UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

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)

 

(Zip Code)

(408) 855-5700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share

 

The New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 31, 2014, there were 83,687,485 shares of the registrant’s common stock outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

  

Page

 

 

PART I – FINANCIAL INFORMATION

  

 

Item 1.

 

Financial Statements (unaudited):

 

3

 

 

Condensed consolidated balance sheets—June 30, 2014 and December 31, 2013

  

3

 

 

Condensed consolidated statements of operations—three and six months ended June 30, 2014 and 2013

  

4

 

 

Condensed consolidated statements of comprehensive loss—three and six months ended June 30, 2014 and 2013

  

5

 

 

Condensed consolidated statements of cash flows—six months ended June 30, 2014 and 2013

  

6

 

 

Notes to condensed consolidated financial statements

  

7

Item 2.

 

Management’s discussion and analysis of financial condition and results of operations

  

19

Item 3.

 

Quantitative and qualitative disclosures about market risk

  

28

Item 4.

 

Controls and procedures

  

28

 

 

PART II – OTHER INFORMATION

  

 

Item 1.

 

Legal proceedings

  

29

Item 1A.

 

Risk factors

  

29

Item 2.

 

Unregistered sales of equity securities and use of proceeds

  

52

Item 6.

 

Exhibits

  

52

Signature

  

53

Index to Exhibits

  

54

 

Unless the context requires otherwise, the words “we,” “us,” “our,” “Company” and “Chegg” refer to Chegg, Inc. and its subsidiaries taken as a whole.

“Campus Special,” “Chegg,” “Chegg.com,” “Chegg for Good,” “CourseRank,” “Cramster,” “InstaEDU,” “Zinch” and “#1 in Textbook Rentals” 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.

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, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan to,” 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. 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.

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.

 

2


 

PART i – FINANCIAL INFORMATION

 

Item 1. Financial Statements

CHEGG, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for number of shares and par value)

 

June 30,

2014

 

 

December 31,

2013 *

 

Assets

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

30,783

 

 

$

76,864

 

Short-term investments

 

28,430

 

 

 

37,071

 

Accounts receivable, net of allowance for doubtful accounts of $516 and $317 at

   June 30, 2014 and December 31, 2013, respectively

 

9,913

 

 

 

7,091

 

Prepaid expenses

 

3,652

 

 

 

2,134

 

Other current assets

 

1,774

 

 

 

1,149

 

Total current assets

 

74,552

 

 

 

124,309

 

Long-term investments

 

19,295

 

 

 

24,320

 

Textbook library, net

 

100,233

 

 

 

105,108

 

Property and equipment, net

 

18,933

 

 

 

18,964

 

Goodwill

 

86,685

 

 

 

49,545

 

Intangible assets, net

 

12,664

 

 

 

3,311

 

Other assets

 

2,160

 

 

 

1,814

 

Total assets

$

314,522

 

 

$

327,371

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

9,813

 

 

$

4,078

 

Deferred revenue

 

24,175

 

 

 

22,804

 

Accrued liabilities

 

19,991

 

 

 

21,270

 

Total current liabilities

 

53,979

 

 

 

48,152

 

Long-term liabilities

 

 

 

 

 

 

 

Other liabilities

 

5,187

 

 

 

4,979

 

Total long-term liabilities

 

5,187

 

 

 

4,979

 

Total liabilities

 

59,166

 

 

 

53,131

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred stock, $0.001 par value –10,000,000 shares authorized, no shares issued and

   outstanding at June 30, 2014 and December 31, 2013, respectively

 

 

 

 

 

Common stock, $0.001 par value – 400,000,000 shares authorized at June 30, 2014 and

   December 31, 2013, respectively; 83,644,883 and 81,708,202 shares issued and outstanding at

   June 30, 2014 and December 31, 2013, respectively

 

84

 

 

 

82

 

Additional paid-in capital

 

494,364

 

 

 

479,279

 

Accumulated other comprehensive income (loss)

 

28

 

 

 

(6

)

Accumulated deficit

 

(239,120

)

 

 

(205,115

)

Total stockholders' equity

 

255,356

 

 

 

274,240

 

Total liabilities and stockholders' equity

$

314,522

 

 

$

327,371

 

 

*

Derived from audited consolidated financial statements as of and for the year ended December 31, 2013

See Notes to Condensed Consolidated Financial Statements.

 

 

 

3


 

CHEGG, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net revenues

$

64,492

 

 

$

55,857

 

 

$

138,885

 

 

$

116,872

 

Cost of revenues

 

38,596

 

 

 

29,607

 

 

 

104,081

 

 

 

79,061

 

Gross profit

 

25,896

 

 

 

26,250

 

 

 

34,804

 

 

 

37,811

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology and development

 

12,189

 

 

 

9,799

 

 

 

23,509

 

 

 

19,352

 

Sales and marketing

 

14,817

 

 

 

8,674

 

 

 

29,844

 

 

 

22,422

 

General and administrative

 

10,654

 

 

 

7,574

 

 

 

20,494

 

 

 

14,283

 

(Gain) loss on liquidation of textbooks

 

(2,122

)

 

 

1,670

 

 

 

(3,800

)

 

 

(609

)

Total operating expenses

 

35,538

 

 

 

27,717

 

 

 

70,047

 

 

 

55,448

 

Loss from operations

 

(9,642

)

 

 

(1,467

)

 

 

(35,243

)

 

 

(17,637

)

Interest and other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(127

)

 

 

(1,183

)

 

 

(188

)

 

 

(2,356

)

Other income (expense), net

 

156

 

 

 

(551

)

 

 

276

 

 

 

(848

)

Total interest and other income (expense), net

 

29

 

 

 

(1,734

)

 

 

88

 

 

 

(3,204

)

Loss before provision for (benefit from)  income taxes

 

(9,613

)

 

 

(3,201

)

 

 

(35,155

)

 

 

(20,841

)

Provision for (benefit from) income taxes

 

(1,367

)

 

 

152

 

 

 

(1,150

)

 

 

337

 

Net loss

$

(8,246

)

 

$

(3,353

)

 

$

(34,005

)

 

$

(21,178

)

Net loss per share, basic and diluted

$

(0.10

)

 

$

(0.27

)

 

$

(0.41

)

 

$

(1.72

)

Weighted average shares used to compute net loss per share, basic and diluted

 

83,209

 

 

 

12,558

 

 

 

82,686

 

 

 

12,295

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

4


 

Chegg, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(8,246

)

 

$

(3,353

)

 

$

(34,005

)

 

$

(21,178

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized loss on available for sale investments

 

54

 

 

 

 

 

 

38

 

 

 

 

Change in foreign currency translation adjustments

 

(27

)

 

 

(18

)

 

 

(4

)

 

 

(47

)

Other comprehensive income (loss)

 

27

 

 

 

(18

)

 

 

34

 

 

 

(47

)

Total comprehensive loss

$

(8,219

)

 

$

(3,371

)

 

$

(33,971

)

 

$

(21,225

)

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

CHEGG, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(34,005

)

 

$

(21,178

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Textbook library depreciation expense

 

38,130

 

 

 

30,817

 

Amortization of warrants and deferred loan costs

 

117

 

 

 

781

 

Other depreciation and amortization expense

 

4,544

 

 

 

5,628

 

Stock-based compensation expense

 

15,411

 

 

 

8,031

 

Provision for  bad debts

 

197

 

 

 

77

 

Gain on liquidation of textbooks

 

(3,800

)

 

 

(609

)

Loss from write-offs of textbooks

 

6,805

 

 

 

2,283

 

Deferred income taxes

 

(1,626

)

 

 

 

Realized gain on sale of securities

 

(18

)

 

 

 

Revaluation of preferred stock warrants

 

 

 

 

1,026

 

Change in assets and liabilities net of effect of acquisition of businesses:

 

 

 

 

 

 

 

Accounts receivable

 

(2,211

)

 

 

(2,233

)

Prepaid expenses and other current assets

 

(1,774

)

 

 

(1,031

)

Other assets

 

(470

)

 

 

(2,563

)

Accounts payable

 

2,988

 

 

 

(2,999

)

Deferred revenue

 

1,241

 

 

 

3,648

 

Accrued liabilities

 

(2,803

)

 

 

567

 

Other liabilities

 

(128

)

 

 

240

 

Net cash provided by operating activities

 

22,598

 

 

 

22,485

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of textbooks

 

(52,781

)

 

 

(42,226

)

Proceeds from liquidations of textbooks

 

18,737

 

 

 

21,061

 

Purchases of marketable securities

 

(54,882

)

 

 

 

Proceeds from sale of marketable securities

 

38,860

 

 

 

 

Maturities of marketable securities

 

29,600

 

 

 

 

Purchases of property and equipment

 

(2,496

)

 

 

(3,188

)

Acquisition of businesses, net of cash acquired

 

(43,872

)

 

 

 

Net cash used in investing activities

 

(66,834

)

 

 

(24,353

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock under employee stock plans

 

1,743

 

 

 

2,477

 

Payment of taxes related to the net share settlement of RSUs

 

(3,588

)

 

 

 

Net cash (used in) provided by financing activities

 

(1,845

)

 

 

2,477

 

Net increase (decrease) in cash and cash equivalents

 

(46,081

)

 

 

609

 

Cash and cash equivalents, beginning of period

 

76,864

 

 

 

21,030

 

Cash and cash equivalents, end of period

$

30,783

 

 

$

21,639

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

$

31

 

 

$

1,197

 

Income taxes

$

445

 

 

$

341

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Accrued purchases of long-lived assets

$

5,528

 

 

$

3,938

 

Issuance of common stock warrants in connection with consulting services

$

 

 

$

130

 

Issuance of common stock related to acquisition

$

1,585

 

 

$

 

See Notes to Condensed Consolidated Financial Statements.

 

6


 

CHEGG, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 on July 29, 2005. Chegg is the leading student-first connected learning platform, empowering students to take control of their education to save time, save money and get smarter. We are driven by our passion to help students become active consumers in the educational process. Our integrated platform, which we call the Student Hub, offers products and services that students need throughout the college lifecycle, from choosing a college through graduation and beyond. Our Student Graph builds on the information generated through students’ and other participants’ use of our platform to increasingly enrich the experience for participants as it grows in scale and power the Student Hub. By helping students learn more in less time and at a lower cost, we help them improve the overall return on investment in education. In 2013, nearly seven million students used our platform.  

Basis of Presentation

The accompanying condensed consolidated balance sheet as of June 30, 2014, the condensed consolidated statements of operations and, the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2014 and 2013, and the condensed consolidated statements of cash flows for the six months ended June 30, 2014 and 2013 and the related footnote disclosures are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2014 and our results of operations for the three and six months ended June 30, 2014 and 2013 and cash flows for the six months ended June 30, 2014. The results of operations for the three and six months ended June 30, 2014 and cash flows for the six months June 30, 2014 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, 2013 as 2013.

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 for 2013, included in our Annual Report on Form 10-K for 2013 filed with the U.S. Securities and Exchange Commission (the SEC).

There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K.

Reverse Stock Split

In August 2013, our board of directors and stockholders approved an amendment to our certificate of incorporation to effect a two-for-three reverse split of our common stock. The record date of the reverse stock split was September 3, 2013, the date the amendment to our certificate of incorporation was filed with the Delaware Secretary of State. In accordance with our certificate of incorporation, the conversion ratios of the convertible preferred stock were adjusted to reflect the reverse stock split. The number of outstanding shares of convertible preferred stock was not adjusted. Additionally, the par value and the authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. The reverse stock split has been reflected in the accompanying consolidated financial statements and related notes on a retroactive basis for all periods presented.

Initial Public Offering

In November 2013, we completed our initial public offering (IPO), whereby 14,400,000 shares of common stock were sold to the public at a price of $12.50 per share.

 

 

 

7


CHEGG, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (U.S. GAAP) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenue and expenses during the reporting periods. Significant estimates, assumptions and judgments are used for, but not limited to: revenue recognition, recoverability of accounts receivable, determination of the useful lives and salvage value related to our textbook library, valuation of preferred stock warrants, and stock-based compensation expense including estimated forfeitures, accounting for income taxes, useful lives assigned to long-lived assets for depreciation and amortization, impairment of goodwill and long-lived assets, and the valuation of acquired intangible assets. 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

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09). This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is not permitted. We are currently in the process of evaluating this new guidance.

 

Note 2. Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase or forfeiture. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including stock options, warrants, RSUs and convertible preferred stock prior to its conversion in our IPO, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential common shares outstanding would have been anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(8,246

)

 

$

(3,353

)

 

$

(34,005

)

 

$

(21,178

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

83,255

 

 

 

12,812

 

 

 

82,760

 

 

 

12,590

 

Less: Weighted-average unvested common shares subject to repurchase or forfeiture

 

(46

)

 

 

(254

)

 

 

(74

)

 

 

(295

)

Weighted-average common shares used in computing basic and diluted net loss per share

 

83,209

 

 

 

12,558

 

 

 

82,686

 

 

 

12,295

 

Net loss per share, basic and diluted

$

(0.10

)

 

$

(0.27

)

 

$

(0.41

)

 

$

(1.72

)

8


CHEGG, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The following potential common shares outstanding were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive (in thousands):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Options to purchase common stock

 

15,579

 

 

 

12,812

 

 

 

14,925

 

 

 

13,142

 

Restricted stock units

 

714

 

 

 

1,322

 

 

 

260

 

 

 

1,313

 

Common stock subject to repurchase or forfeiture

 

40

 

 

 

234

 

 

 

40

 

 

 

234

 

Warrants to purchase common stock

 

996

 

 

 

36

 

 

 

996

 

 

 

36

 

Warrants to purchase convertible preferred  stock

 

 

 

 

1,132

 

 

 

 

 

 

1,132

 

Convertible preferred stock

 

 

 

 

42,242

 

 

 

 

 

 

42,242

 

Total common stock equivalents

 

17,329

 

 

 

57,778

 

 

 

16,221

 

 

 

58,099

 

 

 

 

Note 3. Cash and Cash Equivalents, Investments and Restricted Cash

The following tables show our cash and cash equivalents, restricted cash and investments’ adjusted cost, unrealized gain (loss) and fair value (in thousands):

 

 

June 30, 2014

 

 

December 31, 2013

 

 

Cost

 

 

Net

Unrealized

Gain/(Loss)

 

 

Fair Value

 

 

Cost

 

 

Net

Unrealized

Gain/(Loss)

 

 

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

22,449

 

 

$

 

 

$

22,449

 

 

$

33,322

 

 

$

 

 

$

33,322

 

Money market funds

 

6,334

 

 

 

 

 

 

6,334

 

 

 

42,042

 

 

 

 

 

 

42,042

 

Commercial paper

 

2,000

 

 

 

 

 

 

2,000

 

 

 

1,500

 

 

 

 

 

 

1,500

 

Total cash and cash equivalents

$

30,783

 

 

$

 

 

$

30,783

 

 

$

76,864

 

 

$

 

 

$

76,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

$

17,214

 

 

$

3

 

 

$

17,217

 

 

$

35,571

 

 

$

 

 

$

35,571

 

Corporate securities

 

5,200

 

 

 

2

 

 

 

5,202

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

6,010

 

 

 

1

 

 

 

6,011

 

 

 

1,500

 

 

 

 

 

 

1,500

 

Total short-term investments

$

28,424

 

 

$

6

 

 

$

28,430

 

 

$

37,071

 

 

$

 

 

$

37,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

16,531

 

 

$

11

 

 

$

16,542

 

 

$

24,338

 

 

$

(18

)

 

$

24,320

 

U.S. treasuries

 

1,751

 

 

 

1

 

 

 

1,752

 

 

 

 

 

 

 

 

 

 

Agency bond

 

1,000

 

 

 

1

 

 

 

1,001

 

 

 

 

 

 

 

 

 

 

 

$

19,282

 

 

$

13

 

 

$

19,295

 

 

$

24,338

 

 

$

(18

)

 

$

24,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term restricted cash

$

352

 

 

$

 

 

$

352

 

 

$

352

 

 

$

 

 

$

352

 

Long-term restricted cash

 

1,350

 

 

 

 

 

 

1,350

 

 

 

1,350

 

 

 

 

 

 

1,350

 

Total restricted cash

$

1,702

 

 

$

 

 

$

1,702

 

 

$

1,702

 

 

$

 

 

$

1,702

 

9


CHEGG, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The amortized cost and fair value of available-for-sale investments as of June 30, 2014 by contractual maturity were as follows (in thousands):

 

 

Cost

 

 

Fair Value

 

Due in 1 year or less

$

30,424

 

 

$

30,430

 

Due in 1-2 years

 

19,282

 

 

 

19,295

 

Investments not due at a single maturity date

 

6,334

 

 

 

6,334

 

Total

$

56,040

 

 

$

56,059

 

 

Investments not due at a single maturity date in the preceding table consist of money market fund deposits.

As of June 30, 2014, we considered the declines in market value of our investment portfolio to be temporary in nature and did not consider any of our investments to be other-than-temporarily impaired. We typically invest in highly-rated securities with a minimum credit rating of A- and a weighted average maturity of nine months, and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of preserving capital and maintaining liquidity. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates, and our intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost basis. During the six months ended June 30, 2014, we did not recognize any impairment charges.

 

Note 4. Fair Value Measurement

We have established a fair value hierarchy used to determine the fair value of our financial instruments as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value; the inputs require significant management judgment or estimation.

A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

10


CHEGG, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Financial instruments measured and recorded at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 are classified based on the valuation technique level in the tables below (in thousands):

 

 

June 30, 2014

 

 

Total

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

6,334

 

 

$

6,334

 

 

$

 

 

$

 

Commercial paper

 

2,000

 

 

 

 

 

 

2,000

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

17,217

 

 

 

 

 

 

17,217

 

 

 

 

Corporate securities

 

5,202

 

 

 

 

 

 

5,202

 

 

 

 

Certificate of deposit

 

6,011

 

 

 

 

 

 

6,011

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

16,542

 

 

 

 

 

 

16,542

 

 

 

 

U.S. treasuries

 

1,752

 

 

 

1,752

 

 

 

 

 

 

 

Agency bond

 

1,001

 

 

 

 

 

 

1,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets measured and recorded at fair value

$

56,059

 

 

$

8,086

 

 

$

47,973

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Put option liability

$

1,567

 

 

$

 

 

$

 

 

$

1,567

 

 

 

December 31, 2013

 

 

Total

 

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

42,042

 

 

$

42,042

 

 

$

 

 

$

 

Commercial paper

 

1,500

 

 

 

 

 

 

1,500

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

35,571

 

 

 

 

 

 

35,571

 

 

 

 

Certificate of deposit

 

1,500

 

 

 

 

 

 

1,500

 

 

 

 

Corporate securities, long-term

 

24,320

 

 

 

 

 

 

24,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets measured and recorded at fair value

$

104,933

 

 

$

42,042

 

 

$

62,891

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Put option liability

$

1,521

 

 

$

 

 

$

 

 

$

1,521

 

 

We value our marketable securities based on quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. We classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques.

11


CHEGG, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the change in the fair value of our Level 3 liabilities (in thousands):

 

 

Level 3

 

 

June 30,

2014

 

Beginning balance

$

1,521

 

Vesting of put options

 

250

 

Fair value adjustment related to put options

 

(204

)

Total financial liabilities

$

1,567

 

 

As of June 30, 2014, we did not have observable inputs for the valuation of our put option liability, which relates to a previous acquisition, and provides certain employees of the acquired company the right to require us to acquire vested common shares at a stated contractual price. As shares associated with these put options vest, the liability is recognized as stock-based compensation expense in our condensed consolidated statements of operations and results in a change in our Level 3 liabilities.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

Note 5. Acquisition

On June 5, 2014, we acquired 100% of the outstanding shares and voting interest of InstaEDU, Inc. (InstaEDU), headquartered in San Francisco, California. With this acquisition, we aimed to expand our digital offerings to help students excel in school by including real time tutoring services. We see the acquisition of InstaEDU as a method to connect the book offering and service offerings of Chegg together. The total fair value of the purchase consideration was $31.1 million in cash, which included $4.5 million, placed into an escrow, for general representations and warranties, and will be released 18 months from the closing date of the acquisition.

On April 9, 2014, we acquired 100% of the outstanding shares and voting interest of The Campus Special, LLC and The Campus Special Food, LLC (together, the Campus Special), headquartered in Duluth, Georgia for a total fair value purchase consideration of $16.0 million, consisting of $14 million in cash, 250,000 in shares, which were placed in escrow for general representations and warranties and will be released one year from acquisition date, and a fair value contingent consideration of additional shares of common stock, which is payable on the attainment of certain performance metrics. With the Campus Special acquisition, we aimed to expand our offerings to students to include coupon specials on consumer goods and services. The probability-weighted fair value contingent consideration was recorded in other accrued liabilities in our condensed consolidated balance sheet as of the date of acquisition, and we will record any future fair value adjustments to other acquisition costs.

The acquisition date fair value of the consideration for the above two transactions consisted of the following as of June 30, 2014 (in thousands):

 

Cash consideration

 

$

45,037

 

Fair value of stock escrow consideration

 

 

1,585

 

Fair value of stock contingent consideration

 

 

193

 

Fair value of purchase consideration

 

$

46,815

 

The fair value of the intangible assets acquired was determined under the acquisition method of accounting for business combinations. The excess of purchase consideration paid over the fair value of identifiable intangible assets acquired was recorded as goodwill.  

 


12


CHEGG, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the fair value of the net identifiable assets acquired as of June 30, 2014 (in thousands):

 

 

 

June 30,

 

 

 

2014

 

 

 

 

 

 

Cash

 

$

1,667

 

Other acquired assets

 

 

415

 

Acquired intangible assets:

 

 

 

 

Developed technology

 

 

3,894

 

Customer list

 

 

2,720

 

Trade name

 

 

2,390

 

Non-compete agreements

 

 

1,270

 

Corporate partnerships

 

 

243

 

Total acquired intangible assets

 

 

10,517

 

Total identifiable assets acquired

 

 

12,599

 

Liabilities assumed

 

 

(2,864

)

Net identifiable assets acquired

 

 

9,735

 

Goodwill

 

 

37,080

 

Net assets acquired

 

$

46,815

 

 

For the three months ended June 30, 2014, we incurred $0.5 million of acquisition-related expenses associated with the acquisitions which have been included in general and administrative expenses in the condensed consolidated statements of operations.

On March 7, 2014, we acquired certain assets from Bookstep LLC, (Bookstep) a California limited liability company to expand our technical resources and research and development capabilities. The total fair value of the purchase consideration was $0.5 million. In addition, the agreement requires the payment of approximately $2.5 million in cash, payable over two years contingent upon the continuation of services by a certain number of consultants during the period after acquisition. The fair value of the subsequent payments was $2.5 million, which is being accounted for as post-combination compensation expense.

 

The results of operations of the above acquisitions have been included in our condensed consolidated results of operations from the date of acquisition and were not material to our results of operations.

 

The fair value of the intangible assets acquired was determined under the acquisition method of accounting for business combinations. The excess of purchase consideration paid over the fair value of identifiable intangible assets acquired was recorded as goodwill.

The following table summarizes the fair value of the identifiable intangible assets acquired during the three months ended March 31, 2014 (in thousands):

 

Master service agreement intangible asset

 

$

400

 

Non-compete covenant intangible asset

 

40

 

Goodwill

 

60

 

Fair value of purchase consideration

 

$

500

 

The amounts recorded for goodwill related to the Campus Special and Bookstep transactions are expected to be deductible for tax purposes. The amount recorded for goodwill related to the InstaEDU transaction is not deductible for tax purposes.

 

13


CHEGG, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 6. Goodwill and Intangible Assets

Goodwill consists of the following (in thousands):

 

 

 

June 30,

2014

 

Beginning balance

 

$

49,545

 

Additions due to acquisition

 

 

37,140

 

Ending balance

 

$

86,685

 

 

Intangible assets consist of the following (in thousands):

 

 

June 30, 2014

 

 

Weighted-

Average

Amortization

Period

(in months)

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Developed technology

 

51

 

 

$

9,512

 

 

$

(3,822

)

 

$

5,690

 

Customer list

 

26

 

 

 

3,312

 

 

 

(589

)

 

 

2,723

 

Trade name

 

44

 

 

 

3,132

 

 

 

(703

)

 

 

2,429

 

Non-compete agreements

 

24

 

 

 

1,318

 

 

 

(86

)

 

 

1,232

 

Master service agreement

 

36

 

 

 

400

 

 

 

(42

)

 

 

358

 

Corporate partnerships

 

60

 

 

 

243

 

 

 

(11

)

 

 

232

 

Total intangible assets

 

 

 

 

$

17,917

 

 

$

(5,253

)

 

$

12,664

 

 

 

 

December 31, 2013

 

 

Weighted-

Average

Amortization

Period

(in months)

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Developed technology

 

46

 

 

$

8,008

 

 

$

(5,386

)

 

$

2,622

 

Customer list

 

24

 

 

 

5,472

 

 

 

(5,029

)

 

 

443

 

Trade name

 

33

 

 

 

1,182

 

 

 

(942

)

 

 

240

 

Non-compete agreements

 

34

 

 

 

1,068

 

 

 

(1,062

)

 

 

6

 

Total intangible assets

 

 

 

 

$

15,730

 

 

$

(12,419

)

 

$

3,311

 

 

During the three and six months ended June 30, 2014, amortization expense related to our acquired intangible assets totaled approximately $1.0 million and $1.6 million, respectively. During the three and six months ended June 30, 2013, amortization expense related to our acquired intangible assets totaled approximately $1.2 million and $2.7 million, respectively.

As of June 30, 2014, the estimated future amortization expense related to our intangible assets, subject to amortization, is as follows (in thousands):

 

 

 

 

 

Remaining six months of 2014

 

$

3,127

 

2015

 

 

4,297

 

2016

 

 

2,078

 

2017

 

 

1,586

 

20