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 September 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 October 31, 2014, there were 83,849,487 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—September 30, 2014 and December 31, 2013

  

3

 

 

Condensed consolidated statements of operations—three and nine months ended September 30, 2014 and 2013

  

4

 

 

Condensed consolidated statements of comprehensive loss—three and nine months ended September 30, 2014 and 2013

  

5

 

 

Condensed consolidated statements of cash flows—nine months ended September 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

  

18

Item 3.

 

Quantitative and qualitative disclosures about market risk

  

27

Item 4.

 

Controls and procedures

  

27

 

 

PART II – OTHER INFORMATION

  

 

Item 1.

 

Legal proceedings

  

28

Item 1A.

 

Risk factors

  

28

Item 2.

 

Unregistered sales of equity securities and use of proceeds

  

51

Item 6.

 

Exhibits

  

51

Signature

  

52

Index to Exhibits

  

53

 

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)

 

 

September 30,

2014

 

 

December 31,

2013 *

 

Assets

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

53,186

 

 

$

76,864

 

Short-term investments

 

30,035

 

 

 

37,071

 

Accounts receivable, net of allowance for doubtful accounts of $835 and $317 at

  September 30, 2014 and December 31, 2013, respectively

 

15,758

 

 

 

7,091

 

Prepaid expenses

 

3,391

 

 

 

2,134

 

Other current assets

 

8,679

 

 

 

1,149

 

Total current assets

 

111,049

 

 

 

124,309

 

Long-term investments

 

14,124

 

 

 

24,320

 

Textbook library, net

 

105,205

 

 

 

105,108

 

Property and equipment, net

 

18,298

 

 

 

18,964

 

Goodwill

 

86,685

 

 

 

49,545

 

Intangible assets, net

 

10,972

 

 

 

3,311

 

Other assets

 

1,800

 

 

 

1,814

 

Total assets

$

348,133

 

 

$

327,371

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

6,063

 

 

$

4,078

 

Deferred revenue

 

72,462

 

 

 

22,804

 

Accrued liabilities

 

29,563

 

 

 

21,270

 

Total current liabilities

 

108,088

 

 

 

48,152

 

Long-term liabilities

 

 

 

 

 

 

 

Other liabilities

 

5,315

 

 

 

4,979

 

Total long-term liabilities

 

5,315

 

 

 

4,979

 

Total liabilities

 

113,403

 

 

 

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 September 30, 2014 and December 31, 2013, respectively

 

 

 

 

 

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

   December 31, 2013, respectively; 83,738,790 and 81,708,202 shares issued and outstanding at

  September 30, 2014 and December 31, 2013, respectively

 

84

 

 

 

82

 

Additional paid-in capital

 

506,208

 

 

 

479,279

 

Accumulated other comprehensive loss

 

(1

)

 

 

(6

)

Accumulated deficit

 

(271,561

)

 

 

(205,115

)

Total stockholders' equity

 

234,730

 

 

 

274,240

 

Total liabilities and stockholders' equity

$

348,133

 

 

$

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
September 30,

 

 

Nine Months Ended
September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net revenues

$

81,532

 

 

$

61,587

 

 

$

220,417

 

 

$

178,459

 

Cost of revenues

 

68,281

 

 

 

58,425

 

 

 

172,362

 

 

 

137,486

 

Gross profit

 

13,251

 

 

 

3,162

 

 

 

48,055

 

 

 

40,973

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology and development

 

13,490

 

 

 

9,999

 

 

 

36,999

 

 

 

29,351

 

Sales and marketing

 

23,453

 

 

 

14,223

 

 

 

53,297

 

 

 

36,645

 

General and administrative

 

10,986

 

 

 

6,247

 

 

 

31,480

 

 

 

20,530

 

Gain on liquidation of textbooks

 

(2,044

)

 

 

(2,403

)

 

 

(5,844

)

 

 

(3,012

)

Total operating expenses

 

45,885

 

 

 

28,066

 

 

 

115,932

 

 

 

83,514

 

Loss from operations

 

(32,634

)

 

 

(24,904

)

 

 

(67,877

)

 

 

(42,541

)

Interest and other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(67

)

 

 

(1,306

)

 

 

(255

)

 

 

(3,662

)

Other income (expense), net

 

541

 

 

 

(2,840

)

 

 

817

 

 

 

(3,688

)

Total interest and other income (expense), net

 

474

 

 

 

(4,146

)

 

 

562

 

 

 

(7,350

)

Loss before provision for (benefit from) income taxes

 

(32,160

)

 

 

(29,050

)

 

 

(67,315

)

 

 

(49,891

)

Provision for (benefit from) income taxes

 

281

 

 

 

205

 

 

 

(869

)

 

 

542

 

Net loss

$

(32,441

)

 

$

(29,255

)

 

$

(66,446

)

 

$

(50,433

)

Net loss per share, basic and diluted

$

(0.39

)

 

$

(2.27

)

 

$

(0.80

)

 

$

(4.04

)

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

 

83,688

 

 

 

12,873

 

 

 

82,963

 

 

 

12,488

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

4


 

Chegg, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(32,441

)

 

$

(29,255

)

 

$

(66,446

)

 

$

(50,433

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gain (loss) on available for sale investments

 

(18

)

 

 

 

 

 

20

 

 

 

 

Change in foreign currency translation adjustments

 

(11

)

 

 

12

 

 

 

(15

)

 

 

(35

)

Other comprehensive (loss) income

 

(29

)

 

 

12

 

 

 

5

 

 

 

(35

)

Total comprehensive loss

$

(32,470

)

 

$

(29,243

)

 

$

(66,441

)

 

$

(50,468

)

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

CHEGG, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

Operating activities

 

 

 

 

 

 

 

Net loss

$

(66,446

)

 

$

(50,433

)

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

 

 

 

 

 

 

 

Textbook library depreciation expense

 

54,220

 

 

 

45,287

 

Amortization of warrants and deferred loan costs

 

152

 

 

 

1,516

 

Other depreciation and amortization expense

 

7,823

 

 

 

8,080

 

Stock-based compensation expense

 

27,205

 

 

 

11,888

 

Provision for  bad debts

 

516

 

 

 

194

 

Gain on liquidation of textbooks

 

(5,844

)

 

 

(3,012

)

Loss from write-offs of textbooks

 

10,133

 

 

 

3,289

 

Deferred income taxes

 

(1,626

)

 

 

 

Realized gain on sale of securities

 

(18

)

 

 

 

Revaluation of preferred stock warrants

 

 

 

 

3,906

 

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

 

 

 

 

 

 

 

Accounts receivable

 

(3,633

)

 

 

(2,382

)

Prepaid expenses and other current assets

 

(8,356

)

 

 

(1,156

)

Other assets

 

(147

)

 

 

(4,087

)

Accounts payable

 

(319

)

 

 

2,605

 

Deferred revenue

 

49,528

 

 

 

52,115

 

Accrued liabilities

 

4,826

 

 

 

4,285

 

Other liabilities

 

(12

)

 

 

46

 

Net cash provided by operating activities

 

68,002

 

 

 

72,141

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of textbooks

 

(99,469

)

 

 

(108,492

)

Proceeds from liquidations of textbooks

 

40,175

 

 

 

32,555

 

Purchases of marketable securities

 

(63,872

)

 

 

 

Proceeds from sale of marketable securities

 

42,708

 

 

 

 

Maturities of marketable securities

 

38,230

 

 

 

 

Purchases of property and equipment

 

(3,807

)

 

 

(5,204

)

Acquisition of businesses, net of cash acquired

 

(43,872

)

 

 

 

Net cash used in investing activities

 

(89,907

)

 

 

(81,141

)

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from debt obligations

 

 

 

 

21,000

 

Payments of debt obligations

 

 

 

 

(20,000

)

Proceeds from issuance of common stock under employee stock plans

 

2,001

 

 

 

2,897

 

Payment of taxes related to the net share settlement of RSUs

 

(3,774

)

 

 

 

Net cash (used in) provided by financing activities

 

(1,773

)

 

 

3,897

 

Net decrease in cash and cash equivalents

 

(23,678

)

 

 

(5,103

)

Cash and cash equivalents, beginning of period

 

76,864

 

 

 

21,030

 

Cash and cash equivalents, end of period

$

53,186

 

 

$

15,927

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

$

88

 

 

$

2,338

 

Income taxes

$

518

 

 

$

388

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Accrued purchases of long-lived assets

$

6,736

 

 

$

7,576

 

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 September 30, 2014, the condensed consolidated statements of operations and, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2014 and 2013, and the condensed consolidated statements of cash flows for the nine months ended September 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 September 30, 2014 and our results of operations for the three and nine months ended September 30, 2014 and 2013 and cash flows for the nine months ended September 30, 2014. The results of operations for the three and nine months ended September 30, 2014 and cash flows for the nine months ended September 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 (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 14.4 million shares of common stock were sold to the public at a price of $12.50 per share.

 

 

 

7


 

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(32,441

)

 

$

(29,255

)

 

$

(66,446

)

 

$

(50,433

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

83,704

 

 

 

13,054

 

 

 

83,010

 

 

 

12,745

 

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

 

(16

)

 

 

(181

)

 

 

(47

)

 

 

(257

)

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

 

83,688

 

 

 

12,873

 

 

 

82,963

 

 

 

12,488

 

Net loss per share, basic and diluted

$

(0.39

)

 

$

(2.27

)

 

$

(0.80

)

 

$

(4.04

)

 

8


 

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Options to purchase common stock

 

13,936

 

 

 

13,054

 

 

 

14,592

 

 

 

13,362

 

Restricted stock units

 

334

 

 

 

1,313

 

 

 

355

 

 

 

1,313

 

Common stock subject to repurchase or forfeiture

 

9

 

 

 

131

 

 

 

9

 

 

 

131

 

Warrants to purchase common stock

 

996

 

 

 

36

 

 

 

996

 

 

 

36

 

Warrants to purchase convertible preferred  stock

 

 

 

 

1,130

 

 

 

 

 

 

1,130

 

Convertible preferred stock

 

 

 

 

42,244

 

 

 

 

 

 

42,244

 

Total common stock equivalents

 

15,275

 

 

 

57,908

 

 

 

15,952

 

 

 

58,216

 

 

 

 

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):

 

 

September 30, 2014

 

 

December 31, 2013

 

 

Cost

 

 

Net Unrealized Gain/(Loss)

 

 

Fair Value

 

 

Cost

 

 

Net Unrealized Gain/(Loss)

 

 

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

46,300

 

 

$

 

 

$

46,300

 

 

$

33,322

 

 

$

 

 

$

33,322

 

Money market funds

 

5,696

 

 

 

 

 

 

5,696

 

 

 

42,042

 

 

 

 

 

 

42,042

 

Commercial paper

 

1,190

 

 

 

 

 

 

1,190

 

 

 

1,500

 

 

 

 

 

 

1,500

 

Total cash and cash equivalents

$

53,186

 

 

$

 

 

$

53,186

 

 

$

76,864

 

 

$

 

 

$

76,864

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

$

18,859

 

 

$

 

 

$

18,859

 

 

$

35,571

 

 

$

 

 

$

35,571

 

Corporate securities

 

8,171

 

 

 

4

 

 

 

8,175

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

3,000

 

 

 

1

 

 

 

3,001

 

 

 

1,500

 

 

 

 

 

 

1,500

 

Total short-term investments

$

30,030

 

 

$

5

 

 

$

30,035

 

 

$

37,071

 

 

$

 

 

$

37,071

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

13,130

 

 

$

(6

)

 

$

13,124

 

 

$

24,338

 

 

$

(18

)

 

$

24,320

 

Agency bond

 

999

 

 

 

1

 

 

 

1,000

 

 

 

 

 

 

 

 

 

 

Total long-term investments

$

14,129

 

 

$

(5

)

 

$

14,124

 

 

$

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

 

 

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

 

 

Cost

 

 

Fair Value

 

Due in 1 year or less

$

31,220

 

 

$

31,225

 

Due in 1-2 years

 

14,129

 

 

 

14,124

 

Investments not due at a single maturity date

 

5,696

 

 

 

5,696

 

Total

$

51,045

 

 

$

51,045

 

 

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

9


 

As of September 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 nine months ended September 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.

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

 

 

September 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

$

5,696

 

 

$

5,696

 

 

$

 

 

$

 

Commercial paper

 

1,190

 

 

 

 

 

 

1,190

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

18,859

 

 

 

 

 

 

18,859

 

 

 

 

Corporate securities

 

8,175

 

 

 

 

 

 

8,175

 

 

 

 

Certificate of deposit

 

3,001

 

 

 

 

 

 

3,001

 

 

 

 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

13,124

 

 

 

 

 

 

13,124

 

 

 

 

Agency bond

 

1,000

 

 

 

 

 

 

1,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets measured and recorded at fair value

$

51,045

 

 

$

5,696

 

 

$

45,349

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Put option liability

$

1,588

 

 

$

 

 

$

 

 

$

1,588

 

 

 

10


 

 

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.

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

 

 

Level 3

 

 

September 30,

2014

 

Beginning balance

$

1,521

 

Vesting of put options

 

271

 

Fair value adjustment related to put options

 

(204

)

Total financial liabilities

$

1,588

 

 

As of September 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. Acquisitions

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