DISCUSSION AND ANALYSIS OF MANAGEMENT’S FINANCIAL CONDITION AND RESULTS OF PERFORMANCE (Form 10-K)
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 endedDecember 31, 2020 , filed with theSEC onFebruary 22, 2021 , which is available free of charge on theSEC'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
Millions of people all around the world Learn withChegg . Our mission is to improve learning and learning outcomes by putting students first. We support life-long learners starting with their academic journey and extending into their careers. TheChegg platform provides products and services to support learners to help them better understand their academic course materials, and also provides personal and professional development skills training, to help them achieve their learning goals. Students subscribe to our subscription services, collectively referred to as our Chegg Services, which can be accessed internationally through our websites and on mobile devices. Our primary Chegg Services include Chegg Study,Chegg Writing, Chegg Math Solver, Chegg 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 our Chegg Writing subscription service. Our Chegg Math Solver and Mathway subscription services 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. Required Materials includes our print textbook and eTextbook offerings, which help students save money compared to the cost of buying new. We 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 to source print textbooks and eTextbooks directly or indirectly from publishers. InJanuary 2022 , we completed our acquisition ofBusuu 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 theBusuu language learning community. During the years endedDecember 31, 2021 , and 2020, we generated net revenues of$776.3 million and$644.3 million , respectively, and in the same periods had net losses of$1.5 million and$6.2 million , respectively. 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 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 may continue. Our long-term strategy 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 sustain profitability and remain 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 36 -------------------------------------------------------------------------------- Table of Contents 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" and "Required Materials."
chegg services
Our Chegg Services product line for students primarily includes Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack,Busuu , Mathway and Thinkful. Students typically pay to access Chegg Services 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.
Overall, Chegg Services revenue accounted for 86% and 81% of net revenue for the completed years, respectively
Required material
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 on the total transactional amount immediately when a print textbook ships to a student. Additionally, Required Materials includes revenues from eTextbooks, which are primarily recognized ratably over the contractual period, generally a two-to five-month period.
Overall, Required Materials revenue accounted for 14% and 19% of net revenue for the completed years, respectively
seasonality of our business
Revenues from Chegg Services, print textbooks that we own, and eTextbooks are primarily recognized ratably over the term a student subscribes to ourChegg 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. Our variable expenses related to cost of revenues and marketing activities remain highest in the first and third quarters 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 the earnings situation
net income
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 Math Solver, Chegg Study Pack, Mathway and Thinkful.
Revenues from Chegg Study, Chegg Writing, Chegg Math Solver, Chegg Study Pack,
and Mathway are primarily recognized ratably over the monthly subscription
period. Revenues from Thinkful 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 or rental term, generally a two- to five-month period.
Additionally, we provide students the ability to purchase print textbooks and
recognize
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revenues immediately upon shipment. Revenues from print textbooks owned by a
partner are recognized as a revenue share on the total transaction 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. 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. 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 revenue
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 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 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.
operating expenses
We classify our operating expenses into three categories: research and development, sales and marketing, and general and 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 expenses, amortization of acquired intangible assets, and outside services. We allocate certain costs to each expense category, 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 technology costs to support our research and development, and outside 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. Our marketing expenses are largely variable and to the extent there is increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we could see a corresponding change in our sales and marketing 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.
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Interest expense, net and other income, net
Interest expense, net consists primarily of interest expense on the amortization of debt 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 strategic equity investments.
Provision for income taxes
Provision for income taxes consists primarily of state income taxes inthe 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.
operating results
The following table summarizes our historical consolidated income statements (in thousands, except percentage of total net income):
years ended
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 39
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net income
Net income in the past year
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
Chegg Services revenues increased by $148.7 million , or 29%, during the year
ended December 31, 2021 , compared to the same period in 2020. The increase was
primarily due to our efforts to reduce account sharing, increased global
awareness and penetration and the introduction of enhanced offerings, including
our acquisition of Mathway, which closed in June 2020 . Chegg Services revenues
represented 86% and 81% of net revenues during the years ended December 31, 2021
and 2020, respectively. Required Materials revenues decreased by $16.7 million ,
or 14%, during the year ended December 31, 2021 compared to the same period in
2020. The decrease was primarily due to lower unit volumes driven by decreased
college enrollments and various print textbook logistics challenges. Required
Materials revenues represented 14% and 19% of net revenues during the years
ended December 31, 2021 and 2020, respectively.
cost of revenue
The following table shows our cost of sales for the periods shown (in thousands, except percentages):
Years Ended December 31, Change in 2021
2021 2020 $ %
Cost of revenues(1) $ 254,904 $ 205,417 $ 49,487 24 %
(1) Includes stock-based compensation expense of:
$ 950 $ 671 71 % Cost of revenues during the year endedDecember 31, 2021 increased by$49.5 million , or 24%, compared to the same period in 2020. The increase was primarily attributable to higher other depreciation and amortization expense of$21.5 million , higher net loss on textbook library of$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$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 customer support fees of$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 decreased to 67% in the year endedDecember 31, 2021 , from 68% during the same period in 2020. 40 -------------------------------------------------------------------------------- Table of Contents Operating Expenses
The following table shows our total operating expenses for the periods shown (in thousands, except percentages):
Years Ended December 31, Change in 2021
2021 2020 $ %
Research and development(1) $ 178,821 $ 170,905 $ 7,916 5 %
Sales and marketing(1) 105,414 81,914 23,500 29
General and administrative(1) 159,019 129,349 29,670 23
Total operating expenses $ 443,254 $ 382,168 $ 61,086 16
(1) Includes share-based compensation expense of:
Research and development $ 37,131 $ 31,588 $ 5,543 18 %
Sales and marketing 13,887 9,606 4,281 45
General and administrative 56,207 41,911 14,296 34
Share-based compensation expense $ 107,225 $ 83,105 $ 24,120 29
Research and Development
Research and development expenses during the year endedDecember 31, 2021 increased by$7.9 million , or 5%, compared to the same period in 2020. The increase was primarily attributable to higher employee-related expenses, including share-based compensation expense, of$9.0 million . Research and development expenses as a percentage of net revenues were 23% during the year endedDecember 31, 2021 compared to 26% of net revenues during the same period in 2020. Sales and Marketing Sales and marketing expenses during the year endedDecember 31, 2021 increased by$23.5 million , or 29%, compared to the same period in 2020. The increase was primarily attributable to increased marketing spend, including expansion in international markets, of$15.1 million and higher employee-related expenses, including share-based compensation expense, of$6.2 million . Sales and marketing expenses as a percentage of net revenues were 14% during the year endedDecember 31, 2021 compared to 13% of net revenues during the same period in 2020.
General and administrative
General and administrative expenses in the year endedDecember 31, 2021 increased by$29.7 million , or 23%, compared to the same period in 2020. The increase was primarily due to higher employee-related expenses, including share-based compensation expense, of$23.9 million and increased professional fees of$11.9 million , partially offset by a one-time 2020 impairment charge on our investment in WayUp of$10.0 million . General and administrative expenses as a percentage of net revenues were flat at 20% during the years endedDecember 31, 2021 and 2020.
Interest expense, net and other income, net
The following table shows 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
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*n/m – not meaningful
Interest expense, net decreased by$59.4 million , or 90%, during the year endedDecember 31, 2021 , compared to the same period in 2020. The decrease was primarily due to the reduction in non-cash interest expense related to the debt discount as a result of the adoption of ASU 2020-06 onJanuary 1, 2021 . 41
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Other income, net, decreased by$74.2 million during the year endedDecember 31, 2021 , compared to the same period in 2020. The decrease was primarily due to the$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 partially 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 shows our provisions 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
The provision for income taxes increased during the year endedDecember 31, 2021 , compared to the same period in 2020. The increase was primarily due to an increase in foreign profits and the withholding taxes related to theMarch 2021 sale of our strategic equity investment, partially offset by foreign deferred tax benefit.
liquidity and capital resources
As ofDecember 31, 2021 , our principal sources of liquidity were cash, cash equivalents, and investments totaling$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. InJanuary 2022 , we completed our acquisition ofBusuu 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 theBusuu language learning community, for approximately$417.0 million in an all-cash transaction. InNovember 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 endedDecember 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 endedDecember 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 ofDecember 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. InFebruary 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). InAugust 2020 and March/April 2019 , we closed offerings of our 2026 notes and 2025 notes, generating net proceeds of approximately$984.1 million and$780.2 million , respectively, in each case after deducting the initial purchasers' discount and estimated offering expenses payable by us. The 2026 notes and 2025 notes mature onSeptember 1, 2026 andMarch 15, 2025 , respectively, unless converted, redeemed, or repurchased in accordance with their terms prior to such dates. As ofDecember 31, 2021 , we have incurred cumulative losses of$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 convertible senior notes offerings, our 2021 equity offering, and cash generated from operations. 42
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The table below is a summary of our contractual obligations and other commitments as of today
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Convertible senior notes (1) $ 1,703,044 $ 875
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
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(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 ofDecember 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$4.9 million related to uncertain tax positions as ofDecember 31, 2021 . The timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond one year. As a result, this amount is not included in the above table. We believe that our existing sources of liquidity will be sufficient to fund our operations and debt service obligations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, our investments in research and development activities, our acquisition of new products and services and our sales and marketing activities. To the extent that existing cash and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, operating cash flows and financial condition. Most of our cash, cash equivalents, and investments are held inthe United States . As ofDecember 31, 2021 , our foreign subsidiaries held an insignificant amount of cash in foreign jurisdictions. We currently do not intend or foresee a need to repatriate some of these foreign funds; however, as a result of the Tax Cuts and Jobs Act, we anticipate theU.S. federal impact to be minimal if these foreign funds are repatriated. In addition, based on our current and future needs, we believe our current funding and capital resources for our international operations are adequate.
The table below shows our cash flows (in thousands):
Years Ended December
31,
2021
2020
Consolidated Statements of Cash Flows Data: Net cash provided by operating activities$ 273,224 $
236,442
Net cash used in investing activities (365,768)
(732,786)
Net cash provided by financing activities 466,722
588,627
The cash flow from operating activities
Although we incurred net losses during the years endedDecember 31, 2021 and 2020, our net losses were fully offset by non-cash expenditures, such as depreciation and amortization expense, share-based compensation expense, loss on extinguishments of debt, and amortization of debt discount and issuance costs. Net cash provided by operating activities during the year endedDecember 31, 2021 was$273.2 million . Our net loss of$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$63.3 million , the net loss on textbook library of$11.0 million , which was primarily due to increased write-downs, print textbook depreciation expense of$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 amortization of debt issuance costs of$5.9 million , partially offset by the gain on sale of our strategic equity investments of$12.5 million . 43 -------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities during the year endedDecember 31, 2020 was$236.4 million . Our net loss of$6.2 million was increased 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$47.0 million , share-based compensation expense of$84.1 million , the amortization of debt discount and issuance costs of$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 debt discount of$20.4 million .
Cash flows from investing activities
Cash flows from investing activities were primarily related to the purchase of investments, purchases of property, plant and equipment, purchases of textbooks and acquisitions of businesses, offset by proceeds from the sale and maturing of investments and proceeds from the disposal of textbooks.
Net cash used in investing activities during the year endedDecember 31, 2021 was$365.8 million and was related to the purchases of investments of$1.7 billion , purchases of property and equipment of$94.2 million , purchases of textbooks of$10.9 million , and the acquisition of business of$7.9 million , offset by the maturity of investments of$1.2 billion , proceeds from sale of investments of$206.0 million , proceeds from the sale of our equity investments of$16.1 million and proceeds from disposition of textbooks of$8.7 million . Net cash used in investing activities during the year endedDecember 31, 2020 was$732.8 million and was related to the purchases of investments of$1.0 billion , the acquisition of business of$92.8 million , purchases of property and equipment of$81.3 million , purchases of textbooks of$58.6 million , and the purchase of strategic equity investment of$2.0 million , offset by the maturity of investments of$539.9 million and proceeds from disposition of textbooks of$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 endedDecember 31, 2021 was$466.7 million and was related to the net proceeds from our equity offering of$1,091.5 million , proceeds from 2023 notes and 2025 notes capped call instruments of$69.0 million , and the proceeds from the issuance of common stock under stock plans of$8.9 million , 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$94.4 million in taxes related to the net share settlement of equity awards, and payment of escrow related to an acquisition of$7.5 million . Net cash provided by financing activities during the year endedDecember 31, 2020 was$588.6 million and was related to the proceeds from the issuance of the 2026 notes, net of issuance costs, of$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$15.5 million , offset by the payment of$80.7 million in taxes related to the net share settlement of equity awards, the purchase of capped call instruments related to our 2026 notes of$103.4 million , and the repayment of a portion of our convertible senior notes of$304.0 million .
Critical accounting policies, significant judgments and estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe 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. 44 -------------------------------------------------------------------------------- Table of Contents 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. 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. 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 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.
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
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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.
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. 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 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 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 endedDecember 31, 2021 and 2020.
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 goodwill or our indefinite lived intangible asset impairment charges since our inception.
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.
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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.
Current accounting pronouncements
For relevant recent accounting pronouncements, see Note 2, “Significant Accounting Policies,” of our accompanying notes to the consolidated financial statements in Part II, Item 8, “Consolidated Financial Statements and Supplemental Information” of this Annual Report on Form 10-K.
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