-impairment charges.
Restricted Cash
As of December 31, 2019 and 2018, we had approximately $1.9 million and $1.3 million, respectively, of restricted cash that primarily consists of security deposits for our corporate offices. As of December 31, 2019 and 2018, $0.1 million of restricted cash is classified in other current assets in our consolidated balance sheets. As of December 31, 2019 and 2018, $1.8 million and $1.2 million, respectively, of restricted cash is classified in other assets in our consolidated balance sheets. These amounts are classified based upon the term of the remaining restrictions.
Strategic Investments
In October 2018, we completed an investment of $10.0We previously invested $2.0 million in WayUp,TAPD, Inc., also known as Frank; a U.S.-based job site and mobile applicationservice that helps students access financial aid. In September 2021, we sold our investment in Frank for college students and recent graduates. Additionally, wetotal consideration of $9.2 million, resulting in a $7.2 million gain included within other (expense) income, net on our consolidated statements of operations. We received a cash payment of $9.0 million included within cash flows from investing activities on our consolidated statements of cash flows.
We also previously invested $3.0 million in a foreign entity to explore expanding our reach internationally. In March 2021, we sold our investment in that foreign entity for total consideration of $8.3 million, resulting in a $5.3 million gain included within other (expense) income, net on our consolidated statements of operations. We received a cash payment, net of taxes withheld, of $7.1 million included within cash flows from investing activities on our consolidated statements of cash flows.
We did not record any impairment charges on our strategic investments, other than a $10.0 million impairment charge previously recorded in 2020 on our strategic investment in WayUp, Inc., during the
years ended December 31, 2019, 2018,2021, 2020 and 2017,2019, as there were no significant identified events or changes in circumstances that would be considered an indicator for impairment. We considered general market conditions as a result of the COVID-19 pandemic in our impairment analysis. There were no observable price changes in orderly transactions for the identical or similar investments of the same issuers during the years ended December 31, 20192021, 2020 and 2018.
Note 5. Fair Value Measurement
We have established a fair value hierarchy used to determine the fair value of our financial instruments as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value; the inputs require significant management judgment or estimation.
A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Financial instruments measured and recorded at fair value on a recurring basis as2019. As of December 31, 2019 and 2018 are classified based2021, we had no amounts related to strategic investments recorded on the valuation technique level in the tables below (in thousands):our consolidated balance sheet.
|
| | | | | | | | | | | |
| | December 31, 2019 |
| | Total | | Level 1 | | Level 2 |
| Assets: | | | | | |
| Cash equivalents: | | | | | |
| Money market funds | $ | 146,165 |
| | $ | 146,165 |
| | $ | — |
|
| Short-term investments: | | | | | |
| Commercial paper | 7,489 |
| | — |
| | 7,489 |
|
| Corporate securities | 319,293 |
| | — |
| | 319,293 |
|
| U.S. treasury securities | 44,286 |
| | 44,286 |
| | — |
|
| Agency bonds | 10,006 |
| | — |
| | 10,006 |
|
| Long-term investments: | | | | | |
| Corporate securities | 295,478 |
| | — |
| | 295,478 |
|
| Agency bonds | 15,005 |
| | — |
| | 15,005 |
|
| Total assets measured and recorded at fair value | $ | 837,722 |
| | $ | 190,451 |
| | $ | 647,271 |
|
|
| | | | | | | | | | | |
| | December 31, 2018 |
| | Total | | Level 1 | | Level 2 |
| Assets: | | | | | |
| Cash equivalents: | | | | | |
| Money market funds | $ | 5,052 |
| | $ | 5,052 |
| | $ | — |
|
| Commercial paper | 18,267 |
| | — |
| | 18,267 |
|
| Short-term investments: | | | | | |
| Commercial paper | 40,488 |
| | — |
| | 40,488 |
|
| Corporate securities | 38,529 |
| | — |
| | 38,529 |
|
| U.S. treasury securities | 14,328 |
| | 14,328 |
| | — |
|
| Long-term investments: | | | | | |
| Corporate securities | 14,424 |
| | — |
| | 14,424 |
|
| U.S treasury securities | 1,628 |
| | 1,628 |
| | — |
|
| Total assets measured and recorded at fair value | $ | 132,716 |
| | $ | 21,008 |
| | $ | 111,708 |
|
We value our financial instruments based on quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. Other than our money market funds and U.S. treasury securities, we classify our financial instruments as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. We do not hold any financial instruments valued with a Level 3 input.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Financial Instruments Not Recorded at Fair Value on a Recurring Basis
We report our financial instruments at fair value with the exception of the notes. The estimated fair value of the notes was determined based on the trading price of the notes as of the last day of trading for the period. We consider the fair value of the notes to be a Level 2 measurement due to the limited trading activity. For further information on the notes seerefer to Note 10, “Convertible Senior Notes”.Notes.”
The carrying amounts and estimated fair values of the notes as of December 31, 20192021 and 20182020 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 (1) |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| 2026 notes | $ | 987,691 | | | $ | 840,000 | | | $ | 761,930 | | | $ | 1,129,370 | |
| 2025 notes | 690,464 | | | 682,202 | | | 640,614 | | | 1,456,800 | |
| 2023 notes | — | | | — | | | 104,378 | | | 376,949 | |
| Convertible senior notes, net | $ | 1,678,155 | | | $ | 1,522,202 | | | $ | 1,506,922 | | | $ | 2,963,119 | |
|
| | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| 2025 notes | $ | 602,611 |
| | $ | 831,000 |
| | $ | — |
| | $ | — |
|
| 2023 notes | 297,692 |
| | 523,538 |
| | 283,668 |
| | 416,156 |
|
| Convertible senior notes, net | $ | 900,303 |
| | $ | 1,354,538 |
| | $ | 283,668 |
| | $ | 416,156 |
|
The carrying amount of the 2026 notes and 2025 notes as of December 31, 2021 was net of unamortized issuance costs of $12.3 million and $9.5 million, respectively, and there is no carrying amount of the 2023 notes as we settled the principal amount of the 2023 notes during the year ended December 31, 2021. The carrying amount of the 2026 notes, 2025 notes and
2023 notes as of December 31, 20192020 was net of unamortized debt discount of $184.7$226.7 million, $149.1 million and $42.3$10.0 million, respectively, and unamortized issuance costs of $12.7$11.3 million, $10.2 million and $5.0$1.2 million, respectively. The carrying amount of the 2023 notes as of December 31, 2018 was net of unamortized debt discount of $54.8 million and unamortized issuance costs of $6.5 million.
Note 6. Long-Lived Assets
Textbook Library, Net
Textbook library, net consisted of the following (in thousands):
| | | | | | | | | | | |
| | | |
| December 31, |
| 2021 | | 2020 |
| Textbook library | $ | 27,569 | | | $ | 47,293 | |
| Less accumulated depreciation | (16,328) | | | (13,144) | |
| Textbook library, net | $ | 11,241 | | | $ | 34,149 | |
During the years ended December 31, 2021 and December 31, 2020, print textbook depreciation expense was approximately $10.9 million and $15.4 million, respectively. During the year ended December 31, 2021, net loss on textbook library was approximately $11.0 million, primarily due to increased write-downs, and during the year ended December 31, 2020, net gain on textbook library was approximately $1.5 million.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Content | $ | 258,005 | | | $ | 181,938 | |
| Internal-use software and website development | 29,711 | | | 15,646 | |
| Leasehold improvements | 19,913 | | | 19,574 | |
| Furniture and fixtures | 4,352 | | | 3,891 | |
| Computer and equipment | 3,370 | | | 3,368 | |
| Property and equipment | 315,351 | | | 224,417 | |
| Less accumulated depreciation and amortization | (145,413) | | | (98,610) | |
| Property and equipment, net | $ | 169,938 | | | $ | 125,807 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Computer and equipment | $ | 3,355 |
| | $ | 3,140 |
|
| Internal-use software and website development | 7,552 |
| | 4,043 |
|
| Furniture and fixtures | 3,640 |
| | 2,912 |
|
| Leasehold improvements | 17,738 |
| | 14,167 |
|
| Content | 122,670 |
| | 90,816 |
|
| Property and equipment | 154,955 |
| | 115,078 |
|
| Less accumulated depreciation and amortization | (67,596 | ) | | (55,174 | ) |
| Property and equipment, net | $ | 87,359 |
| | $ | 59,904 |
|
Note 7. Acquisitions
2022 Acquisition
On January 13, 2022, we completed our acquisition of 100% of the outstanding shares of Busuu Online S.L. (Busuu), an online language learning company that offers a comprehensive solution through a combination of self-paced lessons, live classes with expert tutors and the ability to learn and practice with members of the Busuu language learning community, for approximately $417 million in an all-cash transaction. The acquisition helps to expand our existing offerings and global reach through language learning, allowing us to drive further into international markets. There are additional payments of up to $25 million, subject to continued service of certain key employees of Busuu, that are not included in the fair value of the purchase consideration. During the year ended December 31, 2021, we incurred $5.3 million of acquisition-related expenses associated with our acquisition of Busuu, which have been included in general and administrative expense on our consolidated statements of operations. We plan to account for the acquisition as a business combination and the initial accounting for this acquisition, including the valuation of acquired tangible and intangibles assets and liabilities assumed, is in process as of the issuance date for our financial statements, therefore, we are unable to make any additional disclosures.
2021 Acquisition
On February 22, 2021, we completed an acquisition, accounted for as a business combination, of 100% of the outstanding shares of a company for a technology that will strengthen our content creation abilities for a purchase consideration of $8.0 million in cash. Our total allocation of purchase consideration included acquired assets of $0.4 million, acquired developed technology intangible asset of $3.3 million and goodwill of $5.3 million less assumed liabilities of $1.0 million. This acquisition did not have a material impact on our consolidated financial statements and is not expected to have a material impact in future periods.
2020 Acquisition
On June 4, 2020, we completed our acquisition of 100% of the outstanding shares of Mathway, LLC (Mathway), an online, on-demand math problem solving company that provides a vast range of subject areas in mathematics, including pre-algebra, algebra, trigonometry, pre-calculus, calculus, and linear algebra, and related disciplines. This acquisition helps to strengthen our Chegg Math service with the addition of new subjects, languages, and international reach. The total fair value of the purchase consideration was $101.0 million, of which $93.5 million was paid in cash on the acquisition date and $7.5 million was held in escrow as security for general representations and warranties and potential post-closing adjustments. The escrow amount was released in September 2021.
The Mathway purchase agreement provides for additional payments of up to $15.0 million, subject to the achievement of specified milestones and continued employment of the sellers. These payments are not included in the fair value of the purchase consideration but rather are expensed ratably as acquisition-related compensation costs classified as research and development and general and administrative expenses, based on the seller's job function, on our consolidated statement of operations. During the year ended December 31, 2021, the milestones were met. As of December 31, 2021 and 2020, we have recorded approximately $0.4 million and $2.9 million, respectively, within accrued liabilities on our consolidated balance sheets for these payments.
The following table presents the total allocation of purchase consideration recorded on our consolidated balance sheet as of the acquisition date (in thousands):
| | | | | |
| Mathway |
| Cash | $ | 712 | |
| Accounts receivable | 1,132 | |
| Other acquired assets | 779 | |
| Acquired intangible assets | 30,320 | |
| Total identifiable assets acquired | 32,943 | |
| Deferred revenue | (1,423) | |
| Liabilities assumed | (727) | |
| Net identifiable assets acquired | 30,793 | |
| Goodwill | 70,167 | |
| Total fair value of purchase consideration | $ | 100,960 | |
Goodwill is primarily attributable to the potential for enhancing our existing offerings and expanding our reach by providing additional mathematics support for students and helping them through their academic journey. The amounts recorded for intangible assets and goodwill are deductible for tax purposes.
The following table presents the details of the allocation of purchase consideration to the acquired intangible assets (in thousands, except weighted-average amortization period):
| | | | | | | | | | | |
| Mathway |
| Amount | | Weighted-Average Amortization Period (in months) |
| Trade name | $ | 520 | | | 18 |
| Domain names | 220 | | | 18 |
| Customer lists | 6,220 | | | 48 |
| Developed technology | 23,360 | | | 84 |
| Total acquired intangible assets | $ | 30,320 | | | 75 |
During the year ended December 31, 2020, we incurred $3.1 million of acquisition-related expenses associated with our acquisition of Mathway, which have been included in general and administrative expense on our consolidated statement of operations. We have recorded immaterial amounts of revenue and earnings from Mathway during the period since the acquisition date through December 31, 2020.
The following unaudited supplemental pro forma net loss is for informational purposes only and presents our combined results as if the acquisition of Mathway had occurred on January 1, 2019. The unaudited supplemental pro forma information includes the historical combined operating results adjusted for acquisition-related compensation costs, amortization of intangible assets, share-based compensation expense and acquisition-related expenses and does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of our future consolidated results. During the years ended December 31, 2020 and 2019, our supplemental pro forma net loss would have been $6.1 million and $27.3 million, respectively. Revenues from Mathway were immaterial during the years ended December 31, 2020 and 2019.
2019 Acquisition
On October 1, 2019, we completed our acquisition of 100% of the outstanding shares of Thinkful, Inc. (Thinkful), aour skills-based learning platform that offers professional courses in software engineering, data science, data analytics, product design, and product management directly to students across the United States to expand our existing offerings by adding affordable and high-quality courses focused on the most in-demand technology skills. The total fair value of the purchase consideration was $79.2 million, which was paid in cash and included an escrow amount of $9.0 million for general representations and warranties and potential post-closing adjustments. Any remainingThe escrow amount will bewas released 18 months after the acquisition date.in April 2021.
Included in the purchase agreement for the acquisition of Thinkful are additional payments of up to $20.0 million subject to the achievement of specified milestones and continued employment of key employees. These payments are not included in the fair value of the purchase consideration and are expensed ratably as acquisition related compensation costs classified as research and development, general and administrative, and sales and marketing expenses, based on the key employee's job function, on our consolidated statement of operations. These payments may be settled by us, at our sole discretion, either in cash or shares of our common stock. WeDuring the year ended December 31, 2020, the terms of the purchase agreement were amended such that the retention incentive was reduced to $12.8 million, half of which is subject to the achievement of specified milestones and payable in cash and half of which will be settled in equity grants, to adjust for employee departures. During the year ended December 31, 2021, the milestones were met and all cash payments were made therefore we have 0 amounts recorded approximately $3.0 million as of December 31, 2021. As of December 31, 2020 and 2019 we have recorded approximately $5.7 million and $3.0 million, respectively, included within accrued liabilities on our consolidated balance sheet for thesethe cash payments.
Goodwill is primarily attributable to the potential for expanding our existing offerings and reach by providing educational services for students and helping them through their professional journey. The amounts recorded for intangible assets and goodwill are not deductible for tax purposes.
The following table presents the preliminary total allocation of purchase consideration recorded inon our consolidated balance sheet as of the acquisition date (in thousands):
| | | | | |
| Thinkful |
| Cash | $ | 51 | |
| Accounts receivable | 547 | |
| Other acquired assets | 1,710 | |
| |
| |
| |
| |
| |
| |
| |
| Acquired intangible assets | 16,360 | |
| Total identifiable assets acquired | 18,668 | |
| Deferred revenue | (2,455) | |
| Liabilities assumed | (1,906) | |
| Net identifiable assets acquired | 14,307 | |
| Goodwill | 64,893 | |
| Total fair value of purchase consideration | $ | 79,200 | |
|
| | | |
| | Thinkful |
| Cash | $ | 51 |
|
| Accounts receivable | 547 |
|
| Other acquired assets | 1,710 |
|
| Acquired intangible assets | 16,360 |
|
| Total identifiable assets acquired | 18,668 |
|
| Deferred revenue | (3,044 | ) |
| Liabilities assumed | (1,605 | ) |
| Net identifiable assets acquired | 14,019 |
|
| Goodwill | 65,181 |
|
| Total fair value of purchase consideration | $ | 79,200 |
|
The following table presents the details of the allocation of purchase consideration to the acquired intangible assets (in thousands, except weighted-average amortization period):
| | | | | | | | | | | |
| Thinkful |
| Amount | | Weighted-Average Amortization
Period
(in months) |
| Trade name | $ | 4,430 | | | 48 |
| Domain names | 330 | | | 48 |
| Content library | 6,940 | | | 60 |
| Developed technology | 4,660 | | | 36 |
| Acquired intangible assets | $ | 16,360 | | | 50 |
During the year ended December 31, 2019, we incurred $1.0 million of acquisition-related expenses associated with our acquisition of Thinkful, which have been included in general and administrative expenses inon our consolidated statement of operations. During the year ended December 31, 2019, $8.6 million of our consolidated net loss was attributed byto Thinkful and we have recorded an immaterial amount of revenues during the period since the acquisition date.date through December 31, 2019.
The following unaudited supplemental pro forma net loss is for informational purposes only and presents our combined results as if the acquisition of Thinkful had occurred on January 1, 2018. The unaudited supplemental pro forma information includes the historical combined operating results adjusted for acquisition related compensation costs, amortization of intangible assets, share-based compensation expense and transaction expenses and does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of our future consolidated results. During the yearsyear ended December 31, 2019, and 2018, our supplemental pro forma net loss would have been $25.0 million and $38.6 million, respectively.million. Revenues from Thinkful were immaterial during the years ended December 31, 2019 and 2018.
2018 Acquisitions
On July 2, 2018, we acquired StudyBlue, Inc. (StudyBlue), a privately held online learning company that provides a content library that allows students to create flashcards and their own study materials. This acquisition helps strengthen our existing Chegg Services offerings by adding a substantial number of subject categories and a library of content to our learning platform. The total fair value of the purchase consideration was $20.4 million, which included an escrow amount of $3.3 million for general representations and warranties and post-closing adjustments, which was released in January 2020.
On May 15, 2018, we acquired WriteLab, Inc. (WriteLab), an AI-enhanced writing platform that teaches students grammar, sentence structure, writing style, and offers instant feedback to help students revise, edit, and improve their written work. This acquisition helps to strengthen Chegg Writing with the addition of new tools, features, and functionality. The total fair value of the purchase consideration was $14.5 million, which included an escrow amount of $2.6 million for general representations and warranties and potential post-closing adjustments, which was released in January 2020.
Included in the purchase agreement for the acquisition of WriteLab are additional payments of up to $5.0 million subject to continued employment of the sellers. These payments are not included in the fair value of the purchase consideration and are expensed ratably as research and development expenses on our consolidated statement of operations. These payments may be settled by us, at our sole discretion, either in cash or shares of our common stock. We have recorded approximately $1.0 million as of December 31, 2019 and 2018 included within accrued liabilities on our consolidated balance sheet for these payments.
Goodwill is primarily attributable to the potential for future product offerings as well as our expanded student reach. The amounts recorded for intangible assets and goodwill are not deductible for tax purposes.
The following table presents the total allocation of purchase consideration recorded in our consolidated balance sheets as of the acquisition date (in thousands):
|
| | | | | | | | | | | |
| | StudyBlue | | WriteLab | | Total |
| Cash | $ | 152 |
| | $ | 82 |
| | $ | 234 |
|
| Accounts receivable | 288 |
| | 194 |
| | 482 |
|
| Other acquired assets | 151 |
| | — |
| | 151 |
|
| Acquired intangible assets | 7,100 |
| | 4,450 |
| | 11,550 |
|
| Total identifiable assets acquired | 7,691 |
| | 4,726 |
| | 12,417 |
|
| Liabilities assumed | (1,309 | ) | | (897 | ) | | (2,206 | ) |
| Net identifiable assets acquired | 6,382 |
| | 3,829 |
| | 10,211 |
|
| Goodwill | 13,996 |
| | 10,677 |
| | 24,673 |
|
| Total fair value of purchase consideration | $ | 20,378 |
| | $ | 14,506 |
| | $ | 34,884 |
|
The following table presents the details of the allocation of purchase consideration to the acquired intangible assets (in thousands, except weighted-average amortization period):
|
| | | | | | | | | | | | | | | | | |
| | StudyBlue | | WriteLab | | Total |
| | Amount | | Weighted-Average Amortization
Period
(in months) | | Amount | | Weighted-Average Amortization
Period
(in months) | | Amount | | Weighted-Average Amortization
Period
(in months) |
| Trade name | $ | 140 |
| | 12 | | $ | — |
| | 0 | | $ | 140 |
| | 12 |
| Domain names | 180 |
| | 12 | | — |
| | 0 | | 180 |
| | 12 |
| Non-compete agreements | 220 |
| | 36 | | — |
| | 0 | | 220 |
| | 36 |
| Developed technology | 1,340 |
| | 60 | | 4,450 |
| | 96 | | 5,790 |
| | 88 |
| Content library | 5,220 |
| | 60 | | — |
| | 0 | | 5,220 |
| | 60 |
| Acquired intangible assets | $ | 7,100 |
| | 57 | | $ | 4,450 |
| | 96 | | $ | 11,550 |
| | 72 |
During the year ended December 31, 2018, we incurred $1.0 million of acquisition-related expenses associated with the above 2018 acquisitions which have been included in general and administrative expenses in our consolidated statement of operations.
We have not presented supplemental pro forma financial information as the revenues and earnings of these 2018 acquisitions were immaterial during the year ended December 31, 2018. Further, we have recorded an immaterial amount of revenues and expenses since the acquisition dates during the year ended December 31, 2018.
2017 Acquisition
In October 2017, we acquired all of the outstanding interests of Cogeon GmbH (Cogeon), a provider of adaptive math technology and developer of the math application, Math 42. The total fair value of the purchase consideration was $15.0 million which included an escrow amount of $2.2 million for general representations and warranties and potential post-closing adjustments, which was released in October 2019.
Included in the purchase agreement for the acquisition of Cogeon are additional payments of up to approximately $9.0 million subject to achievement of specified milestones and continued employment of the sellers. These payments are not included in the fair value of the purchase consideration and are expensed ratably as research and development expense on our consolidated statements of operations. These payments may be settled by us, at our sole discretion, either in cash or shares of our common stock. The terms of the purchase agreement were amended in 2019 such that the payments to the sellers were accelerated and we paid out a total of $7.5 million in cash to the sellers during the year ended December 31, 2019. Additionally, included in the purchase agreement are equity grants of up to approximately $3.8 million subject to achievement of the above specified milestones, continued employment of the sellers, and an adverse tax ruling on the additional payments from the German tax authority. In 2018, the sellers received an adverse tax ruling and during the year ended December 31, 2019, we issued $3.0 million of common stock in connection with the accelerated additional payments.
Goodwill is primarily attributable to the potential for future product offerings as well as our expanded student reach. The amounts recorded for goodwill are expected to be deductible for tax purposes.
The following table presents the total allocation of purchase consideration recorded in our consolidated balance sheets as of the acquisition date (in thousands):
|
| | | |
| Net tangible assets | $ | 60 |
|
| Acquired intangible assets: | |
| Trade name | 50 |
|
| Domain names | 230 |
|
| Non-compete agreements | 70 |
|
| Developed technology | 5,510 |
|
| Content Library | 70 |
|
| Total acquired intangible assets | 5,930 |
|
| Total identifiable assets acquired | 5,990 |
|
| Goodwill | 9,024 |
|
| Total fair value of purchase consideration | $ | 15,014 |
|
During the year ended December 31, 2017, we incurred $0.7 million of acquisition-related expenses associated with the above 2017 acquisition which have been included in general and administrative expenses in our consolidated statements of operations.
Note 8. Goodwill and Intangible Assets
Goodwill consists of the following (in thousands):
| | | | | | | | | | | |
| | Years Ended December 31, |
| 2021 | | 2020 |
| Beginning balance | $ | 285,214 | | | $ | 214,513 | |
| Additions due to acquisitions | 5,782 | | | 70,167 | |
| Foreign currency translation adjustment | (707) | | | 822 | |
| Measurement period adjustments related to prior acquisitions | (526) | | | (288) | |
| Ending balance | $ | 289,763 | | | $ | 285,214 | |
|
| | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
| Beginning balance | $ | 149,524 |
| | $ | 125,272 |
|
| Additions due to acquisitions | 65,181 |
| | 24,673 |
|
| Foreign currency translation adjustment | (192 | ) | | (421 | ) |
| Ending balance | $ | 214,513 |
| | $ | 149,524 |
|
Intangible assets as of December 31, 20192021 and December 31, 20182020 consist of the following (in thousands, except weighted-average amortization period):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| Weighted-Average Amortization
Period
(in months) | | Gross
Carrying
Amount | | Accumulated
Amortization | | | | Net
Carrying
Amount |
| Developed technologies | 76 | | $ | 57,521 | | | $ | (31,790) | | | | | $ | 25,731 | |
| Content library | 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 | 65 | | $ | 101,154 | | | $ | (60,588) | | | | | $ | 40,566 | |
| | | | | | | | | | | December 31, 2020 |
| | December 31, 2019 | | Weighted-Average Amortization
Period
(in months) | | Gross
Carrying
Amount | | Accumulated
Amortization | | | Net
Carrying
Amount |
| | Weighted-Average Amortization Period (in months) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | |
| Developed technologies and content library | 66 |
| | $ | 43,268 |
| | $ | (18,395 | ) | | $ | 24,873 |
| |
| Developed technologies | | Developed technologies | 75 | | $ | 54,540 | | | $ | (24,246) | | | | $ | 30,294 | |
| Content library | | Content library | 60 | | 12,230 | | | (4,390) | | | | 7,840 | |
| Customer lists | 47 |
| | 9,970 |
| | (8,210 | ) | | 1,760 |
| Customer lists | 47 | | 16,190 | | | (10,437) | | | | 5,753 | |
| Trade and domain names | 46 |
| | 10,873 |
| | (6,169 | ) | | 4,704 |
| Trade and domain names | 44 | | 11,613 | | | (7,888) | | | | 3,725 | |
| Non-compete agreements | 31 |
| | 2,018 |
| | (1,890 | ) | | 128 |
| Non-compete agreements | 31 | | 2,018 | | | (1,981) | | | | 37 | |
| | Indefinite-lived trade name | — |
| | 3,600 |
| | — |
| | 3,600 |
| Indefinite-lived trade name | — | | | 3,600 | | | — | | | | 3,600 | |
| Foreign currency translation adjustment | — |
| | (398 | ) | | — |
| | (398 | ) | |
| | Total intangible assets | 58 |
| | $ | 69,331 |
| | $ | (34,664 | ) | | $ | 34,667 |
| Total intangible assets | 64 | | $ | 100,191 | | | $ | (48,942) | | | | $ | 51,249 | |
|
| | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Weighted-Average Amortization Period (in months) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Developed technologies and content library | 71 |
| | $ | 31,667 |
| | $ | (13,737 | ) | | $ | 17,930 |
|
| Customer lists | 47 |
| | 9,970 |
| | (6,847 | ) | | 3,123 |
|
| Trade and domain names | 44 |
| | 6,113 |
| | (4,863 | ) | | 1,250 |
|
| Non-compete agreements | 31 |
| | 2,018 |
| | (1,735 | ) | | 283 |
|
| Indefinite-lived trade name | — |
| | 3,600 |
| | — |
| | 3,600 |
|
| Foreign currency translation adjustment | — |
| | (271 | ) | | — |
| | (271 | ) |
| Total intangible assets | 61 |
| | $ | 53,097 |
| | $ | (27,182 | ) | | $ | 25,915 |
|
During the years ended December 31, 2019, 20182021, 2020 and 2017,2019, amortization expense related to our acquired intangible assets totaled approximately $7.5$13.7 million, $6.5$14.3 million and $5.5$7.5 million, respectively.
As of December 31, 2019,2021, the estimated future amortization expense related to our finite-lived intangible assets is as follows (in thousands):
| | | | | |
| |
| 2022 | $ | 11,303 | |
| 2023 | 9,173 | |
| 2024 | 6,121 | |
| 2025 | 4,307 | |
| 2026 | 3,959 | |
| Thereafter | 2,103 | |
| Total | $ | 36,966 | |
|
| | | |
| 2020 | $ | 8,947 |
|
| 2021 | 7,554 |
|
| 2022 | 6,686 |
|
| 2023 | 4,557 |
|
| 2024 | 2,411 |
|
| Thereafter | 912 |
|
| Total | $ | 31,067 |
|
Note 9. Balance Sheet Details
Other Current Assets
Other current assets consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Insurance recovery related to loss contingency | $ | 7,800 | | | $ | — | |
| Other | 16,046 | | | 11,846 | |
| Other current assets | $ | 23,846 | | | $ | 11,846 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
Reimbursement from Required Materials partners (1) | $ | 6,552 |
| | $ | 3,785 |
|
| Other | 10,054 |
| | 5,725 |
|
| Other current assets | $ | 16,606 |
| | $ | 9,510 |
|
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Taxes payable | $ | 11,127 | | | $ | 6,166 | |
| Loss contingency | 8,000 | | | — | |
| Current operating lease liabilities | 6,663 | | | 6,603 | |
| Accrued content related costs | 6,448 | | | 6,273 | |
| Order fulfillment fees | 6,254 | | | 11,430 | |
| Payment processing fees | 3,419 | | | 2,130 | |
| Accrued purchases of long-lived assets | 2,982 | | | 1,588 | |
| Refund reserve | 1,392 | | | 1,515 | |
| Restructuring liability | 785 | | | — | |
| Acquisition-related compensation | 417 | | | 9,611 | |
| Accrued escrow related to acquisition | — | | | 7,451 | |
| Other | 19,722 | | | 15,798 | |
| Accrued liabilities | $ | 67,209 | | | $ | 68,565 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
Payable to Required Materials partners (2) | $ | 4,898 |
| | $ | 6,420 |
|
| Acquisition-related compensation | 4,042 |
| | 8,536 |
|
| Taxes payable | 3,046 |
| | 3,864 |
|
| Accrued purchases of long-lived assets | 10,036 |
| | 1,210 |
|
| Other | 17,942 |
| | 14,047 |
|
| Accrued liabilities | $ | 39,964 |
|
| $ | 34,077 |
|
(1) Reimbursement from Required Materials partners represents the cost of print textbooks sourced on their behalf.
(2) Payable to Required Materials partners represents the amounts owed to our partners for the rental and sale of print textbooks.
Note 10. Convertible Senior Notes
Adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
We adopted ASU 2020-06 on January 1, 2021 under the modified retrospective method applied to convertible senior notes outstanding as of January 1, 2021 and have not changed previously disclosed amounts or provided additional disclosures for comparative periods. Under ASU 2020-06, convertible instruments with embedded conversion features, that are not required to be accounted for as a derivative or that do not result in a substantial premium, are no longer required to be separated from the host contract thereby eliminating the cash conversion feature model. Instead, these convertible debt instruments will be accounted for as a single liability measured at amortized cost under the traditional convertible debt accounting model.
In August 2020, we issued $1.0 billion in aggregate principal amount of 0% convertible senior notes due in 2026 (2026 notes). The aggregate principal amount of the 2026 notes includes $100 million from the initial purchasers fully exercising their option to purchase additional notes. In March 2019, we issued $700 million in aggregate principal amount of 0.125% convertible senior notes due in 2025 (2025 notes) and in April 2019, the initial purchasers fully exercised their option to purchase $100 million of additional 2025 notes for aggregate total principal amount of $800 million. In April 2018, we issued $345 million in aggregate principal amount of 0.25% convertible senior notes due in 2023 (2023 notes and together with the 2026 notes and the 2025 notes, the notes). The aggregate principal amount of the 2023 notes includesincluded $45 million from the initial purchasers fully exercising their option to purchase additional notes. Collectively, the 2025 notes and 2023 notes are referred to as the “notes.” The notes were issued in private placements to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended.1933.
The total net proceeds from the notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2026 Notes | | 2025 Notes | | 2023 Notes |
| Principal amount | $ | 1,000,000 | | | $ | 800,000 | | | $ | 345,000 | |
| Less initial purchasers’ discount | (15,000) | | | (18,998) | | | (8,625) | |
| Less other issuance costs | (904) | | | (822) | | | (757) | |
| Net proceeds | $ | 984,096 | | | $ | 780,180 | | | $ | 335,618 | |
|
| | | | | | | |
| | 2025 Notes | | 2023 Notes |
| Principal amount | $ | 800,000 |
| | $ | 345,000 |
|
| Less initial purchasers’ discount | (18,998 | ) | | (8,625 | ) |
| Less other issuance costs | (822 | ) | | (757 | ) |
| Net proceeds | $ | 780,180 |
| | $ | 335,618 |
|
During the year ended December 31, 2021, we settled $115.6 million of aggregate principal amount of the 2023 notes, consisting of $24.7 million related to requests for conversions and $90.9 million pursuant to our election of our option to redeem the remaining outstanding 2023 notes, for a total aggregate consideration of $351.1 million, consisting of $115.6 million in cash and 2,983,011 shares of our common stock with an aggregate value of $235.5 million. The carrying amount of the 2023 notes was $114.2 million, resulting in a $236.9 million difference that was recorded in additional paid-in capital on our consolidated balance sheet. Additionally, we entered into 2023 notes capped call privately-negotiated transactions which terminated capped call transactions underlying 4,288,459 shares of our common stock and received aggregate cash proceeds of $45.2 million. As of December 31, 2021, no amounts of our 2023 notes remain outstanding and no shares remain underlying the 2023 notes capped call transactions.
In March 2021, in connection with our securities repurchase program, we extinguished $100.0 million aggregate principal amount of the 2025 notes in privately-negotiated transactions for aggregate consideration of $184.9 million, which was paid in cash. Upon execution, we concluded that the 2025 notes embedded conversion features no longer met the derivative scope exception and, as a result, initially recorded a derivative liability of $176.5 million, related to the fair value of extinguished 2025 notes. We settled the derivative liability for aggregate consideration of $184.9 million resulting in a $8.4 million loss on change in fair value. The carrying amount of the 2025 notes subject to the extinguishment was $98.3 million resulting in a $78.2 million loss on early extinguishment of debt. Additionally, we entered into 2025 notes capped call privately-negotiated transactions which terminated capped call transactions underlying 1,939,560 shares of our common stock and received aggregate cash proceeds of $23.9 million. Upon execution, we concluded that the capped call transactions no longer met the derivative scope exception and, as a result recorded a derivative liability of $22.6 million related to the fair value of terminated 2025 notes capped call transactions. We settled the capped call transactions for aggregate consideration of $23.9 million resulting in a $1.3 million gain on change in fair value.
During the year ended December 31, 2020, in connection with our securities repurchase program, we extinguished $57.4 million aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $149.6 million, which was paid in cash. Of the $149.6 million consideration, we allocated $52.6 million and $97.0 million to the liability and equity components of the extinguished 2023 notes, respectively. The fair value of the liability component was calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the liability component of the 2023 notes subject to the extinguishment was $51.6 million resulting in a $1.0 million loss on early extinguishment which was recorded in other (expense) income, net on our consolidated statements of operations. Additionally, we terminated 2023 notes capped call transactions underlying 2,131,354 shares of our common stock and received cash proceeds of $19.7 million.
During the year ended December 31, 2020, in connection with our issuance of the 2026 notes, we exchanged $172.0 million aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $501.7 million, consisting of $174.6 million in cash and 4,182,320 shares of our common stock with a value of $327.1 million. Of the $501.7 million consideration, we allocated $156.1 million and $345.6 million to the liability and equity components of the exchanged 2023 notes, respectively. The fair value of the liability component was calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the liability component of the 2023 notes subject to the exchange was $152.8 million resulting in a $3.3 million loss on early extinguishment of debt which was recorded in other (expense) income, net on our consolidated statements of operations. Additionally, we terminated 2023 notes capped call transactions underlying 6,380,815 shares of our common stock and received cash proceeds of $57.4 million.
The notes are our senior, unsecured obligations and are governed by indenture agreements by and between us and Wells Fargo Bank, National Association, as Trustee (the indentures). The 2026 notes bear no interest and will mature on September 1, 2026, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The 2025 notes bear interest of 0.125% per year which is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019. The 2025 notes will mature on March 15, 2025, (the 2025 notes maturity date), unless repurchased, redeemed or converted in accordance
with their terms prior to such date. The 2023 notes bearbore interest of 0.25% per year which iswas payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2018. The 2023
Each $1,000 principal amount of the 2026 notes will mature on May 15, 2023 (the 2023 notes maturity date), unless repurchased, redeemed or convertedinitially 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 accordance with their terms prior to such date.
certain circumstances. Each $1,000 principal amount of the 2025 notes will initially be convertible into 19.3956 shares of our common stock. This is equivalent to an initial conversion price of approximately $51.56 per share, which is subject to adjustment in certain circumstances. Each $1,000 principal amount of the 2023 notes willwas initially be convertible into 37.1051 shares of our common stock. This iswas equivalent to an initial conversion price of approximately $26.95 per share, which iswas 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 and February 15, 2023 for the 2023 notes, the notes are convertible at the option of holders only upon satisfaction of the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 for the 2026 notes and June 30, 2019 for the 2025 notes and June 30, 2018 for the 2023 notes, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the respective conversion price for the notes on each applicable trading day;
•during the five-business5-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 and February 15, 2023 for the 2023 notes until the close of business on the second scheduled trading day immediately preceding the respective maturity dates, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the notes may be settled in shares of our common stock, cash or a combination of cash and shares of our common stock, at our election.
If we undergo a fundamental change, as defined in the indentures, prior to the respective maturity dates, subject to certain conditions, holders of the notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events, described in the indentures, occur prior to the respective maturity dates, we will also increase the conversion rate for a holder who elects to convert their notes in connection with such specified corporate events.
DuringThe conditions allowing holders of the year ended December 31, 2019,2026 notes to convert were not met and therefore the 2026 notes are not convertible. The conditions allowing holders of the 2025 notes to convert hadwere not been met and were therefore not convertible. Duringduring the yearthree months ended December 31, 2019,2021, therefore the 2025 notes are no longer convertible. The first circumstance noted above allowing holders of the 20232025 notes to convert had beenwas met during the three months ended September 30, 2021, June 30, 2021, March 31, 2021, December 31, 2020 and areSeptember 30, 2020 and therefore, convertible. Nonethe 2025 notes were convertible starting October 1, 2020 through December 31, 2021. Aside from the extinguishment of $100.0 million aggregate principal amount of the holders of the 20232025 notes elected to convert their notes into shares of our common stockdiscussed above, during the year ended December 31, 2019. During the year ended December 31, 2018, the conditions allowing holders2021, we received immaterial requests for conversion of the 2023 notes to convert had not been met and were therefore not convertible.
In accounting for the issuance of the notes, we separated the notes into liability and equity components. The carrying amount of the liability components for the 2025 notes and 2023 notes of approximately $588.0 million and $280.8 million, respectively, was calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the equity components for the 2025 notes and 2023 notes of approximately $212.0 million and $64.2 million, respectively, representing the conversion option, was determined by deducting the carrying amount of the liability components from the principal amount of the notes. This difference between the principal amount of the notes and the liability components represents the debt discount, presented as a reductionwhich we settled or intend to the notes on our consolidated balance sheets, and is amortized to interest expense using the effective interest method over the remaining term of the notes. The equity components of the notes are includedsettle in additional paid-in capital on our consolidated balance sheets and are not remeasured as long as they continue to meet the conditions for equity classification.cash.
We incurred issuance costs related to the 2025 notes of approximately $19.8 million, consisting of the initial purchasers' discount of $19.0 million and other issuance costs of approximately $0.8 million. We incurred issuance costs related to the 2023 notes of approximately $9.4 million, consisting of the initial purchasers' discount of $8.6 million and other issuance costs of approximately $0.8 million. In accounting for the issuance costs, we allocated the total amount incurred to the liability and equity components using the same proportions determined above for the notes. Transaction costs attributable to the liability components for the 2025 notes and 2023 notes of approximately $14.6 million and $7.6 million, respectively, were recorded as debt issuance cost, presented as a reduction to the notes on our consolidated balance sheets, and are amortized to interest expense using the effective interest method over the term of the notes. The issuance costs attributable to the equity components
for the 2025 notes and 2023 notes were approximately $5.3 million and $1.7 million, respectively, and were recorded as a reduction to the equity component included in additional paid-in capital.
The net carrying amount of the liability component of the notes is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020(1) |
| 2026 Notes | | 2025 Notes | | | | 2026 Notes | | 2025 Notes | | 2023 Notes |
| Principal amount | $ | 1,000,000 | | | $ | 699,982 | | | | | $ | 1,000,000 | | | $ | 800,000 | | | $ | 115,576 | |
| Unamortized debt discount | — | | | — | | | | | (226,732) | | | (149,138) | | | (9,953) | |
| Unamortized issuance costs | (12,309) | | | (9,518) | | | | | (11,338) | | | (10,248) | | | (1,245) | |
| Net carrying amount (liability) | $ | 987,691 | | | $ | 690,464 | | | | | $ | 761,930 | | | $ | 640,614 | | | $ | 104,378 | |
|
| | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | 2025 Notes | | 2023 Notes | | 2023 Notes |
| Principal amount | $ | 800,000 |
| | $ | 345,000 |
| | $ | 345,000 |
|
| Unamortized debt discount | (184,698 | ) | | (42,280 | ) | | (54,817 | ) |
| Unamortized issuance costs | (12,691 | ) | | (5,028 | ) | | (6,515 | ) |
| Net carrying amount (liability) | $ | 602,611 |
| | $ | 297,692 |
| | $ | 283,668 |
|
The net carrying amount(1) As noted above, prior period amounts have not been adjusted due to the adoption of ASU 2020-06 under the equity component of the notes is as follows (in thousands):
|
| | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | 2025 Notes | | 2023 Notes | | 2023 Notes |
| Debt discount for conversion option | $ | 212,000 |
| | $ | 64,193 |
| | $ | 64,193 |
|
| Issuance costs | (5,253 | ) | | (1,749 | ) | | (1,749 | ) |
| Net carrying amount | $ | 206,747 |
| | $ | 62,444 |
| | $ | 62,444 |
|
Based on the closing price of our common stock of $37.91 on December 31, 2019, the if-converted value of the 2025 notes was approximately $588.2 million, which is less than the principal amount of $800 million by approximately $211.8 million, and the if-converted value of the 2023 notes was approximately $485.3 million and exceeds the principal amount of $345 million by approximately $140.3 million.
The effective interest rates of the liability components of the 2025 notes and 2023 notes are 5.40% and 4.34%, respectively, and each is based on the interest rate of similar debt instruments, at the time of our offering, that do not have associated convertible features. The following table sets forth the total interest expense recognized related to the notes (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020(1) | | 2019(1) |
| 2026 notes: | | | | | |
| Amortization of debt discount | $ | — | | | $ | 14,568 | | | $ | — | |
| Amortization of issuance costs | 2,635 | | | 728 | | | — | |
| Total 2026 notes interest expense | $ | 2,635 | | | $ | 15,296 | | | $ | — | |
| 2025 notes: | | | | | |
| Contractual interest expense | $ | 896 | | | $ | 1,001 | | | $ | 769 | |
| Amortization of debt discount | — | | | 35,561 | | | 27,302 | |
| Amortization of issuance costs | 3,045 | | | 2,443 | | | 1,876 | |
| Total 2025 notes interest expense | $ | 3,941 | | | $ | 39,005 | | | $ | 29,947 | |
| 2023 notes: | | | | | |
| Contractual interest expense | $ | 78 | | | $ | 691 | | | $ | 862 | |
| Amortization of debt discount | — | | | 10,073 | | | 12,536 | |
| Amortization of issuance costs | 242 | | | 1,200 | | | 1,488 | |
| Total 2023 notes interest expense | $ | 320 | | | $ | 11,964 | | | $ | 14,886 | |
| | | | | |
|
| | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | 2025 Notes | | 2023 Notes | | 2023 Notes |
| Contractual interest expense | $ | 769 |
| | $ | 862 |
| | $ | 645 |
|
| Amortization of debt discount | 27,302 |
| | 12,536 |
| | 9,377 |
|
| Amortization of issuance costs | 1,876 |
| | 1,488 |
| | 1,117 |
|
| Total interest expense | $ | 29,947 |
| | $ | 14,886 |
| | $ | 11,139 |
|
Capped Call Transactions
Concurrently with the offering of the 20252026 notes and 20232025 notes, we used $97.2$103.4 million and $39.2$97.2 million, respectively, of the net proceeds to enter into privately negotiated capped call transactions which are expected to generally reduce or offset potential dilution to holders of our common stock upon conversion of the notes and/or offset the potential cash payments we would be required to make in excess of the principal amount of any converted notes. The capped call transactions automatically exercise upon conversion of the notes and as of December 31, 2021, cover 15,516,4809,297,800 and 12,801,26013,576,571 shares of our common stock for the 2026 notes and 2025 notes, and 2023 notes, respectively, andrespectively. 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 and $26.95 to $40.68 per share for the 2023 notes. The effective increase in conversion price as a result of the capped call transactions serves to reduce potential dilution to holders of our common stock and/or offset the cash payments we are required to make in excess of the principal amount of any converted notes. As these transactions meet certain accounting criteria, they are recorded in stockholders’ equity as a reduction of additional paid-in capital on our 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.
Impact to Earnings per Share
The notes will have no impact to diluted earnings per share until the average price of our common stock exceeds the conversion price for the 2025 notes and 2023 notes of $51.56 and $26.95 per share, respectively, because we intend to settle the principal amount of the notes in cash upon conversion. Under the treasury stock method, in periods we report net income, we are required to include the effect of additional shares that may be issued under the notes when the average price of our common stock exceeds each respective conversion price. However, as a result of the capped call transactions described above, there will be no economic dilution from the 2025 notes and 2023 notes up to $79.32 and $40.68, respectively, as exercise of the capped call instruments will reduce any dilution from the notes that would have otherwise occurred when the average price of our common stock exceeds the conversion price.
Note 11. Leases
On January 1, 2019, we adopted the new leases guidance and recorded an immaterial decrease to our opening balance of accumulated deficit. Results for reporting periods beginning January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported in accordance with the previous guidance. We initially recorded ROU assets of $17.2 million and lease liabilities of $21.1 million on our consolidated balance sheet. ASC 842 did not have a material impact to our consolidated statements of operations. We elected a package of transition practical expedients which included not reassessing whether any expired or existing contracts are or contained leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining our lease terms or assessing impairment of our ROU assets.
We have operating leases for our corporate offices worldwide, which expire at various dates through 2024.2027. Our primary operating lease commitments at December 31, 20192021 are related to our corporate headquarters in Santa Clara, California. We have additionalCalifornia and offices in San Francisco, California Oregon, and New York in the United States and internationally in India and Israel.City, New York. As of December 31, 2019,2021 and 2020, we had operating lease ROU assets of $15.9$18.1 million and $24.2 million, respectively, and operating lease liabilities of $19.8 million. During the year ended December 31, 2019, we obtained $3.4$19.1 million of ROU assets in exchange for lease liabilities related to the reassessment of the lease term for 2 of our leases in India and commencing a lease for an additional office space in India.$25.9 million, respectively.
As of December 31, 2019,2021 and 2020, we dodid not have finance leases recorded on our consolidated balance sheet. As of December 31, 2019,sheet, our weighted average remaining lease term was 3.7 years. During the year ended December 31, 2019,4.0 years and 4.6 years, respectively, and our weighted average discount rate was 4.7%4.8%. Operating lease expense, net of immaterial sublease income, was approximately $7.1 million, $5.6 million and $5.0 million, respectively, during the yearyears ended December 31, 2021, 2020 and 2019. Variable lease cost and short term lease cost were immaterial during the yearyears ended December 31, 2021, 2020 and 2019.
The aggregate future minimum lease payments and reconciliation to operating lease liabilities as of December 31, 2019,2021, are as follows (in thousands):
|
| | | |
| | December 31, 2019 |
| 2020 | $ | 6,094 |
|
| 2021 | 5,622 |
|
| 2022 | 5,404 |
|
| 2023 | 3,738 |
|
| 2024 | 780 |
|
| Total future minimum lease payments | 21,638 |
|
| Less imputed interest | (1,842 | ) |
| Total lease liabilities | $ | 19,796 |
|
The aggregate future minimum lease payments as of December 31, 2018, are as follows (in thousands):
|
| | | |
| | December 31, 2018 |
| 2019 | $ | 5,222 |
|
| 2020 | 5,251 |
|
| 2021 | 4,775 |
|
| 2022 | 3,999 |
|
| 2023 | 3,421 |
|
| Thereafter | 788 |
|
| Total | $ | 23,456 |
|
| | | | | |
| December 31, 2021 |
| 2022 | $ | 7,435 | |
| 2023 | 5,599 | |
| 2024 | 2,559 | |
| 2025 | 1,823 | |
| 2026 | 1,869 | |
| Thereafter | 1,750 | |
| Total future minimum lease payments | 21,035 | |
| Less imputed interest | (1,925) | |
| Total operating lease liabilities | $ | 19,110 | |
During the year ended December 31, 2019,2021, we entered into a seven years lease for a corporate5.5 year amendment to expand our office space in New YorkPortland, Oregon with future minimum lease payments of approximately $12.4$3.7 million. As of December 31, 2019,2021, this lease has not yet commenced and therefore these future minimum lease payments are not included in our future minimum lease payments in the above table.table above.
Note 12. Commitments and Contingencies
From time to time, third parties may assert patent infringement claims against us in the form of letters, litigation, or other forms of communication. In addition, weWe may from time to time be subject to othercertain 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 investigations.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 September 27, 2018January 12, 2022, Rak Joon Choi, derivatively on behalf of Chegg, filed a purported securities class action captioned Shah v.shareholder derivative complaint against Chegg Inc. et. al. (Case No. 3:18-cv-05956-CRB) was filedand certain of its current and former directors and officers in the U.S.United States District Court for the Northern District of California, against usalleging breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and our CEO.waste of corporate assets, among others. The complaint wasCompany 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 by a purported Company shareholdersecurities fraud class action on behalf of all purchasers of Chegg common stock between May 5, 2020 and alleges claims underNovember 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, as amended, and SEC Rule 10b-5, based on allegedly misleading statements regarding the Company’s security measures to protect users’ data and related internal controls and procedures, as well as our second quarter 2018 financial results.1934. The suit is purportedly brought on behalf of purchasers of our securities between July 30, 2018 and September 25, 2018. The complaintplaintiff in this matter seeks unspecified compensatory damages, as well as interest,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. The Company disputes these claims and intends to vigorously defend itself in this matter.
On November 15, 2018,December 1, 2020, we received notice that a second purported securities class action captioned Kurland v. Chegg, Inc. et al. (Case No. 3:18-cv-06714-CRB)lawsuit was filed against Chegg in New York alleging violations of the U.S. District CourtAmerican with Disabilities Act. The claim asserted that one of Chegg’s websites is not compatible with software used by vision-impaired individuals. During the year ended December 31, 2021, we settled this matter for an immaterial amount, and it is now concluded.
On August 18, 2020, we received notice that a class action lawsuit was filed against Chegg in California alleging violations of the Northern DistrictUnruh Civil Rights Act. The claim asserted that one of CaliforniaChegg’s websites is not compatible with software used by vision-impaired individuals. During the year ended December 31, 2021, we settled this matter for an immaterial amount, and it is now concluded.
On July 21, 2020, VitalSource Technologies LLC (VST), which is wholly owned by Ingram Industries Inc., filed a complaint against Chegg alleging that Chegg breached its contract with VST involving the development of an eTextbook reader and eTextbook reader platform. The suit sought uncertain damages, but the complaint alleged that they exceeded $75 thousand. During the year ended December 31, 2021, we settled this matter for an immaterial amount, and it is now concluded.
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.
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 (the 2018 Data Incident). 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 have been filed by the same counsel in Maryland and California. We dispute that these claimants have a valid basis for seeking arbitration, assert that they have acted in bad faith and are working with the Maryland and California courts and plaintiffs’ counsel on resolution of these claims. 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. In March 2021, we recorded a loss contingency accrual and a corresponding insurance loss recovery, the net impact of which did not materially impact our CEO, and our CFO. The Shah and Kurland actions contain similar allegations, assert similar claims, and seek similar relief, and on January 24, 2019, the Court consolidated the two actions. On March 29, 2019, the Plaintiffs filed a Lead Plaintiff's Noticestatements of Voluntary Dismissal Without Prejudice.operations.
On November 5, 2018, NetSoc, LLC (NetSoc) filed a complaint against us captioned NetSoc, LLC v. Chegg, Inc., (Civil Action No. 1:18-CV-10262-RAC) in the U.S. District Court for the Southern District of New York (SDNY) for patent infringement alleging that the Chegg Tutors service infringes U.S. Patent No. 9,978,107 (the NetSoc Patent) and seeking unspecified compensatory damages. A responsive pleading was filed on February 19, 2019. On January 13, 2020, the CourtSDNY issued an order dismissing the case as to Chegg. On January 30, 2020, NetSoc appealed the dismissal to the United States Court of Appeals for the Federal Circuit (the Federal Circuit). On September 24, 2021, the Federal Circuit dismissed NetSoc's appeal of the SDNY dismissal. On December 2, 2020, the U.S. Patent and Trademark Office determined that the NetSoc Patent is invalid based on two Inter Partes Review (IPR) proceedings instituted in part by Chegg, and on January 4, 2021, NetSoc filed a Notice of Appeals at the Federal Circuit appealing the IPR decisions. On October 18, 2021, Chegg filed a motion to dismiss NetSoc's appeal of the IPR decisions. On December 7, 2021, the Federal Circuit granted Chegg’s motion to terminate the IPR appeal. This matter is now concluded.
Aside from the loss contingency accrual for the 2018 Data Incident matter, we are currently awaiting their filing ofhave not recorded any additional amounts related to the above matters as we do not believe that a brief with the court.
loss is probable in these remaining 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 determinationanalysis of whether a claim will proceed to litigation cannot be madepredicted 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 of operations, andand/or financial condition.
Note 13. Guarantees and Indemnifications
We have agreed to indemnify our directors and officers for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these
persons upon termination of employment, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. We have a directors’ and officers’ insurance policy that limits our potential exposure up to the limits of our insurance coverage. In addition, we also have other indemnification agreements with various vendors against certain claims, liabilities, losses, and damages. The maximum amount of potential future indemnification is unlimited.
We believe the fair value of these indemnification agreements is minimal.immaterial. We have not recorded any liabilities for these agreements as of December 31, 2019.2021.
Note 14. Common Stock
We are authorized to issue 400 million shares of our common stock, with a par value per share of $0.001. As of December 31, 2019,2021, we have reserved the following shares of our common stock for future issuance:
|
| | | | |
| December 31, 20192021 |
| |
| Outstanding stock options | 1,611,385381,756 |
|
| Outstanding RSUs and PSUs | 6,909,5308,171,462 |
|
| Shares available for grant under the 2013 Plan | 23,405,02330,629,068 |
|
| Shares available for issuance under the 2013 ESPP | 7,646,7849,814,172 |
|
| Total common shares reserved for future issuance | 39,572,72248,996,458 |
|
Stock Plans
2013 Equity Incentive Plan
On June 6, 2013, the Board of Directors adopted our 2013 Equity Incentive Plan (the 2013 Plan), which was subsequently approved by our stockholders on August 29, 2013. The 2013 Plan became effective on November 11, 2013 and replaced the 2005 Plan. On the effective date of the 2013 Plan, 12,000,000 shares of our common stock were reserved for issuance, plus an additional 3,838,985 shares reserved but not issued or subject to outstanding awards under our 2005 Plan on the effective date of the 2013 Plan, plus, on and after the effective date of the 2013 Plan, (i) shares that are subject to outstanding awards under the 2005 Plan which cease to be subject to such awards, (ii) shares issued under the 2005 Plan that are forfeited or repurchased at their original issue price and (iii) shares subject to awards under the 2005 Plan that are used to pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any award. As of December 31, 20192021, there were 23,405,02330,629,068 shares available for grant under the 2013 Plan. The 2013 Plan permits the granting of incentive stock options, non-qualified stock options, RSUs, stock appreciation rights, restricted shares of common stock and performance share awards. The exercise price of stock options may not be less than the 100% of the fair market value of the common stock on the date of grant. Options granted pursuant to the 2013 Plan generally expire no later than 10 years.
years.
2013 Employee Stock Purchase Plan
On June 6, 2013, our Board of Directors adopted our 2013 Employee Stock Purchase Plan (the 2013 ESPP) and our stockholders subsequently approved the 2013 ESPP Plan on August 29, 2013. The 2013 ESPP permits eligible employees to acquire shares of our common stock by accumulating funds through periodic payroll deductions of up to 15% of base salary. Our 2013 ESPP is intended to qualify as an ESPP under Section 423 of the Code and employees will receive a 15% discount to the lesser of the fair market value of our common stock on (i) the first trading day of the applicable offering period or (ii) the last day of each purchase period in the applicable offering period. Each offering period may run for no more than six months. We have reserved 4,000,000 shares of our common stock under our 2013 ESPP. The aggregate number of shares issued over the term of our 2013 ESPP will not exceed 20,000,000 shares of our common stock. As of December 31, 2019,2021, there were 7,646,7849,814,172 shares of common stock available for future issuance under the 2013 ESPP.
Note 15. Stockholders' Equity
Accelerated Share Repurchase
On December 3, 2021, we entered into an accelerated share repurchase (ASR) agreement with a financial institution (2021 ASR). We accounted for the 2021 ASR as 2 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 8,403,361 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 $300.0 million, which was based on the share price of our common stock on the date of execution. The 2021 ASR was recorded as a reduction to additional paid in capital on our consolidated statements of stockholders’ equity. The 2021 ASR settled during the first quarter of 2022 and we received an additional delivery of 2,163,219 shares of our common stock, which were retired immediately. The 2021 ASR resulted in a total repurchase of 10,566,580 shares of our common stock at a volume-weighted-average price, less an agreed upon discount, of $28.3914 per share. We were not required to make any additional cash payments or delivery of common stock to the financial institutions upon settlement.
Securities Repurchase Program
In November 2021, our board of directors approved a $500.0 million increase to our existing securities repurchase program authorizing the repurchase of up to $1.0 billion of our common stock and/or convertible notes, through open market purchases, block trades, and/or privately negotiated transactions or pursuant to Rule 10b5-1 plans, in compliance with applicable securities laws and other legal requirements. The timing, volume, and nature of the repurchases will be determined by management based on the capital needs of the business, market conditions, applicable legal requirements, and other factors. During the year ended December 31, 2021, we entered into the 2021 ASR for $300.0 million and repurchased $100.0 million of aggregate principal amount of the 2025 notes in privately-negotiated transaction for an aggregate consideration of $184.9 million. During the year ended December 31, 2020, we repurchased $57.4 million of aggregate principal amount of the 2023 notes in privately-negotiated transactions for an aggregate consideration of $149.6 million. As of December 31, 2021 $365.5 million remains under the repurchase program, which has no expiration date and will continue until otherwise suspended, terminated or modified at any time for any reason by our board of directors.
Equity Offering
In February 2021, we entered into an underwriting agreement pursuant to which we agreed to issue and sell 10,974,600 shares of our common stock at a public offering price of $102.00 per share generating aggregate net proceeds of $1,091.5 million, after deducting underwriting discounts and commissions of $26.9 million and offering expenses of $1.1 million.
Share-based Compensation Expense
Total share-based compensation expense recorded for employees and non-employees, is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
| Cost of revenues | | | | | $ | 1,621 | | | $ | 950 | | | $ | 426 | |
| Research and development | | | | | 37,131 | | | 31,588 | | | 22,229 | |
| Sales and marketing | | | | | 13,887 | | | 9,606 | | | 7,380 | |
| General and administrative | | | | | 56,207 | | | 41,911 | | | 34,874 | |
| Total share-based compensation expense | | | | | $ | 108,846 | | | $ | 84,055 | | | $ | 64,909 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Cost of revenues | $ | 426 |
| | $ | 420 |
| | $ | 316 |
|
| Research and development | 22,229 |
| | 17,055 |
| | 14,333 |
|
| Sales and marketing | 7,380 |
| | 6,703 |
| | 5,007 |
|
| General and administrative | 34,874 |
| | 27,852 |
| | 18,703 |
|
| Total share-based compensation expense | $ | 64,909 |
| | $ | 52,030 |
| | $ | 38,359 |
|
During the year ended December 31, 2021 we capitalized share-based compensation expense of $2.6 million. As of December 31, 2021, we had a total of approximately $273.0 million of unrecognized share-based compensation expense that is expected to be recognized over the remaining weighted average period of 2.6 years.
2021 PSU Grants with Market-Based Conditions
In March 2021, we granted PSUs under the 2013 Equity Incentive Plan (the 2013 Plan) with market-based conditions to certain of our key employees. The number of shares of our common stock that may be issued to settle these PSUs range from 50% at the threshold level to 150% at the maximum level of the 100% target level of the award depending on achieving a maximum average market value of the per share price of our common stock, for a period of 60 consecutive trading days, over a three-year performance period ending on the third anniversary of the date of grant. No payout will be made for performance below the 50% threshold level. The market value of the per share price of our common stock must reach $123.81, $148.58, or $173.34 at the threshold, target, or maximum levels, respectively, for achievement of the award, which could result in issuance of 244,086, 488,173, or 732,260 shares of our common stock at each respective payout level. These PSUs will vest over a four-year period, with the initial vesting of 50% of the award occurring in March 2024. The number of PSUs granted totaled 732,260 shares, which represents the maximum number of shares, and had a grant date fair value of $68.55 per share, determined under the Monte Carlo simulation approach described further below. As of December 31, 2021, the market-based conditions have not been met.
Fair Value of 2013 ESPPPSUs with Market-Based Conditions
Under the 2013 ESPP, rights to purchase shares are generally granted during the second and fourth quarter of each year. We estimate the fair value of each right to purchase shares under our 2013 ESPPthe PSUs using the Black-Scholes-Merton option-pricing model,a Monte Carlo simulation approach, which utilizes the fair value of our common stock based on an active market and requires input on the following subjective assumptions:
Expected Term.Term. The expected term for rights to purchase shares under the 2013 ESPPawards is half a year.the performance period of three years.
Expected Volatility.Volatility. The expected volatility is based on the historical average volatility of our stock price over the expected term.
Expected Dividends.Dividends. The dividend assumption is based on our historical experience. To date we have not paid any dividends on our common stock.
Risk-Free Interest Rate.Rate. The risk-free interest rate used in the valuation method is the implied yield currently available on the United StatesU.S. treasury zero-coupon issues, with a remaining term equal to the expected term.
The following table summarizes the key assumptions used to determine the fair value of rightsthe awards:
| | | | | |
| Expected term (years) | 3.00 |
| Expected volatility | 49.04 | % |
| Expected dividends | — | % |
| Risk-free interest rate | 0.27 | % |
2021 PSU Grants with Financial and Strategic Performance Targets
In March 2021, we granted PSUs under the 2013 ESPP:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Expected term (years) | 0.50 |
| | 0.50 |
| | 0.50 |
|
| Expected volatility | 40.51%-41.81% |
| | 42.07%-44.97% |
| | 38.15%-45.57% |
|
| Dividend yield | — | % | | — | % | | — | % |
| Risk-free interest rate | 1.59%-2.43% |
| | 2.09%-2.50% |
| | 1.04%-1.42% |
|
| Weighted-average grant-date fair value per share | $ | 9.88 |
| | $ | 7.14 |
| | $ | 3.55 |
|
Fair ValuePlan to certain of Restricted Stock Units (RSUs) andour key executives. The PSUs entitle the executives to receive a certain number of Performance-Based Restricted Stock Units (PSUs)
RSUs and PSUs are converted into shares of our common stock upon vestingbased on a one-for-one basis. Vestingour satisfaction of RSUs is subject to the employee’s continuing service to us, while vesting of PSUs is subject to our achievement of specified corporatecertain financial and strategic performance objectives in addition to the employee's continuing service to us. RSUs are typically fully vested at the end of three or four years while PSUs vest subject totargets during 2021. Based on the achievement of the performance objectives and if achieved, typicallyconditions for the March 2021 grants, the final settlement partially met the target threshold based on a specified objective formula approved by the Compensation Committee. These PSUs will vest over two to three years. We assessa three-year period, with the achievementinitial vesting occurring in March 2022. The number of performance objectives on a quarterly basis and adjust our share-based payment expense as appropriate.
2013 ESPP Activity
There were 201,581 shares purchased under the 2013 ESPP forunderlying these March 2021 PSUs granted during the year ended December 31, 2019 at an average price2021 totaled 278,644 shares and had a grant date fair value of $99.05 per shareshare.
2020 PSU Grants with Financial and Strategic Performance Targets
In March 2020, we granted PSUs under the 2013 Plan to certain of $25.55 with cash proceeds fromour key executives. The PSUs entitle the issuanceexecutives to receive a certain number of shares of $5.1 million.
There were 253,301our common stock based on our satisfaction of certain financial and strategic performance targets during 2020. Based on the achievement of the performance conditions for the March 2020 grants, the final settlement met the target threshold based on a specified objective formula approved by the Compensation Committee. These PSUs will vest over a three-year period, with the initial vesting occurring in March 2021. The number of shares purchased underunderlying the 2013 ESPP forMarch 2020 PSUs granted during the year ended December 31, 2018 at an average price per share of $15.77 with cash proceeds from the issuance of2020 totaled 460,976 shares of $4.0 million.
Stock Option Activity
|
| | | | | | | | | | | | |
| | Options Outstanding |
| | Number of Options Outstanding | | Weighted- Average Exercise Price per Share | | Weighted-Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
| Balance at December 31, 2018 | 4,776,481 |
| | $ | 9.40 |
| | 4.25 | | $ | 90,848,450 |
|
| Exercised | (3,165,096 | ) | | 9.79 |
| | | | |
| Balance at December 31, 2019 | 1,611,385 |
| | $ | 8.64 |
| | 3.60 | | $ | 47,171,160 |
|
We did notand had a grant any stock option awards during the years ended December 31, 2019, 2018, and 2017.
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017, was approximately $90.8 million, $57.2 million, and $16.8 million, respectively.
RSU and PSU Activity
|
| | | | | | |
| | RSUs and PSUs Outstanding |
| | Number of RSUs and PSUs Outstanding | | Weighted Average Grant Date Fair Value |
| Balance at December 31, 2018 | 10,804,808 |
| | $ | 11.87 |
|
| Granted | 2,910,400 |
| | 37.56 |
|
| Released | (5,628,938 | ) | | 10.15 |
|
| Canceled | (1,176,740 | ) | | 12.20 |
|
| Balance at December 31, 2019 | 6,909,530 |
| | $ | 24.04 |
|
The weighted-average grant-datedate fair value of RSUs and PSUs granted during the years ended December 31, 2019, 2018, and 2017 was $37.56, $21.67, and $9.10, respectively. The total fair value of RSUs and PSUs vested as of the vesting dates during the years ended December 31, 2019, 2018, and 2017 was $222.3 million, $120.9 million, and $49.4 million, respectively.$39.21 per share.
As of December 31, 2019, we had a total of approximately $91.2 million of unrecognized compensation costs related to RSUs and PSUs that is expected to be recognized over the remaining weighted average period of 1.6 years.
2019 PSU Grants with Financial and Strategic Performance Targets
In March 2019, we granted PSUs under the 2013 Plan to certain of our key executives. The PSUs entitle the executives to receive a certain number of shares of our common stock based on our satisfaction of certain financial and strategic performance targets during 2019. Based on the achievement of the performance conditions for the March 2019 grants, the final settlement met the target threshold based on a specified objective formula approved by the Compensation Committee. These PSUs will vest over a three-year period, with the initial vesting occurring in March 2020.
The number of shares underlying the March 2019 PSUs granted during the year ended December 31, 2019 totaled 436,042 shares and had a grant date fair value of $40.42 per share.
In August 2018, in conjunction with our acquisition | | | | | | | | | | | |
| | RSUs and PSUs Outstanding |
| | Number of RSUs and PSUs Outstanding | | Weighted Average Grant Date Fair Value |
| Balance at December 31, 2020 | 4,816,000 | | | $ | 37.82 | |
| Granted | 6,758,593 | | | 47.95 | |
| Released | (2,762,251) | | | 34.77 | |
| Forfeited | (640,880) | | | 48.97 | |
| Balance at December 31, 2021 | 8,171,462 | | | $ | 46.36 | |
The weighted-average grant-date fair value of StudyBlue, weRSUs and PSUs granted during the years ended December 31, 2021, 2020, and 2019 was $47.95, $45.37, and $37.56, respectively. The total fair value of RSUs and PSUs undervested as of the vesting dates during the years ended December 31, 2021, 2020, and 2019 was $232.0 million, $200.1 million, and $222.3 million, respectively.
Fair Value of 2013 ESPP
Under the 2013 PlanESPP, rights to certain employees. The PSUs entitlepurchase shares are generally granted during the employeessecond and fourth quarter of each year. We estimate the fair value of each right to receive a certain number ofpurchase shares under our 2013 ESPP using the Black-Scholes-Merton option-pricing model, which utilizes the fair value of our common stock based on our satisfaction of certain strategic performance targets during 2018active market and 2019. Basedrequires input on the achievement offollowing subjective assumptions:
Expected Term. The expected term for rights to purchase shares under the performance2013 ESPP is six months.
conditions for the August 2018 grant, the final settlement exceeded the target thresholdExpected Volatility. The expected volatility is based on the average volatility of our stock price over the expected term.
Expected Dividends. The dividend assumption is based on our historical experience. To date we have not paid any dividends on our common stock.
Risk-Free Interest Rate. The risk-free interest rate used in the valuation method is the implied yield currently available on the United States treasury zero-coupon issues, with a specified objective formula approved byremaining term equal to the Compensation Committee. These PSUs vest over a three-year period, with the initial vesting occurring in September 2019.expected term.
The numberfollowing table summarizes the key assumptions used to determine the fair value of rights granted under the 2013 ESPP:
| | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
| Expected term (years) | | | | | 0.50 | | 0.50 | | 0.50 |
| Expected volatility | | | | | 47.02%-99.96% | | 52.06%-68.09% | | 40.51%-41.81% |
| Dividend yield | | | | | — | % | | — | % | | — | % |
| Risk-free interest rate | | | | | 0.04%-0.07% | | 0.12%-0.15% | | 1.59%-2.43% |
| Weighted-average grant-date fair value per share | | | | | $ | 14.70 | | | $ | 20.52 | | | $ | 9.88 | |
2013 ESPP Activity
There were 167,890, 173,992 and 201,581 shares underlyingpurchased under the August 2018 PSUs granted2013 ESPP during the yearyears ended December 31, 2018 totaled 45,756 shares2021, 2020 and had a grant date fair value2019, respectively, at an average price per share of $28.74 per share.
In March 2018, we granted PSUs under$40.35, $38.85 and $25.55, respectively, with cash proceeds from the 2013 Plan to certain of our key executives. The PSUs entitle the executives to receive a certain numberissuance of shares of our common$6.8 million, $6.8 million and $5.1 million, respectively.
Stock Option Activity
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Options Outstanding |
| | | | Number of Options Outstanding | | Weighted-Average Exercise Price per Share | | Weighted-Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
| Balance at December 31, 2020 | | | 627,317 | | | $ | 7.86 | | | 3.48 | | $ | 51,733,285 | |
| | | | | | | | | |
| Released | | | (245,561) | | | 8.78 | | | | | |
| | | | | | | | | |
| Balance at December 31, 2021 | | | 381,756 | | | $ | 7.28 | | | 2.80 | | $ | 8,942,541 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
We did not grant any stock based on our satisfaction of certain financial and strategic performance targets during 2018. Based on the achievement of the performance conditions for the March 2018 grant, the final settlement exceeded the target threshold based on a specified objective formula approved by the Compensation Committee. These PSUs vest over a three-year period, with the initial vesting occurring in March 2019.
The number of shares underlying the March 2018 PSUs grantedoption awards during the yearyears ended December 31, 2018 totaled 845,934 shares2021, 2020, and had a grant date fair2019. The total intrinsic value of $19.70 per share.
2017 PSU Grants
In March 2017, we granted PSUs under the 2013 Plan to certain of our key executives. The PSUs entitle the executives to receive a certain number of shares of our common stock based on our satisfaction of certain financial and strategic performance targets during 2017. Based on the achievement of the performance conditions for the March 2017 grant, the final settlement met the maximum threshold based on a specified objective formula approved by the Compensation Committee. These PSUs vest over a three-year period, with the initial vesting occurring in March 2018.
The number of shares underlying the PSUs grantedoptions exercised during the yearyears ended December 31, 2017 totaled 1,822,284 shares2021, 2020 and had a grant date fair value of $8.91 per share.2019, was approximately $10.7 million, $53.5 million and $90.8 million, respectively.
Stock Warrants
As of December 31, 2018, we 0 longer had exercisable common stock warrants.
During the year ended December 31, 2018, 100,000 common stock warrants were exercised at an exercise price of $12.00. During the year ended December 31, 2017, 100,000 common stock warrants were exercised at an exercise price of $12.00.
Note 16. Income Taxes
We recorded an income tax provision of approximately $2.6$7.2 million, $1.4$5.4 million and $1.8$2.6 million for the years ended December 31, 2021, 2020 and 2019, 2018respectively. The income tax provision for the year ended December 31, 2021 was primarily due to state and 2017, respectively.foreign income tax expenses and the withholding taxes related to the sale of our strategic equity investment. The income tax provision for the years ended December 31, 2019, 20182020 and 20172019 was primarily due to state and foreign income tax expense and federal and state tax expense related to tax amortization of acquired indefinite lived intangible assets.expense.
Our income tax provision consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Current income taxes: | | | | | |
| Federal | $ | — | | | $ | — | | | $ | (185) | |
| State | 852 | | | 459 | | | 264 | |
| Foreign | 7,449 | | | 5,010 | | | 2,594 | |
| Total current income taxes | 8,301 | | | 5,469 | | | 2,673 | |
| | | | | |
| Deferred income taxes: | | | | | |
| Federal | 250 | | | 187 | | | (17) | |
| State | 218 | | | 255 | | | 42 | |
| Foreign | (1,572) | | | (551) | | | (64) | |
| Total deferred income taxes | (1,104) | | | (109) | | | (39) | |
| Total income tax provision | $ | 7,197 | | | $ | 5,360 | | | $ | 2,634 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Current income taxes: | | | | | |
| Federal | $ | (185 | ) | | $ | (91 | ) | | $ | (103 | ) |
| State | 264 |
| | (73 | ) | | 100 |
|
| Foreign | 2,594 |
| | 1,374 |
| | 1,523 |
|
| Total current income taxes | 2,673 |
| | 1,210 |
| | 1,520 |
|
| | | | | | |
| Deferred income taxes: | | | | | |
| Federal | (17 | ) | | 155 |
| | (992 | ) |
| State | 42 |
| | 76 |
| | 75 |
|
| Foreign | (64 | ) | | (11 | ) | | 1,199 |
|
| Total deferred income taxes | (39 | ) | | 220 |
| | 282 |
|
| Total income tax provision | $ | 2,634 |
| | $ | 1,430 |
| | $ | 1,802 |
|
Loss before provision for income taxes consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| United States | $ | (6,256) | | | $ | (10,369) | | | $ | (12,497) | |
| Foreign | 11,995 | | | 9,508 | | | 5,526 | |
| Total | $ | 5,739 | | | $ | (861) | | | $ | (6,971) | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| United States | $ | (12,497 | ) | | $ | (18,617 | ) | | $ | (20,983 | ) |
| Foreign | 5,526 |
| | 5,159 |
| | 2,502 |
|
| Total | $ | (6,971 | ) | | $ | (13,458 | ) | | $ | (18,481 | ) |
The differences between our income tax provision as presented in the accompanying consolidated statements of operations and the income tax expense computed at the federal statutory rate consists of the items shown in the following table as a percentage of pretax loss (in percentages):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Income tax at U.S. statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State, net of federal benefit | (232.0) | | | (169.5) | | | (76.3) | |
| Foreign rate differential | 35.5 | | | (285.9) | | | (19.4) | |
| Share-based compensation | (209.0) | | | 2,901.5 | | | 695.4 | |
| Non-deductible expenses | 1.5 | | | (50.3) | | | 0.4 | |
| Tax credits | (28.3) | | | 351.6 | | | 19.3 | |
| | | | | |
| Acquisition related | 17.2 | | | — | | | 31.8 | |
| Convertible senior notes | (2,435.3) | | | (5,854.8) | | | (412.6) | |
| Other | 0.5 | | | 1.2 | | | 27.9 | |
| Change in valuation allowance | 2,954.3 | | | 2,462.7 | | | (325.3) | |
| Total | 125.4 | % | | (622.5) | % | | (37.8) | % |
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Income tax at U.S. statutory rate | 21.0 | % | | 21.0 | % | | 34.0 | % |
| State, net of federal benefit | (76.3 | ) | | 14.8 |
| | 8.3 |
|
| Foreign rate differential | (19.4 | ) | | (3.0 | ) | | (3.8 | ) |
| Share-based compensation | 695.4 |
| | 178.7 |
| | 38.2 |
|
| Non-deductible expenses | 0.4 |
| | (4.4 | ) | | (1.1 | ) |
| Tax credits | 19.3 |
| | 26.7 |
| | 7.8 |
|
| Tax Cuts and Jobs Act impact | — |
| | — |
| | (220.2 | ) |
| Acquisition related | 31.8 |
| | 15.2 |
| | — |
|
| Convertible senior notes | (412.6 | ) | | (0.3 | ) | | — |
|
| Other | 27.9 |
| | (1.8 | ) | | 0.4 |
|
| Change in valuation allowance | (325.3 | ) | | (257.5 | ) | | 126.6 |
|
| Total | (37.8 | )% | | (10.6 | )% | | (9.8 | )% |
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was signed into law, enacting significant changes to the U.S. Internal Revenue Code. The Tax Act made broad and complex changes to the U.S. tax code.
On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, as of December 31, 2017, we had not yet completed our accounting for the tax effects of the enactment of the Act. Our provision for income
taxes for the year ended December 31, 2017 was based in part on our best estimate of the effects of the transition tax and existing deferred tax balances with our understanding of the Tax Act and guidance available as of the date of filing. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings which was a benefit of $0.1 million. We also provided withholding tax on the deemed repatriation of foreign earnings of $1.2 million. Under guidance in place at December 31, 2019 and December 31, 2018, no adjustments to our provisional effects of the Tax Act recorded at December 31, 2017 were necessary. As of December 22, 2018 we have completed our accounting for the income tax effects of the Tax Act.
The Tax Act also included provisions for the GILTI tax inclusion, wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate in general. Under the U.S. generally accepted accounting principles companies are allowed to make an accounting policy election of either (i) account for GILTI as a component of tax expense in the period in which we are subject to the rules (the “period cost method”), or (ii) account for GILTI in our measurement of deferred taxes (the “deferred method”). We are electing the period-cost method for any tax as a result of the GILTI provisions.
A summary of our deferred tax assets is as follows (in thousands):
| | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 | | |
| Deferred tax assets: | | | | | |
| Accrued expenses and reserves | $ | 6,402 | | | $ | 6,365 | | | |
| Share-based compensation | 8,979 | | | 6,473 | | | |
| Accrued compensation | — | | | 2,402 | | | |
| Net operating loss carryforwards | 188,329 | | | 190,904 | | | |
| Property and equipment, textbooks and intangibles assets | 1,849 | | | — | | | |
| Convertible senior notes | 32,254 | | | — | | | |
| Other items | 7,221 | | | 5,734 | | | |
| Gross deferred tax assets | 245,034 | | | 211,878 | | | |
| Valuation allowance | (238,317) | | | (151,825) | | | |
| Total deferred tax assets | 6,717 | | | 60,053 | | | |
| | | | | |
| Deferred tax liabilities: | | | | | |
| Property and equipment, textbooks and intangibles assets | — | | | (4,066) | | | |
| Convertible senior notes | — | | | (51,607) | | | |
| Other | (7,878) | | | (5,890) | | | |
| Total deferred tax liabilities | (7,878) | | | (61,563) | | | |
| | | | | |
| Net deferred tax liability | $ | (1,161) | | | $ | (1,510) | | | |
|
| | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 |
| Deferred tax assets: | | | |
| Accrued expenses and reserves | $ | 3,978 |
| | $ | 1,661 |
|
| Share-based compensation | 12,003 |
| | 13,083 |
|
| Accrued compensation | 997 |
| | 2,075 |
|
| Net operating loss carryforwards | 162,320 |
| | 106,659 |
|
| Property and equipment, textbooks and intangibles assets | — |
| | 3,745 |
|
| Other items | 3,438 |
| | 2,951 |
|
| Gross deferred tax assets | 182,736 |
| | 130,174 |
|
| Valuation allowance | (148,519 | ) | | (125,844 | ) |
| Total deferred tax assets | 34,217 |
| | 4,330 |
|
| | | | |
| Deferred tax liabilities: | | | |
| Property and equipment, textbooks and intangibles assets | (4,111 | ) | | — |
|
| Convertible senior notes | (27,065 | ) | | (46 | ) |
| Other | (4,661 | ) | | (5,943 | ) |
| Total deferred tax liabilities | (35,837 | ) | | (5,989 | ) |
| | | | |
| Net deferred tax liability | $ | (1,620 | ) | | $ | (1,659 | ) |
At December 31, 20192021 and 20182020, the deferred tax liability is primarily created by the tax amortization of acquired indefinite lived intangible assets. Under the accounting guidance this deferred tax liability can be used as a source of income for recognition of deferred tax assets when determining the amount of valuation allowance to be recorded.
As of December 31, 2021, we intend to permanently reinvest all 2018 and later earnings from our foreign subsidiaries. As such, we have not provided for any remaining tax effect, if any, of the outside basis difference of our foreign subsidiaries based upon plans of future reinvestment. The determination of the future tax consequences of the remittance of these earnings is not practicable.
Realization of the deferred tax assets is dependent upon future taxable income, the amount and timing of which are uncertain. Accordingly, the federal and state gross deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $22.7$86.5 million during the year ended December 31, 20192021 and increased by $34.7approximately $3.3 million during the year ended December 31, 2018.2020.
As of December 31, 2019,2021, we had net operating loss carryforwards for federal and state income tax purposes of approximately $591$660 million and $440$485 million, respectively, which will begin to expire in years beginning 2028 and 2020,2022, respectively.
As of December 31, 2019,2021, we had tax credit carryforwards for federal and state income tax purposes of approximately $14.8$21.4 million and $11.9$15.7 million, respectively. The federal credits expire in various years beginning in 2030. The state credits do not expire.
Utilization of our net operating losses and tax credit carryforwards may be subject to substantial annual limitations due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended (IRC), and similar state provisions. Such annual limitations could result in the expiration of the net operating losses and tax credit carryforwards before utilization.
As described above, the Tax Act included a transition tax in 2017 that taxed any previously deferred foreign earnings and profits in 2017 at a reduced tax rate. As a result of this tax and the accrual of associated distribution tax, we have no unrecorded tax liabilities associated with unremitted foreign retained earnings as of December 31, 2017. As of December 31, 2019, we intend to permanently reinvest all 2018 and 2019 earnings from our international subsidiaries. As such we have not provided for any remaining tax effect, if any, of limited outside basis difference of our foreign subsidiaries based upon plans of future reinvestment. As a result of the Tax Act this amount is anticipated to be insignificant. The determination of the future tax consequences of the remittance of these earnings is not practicable.
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. During the years ended December 31, 2019, 20182021, 2020 and 2017,2019, we recognized an increase of $45 thousand, a decrease of $0.7$0.1 million, $0.1 million and an increase of $0.2 million$45 thousand of interest and penalties, respectively. Accrued interest and penalties as of December 31, 20192021 and 20182020 were approximately $0.1$0.3 million and $73 thousand,$0.2 million, respectively.
We file tax returns in U.S. federal, state, and certain foreign jurisdictions with varying statutes of limitations. Due to net operating loss and credit carryforwards, all of the tax years since inception through the 20192021 tax year remain subject to examination by the U.S. federal and some state authorities. Foreign jurisdictions remain subject to examination up to approximately seven years from the filing date, depending on the jurisdiction.
A reconciliation of the beginning and ending balances of the total amount of unrecognized tax benefits, excluding accrued interest and penalties, is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Beginning balance | $ | 14,654 | | | $ | 10,993 | | | $ | 8,771 | |
| Increase in tax positions for prior years | 305 | | | 479 | | | 221 | |
| Decrease in tax positions for prior years | (952) | | | (535) | | | (1,550) | |
| Decrease in tax positions for prior year settlement | (22) | | | (208) | | | — | |
| Decrease in tax positions for prior years due to statutes lapsing | (426) | | | (26) | | | (164) | |
| Increase in tax positions for current year | 3,309 | | | 3,999 | | | 3,722 | |
| Change due to translation of foreign currencies | (63) | | | (48) | | | (7) | |
| Ending balance | $ | 16,805 | | | $ | 14,654 | | | $ | 10,993 | |
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Beginning balance | $ | 8,771 |
| | $ | 5,772 |
| | $ | 4,882 |
|
| Increase in tax positions for prior years | 221 |
| | 758 |
| | 280 |
|
| Decrease in tax positions for prior years | (1,550 | ) | | (569 | ) | | (101 | ) |
| Decrease in tax positions for prior year settlement | — |
| | (149 | ) | | (172 | ) |
| Decrease in tax positions for prior years due to statutes lapsing | (164 | ) | | (103 | ) | | (169 | ) |
| Increase in tax positions for current year | 3,722 |
| | 3,112 |
| | 978 |
|
| Change due to translation of foreign currencies | (7 | ) | | (50 | ) | | 74 |
|
| Ending balance | $ | 10,993 |
| | $ | 8,771 |
| | $ | 5,772 |
|
The amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $1.9$4.5 million for the year ended December 31, 2019.2021. One or more of these unrecognized tax benefits could be subject to a valuation allowance if, and when recognized in a future period, which could impact the timing of any related effective tax rate benefit.
The actual amount of any taxes due could vary significantly depending on the ultimate timing and nature of any settlement. We believe that the amount by which the unrecognized tax benefits may increase or decrease within the next 12 months is not estimable.
Note 17. Restructuring ChargesRelated-Party Transactions
2017 Restructuring Plan
In January 2017, we entered intoOur Chief Executive Officer is a strategic partnership withmember of the NRCCUA where they assumed responsibility for managing, renewing, and maintaining our existing university contracts and become the exclusive resellerBoard of our digital marketing services for colleges and universities. As a resultDirectors of this strategic partnership, approximately 55 employees in China and the United States supporting the sales and account support functions of our marketing services offerings were terminated.Adobe Systems Incorporated (Adobe). During the yearyears ended December 31, 2021, 2020, and 2019, we recorded workforce reduction costspurchased services of $0.1$2.4 million, $1.7 million and $2.1 million, respectively, from Adobe. We had no revenues from Adobe during the year ended December 31, 2018, we recorded workforce reduction costs of $0.32021 and $0.1 million and lease termination and other costs of $19 thousand. We expect remaining costs incurred to date related to this workforce reduction to be fully paid within two months.
2015 Restructuring Plan
We recorded a reduction of $0.3$0.2 million, to our 2015 Restructuring Plan liability related to our adoption of ASU 2016-02, Leases (Topic 842)in revenues during the three monthsyears ended MarchDecember 31, 2019. Our 2015 Restructuring Plan is now complete.
The following table summarizes the activity related to the accrual for restructuring charges (in thousands):2020 and 2019, respectively. We had no payables as of
|
| | | | | | | | | | | | | | | |
| | 2017 Restructuring Plan | | 2015 Restructuring Plan | | |
| | Workforce Reduction Costs | | Lease Termination and Other Costs | | Lease Termination and Other Costs | | Total |
| Balance at January 1, 2018 | $ | 44 |
| | $ | — |
| | $ | 221 |
| | $ | 265 |
|
| Restructuring charges | 253 |
| | 19 |
| | 317 |
| | 589 |
|
| Cash payments | (151 | ) | | (19 | ) | | (218 | ) | | (388 | ) |
| Write-offs | — |
| | — |
| | (18 | ) | | (18 | ) |
| Balance at December 31 2018 | 146 |
| | — |
| | 302 |
| | 448 |
|
| Cumulative-effect adjustment to accumulated deficit related to adoption of ASU 2016-02 | — |
| | — |
| | (302 | ) | | (302 | ) |
| Restructuring charges | 97 |
| | — |
| | — |
| | 97 |
|
| Cash payments | (221 | ) | | — |
| | — |
| | (221 | ) |
| Write-offs | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2019 | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 22 |
|
86
December 31, 2021 and $0.1 million of payables as of December 31, 2020 to Adobe. We had no outstanding receivables as of December 31, 2021 and 2020 from Adobe.
NaN of our board members is a member of the Board of Directors of Zuora, Inc. (Zuora). During the years ended December 31, 2021 and 2020 we purchased services of $1.9 million and $1.3 million, respectively, from Zuora. We had no payables as December 31, 2021 and 2020 to Zuora.
NaN of our board members is also the Chief Executive Officer of the San Francisco 49ers (49ers). During the years ended December 31, 2021, 2020 and 2019, we purchased advertisements of $0.2 million, $0.1 million, and $0.2 million, respectively, from the 49ers.
Note 18. Related-Party Transactions
Our Chief Executive Officer is a member of the Board of Directors of Adobe Systems Incorporated (Adobe). During the years ended December 31, 2019, 2018, and 2017, we purchased $2.1 million, $3.3 million and $3.2 million, respectively, of services from Adobe. We had $0.2 million in revenues during the year ended December 31, 2019 and $0.1 million in revenues during the years ended December 31, 2018 and 2017 from Adobe. We had $0.2 million and an immaterial amount in payables as of December 31, 2019 and 2018, respectively, to Adobe. We had 0 outstanding receivables as of December 31, 2019 and 2018 from Adobe.
NaN of
In September 2021, we changed our board members wasgo-to-market strategy for our Thinkful product offering which we believe will have the most growth potential to serve learners. This resulted in a member ofmanagement approved restructuring plan that impacted approximately 60 full-time employees and 100 part-time employees in the Board of Directors of Cengage Learning, Inc. (Cengage) until December 23, 2019. During the years ended December 31, 2019, 2018, and 2017, we purchased $17.2 million, $15.1 million, and $11.5 million, respectively, of goods and services from Cengage. We had $3.0 million, $2.5 million, and $1.9 million in revenues during the years ended December 31, 2019, 2018, and 2017, respectively, from Cengage. We had an immaterial amount and $0.1 million in payables as of December 31, 2019 and 2018, respectively, to Cengage. We had an immaterial amount of outstanding receivables as of December 31, 2019 and 2018, respectively, from Cengage.
NaN of our board members is also a member of the Board of Directors of Synack, Inc. (Synack). During the years ended December 31, 2019, 2018, and 2017, we purchased $0.4 million, $0.1 million, and $0.1 million, respectively, of services from Synack.
The immediate family of 1 of our board members is a member of the Board of Directors of PayPal Holdings, Inc. (PayPal). During the years ended December 31, 2019, 2018, and 2017, we incurred payment processing fees of $1.6 million, $1.3 million, and $1.0 million, respectively, to PayPal.
NaN of our board members is the Chief Executive Officer of the San Francisco 49ers (49ers).United States. During the year ended December 31, 2019,2021, we purchased $0.2recorded restructuring charges of $1.9 million related to one-time employee termination benefits classified on our consolidated statements of advertisementsoperations based on the employees' job function and made cash payments of $1.1 million. As of December 31, 2021, we have $0.8 million remaining liability which is included within accrued liabilities on our consolidated balance sheets. The total cost of the restructuring plan has been recorded and we expect it to be completed by the end of the second quarter of fiscal year 2022. We expect cost savings from the 49ers.restructuring plan to be reinvested in future growth opportunities.
The following table summarizes the activity related to the restructuring liability (in thousands): | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | | | |
| Beginning balance | $ | — | | | | | | | | | |
| Restructuring charges | 1,922 | | | | | | | | | |
| Cash payments | (1,137) | | | | | | | | | |
| | | | | | | | | |
| Ending balance | $ | 785 | | | | | | | | | |
Note 19. Consolidated Statements of Operations Details
Other (expense) income, net, net consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Loss on early extinguishment of debt(1) | $ | (78,152) | | | $ | (4,286) | | | $ | — | |
Loss on change in fair value of derivative instruments, net(1) | (7,148) | | | — | | | — | |
Gain on sale of strategic equity investments(2) | 12,496 | | | — | | | — | |
| Interest income | 6,700 | | | 12,783 | | | 19,586 | |
| Other | 632 | | | 186 | | | 477 | |
| Total other (expense) income, net | $ | (65,472) | | | $ | 8,683 | | | $ | 20,063 | |
(1) For further information, see Note 10, “Convertible Senior Notes.”
(2) For further information, see Note 5, “Cash and Cash Equivalents, and Investments and Fair Value Measurements.”
Note 19.20. Employee Benefit Plan
We sponsor a 401(k) savings plan for eligible employees and their beneficiaries. Contributions by us are discretionary. Participantsdiscretionary and participants may contribute, on a pretax basis, a percentage of their annual compensation, but not to exceed a maximum contribution amount pursuant to Section 401(k) of the IRC. During the years ended December 31, 2019, 2018,2021, 2020, and 2017, our 2019,
matching contributions totaled approximately $2.6 million, $2.2 million and $1.7 million, $1.4 million, and $1.1 million, respectively.
Note 20.21. Segment Information
Our chief operating decision-maker is our Chief Executive Officer who makes resource allocation decisions and reviews financial information presented on a consolidated basis. Accordingly, we have determined that we have a single operating and reportable segment and operating unit structure.
Product Information
We derive our revenues from our Chegg Services and Required Materials product lines. Our Chegg Services primarily include Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, Chegg Study Pack, Mathway and Thinkful. Our Required Materials include a revenue share, upon fulfillment, on the total transactional amount of a rental and sale transaction forproduct line includes revenues from print textbooks as well as revenues fromand eTextbooks.
The following table sets forth our total net revenues for the periods shown for our Chegg Services and Required Materials product lines (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Chegg Services | $ | 669,894 | | | $ | 521,228 | | | $ | 332,221 | |
| Required Materials | 106,371 | | | 123,110 | | | 78,705 | |
| Total net revenues | $ | 776,265 | | | $ | 644,338 | | | $ | 410,926 | |
|
| | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 |
| Chegg Services | $ | 332,221 |
| | $ | 253,985 |
| | $ | 185,683 |
|
| Required Materials | 78,705 |
| | 67,099 |
| | 69,383 |
|
| Total net revenues | $ | 410,926 |
| | $ | 321,084 |
| | $ | 255,066 |
|
Geographic Information
Our headquarters and most of our operations are located in the United States. WeStates where we primarily conduct our sales, marketing and customer service activities primarily inactivities. During the year ended December 31, 2021, we had revenues of $690.0 million from the United States. Geographic revenues information is based onStates and $86.3 million internationally. During the location of the customer. Inyears ended December 31, 2020 and 2019, 2018, and 2017, substantially all of our revenuesrevenue was from the United States. As of December 31, 2021 and 2020, substantially all of our long-lived assets are located in the United States.
Note 21. Selected Quarterly Financial Data (unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2019 | | June 30, 2019 | | September 30, 2019 | | December 31, 2019 |
| Total net revenues | $ | 97,409 |
| | $ | 93,862 |
| | $ | 94,151 |
| | $ | 125,504 |
|
| Gross profit | 74,074 |
| | 73,344 |
| | 71,987 |
| | 99,339 |
|
| (Loss) income from operations | (1,027 | ) | | 6,815 |
| | (5,057 | ) | | 17,086 |
|
| Net (loss) income | (4,318 | ) | | (2,029 | ) | | (11,477 | ) | | 8,219 |
|
| Weighted average shares used to compute net (loss) income per share: | | | | | | | |
| Basic | 116,730 |
| | 118,790 |
| | 120,085 |
| | 121,151 |
|
| Diluted | 116,730 |
| | 118,790 |
| | 120,085 |
| | 129,150 |
|
| Net (loss) income per share: | | | | | | | |
| Basic | $ | (0.04 | ) | | $ | (0.02 | ) | | $ | (0.10 | ) | | $ | 0.07 |
|
| Diluted | $ | (0.04 | ) | | $ | (0.02 | ) | | $ | (0.10 | ) | | $ | 0.06 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2018 | | June 30, 2018 | | September 30, 2018 | | December 31, 2018 |
| Total net revenues | $ | 76,949 |
| | $ | 74,222 |
| | $ | 74,237 |
| | $ | 95,676 |
|
| Gross profit | 56,725 |
| | 56,438 |
| | 54,319 |
| | 73,606 |
|
| (Loss) income from operations | (2,620 | ) | | (711 | ) | | (10,433 | ) | | 7,544 |
|
| Net (loss) income | (2,617 | ) | | (3,909 | ) | | (13,709 | ) | | 5,347 |
|
| Weighted average shares used to compute net (loss) income per share: | | | | | | | |
| Basic | 110,904 |
| | 112,738 |
| | 114,184 |
| | 115,123 |
|
| Diluted | 110,904 |
| | 112,738 |
| | 114,184 |
| | 125,610 |
|
| Net (loss) income per share: | | | | | | | |
| Basic | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.12 | ) | | $ | 0.05 |
|
| Diluted | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.12 | ) | | $ | 0.04 |
|
Note 22. Subsequent Event
On January 29, 2020, we purchased $29.4 millionTable of print textbooks to establish our initial print textbook library.Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
| |
(a) | Evaluation of Disclosure Controls and Procedures |
(a)Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
| |
(b) | Management's Annual Report on Internal Control Over Financial Reporting |
(b)Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 framework). The Company has excluded the financial results of Thinkful, Inc. from its evaluation of its internal control over financial reporting, which financial results are included in the December 31, 2019 consolidated financial statements and constituted less than 1% of total assets as of December 31, 2019, and less than 1% of total net revenues for the year ended December 31, 2019. All control systems are subject to inherent limitations. Our management has concluded that, as of December 31, 2019,2021, our internal control over financial reporting is effective based on these criteria. Additionally, our independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the Company's internal control over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K.
| |
(c) | Changes in Internal Control over Financial Reporting |
(c)Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2019,2021, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.We continue to monitor the impact of the COVID-19 pandemic and, despite many of our employees working remotely, have not experienced any changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning our directors, compliance with Section 16(a) of the Exchange Act, our Audit Committee and any changes to the process by which stockholders may recommend nominees to the Board required by this Item are incorporated herein by reference to information contained in the Proxy Statement, including “Proposal No. 1 Election of Directors,” “Committees of our Board of Directors,” “Delinquent Section 16(a) Reports” and “Stockholder Proposals to Be Presented at Next Annual Meeting.” The Proxy Statement will be filed with the SEC within 120 days of the fiscal year ended December 31, 2019.2021.
The information concerning our executive officers required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Our Management.”
We have adopted a code of ethics, our Code of Business Conduct and Ethics, which applies to all employees, including our principal executive officer, our principal financial officer, and all other executive officers, and our board of directors. The Code of Business Conduct and Ethics is available on our web-sitewebsite at investor.chegg.com under “Corporate Governance.” We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information on our website at the address and location specified above.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Compensation Committee Interlocks and Insider Participation” and “Executive Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Equity Compensation Plan Information,” “Transactions with Related Parties, Founders and Control Persons”Persons,” and “Independence of Directors.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Corporate Governance Standards and Director Independence” “Transactions with Related Parties, Founders and Control Persons” and “Termination and Change of Control Arrangements.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to information contained in the Proxy Statement, including “Proposal No. 23 Ratification of Independent Registered Public Accounting Firm.”
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
|
| | | | |
| Page |
ReportsReport of Deloitte & Touche LLP, Independent Registered Public Accounting Firm (PCAOB ID No. 34) | |
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Operations | |
| Consolidated Statements of Comprehensive Loss | |
Consolidated Statements of Stockholders'Stockholders’ Equity | |
| Consolidated Statements of Cash Flows | |
| Notes to Consolidated Financial Statements | |
2. Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, 2021, 2020 and 2019 |
| | Balance at Beginning of Year | | Provision (Release) for Bad Debts | | Net Write-offs | | Balance at End of Year |
| Accounts receivable allowance | | | | | | | |
| 2021 | $ | 153 | | | $ | 57 | | | $ | (57) | | | $ | 153 | |
| 2020 | 56 | | | 191 | | | (94) | | | 153 | |
| 2019 | 229 | | | (79) | | | (94) | | | 56 | |
|
| | | | | | | | | | | | | | | |
| | Years Ended December 31, 2019, 2018, and 2017 |
| | Balance at
Beginning of
Year | | (Release) Provision for Bad Debts | | Net Write-offs | | Balance at
End of Year |
| Allowance for doubtful accounts | | | | | | | |
| 2019 | $ | 229 |
| | $ | (79 | ) | | $ | (94 | ) | | $ | 56 |
|
| 2018 | 259 |
| | 142 |
| | (172 | ) | | 229 |
|
| 2017 | 436 |
| | 47 |
| | (224 | ) | | 259 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, 2021, 2020 and 2019 |
| | Balance at Beginning of Year | | Provision for Refunds | | Refunds Issued | | Balance at End of Year |
| Refund reserve | | | | | | | |
| 2021 | $ | 1,515 | | | $ | 58,553 | | | $ | (58,676) | | | $ | 1,392 | |
| 2020 | 554 | | | 44,171 | | | (43,210) | | | 1,515 | |
| 2019 | 396 | | | 24,987 | | | (24,829) | | | 554 | |
|
| | | | | | | | | | | | | | | |
| | Years Ended December 31, 2019, 2018, and 2017 |
| | Balance at
Beginning of
Year | | Provision for Refunds | | Refunds Issued | | Balance at
End of Year |
| Refund Reserve | | | | | | | |
| 2019 | $ | 396 |
| | $ | 24,987 |
| | $ | (24,829 | ) | | $ | 554 |
|
| 2018 | 282 |
| | 21,240 |
| | (21,126 | ) | | 396 |
|
| 2017 | 487 |
| | 22,446 |
| | (22,651 | ) | | 282 |
|
All other financial statement schedules are omitted because they are not applicable or the information is included in the Registrant’s consolidated financial statements or related notes.
3. Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit | | Form | | File No. | | Filing Date | | Exhibit No. | | Filed
Herewith |
| | | | 10-K | | 001-36180 | | 3/4/16 | | 3.01 | | |
| | | | 8-K | | 001-36180 | | 9/20/18 | | 3.1 | | |
| | | | S-1/A | | 333-190616 | | 10/01/13 | | 4.01 | | |
| | | | 10-K | | 001-36180 | | 2/20/20 | | 4.04 | | |
| | | | 8-K | | 001-36180 | | 4/3/18 | | 4.1 | | |
|
| | | | | | | | | | | | |
| | | | | Incorporated by Reference |
Exhibit No. | | Exhibit | | Form | | File No. | | Filing Date | | Exhibit No. | | Filed Herewith |
| | | | 10-K | | 001-36180 | | 3/4/16 | | 3.01 | | |
| | | | 8-K | | 001-36180 | | 9/20/18 | | 3.1 | | |
| | | | S-1/A | | 333-190616 | | 10/01/13 | | 4.01 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 8-K | | 001-36180 | | 3/26/19 | | 4.1 | | |
| | | | 8-K | | 001-36180 | | 08/24/20 | | 4.1 | | |
| | | | S-1/A | | 333-190616 | | 10/01/13 | | 10.01 | | |
| | | | | | | | | | | | |
| | | | S-1/A | | 333-190616 | | 10/25/13 | | 10.04 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.05 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.06 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.07 | | |
| | | | 10-K | | 001-36180 | | 3/6/14 | | 10.07 | | |
| | | | 10-K | | 001-36180 | | 3/6/14 | | 10.08 | | |
| | | | S-1 | | 333-190616 | | 8/14/13 | | 10.09 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | 10-K | | 001-36180 | | 2/20/20 | | 10.14 | | |
| | | | | | | | | | | | X |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.14 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.15 | | |
| | | | 8-K | | 001-36180 | | 6/5/18 | | 99.1 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | 10-Q | | 001-3618 | | 7/29/19 | | 10.02 | | |
| | | | 10-Q | | 001-36180 | | 7/29/19 | | 10.03 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | 8-K | | 001-36180 | | 3/26/19 | | 99.1 | | |
| | | | 8-K | | 001-36180 | | 4/5/19 | | 99.1 | | |
| | | | 8-K | | 001-36180 | | 8/24/20 | | 99.1 | | |
| | | | 8-K | | 001-36180 | | 8/24/20 | | 99.2 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
|
| | | | | | | | | | | | |
| | | | 8-K | | 001-36180 | | 4/3/18 | | 4.1 | | |
| | | | 8-K | | 001-36180 | | 3/26/19 | | 4.1 | | |
| | | | | | | | | | | | X |
| | | | S-1/A | | 333-190616 | | 10/01/13 | | 10.01 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.02 | | |
| | | | S-1/A | | 333-190616 | | 10/25/13 | | 10.04 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.05 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.06 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.07 | | |
| | | | 10-K | | 001-36180 | | 3/6/14 | | 10.07 | | |
| | | | 10-K | | 001-36180 | | 3/6/14 | | 10.08 | | |
| | | | S-1 | | 333-190616 | | 8/14/13 | | 10.09 | | |
| | | | 10-K | | 001-36180 | | 2/23/17 | | 10.09 | | |
| | | | 8-K | | 001-36180 | | 1/13/20 | | 99.01 | | |
| | | | 10-K | | 001-36180 | | 2/26/18 | | 10.11 | | |
| | | | S-1 | | 333-190616 | | 8/14/13 | | 10.08 | | |
| | | | | | | | | | | | X |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.14 | | |
| | | | S-1 | | 333-190616 | | 08/14/13 | | 10.15 | | |
| | | | 8-K | | 001-36180 | | 6/5/18 | | 99.1 | | |
| | | | 10-K | | 001-36180 | | 2/26/18 | | 10.17 | | |
| | | | 8-K | | 001-36180 | | 5/2/16 | | 99.03 | | |
| | | | 10-K | | 001-36180 | | 2/26/18 | | 10.20 | | |
|
| | | | | | | | | | | | |
| | | | 10-K | | 001-36180 | | 2/26/18 | | 10.21 | | |
| | | | 10-Q | | 001-3618 | | 7/29/19 | | 10.02 | | |
| | | | 10-Q | | 001-36180 | | 7/29/19 | | 10.03 | | |
| | | | 8-K | | 001-36180 | | 04/3/18 | | 99.1 | | |
| | | | 8-K | | 001-36180 | | 04/3/18 | | 99.2 | | |
| | | | 8-K | | 001-36180 | | 3/26/19 | | 99.1 | | |
| | | | 8-K | | 001-36180 | | 4/5/19 | | 99.1 | | |
| | | | 8-K | | 00-36180 | | 3/12/18 | | 16.01 | | |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| | | | | | | | | | | | X |
| 101.INS | | XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | X |
| 101.SCH | | XBRL Taxonomy Extension Schema | | | | | | | | | | X |
| 101.CAL | | XBRL Taxonomy Extension Calculation | | | | | | | | | | X |
| 101.LAB | | XBRL Taxonomy Extension Labels | | | | | | | | | | X |
| 101.PRE | | XBRL Taxonomy Extension Presentation | | | | | | | | | | X |
| 101.DEF | | XBRL Taxonomy Extension Definition | | | | | | | | | | X |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit) | | | | | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | X |
| 101.INS | | XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | X |
| 101.SCH | | XBRL Taxonomy Extension Schema | | | | | | | | | | X |
| 101.CAL | | XBRL Taxonomy Extension Calculation | | | | | | | | | | X |
| 101.LAB | | XBRL Taxonomy Extension Labels | | | | | | | | | | X |
| 101.PRE | | XBRL Taxonomy Extension Presentation | | | | | | | | | | X |
| 101.DEF | | XBRL Taxonomy Extension Definition | | | | | | | | | | X |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit) | | | | | | | | | | X |
| | | | | |
| |
† | Confidential treatment has been granted for portions of this exhibit by the SEC. |
| * | Indicates a management contract or compensatory plan. |
| ** | This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act. |
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | | | | |
| CHEGG, INC. |
February 20, 202022, 2022 | By: | | /S//S/ DAN ROSENSWEIG |
| | | Dan Rosensweig |
| | | President, Chief Executive Officer and Co-Chairperson |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Dan Rosensweig, Andrew Brown and Dana Jewell,Woodie Dixon Jr., and each of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
| | |
Name | Title | Date |
| | |
| /S/ DAN ROSENSWEIG | | President, Chief Executive Officer and Co-Chairperson | | February 20, 202022, 2022 |
| Dan Rosensweig | | (Principal Executive Officer) | | |
| | | | |
| /S/ ANDREW BROWN | | Chief Financial Officer | | February 20, 202022, 2022 |
| Andrew Brown | | (Principal Financial Officer) | | |
| | | | |
/S/ ROBIN TOMASELLODAVID LONGO | | Vice President, Chief Accounting Officer, Corporate Controller, and Assistant Treasurer | | February 20, 202022, 2022 |
Robin TomaselloDavid Longo | | (Principal Accounting Officer) | | |
| | | | |
| /S/ SARAH BOND | | Director | | February 22, 2022 |
| Sarah Bond | | | | |
| | | | |
| /S/ RENEE BUDIG | Director | Director | | February 20, 202022, 2022 |
| Renee Budig | | | | |
| | | | |
| /S/ PAUL LEBLANC | Director | Director | | February 20, 202022, 2022 |
| Paul LeBlanc | | | | |
| | | | |
| /S/ MARNE LEVINE | Director | Director | | February 20, 202022, 2022 |
| Marne Levine | | | | |
| | | | |
| /S/ MARCELA MARTIN | | Director | | February 22, 2022 |
| Marcela Martin | | | | |
| | | | |
| /S/ RICHARD SARNOFF | | Director and Co-Chairperson | | February 20, 202022, 2022 |
| Richard Sarnoff | | | | |
| | | | |
| /S/ TED SCHLEIN | Director | Director | | February 20, 202022, 2022 |
| Ted Schlein | | | | |
| | | | |
| /S/ MELANIE WHELAN | Director | Director | | February 20, 202022, 2022 |
| Melanie Whelan | | | | |
| | | | |
| /S/ JOHN YORK | Director | Director | | February 20, 202022, 2022 |
| John York | | | | |
