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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 September 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 October 23, 2020, the Registrant had 128,810,888 outstanding shares of Common Stock.





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TABLE OF CONTENTS
     Page
   
   
    
   
   
  

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)
 September 30, 2020December 31, 2019
Assets
Current assets  
Cash and cash equivalents$527,541 $387,520 
Short-term investments723,327 381,074 
Accounts receivable, net of allowance of $198 and $56 at September 30, 2020 and December 31, 2019, respectively
12,487 11,529 
Prepaid expenses15,082 10,538 
Other current assets21,059 16,606 
Total current assets1,299,496 807,267 
Long-term investments521,261 310,483 
Textbook library, net34,575  
Property and equipment, net113,058 87,359 
Goodwill284,809 214,513 
Intangible assets, net55,386 34,667 
Right of use assets14,124 15,931 
Other assets18,948 18,778 
Total assets$2,341,657 $1,488,998 
Liabilities and stockholders' equity  
Current liabilities  
Accounts payable$5,838 $7,362 
Deferred revenue51,941 18,780 
Current operating lease liabilities5,652 5,283 
Accrued liabilities79,524 39,964 
Total current liabilities142,955 71,389 
Long-term liabilities  
Convertible senior notes, net1,536,984 900,303 
Long-term operating lease liabilities11,661 14,513 
Other long-term liabilities4,665 3,964 
Total long-term liabilities1,553,310 918,780 
Total liabilities1,696,265 990,169 
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; 128,654,401 and 121,583,501 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
129 122 
Additional paid-in capital1,092,574 916,095 
Accumulated other comprehensive income (loss)1,333 (1,096)
Accumulated deficit(448,644)(416,292)
Total stockholders' equity645,392 498,829 
Total liabilities and stockholders' equity$2,341,657 $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 September 30,Nine Months Ended September 30,
 2020201920202019
Net revenues$154,018 $94,151 $438,617 $285,422 
Cost of revenues62,370 22,164 148,284 66,017 
Gross profit91,648 71,987 290,333 219,405 
Operating expenses:
Research and development44,041 36,442 123,956 101,199 
Sales and marketing24,625 16,822 60,621 47,334 
General and administrative40,784 23,752 98,221 70,044 
Restructuring charges 28  97 
Total operating expenses109,450 77,044 282,798 218,674 
(Loss) income from operations(17,802)(5,057)7,535 731 
Interest expense, net and other (expense) income, net:
Interest expense, net(17,468)(13,548)(44,320)(31,294)
Other (expense) income, net(804)7,751 7,396 14,571 
Total interest expense, net and other (expense) income, net(18,272)(5,797)(36,924)(16,723)
Loss before provision for income taxes(36,074)(10,854)(29,389)(15,992)
Provision for income taxes1,066 623 2,875 1,832 
Net loss$(37,140)$(11,477)$(32,264)$(17,824)
Net loss per share, basic and diluted$(0.29)$(0.10)$(0.26)$(0.15)
Weighted average shares used to compute net loss per share, basic and diluted126,194 120,085 124,162 118,547 
See Notes to Condensed Consolidated Financial Statements.

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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net loss$(37,140)$(11,477)$(32,264)$(17,824)
Other comprehensive (loss) income
Change in net unrealized (loss) gain on available for sale investments, net of tax(1,642)(73)1,922 379 
Change in foreign currency translation adjustments, net of tax1,125 (1,067)507 (1,118)
Other comprehensive (loss) income(517)(1,140)2,429 (739)
Total comprehensive loss$(37,657)$(12,617)$(29,835)$(18,563)
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 September 30, 2020
Common Stock 
SharesPar 
Value
Additional Paid-In
Capital
 Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit
 Total Stockholders’ Equity
Balances at June 30, 2020124,123 $124 $907,908 $1,850 $(411,504)$498,378 
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— — (345,552)— — (345,552)
Issuance of common stock upon conversion of 2023 convertible senior notes4,182 4 327,137 — — 327,141 
Proceeds from capped call related to conversions of 2023 convertible senior notes— — 57,414 — — 57,414 
Issuance of common stock upon exercise of stock options and ESPP106 1 1,196 — — 1,197 
Net issuance of common stock for settlement of equity awards243  (11,120)— — (11,120)
Share-based compensation expense— — 21,529 — — 21,529 
Other comprehensive loss— — — (517)— (517)
Net loss— — — — (37,140)(37,140)
Balances at September 30, 2020
128,654 $129 $1,092,574 $1,333 $(448,644)$645,392 

Three Months Ended September 30, 2019
Common Stock 
SharesPar 
Value
Additional Paid-In
Capital
 Accumulated Other Comprehensive Income (Loss) Accumulated
Deficit
 Total Stockholders’ Equity
Balances at June 30, 2019119,336 $119 $873,104 $(618)$(413,034)$459,571 
Issuance of common stock upon exercise of stock options and ESPP991 1 11,673 — — 11,674 
Net issuance of common stock for settlement of equity awards319 1 (8,825)— — (8,824)
Issuance of common stock in connection with prior acquisition23 — 1,843 — — 1,843 
Share-based compensation expense— — 16,865 — — 16,865 
Other comprehensive loss— — — (1,140)— (1,140)
Net loss— — — — (11,477)(11,477)
Balances at September 30, 2019
120,669 $121 $894,660 $(1,758)$(424,511)$468,512 

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Nine Months Ended September 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)
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— — (345,552)— — (345,552)
Issuance of common stock upon conversion of 2023 convertible senior notes4,182 4 327,137 — — 327,141 
Proceeds from capped call related to conversions of 2023 convertible senior notes— — 57,414 — — 57,414 
Issuance of common stock upon exercise of stock options and ESPP778 1 9,233 — — 9,234 
Net issuance of common stock for settlement of equity awards2,110 2 (65,224)— — (65,222)
Share-based compensation expense— — 59,409 — — 59,409 
Other comprehensive income— — — 2,429 — 2,429 
Net loss— — — — (32,264)(32,264)
Balances at September 30, 2020
128,654 $129 $1,092,574 $1,333 $(448,644)$645,392 

Nine Months Ended September 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 2026 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 ESPP2,545 3 27,717 — — 27,720 
Net issuance of common stock for settlement of equity awards3,064 3 (91,076)— — (91,073)
Issuance of common stock in connection with prior acquisition64 — 3,003 — — 3,003 
Share-based compensation expense— — 47,355 — — 47,355 
Other comprehensive loss— — — (739)— (739)
Net loss— — — — (17,824)(17,824)
Balances at September 30, 2019
120,669 $121 $894,660 $(1,758)$(424,511)$468,512 
See Notes to Condensed Consolidated Financial Statements.
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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months Ended September 30,
 20202019
Cash flows from operating activities 
Net loss$(32,264)$(17,824)
Adjustments to reconcile net loss to net cash provided by operating activities:
Print textbook depreciation expense10,699  
Other depreciation and amortization expense33,088 21,369 
Share-based compensation expense59,409 47,355 
Amortization of debt discount and issuance costs42,910 30,114 
Repayment of convertible senior notes attributable to debt discount(14,912) 
Loss on early extinguishment of debt3,315  
Loss from write-off of property and equipment1,057 832 
Loss from impairment of strategic equity investment10,000  
Gain on textbook library, net(2,028) 
Deferred income taxes(17)59 
Operating lease expense, net of accretion3,400 3,284 
Other non-cash items(85)(370)
Change in assets and liabilities, net of effect of acquisition of business:  
Accounts receivable106 (850)
Prepaid expenses and other current assets(6,178)(20,741)
Other assets(2,638)1,989 
Accounts payable(1,634)(3,983)
Deferred revenue32,239 10,039 
Accrued liabilities34,276 18,095 
Other liabilities(2,088)(2,793)
Net cash provided by operating activities168,655 86,575 
Cash flows from investing activities  
Purchases of property and equipment(57,457)(31,520)
Purchases of textbooks(49,641) 
Proceeds from disposition of textbooks7,012  
Purchases of investments(968,106)(822,869)
Proceeds from sale of investments 53,261 
Maturities of investments412,046 190,744 
Purchase of strategic equity investment(2,000) 
Acquisition of business, net of cash acquired(92,796) 
Net cash used in investing activities(750,942)(610,384)
Cash flows from financing activities  
Proceeds from common stock issued under stock plans, net9,236 27,723 
Payment of taxes related to the net share settlement of equity awards(65,224)(91,076)
Proceeds from issuance of convertible senior notes, net of issuance costs984,096 780,180 
Purchase of convertible senior notes capped call(103,400)(97,200)
Repayment of convertible senior notes(159,677) 
Proceeds from exercise of convertible senior notes capped call57,414  
Repurchase of common stock (20,000)
Net cash provided by financing activities722,445 599,627 
Net increase in cash, cash equivalents and restricted cash140,158 75,818 
Cash, cash equivalents and restricted cash, beginning of period389,432 375,945 
Cash, cash equivalents and restricted cash, end of period$529,590 $451,763 

 Nine Months Ended September 30,
 20202019
Supplemental cash flow data:
Cash paid during the period for:  
Interest$1,546 $901 
Income taxes$2,450 $1,492 
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$5,174 $3,847 
Right of use assets obtained in exchange for lease obligations:
Operating leases$1,713 $2,638 
Non-cash investing and financing activities:  
Accrued purchases of long-lived assets$6,102 $4,452 
Accrued escrow related to acquisition$7,451 $ 
Issuance of common stock related to prior acquisition$ $3,003 
Issuance of common stock related to repayment of convertible senior notes$327,141 $ 

September 30,
20202019
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$527,541 $450,457 
Restricted cash included in other current assets313 125 
Restricted cash included in other assets1,736 1,181 
Total cash, cash equivalents and restricted cash$529,590 $451,763 
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 September 30, 2020, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss, and the condensed consolidated statements of stockholder's equity for the three and nine months ended September 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended September 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 September 30, 2020, our results of operations, results of comprehensive loss, and stockholder's equity for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2020 and 2019. Our results of operations, results of comprehensive loss, stockholder's equity, and cash flows for the nine months ended September 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, convertible senior notes, net, 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 (loss) 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 (expense) income, net in our condensed consolidated statements of operations, rather than as a reduction to the amortized cost basis in other comprehensive (loss) 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 (expense) 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 or on a just-in-time basis 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 September 30, 2020, our net print textbook library of $34.6 million consisted of gross print textbook library of approximately $44.8 million net of accumulated depreciation and write-downs of approximately $9.2 million and $1.0 million, respectively.

During the three and nine months ended September 30, 2020, print textbook depreciation expense was approximately $3.6 million and $10.7 million, respectively, and our net gain on textbook library was approximately $0.6 million and $2.0 million, respectively.

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.” In accounting for their issuance, we separated the notes into liability and equity components, as the notes represent convertible instruments with a cash conversion feature. 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, recorded as a reduction 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. The carrying amount of the liability component is classified as a long-term liability as we have the election to settle conversion requests in shares of our common stock. The carrying amount of the equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. 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 attributable to the equity component are recorded as a reduction of the equity component within additional paid-in capital. In accounting for extinguishment of the notes, we allocated the consideration transferred between the liability and equity components in a similar manner as upon issuance. The liability component for extinguished notes is then compared to the carrying amount of the respective extinguished notes and a gain or loss is recorded in other (expense) income, net in our condensed consolidated statements of operations.

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
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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. 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 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 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 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.

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.

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    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 or on a just-in-time basis, 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.

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements Not Yet Adopted

In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. ASU 2020-06 simplifies the guidance in Accounting Standards Codification (ASC) 470-20, Debt - Debt with Conversion and Other Options, by reducing the number of accounting separation models for convertible instruments, amends the guidance in ASC 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity, for certain contracts in an entity's own equity that are currently accounted for as derivatives, and requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share (EPS) calculation. Early adoption is permitted, but no earlier than annual periods beginning after December 15, 2020, and the guidance allows for a modified retrospective or fully retrospective method of transition. We currently plan to adopt the guidance on January 1, 2021. At this time, we are continuing to refine the quantitative impact of early adopting this guidance and we initially believe the most significant impacts will be an increase in liabilities on our condensed consolidated balance sheets as a result of removing the accounting separation model for convertible instruments with a cash conversion feature, a significant reduction of non-cash interest expense on our condensed consolidated statements of operations, and an increase in the number of shares included in our diluted EPS calculations. We will continue to evaluate the impacts of this guidance, including method of transition, as we near our adoption date.

In March 2020, the FASB issued 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.

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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 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 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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The following tables set forth our total net revenues for the periods shown disaggregated for our Chegg Services and Required Materials product lines (in thousands, except percentages):
 Three Months Ended September 30,Change
 20202019$%
Chegg Services$118,895 $69,304 $49,591 72 %
Required Materials35,123 24,847 10,276 41 
Total net revenues$154,018 $94,151 $59,867 64 

 Nine Months Ended September 30,Change
 20202019$%
Chegg Services$345,258