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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
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.
(Exact name of registrant as specified in its charter)
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) 855-5700
(Registrant’s telephone number, including area code)
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, $0.001 par value per shareCHGGThe New York Stock Exchange

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 ¨
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.
Large accelerated filerxAccelerated filer
Non-accelerated filer
 (Do not check if a smaller reporting company)
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 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x
As of July 31, 2020, the Registrant had 124,314,241 outstanding shares of Common Stock.





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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, Thinkful, and the Chegg “C” logo, are some of our trademarks used in this Quarterly Report on Form 10-Q. Solely for convenience, our trademarks, trade names, and service marks referred to in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q are the property of their respective holders.

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NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, 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 II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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.
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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CHEGG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)
(unaudited)
 June 30, 2020December 31, 2019
Assets
Current assets  
Cash and cash equivalents$285,064  $387,520  
Short-term investments417,530  381,074  
Accounts receivable, net of allowance of $134 and $56 at June 30, 2020 and December 31, 2019, respectively
8,834  11,529  
Prepaid expenses16,060  10,538  
Other current assets14,650  16,606  
Total current assets742,138  807,267  
Long-term investments280,492  310,483  
Textbook library, net27,129    
Property and equipment, net105,640  87,359  
Goodwill284,682  214,513  
Intangible assets, net59,522  34,667  
Right of use assets15,207  15,931  
Other assets25,068  18,778  
Total assets$1,539,878  $1,488,998  
Liabilities and stockholders' equity  
Current liabilities  
Accounts payable$6,421  $7,362  
Deferred revenue28,320  18,780  
Current operating lease liabilities5,685  5,283  
Accrued liabilities50,067  39,964  
Total current liabilities90,493  71,389  
Long-term liabilities  
Convertible senior notes, net926,193  900,303  
Long-term operating lease liabilities12,947  14,513  
Other long-term liabilities11,867  3,964  
Total long-term liabilities951,007  918,780  
Total liabilities1,041,500  990,169  
Commitments and contingencies
Stockholders' equity:  
Preferred stock, 0.001 par value – 10,000,000 shares authorized, no shares issued and outstanding
    
Common stock, 0.001 par value 400,000,000 shares authorized; 124,122,675 and 121,583,501 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively
124  122  
Additional paid-in capital907,908  916,095  
Accumulated other comprehensive income (loss)1,850  (1,096) 
Accumulated deficit(411,504) (416,292) 
Total stockholders' equity498,378  498,829  
Total liabilities and stockholders' equity$1,539,878  $1,488,998  
See Notes to Condensed Consolidated Financial Statements.
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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Net revenues$153,009  $93,862  $284,599  $191,271  
Cost of revenues43,524  20,518  85,914  43,853  
Gross profit109,485  73,344  198,685  147,418  
Operating expenses:
Research and development40,374  32,065  79,915  64,757  
Sales and marketing15,758  11,795  35,996  30,512  
General and administrative31,292  22,622  57,437  46,292  
Restructuring charges  47    69  
Total operating expenses87,424  66,529  173,348  141,630  
Income from operations22,061  6,815  25,337  5,788  
Interest expense, net and other income, net:
Interest expense, net(13,425) (13,514) (26,852) (17,746) 
Other income, net3,240  5,253  8,200  6,820  
Total interest expense, net and other income, net(10,185) (8,261) (18,652) (10,926) 
Income (loss) before provision for income taxes11,876  (1,446) 6,685  (5,138) 
Provision for income taxes1,287  583  1,809  1,209  
Net income (loss)$10,589  $(2,029) $4,876  $(6,347) 
Net income (loss) per share:
Basic$0.09  $(0.02) $0.04  $(0.05) 
Diluted$0.08  $(0.02) $0.04  $(0.05) 
Weighted average shares used to compute net income (loss) per share:
Basic123,842  118,790  123,135  117,766  
Diluted133,851  118,790  132,674  117,766  
See Notes to Condensed Consolidated Financial Statements.

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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net income (loss)$10,589  $(2,029) $4,876  $(6,347) 
Other comprehensive income:
Change in net unrealized gain on available for sale investments, net of tax6,831  333  3,564  452  
Change in foreign currency translation adjustments, net of tax381  (51) (618) (51) 
Other comprehensive income7,212  282  2,946  401  
Total comprehensive income (loss)$17,801  $(1,747) $7,822  $(5,946) 
See Notes to Condensed Consolidated Financial Statements.

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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Three Months Ended June 30, 2020
Common Stock 
SharesPar 
Value
Additional Paid-In
Capital
 Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit
 Total Stockholders’ Equity
Balances at March 31, 2020123,543  $124  $890,258  $(5,362) $(422,093) $462,927  
Issuance of common stock upon exercise of stock options and ESPP312    5,372  —  —  5,372  
Net issuance of common stock for settlement of RSUs268    (7,268) —  —  (7,268) 
Share-based compensation expense—  —  19,546  —  —  19,546  
Other comprehensive income—  —  —  7,212  —  7,212  
Net income—  —  —  —  10,589  10,589  
Balances at June 30, 2020124,123  $124  $907,908  $1,850  $(411,504) $498,378  

Three Months Ended June 30, 2019
Common Stock 
SharesPar 
Value
Additional Paid-In
Capital
 Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit
 Total Stockholders’ Equity
Balances at March 31, 2019118,197  $118  $839,924  $(900) $(411,005) $428,137  
Equity component of convertible senior notes, net of issuance costs—  —  25,860  —  —  25,860  
Purchase of convertible senior notes capped call—  —  (12,150) —  —  (12,150) 
Issuance of common stock upon exercise of stock options and ESPP845  1  10,225  —  —  10,226  
Net issuance of common stock for settlement of RSUs294    (6,207) —  —  (6,207) 
Share-based compensation expense—  —  15,452  —  —  15,452  
Other comprehensive income—  —  —  282  —  282  
Net loss—  —  —  —  (2,029) (2,029) 
Balances at June 30, 2019119,336  $119  $873,104  $(618) $(413,034) $459,571  

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Six Months Ended June 30, 2020
Common Stock
SharesPar 
Value
Additional Paid-In
Capital
Accumulated Other Comprehensive Income (Loss)Accumulated
Deficit
Total Stockholders’ Equity
Balances at December 31, 2019121,584  $122  $916,095  $(1,096) $(416,292) $498,829  
Cumulative-effect adjustment to accumulated deficit related to adoption of ASU 2016-13
—  —  —  —  (88) (88) 
Issuance of common stock upon exercise of stock options and ESPP672    8,037  —  —  8,037  
Net issuance of common stock for settlement of RSUs1,867  2  (54,104) —  —  (54,102) 
Share-based compensation expense—  —  37,880  —  —  37,880  
Other comprehensive income—  —  —  2,946  —  2,946  
Net income—  —  —  —  4,876  4,876  
Balances at June 30, 2020124,123  $124  $907,908  $1,850  $(411,504) $498,378  

Six Months Ended June 30, 2019
Common Stock 
SharesPar 
Value
Additional Paid-In
Capital
 Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit
 Total Stockholders’ Equity
Balances at December 31, 2018115,500  $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 ESPP1,554  2  16,044  —  —  16,046  
Net issuance of common stock for settlement of RSUs2,745  2  (82,251) —  —  (82,249) 
Issuance of common stock in connection with prior acquisition41  —  1,160  —  —  1,160  
Share-based compensation expense—  —  30,490  —  —  30,490  
Other comprehensive income—  —  —  401  —  401  
Net loss—  —  —  —  (6,347) (6,347) 
Balances at June 30, 2019119,336  $119  $873,104  $(618) $(413,034) $459,571  
See Notes to Condensed Consolidated Financial Statements.

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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months Ended June 30,
 20202019
Cash flows from operating activities 
Net income (loss)$4,876  $(6,347) 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Print textbook depreciation expense7,062    
Other depreciation and amortization expense19,834  13,934  
Share-based compensation expense37,880  30,490  
Amortization of debt discount and issuance costs25,892  17,025  
Loss from write-off of property and equipment851    
Gain on textbook library, net(1,371)   
Deferred income taxes(238) 39  
Operating lease expense, net of accretion2,185  2,168  
Other non-cash items(189) (115) 
Change in assets and liabilities:  
Accounts receivable3,961  6,944  
Prepaid expenses and other current assets(1,812) (12,942) 
Other assets(712) 2,334  
Accounts payable(574) (5,417) 
Deferred revenue8,117  1,403  
Accrued liabilities17,389  2,397  
Other liabilities(946) (4,067) 
Net cash provided by operating activities122,205  47,846  
Cash flows from investing activities  
Purchases of property and equipment(43,111) (23,491) 
Purchases of textbooks(38,668)   
Proceeds from disposition of textbooks3,415    
Purchases of investments(277,033) (527,363) 
Maturities of investments271,711  86,105  
Purchase of strategic equity investment(2,000)   
Acquisition of business, net of cash acquired(92,796)   
Net cash used in investing activities(178,482) (464,749) 
Cash flows from financing activities  
Common stock issued under stock plans, net8,039  17,208  
Payment of taxes related to the net share settlement of equity awards(54,104) (82,251) 
Proceeds from issuance of convertible senior notes, net of issuance costs  780,180  
Purchase of convertible senior notes capped call  (97,200) 
Repurchase of common stock  (20,000) 
Net cash (used in) provided by financing activities(46,065) 597,937  
Net (decrease) increase in cash, cash equivalents and restricted cash(102,342) 181,034  
Cash, cash equivalents and restricted cash, beginning of period389,432  375,945  
Cash, cash equivalents and restricted cash, end of period$287,090  $556,979  

 Six Months Ended June 30,
 20202019
Supplemental cash flow data:
Cash paid during the period for:  
Interest$931  $431  
Income taxes$1,247  $912  
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$3,350  $2,325  
Right of use assets obtained in exchange for lease obligations:
Operating leases$1,713  $  
Non-cash investing and financing activities:  
Accrued purchases of long-lived assets$754  $5,170  
Accrued escrow related to acquisition$7,451  $  

June 30,
20202019
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$285,064  $555,792  
Restricted cash included in other current assets308  121  
Restricted cash included in other assets1,718  1,066  
Total cash, cash equivalents and restricted cash$287,090  $556,979  
See Notes to Condensed Consolidated Financial Statements.
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CHEGG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Background and Basis of Presentation

Company and Background

Chegg, Inc. (Chegg, the Company, we, us, or our), headquartered in Santa Clara, California, was incorporated as a Delaware corporation in July 2005. Chegg is a Smarter Way to Student. As the leading direct-to-student learning platform, we strive to improve educational outcomes by putting the student first in all our decisions. We support students on their journey from high school to college and into their career with tools designed to help them pass their test, pass 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.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of June 30, 2020, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive income (loss), and the condensed consolidated statements of stockholder's equity for the three and six months ended June 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the six months ended June 30, 2020 and 2019, and the related footnote disclosures are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2020, our results of operations, results of comprehensive income (loss), and stockholder's equity for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019. Our results of operations, results of comprehensive income (loss), stockholder's equity, and cash flows for the six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year.

We operate in a single segment. Our fiscal year ends on December 31 and in this report we refer to the year ended December 31, 2019 as 2019.

The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC).

Except for our policies on investments, textbook library, revenue recognition and deferred revenue, and cost of revenues, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K.

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 based on the nature of each security that are either short or long-term based on the remaining contractual maturity of the 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 income in our condensed consolidated statements of stockholders’ equity. Beginning in 2020, unrealized losses related to credit loss factors are now recorded through an allowance for credit losses in other income, net in our condensed consolidated statements of operations, rather than as a reduction to the amortized cost basis in other comprehensive income, when a decline in fair value has resulted from a credit loss. We determine realized gains or losses on the sale of investments on a specific identification method, and record such gains or losses as other income, net in our condensed 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 in our condensed 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.

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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 are recorded in cost of revenues in our condensed consolidated statements of operations and classified as adjustments 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 proceeds from the disposition of print textbooks net of changes in related accounts receivable, are classified as cash flows from investing activities in our condensed consolidated statements of cash flows.

As of June 30, 2020, our net print textbook library of $27.1 million consisted of gross print textbook library of approximately $33.7 million net of accumulated depreciation and write-downs of approximately $6.4 million and $0.1 million, respectively.

During the three and six months ended June 30, 2020, print textbook depreciation expense was approximately $3.6 million and $7.1 million, respectively, and our net gain on textbook library was approximately $0.2 million and $1.4 million, respectively.

Revenue Recognition and Deferred Revenue

We recognize revenues when the control of 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 includes Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, Thinkful, and Mathway. Revenues from Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, and Mathway are primarily recognized ratably over the respective weekly or monthly 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 our Required Materials product line includes revenues from print textbooks that we own or that are owned by a partner as well as revenues from eTextbooks. Beginning in 2020, our Required Materials product line includes operating leases with students for the rental of print textbooks that we own. Operating lease income is recognized as the total transaction amount, paid upon commencement of the lease, ratably over the lease term which is generally a two- to five-month lease 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. Revenues from print textbooks owned by a partner are recognized as a revenue share on the total transactional amount of a rental or sale transaction immediately when a print textbook ships to a student. Shipping and handling activities are expensed as incurred. Revenues from eTextbooks are recognized ratably over the contractual period, generally a two- to five-month period.

Some of our customer arrangements include multiple performance obligations. We have determined these performance obligations qualify as distinct performance obligations, as the customer can benefit from the service on its own or together with other resources that are readily available to the customer, and our promise to transfer the service is separately identifiable from other promises in the contract. For these arrangements that contain multiple performance obligations, we allocate the transaction price based on the relative standalone selling price (SSP) method by comparing the SSP of each distinct performance obligation to the total value of the contract. We determine the SSP based on our historical pricing and discounting
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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.

Some of our customer arrangements may include an amount of variable consideration in addition to a fixed revenue share that we earn. This variable consideration can either increase or decrease the total transaction price depending on the nature of the variable consideration. We estimate the amount of variable consideration that we will earn at the inception of the contract, adjusted during each period, and include an estimated amount each period.

For sales of third-party products, we evaluate whether we are acting as a principal or an agent, and therefore would record the gross sales amount as revenues and related costs or the net amount earned as a revenue share from the sale of third-party products. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. In relation to print textbooks owned by a partner, we recognize revenues on a net basis based on our role in the transaction as an agent as we have concluded that we do not control the use of the print textbooks, and therefore record only the net revenue share we earn. We have concluded that we control our Chegg Service, print textbooks that we own, and eTextbook service and therefore we recognize revenues and cost of revenues on a gross basis.

Contract assets are contained within other current assets and other assets on our condensed consolidated balance sheets. Contract assets represent the goods or services that we have transferred to a customer before invoicing the customer. Contract receivables are contained within accounts receivable, net on our condensed 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 condensed 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 in our condensed 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, licenses from publishers for which we pay one-time license fees, or acquire through acquisitions, write-downs for print textbooks, the gain or loss on print textbooks liquidated, the net book value of print textbooks purchased by students at the end of the term, print textbook depreciation expense, payment processing costs, the payments made to tutors through our Chegg Tutors service, personnel costs and other direct costs related to providing products or services. In addition, cost of revenues includes allocated information technology and facilities costs.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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, share-based compensation expense including estimated forfeitures, accounting for income taxes, 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, internal-use software and website development costs, operating lease right of use (ROU) assets, and operating lease liabilities. 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.

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Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides temporary optional expedients and exceptions for applying reference rate reform to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance can be applied immediately and only applies to contract modifications made or hedging relationships entered into or evaluated before December 31, 2022. While we do not have any hedging relationships and currently do not believe we have material contracts impacted by reference rate reform, we are in the process of evaluating the impact of this guidance.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 key changes include hybrid tax regimes, intraperiod tax allocation exception, and interim-period accounting for enacted changes in tax law. We early adopted ASU 2019-12 during the second quarter of 2020 under the prospective method of adoption. As a result of adoption, there was no modification required to the first quarter of 2020 results of operations as previously presented.

The FASB issued four ASUs related to Accounting Standards Codification (ASC) 326, Financial Instruments - Credit Losses. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. 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. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. On January 1, 2020, we adopted ASC 326, which replaces the existing incurred loss impairment model for financial assets, including 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 requires us to focus on determining whether any unrealized loss is a result of a credit loss or other factors. We adopted ASC 326 under the modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after adoption are presented under ASC 326 while we have not changed previously disclosed amounts or provided additional disclosures for comparative periods. We recorded an immaterial cumulative-effect adjustment to trade receivables to the opening balance of accumulated deficit in our condensed consolidated balance sheet. We adopted ASC 326 under the prospective transition approach for available-for-sale investments which resulted in no change to amortized cost basis before and after adoption. Credit losses related to available-for-sale investments will now be recorded through an allowance for credit losses with immediate recognition to our condensed consolidated statement of operations rather than as a reduction to the amortized cost basis and recognition to our condensed consolidated statements of comprehensive income (loss). See above within Note 1, “Background and Basis of Presentation”, for updates to our significant accounting policies impacted by our adoption of ASC 326 as well as Note 4, “Cash and Cash Equivalents, and Investments” for more information.

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. We adopted ASU 2018-15 on January 1, 2020 under the prospective method of adoption.

Note 2. Revenues

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The majority of our revenues are recognized over time as services are performed, with certain revenues, most significantly the revenue share we earn from our print textbook partners, being recognized at the point in time when print textbooks are shipped to students.

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Table of Contents
The following tables set forth our total net revenues for the periods shown disaggregated for our Chegg Services and Required Materials product lines (in thousands, except percentages):
 Three Months Ended June 30,Change
 20202019$%
Chegg Services$126,004  $80,307  $45,697  57 %
Required Materials27,005  13,555  13,450  99  
Total net revenues$153,009  $93,862  $59,147  63