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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
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
 
currentchegglogoa17.jpg
CHEGG, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-3237489
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3990 Freedom Circle
Santa Clara, CA, 95054
(Address of principal executive offices)
(408) 855-5700
(Registrant’s telephone number, including area code)
 



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨
 (Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 27, 2018, the Registrant had 113,960,276 outstanding shares of Common Stock.
 





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TABLE OF CONTENTS

 
 
 
  
Page
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
  
 
 
 
 
  

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

“Chegg,” “Chegg.com,” “Chegg Study,” “Chegg for Good,” “Student Hub,” “internships.com,” “Research Ready,” “EasyBib” 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.


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NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “would,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “project,” “endeavor,” “expect,” “plans to,” “if,” “future,” 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. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.

We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CHEGG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)
(unaudited)
 
June 30, 2018
 
December 31, 2017
Assets

 

Current assets
 
 
 
Cash and cash equivalents
$
384,926

 
$
126,457

Short-term investments
80,938

 
81,742

Accounts receivable, net of allowance for doubtful accounts of $333 and $259 at June 30, 2018 and December 31, 2017, respectively
8,096

 
10,855

Prepaid expenses
8,707

 
2,043

Other current assets
7,742

 
7,845

Total current assets
490,409

 
228,942

Long-term investments
15,957

 
20,305

Property and equipment, net
51,516

 
47,493

Goodwill
135,842

 
125,272

Intangible assets, net
22,591

 
21,153

Other assets
4,256

 
3,765

Total assets
$
720,571

 
$
446,930

Liabilities and stockholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
5,337

 
$
7,049

Deferred revenue
13,710

 
13,440

Accrued liabilities
29,460

 
31,074

Total current liabilities
48,507

 
51,563

Long-term liabilities
 
 
 
Convertible senior notes, net
276,578

 

Other long-term liabilities
6,767

 
4,305

Total long-term liabilities
283,345

 
4,305

Total liabilities
331,852

 
55,868

Commitments and contingencies (Note 10)

 

Stockholders' equity:
 
 
 
Preferred stock, $0.001 par value – 10,000,000 shares authorized, no shares issued and outstanding

 

Common stock, $0.001 par value 400,000,000 shares authorized; 113,551,003 and 109,667,640 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
114

 
110

Additional paid-in capital
787,480

 
782,845

Accumulated other comprehensive loss
(661
)
 
(282
)
Accumulated deficit
(398,214
)
 
(391,611
)
Total stockholders' equity
388,719

 
391,062

Total liabilities and stockholders' equity
$
720,571

 
$
446,930

See Notes to Condensed Consolidated Financial Statements.

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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net revenues
$
74,222

 
$
56,317

 
$
151,171

 
$
118,919

Cost of revenues
17,784

 
17,042

 
38,008

 
38,438

Gross profit
56,438

 
39,275

 
113,163

 
80,481

Operating expenses:
 
 
 
 
 
 
 
Research and development
26,218

 
19,899

 
51,751

 
39,201

Sales and marketing
11,437

 
10,098

 
26,773

 
26,062

General and administrative
19,479

 
14,501

 
37,735

 
29,843

Restructuring charges
15

 
59

 
235

 
959

Gain on liquidation of textbooks

 

 

 
(4,766
)
Total operating expenses
57,149

 
44,557

 
116,494

 
91,299

Loss from operations
(711
)
 
(5,282
)
 
(3,331
)
 
(10,818
)
Interest expense and other income (expense), net:
 
 
 
 
 
 
 
Interest expense, net
(3,664
)
 
(18
)
 
(3,684
)
 
(37
)
Other income (expense), net
894

 
(9
)
 
1,458

 
(208
)
Total interest expense and other income (expense), net
(2,770
)
 
(27
)
 
(2,226
)
 
(245
)
Loss before provision for income taxes
(3,481
)
 
(5,309
)
 
(5,557
)
 
(11,063
)
Provision for income taxes
428

 
716

 
969

 
1,363

Net loss
$
(3,909
)
 
$
(6,025
)
 
$
(6,526
)
 
$
(12,426
)
Net loss per share, basic and diluted
$
(0.03
)
 
$
(0.06
)
 
$
(0.06
)
 
$
(0.13
)
Weighted average shares used to compute net loss per share, basic and diluted
112,738

 
95,047

 
111,826

 
93,943

See Notes to Condensed Consolidated Financial Statements.


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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(3,909
)
 
$
(6,025
)
 
$
(6,526
)
 
$
(12,426
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in net unrealized loss on available for sale investments
114

 

 
23

 

Change in foreign currency translation adjustments, net of tax
(913
)
 
153

 
(402
)
 
252

Other comprehensive (loss) income
(799
)
 
153

 
(379
)
 
252

Total comprehensive loss
$
(4,708
)
 
$
(5,872
)
 
$
(6,905
)
 
$
(12,174
)
See Notes to Condensed Consolidated Financial Statements.


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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities
 
 
 *
Net loss
$
(6,526
)
 
$
(12,426
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
10,665

 
9,093

Share-based compensation expense
23,685

 
17,377

Gain on liquidation of textbooks

 
(4,766
)
Loss from write-offs of textbooks

 
314

Interest accretion on deferred consideration

 
(626
)
Amortization of debt discount and issuance costs
3,421

 

Deferred income taxes
(315
)
 

Other non-cash items
115

 
(55
)
Change in assets and liabilities:
 
 
 
Accounts receivable
2,609

 
1,989

Prepaid expenses and other current assets
(6,773
)
 
9,072

Other assets
(500
)
 
473

Accounts payable
(1,712
)
 
(3,591
)
Deferred revenue
270

 
(2,379
)
Accrued liabilities
(2,678
)
 
1,181

Other liabilities
1,254

 
858

Net cash provided by operating activities
23,515

 
16,514

Cash flows from investing activities
 
 
 
Proceeds from liquidations of textbooks

 
6,943

Purchases of marketable securities
(66,634
)
 

Maturities of marketable securities
71,980

 

Purchases of property and equipment
(10,087
)
 
(12,507
)
Acquisition of business, net of cash acquired
(14,438
)
 

Net cash used in investing activities
(19,179
)
 
(5,564
)
Cash flows from financing activities
 
 
 
Common stock issued under stock plans, net
18,050

 
9,765

Payment of taxes related to the net share settlement of equity awards
(40,314
)
 
(14,850
)
Payment of deferred cash consideration related to acquisitions

 
(16,750
)
Proceeds from issuance of convertible senior notes, net of issuance costs
335,601

 

Purchase of convertible senior notes capped call
(39,227
)
 

Repurchase of common stock
(20,000
)
 

Net cash provided by (used in) financing activities
254,110

 
(21,835
)
Net increase (decrease) in cash, cash equivalents and restricted cash
258,446

 
(10,885
)
Cash, cash equivalents and restricted cash, beginning of period
126,963

 
77,433

Cash, cash equivalents and restricted cash, end of period
$
385,409

 
$
66,548

 
 
 
 
Supplemental cash flow data:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
37

 
$
48

Income taxes
$
944

 
$
821

Non-cash investing and financing activities:
 
 
 
Accrued purchases of long-lived assets
$
5,337

 
$
1,144

Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
384,926

 
$
66,086

Restricted cash included in other assets
483

 
462

Total cash, cash equivalents and restricted cash
$
385,409

 
$
66,548

* Adjusted to reflect the adoption of ASU 2016-18. See Note 1 for more information.
See Notes to Condensed Consolidated Financial Statements.

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CHEGG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Background and Basis of Presentation

Company and Background

Chegg, Inc. (Chegg, the Company, we, us, or our), headquartered in Santa Clara, California, was incorporated as a Delaware corporation in July 2005. Chegg is the smarter way to student. As the leading direct-to-student learning platform, we strive to improve educational outcomes by putting the student first in all our decisions. We support students on their journey from high school to college and into their career with tools designed to help them pass their test, pass their class, and save money on required materials. Our services are available online, anytime and anywhere, so we can reach students when they need us most.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of June 30, 2018, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2018 and 2017, the condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017 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, 2018, our results of operations for the three and six months ended June 30, 2018 and 2017, and cash flows for the six months ended June 30, 2018 and 2017. Our results of operations and cash flows for the six months ended June 30, 2018 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, 2017 as 2017.

The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC).

We have changed the caption on our condensed consolidated statements of operations from “technology and development” to “research and development.” This change does not impact any current or previously reported amounts.

Except for our policies on revenue recognition, deferred revenue and convertible senior notes, 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.

Revenue Recognition and Deferred Revenue

We recognize revenues from our Chegg Services and Required Materials offerings when control of the goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation

We generate revenues from our Chegg Services product line including our Chegg Study service, our Chegg Writing service, our Chegg Tutors service, Test Prep, through our partnership with Kaplan Test Prep (Kaplan), Internship services, Brand Partnership services that we offer to brands and Enrollment Marketing services to colleges, through our strategic partnership with the National Research Center for College and University Admissions (NRCCUA). Chegg Services are offered to students through weekly, monthly or annual subscriptions, and we primarily recognize revenues ratably over the respective

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subscription period. Enrollment Marketing services and Brand Partnership services are offered either on a subscription or on an a la carte basis. Revenues are recognized ratably or as earned over the subscription service period, generally one year. Revenues from Enrollment Marketing services or Brand Partnership services delivered on an a la carte basis, without a subscription, are recognized when delivery of the respective lead or service has occurred. Historically, under previous revenue recognition guidance, revenue recognition was delayed for certain contracts with extended payment terms. For these services, we bill the customer at the inception, over the term of the customer arrangement or as the services are performed. Upon satisfactory assessment of creditworthiness, we generally grant credit to our Enrollment Marketing and Brand Partnership customers with normal credit terms, typically 30 days.

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

We determine the SSP based on our historical pricing and discounting practices for the distinct performance obligation when sold separately. If the SSP is not directly observable, we estimate the SSP by considering information such as market conditions, and information about the customer. Additionally, we limit the amount of revenues recognized for delivered promises to the amount that is not contingent on future delivery of services or other future performance obligations.

We also generate revenues from our Required Materials product line including revenue share earned on print textbooks for rental or sale transactions, owned by Ingram and other partners, which are recognized immediately when a book ships to the student. Revenues from the rental or sale of eTextbooks is recognized ratably over the contractual period, generally two to five months, or at time of the sale, respectively. Our strategic partnership with Ingram includes 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. Under the new revenue recognition guidance, 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 as opposed to the contractual amount earned under the previous revenue recognition guidance.

For sales of third party products, we evaluate whether we are acting as a principal or an agent, and therefore would record the gross sales amount as revenues and related costs or the net amount earned as a revenue share from the sale of third party products. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. For our strategic partnership with Ingram and our agreements with other textbook publishers, we have concluded that we do not control the use of the print textbooks, and therefore record net revenue only for the revenue share we earn upon the shipment of a print textbook to a student. For the sale of eTextbooks we have concluded that we control the service, therefore we recognize revenue and cost of revenue on a gross basis.

Revenues are presented net of sales tax collected from customers to be remitted to governmental authorities and net of allowances for estimated cancellations and customer returns, which are based on historical data. Customer refunds from cancellations and returns are recorded as a reduction to revenues.

Contract assets are contained within other current assets on our condensed consolidated balance sheets. Contract assets represent the goods or services that we have transferred to a customer before invoicing the customer. Contract receivables are contained within accounts receivable, net on our condensed consolidated balance sheets and represent unconditional consideration that will be received solely due to the passage of time. Contract liabilities are contained within deferred revenue on our condensed consolidated balance sheets. Deferred revenue primarily consists of advanced payments from students related to rentals and subscriptions performance obligations that have not been satisfied, and Brand Partnership and Enrollment Marketing performance obligations that have yet to be satisfied. Deferred revenue is recognized as revenues ratably over the term for subscriptions or when the services are provided and all other revenue recognition criteria have been met.

Convertible Senior Notes, net

In April 2018, we issued $345 million in aggregate principal amount of 0.25% convertible senior notes due in 2023 (the notes). In accounting for their issuance, we separated the notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the carrying amount of the liability component from the par value of the notes. The difference represents the debt discount,

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recorded as a reduction of the convertible senior notes on our condensed consolidated balance sheet, and is amortized to interest expense over the term of the notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. Issuance costs attributable to the liability component are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the notes. The issuance costs attributable to the equity component are recorded as a reduction of the equity component within additional paid-in capital.

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 liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions, and judgments are used for, but not limited to: revenue recognition including variable consideration, recoverability of accounts receivable, fair value of debt and equity components related to our convertible senior notes, restructuring charges, share-based compensation expense including estimated forfeitures, accounting for income taxes, useful lives assigned to long-lived assets for depreciation and amortization, valuation 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

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on classification as a finance or operating lease. The amendments in this update also require certain quantitative and qualitative disclosures about leasing arrangements. Early adoption is permitted, and the guidance requires a modified retrospective adoption. The guidance is effective for annual periods beginning after December 15, 2018 and we plan to adopt the guidance on January 1, 2019. We plan to elect the package of transition practical expedients which include not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. At this time, we do not know the quantitative impact of adopting ASU 2016-02; however, we initially believe that this will only have an impact on our consolidated balance sheet and little to no impact to our statement of operations. We will continue to evaluate as we near our adoption date.

Recently Adopted Accounting Pronouncements

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation to include share-based payment transactions for acquiring goods and services from non-employees. These awards are measured at the grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The guidance is effective for annual periods after December 15, 2018, with early adoption permitted, and the guidance requires a modified retrospective application to awards that have not been settled as of the adoption date. We have elected to early adopt this guidance during the second quarter of 2018 and our adoption did not result in an adjustment to the opening balance of accumulated deficit.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. We adopted the guidance on January 1, 2018 recording an immaterial reclassification from accumulated other comprehensive income (loss) to the opening balance of accumulated deficit.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates step 2 from the annual goodwill impairment test no longer requiring the

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comparison of the implied fair value of a reporting unit's goodwill with the carrying amount of goodwill. We early adopted the guidance with a prospective application on January 1, 2018 and will apply the guidance starting with our 2018 annual goodwill impairment assessment.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business to assist entities with evaluating whether a transaction should be accounted for as acquisitions of assets or businesses. We adopted the guidance with a prospective application on January 1, 2018. We will analyze the clarified definition of a business to determine whether transactions from our application date should be accounted for as an asset acquisition or business combination under the new guidance.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires an entity to explain the change during a period in restricted cash equivalents on the condensed consolidated statements of cash flows and include such amounts when reconciling beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. We adopted the guidance with a retrospective application on January 1, 2018 and have adjusted our beginning-of-period and end-of-period amounts on our condensed consolidated statement of cash flows to include restricted cash with the change in restricted cash included within the other assets line on our condensed consolidated statement of cash flows.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires entities to measure equity investments at fair value and recognize any changes in fair value within the statement of operations. We have a strategic investment of $3.0 million recorded in other assets on our condensed consolidated balance sheets that falls under this guidance update. The guidance provides for electing a measurement alternative for equity investments that do not have readily determinable fair values. We have elected the measurement alternative for our strategic investment as there is not a readily determinable fair value, which we will apply to our strategic investment starting with our adoption date of January 1, 2018. This investment will be measured at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, with any changes in the value of the investment recorded within the statement of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended (Topic 606) (ASC 606), which changes the way we recognize revenue and significantly expands the disclosure requirements for revenue arrangements.

We adopted ASU 2014-09 under the modified retrospective application, recording the cumulative effect of adoption as an adjustment to the opening balance of accumulated deficit on our adoption date of January 1, 2018. We have not adjusted previously reported amounts. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, and trade and other receivables. See note 2 for more information.

Note 2. Revenues

Adoption of ASC Topic 606, Revenue from Contracts with Customers

On January 1, 2018, we adopted the new revenue recognition guidance using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning January 1, 2018 are presented under the new revenue recognition guidance, while prior period amounts were not adjusted and continue to be reported in accordance with the previous revenue recognition guidance.

We recorded an immaterial net increase to the opening balance of accumulated deficit as of January 1, 2018 due to the cumulative impact of adopting the new revenue recognition guidance. The two primary impacts of the new revenue recognition guidance are for our Enrollment Marketing services where revenue is recognized earlier in the contract life under the new revenue recognition guidance than under the previous guidance and for our strategic partnership with Ingram where we are required to estimate variable consideration under the new revenue recognition guidance, which we were not previously required to estimate. The requirement to estimate variable consideration has shifted $0.8 million and $1.1 million of revenues during the three and six months ended June 30, 2018, respectively, to future periods as compared to the previous revenue recognition guidance.


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Revenue Recognition

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

The following table sets forth our total net revenues for the periods shown disaggregated for our Chegg Services and Required Materials product lines (in thousands, except percentages):

 
Three Months Ended June 30,
 
Change
 
2018
 
2017(1)
 
$
 
%
Chegg Services
$
61,849

 
$
44,700

 
$
17,149

 
38
%
Required Materials
12,373

 
11,617

 
756

 
7
%
Total net revenues
$
74,222

 
$
56,317

 
$
17,905

 
32
%

 
Six Months Ended June 30,
 
Change
 
2018
 
2017(1)
 
$
 
%
Chegg Services
$
118,126

 
$
85,735

 
$
32,391

 
38
 %
Required Materials
33,045

 
33,184

 
(139
)
 
 %
Total net revenues
$
151,171

 
$
118,919

 
$
32,252

 
27
 %

(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

During the three months ended June 30, 2018, we recognized $14.5 million of revenues that were included in our deferred revenue balance as of March 31, 2018. During the six months ended June 30, 2018, we recognized $11.2 million of revenues that were included in our deferred revenue balance as of December 31, 2017. During the three and six months ended June 30, 2018, there were no revenues recognized from performance obligations satisfied in previous periods. The aggregate amount of unsatisfied performance obligations is approximately $17.7 million as of June 30, 2018, of which a majority is expected to be recognized into revenues over the next year and the remainder within three years. As a practical expedient, we do not disclose the value of unsatisfied performance obligations for contracts with an expected duration of one year or less.

Contract Balances

The following table presents our accounts receivable, net and deferred revenue balances (in thousands, except percentages):
 
 
 
Change
 
June 30, 2018
 
December 31, 2017
 
$
 
%
Accounts receivable, net
$
8,096

 
$
10,855

 
$
(2,759
)
 
(25
)%
Deferred revenue
$
13,710

 
$
13,440

 
$
270

 
2
 %

During the six months ended June 30, 2018, our accounts receivable, net balance decreased by $2.8 million, or 25%, primarily due to an improvement in cash collections. During the six months ended June 30, 2018, our deferred revenue balance increased by $0.3 million, or 2%, primarily due to increased bookings for our Chegg Study service and eTextbook rentals.

Our contract assets balance was immaterial as of June 30, 2018 and December 31, 2017.


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Note 3. 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. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including stock options, warrants, restricted stock units (RSUs), and performance-based restricted stock units (PSUs), 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 historical basic and diluted net loss per share (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net loss
$
(3,909
)
 
$
(6,025
)
 
$
(6,526
)
 
$
(12,426
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares used to compute net loss per share, basic and diluted
112,738

 
95,047

 
111,826

 
93,943

 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.03
)
 
$
(0.06
)
 
$
(0.06
)
 
$
(0.13
)

The following potential weighted-average shares of common stock 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,
 
2018
 
2017
 
2018
 
2017
Options to purchase common stock
4,369

 
3,119

 
4,321

 
3,395

RSUs and PSUs
7,079

 
107

 
8,128

 
66

Employee stock purchase plan

 
8

 

 
8

Warrants to purchase common stock

 
200

 

 
200

Total common stock equivalents
11,448

 
3,434

 
12,449

 
3,669



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Note 4. Cash and Cash Equivalents, and Investments
 
The following table shows our cash and cash equivalents, and investments’ cost, net unrealized loss and fair value as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Cost
 
Net Unrealized Gain/(Loss)
 
Fair Value
 
Cost
 
Net Unrealized Loss
 
Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
Cash
$
350,638

 
$

 
$
350,638

 
$
98,370

 
$

 
$
98,370

Money market funds
5,032

 

 
$
5,032

 
5,358

 

 
5,358

Commercial paper
29,252

 
4

 
29,256

 
22,729

 

 
22,729

Total cash and cash equivalents
$
384,922

 
$
4

 
$
384,926

 
$
126,457

 
$

 
$
126,457

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
36,493

 
$
6

 
$
36,499

 
$
38,850

 
$
(27
)
 
$
38,823

Corporate securities
35,099

 
(118
)
 
34,981

 
23,001

 
(43
)
 
22,958

U.S. treasury securities
9,460

 
(2
)
 
9,458

 
19,978

 
(17
)
 
19,961

Total short-term investments
$
81,052

 
$
(114
)
 
$
80,938

 
$
81,829

 
$
(87
)
 
$
81,742

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
14,389

 
$
(53
)
 
$
14,336

 
$
20,405

 
$
(100
)
 
$
20,305

U.S. treasury securities
1,622

 
(1
)
 
1,621

 

 

 

Total long-term investments
$
16,011

 
$
(54
)
 
$
15,957

 
$
20,405

 
$
(100
)
 
$
20,305

 
The cost and fair value of available-for-sale investments as of June 30, 2018 by contractual maturity were as follows (in thousands):
 
Cost
 
Fair Value
Due in 1 year or less
$
110,304

 
$
110,194

Due in 1-2 years
16,011

 
15,957

Investments not due at a single maturity date
5,032

 
5,032

Total
$
131,347

 
$
131,183


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

As of June 30, 2018, 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 do not intend to sell the investments nor is it more likely than not that we will be required to sell the investments before recovery of their cost bases. We typically invest in highly-rated securities with a minimum credit rating of A- and a weighted average maturity of five 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 three months ended June 30, 2018 and 2017, we did not recognize any impairment charges.

Restricted Cash

As of June 30, 2018 and December 31, 2017, we had approximately $0.5 million of restricted cash that consists of security deposits for our offices. These amounts are classified in either other current assets and other assets on our condensed consolidated balance sheets based on the remaining term of the lease from the balance sheet dates.


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Strategic Investment

We previously invested $3.0 million in a foreign entity to explore expanding our reach internationally. Our investment is included in other assets on our condensed consolidated balance sheets. We did not record an impairment charge on this investment during the three and six months ended June 30, 2018 and 2017, as there were no significant identified events or changes in circumstances that would be considered an indicator for impairment. Further, there were no observable price changes in orderly transactions for the identical or a similar investment of the same issuer during the three and six months ended June 30, 2018.

Note 5. 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 June 30, 2018 and December 31, 2017 are classified based on the valuation technique level in the tables below (in thousands):
 
June 30, 2018
 
Total
 
Quoted Prices
in Active
Markets for Identical
Assets
(Level 1)
 
Significant
Other Observable
Inputs (Level 2)
Assets:
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market funds
$
5,032

 
$
5,032

 
$

Commercial paper
29,256

 

 
29,256

Short-term investments:
 
 
 
 
 
Commercial paper
36,499

 

 
36,499

Corporate securities
34,981

 

 
34,981

U.S. treasury securities
9,458

 
9,458

 

Long-term investments:
 
 
 
 
 
Corporate securities
14,336

 

 
14,336

U.S. treasury securities
1,621

 
1,621

 

Total assets measured and recorded at fair value
$
131,183

 
$
16,111

 
$
115,072



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December 31, 2017
 
Total
 
Quoted Prices
in Active
Markets for Identical
Assets
(Level 1)
 
Significant 
Other Observable 
Inputs (Level 2)
Assets:
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market funds
$
5,358

 
$
5,358

 
$

Commercial paper
22,729

 

 
22,729

Short-term investments:

 
 
 
 
Commercial paper
38,823

 

 
38,823

Corporate securities
22,958

 

 
22,958

U.S. treasury securities
19,961

 
19,961

 

Long-term corporate securities
20,305

 

 
20,305

Total assets measured and recorded at fair value
$
130,134

 
$
25,319

 
$
104,815

 
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. Other than our money market funds and U.S. treasury securities, we classify 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. We do not hold any marketable securities valued with a Level 3 input.

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.
 
Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We report our financial instruments at fair value with the exception of the notes. The notes are measured at fair value on a quarterly basis for disclosure purposes.

The carrying amounts and estimated fair values of financial instruments not recorded at fair value as of June 30, 2018 are as follows (in thousands):
 
June 30, 2018
 
Carrying Amount
 
Estimated Fair Value
Convertible senior notes, net
$
276,578

 
$
413,569


The carrying amount of the notes as of June 30, 2018 was net of unamortized debt discount of $61.1 million and unamortized issuance costs of $7.3 million. The estimated fair value of the notes was determined based on the closing trading price of the notes as of the last day of trading for the period. We consider the fair value of the notes to be a Level 2 measurement due to the limited trading activity. For further information on the notes see Note 8.

Note 6. Acquisition

On May 15, 2018, we acquired WriteLab, Inc. (WriteLab), an AI-enhanced writing platform, based in Berkeley, California, that teaches students grammar, sentence structure, writing style, and offers instant feedback to help students revise, edit, and improve their written work. This acquisition helps to strengthen our existing Chegg Writing service with the addition of new tools, features, and functionality. The total fair value of the purchase consideration was $14.5 million which included an escrow amount of $2.6 million for general representations and warranties and potential post-closing adjustments. Any remaining escrow amount will be released twenty months after the acquisition date.

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The acquisition date fair value of the purchase consideration for the above transaction consisted of the following (in thousands):
Initial cash consideration
$
12,450

Escrow
2,550

Net working capital adjustment
(483
)
Fair value of purchase consideration
$
14,517


Included in the purchase agreement for the acquisition of WriteLab are additional contingent payments of up to $5.0 million subject to continued employment of the sellers. These payments are expensed ratably as research and development expenses on our condensed consolidated statement of operations. These contingent payments may be settled by us, at our sole discretion, either in cash or shares of our common stock. We have recorded approximately $0.2 million as of June 30, 2018 included within accrued liabilities on our condensed consolidated balance sheet for these contingent payments.

The fair value of the intangible assets acquired was determined under the acquisition method of accounting for business combinations. The excess of the purchase consideration paid over the fair value of net identifiable assets acquired was recorded as goodwill. Goodwill is primarily attributable to the potential for future product offerings as well as our expanded student reach. The amounts recorded for intangible assets and goodwill are not deductible for tax purposes.

The following table presents the total allocation of purchase consideration recorded in our condensed consolidated balance sheets as of the acquisition date (in thousands):
Cash
$
82

Accounts receivable
14

Acquired intangible assets:
 
Developed technology
4,450

Total identifiable assets acquired
4,546

Liabilities assumed
(826
)
Goodwill
10,797

Total fair value of purchase consideration
$
14,517


During the three months ended June 30, 2018, we incurred $0.4 million of acquisition-related expenses which have been included in general and administrative expenses in our condensed consolidated statement of operations.

We have not presented supplemental pro forma financial information as the revenues and earnings of WriteLab were immaterial during the six months ended June 30, 2018. Further, we have recorded no revenues and an immaterial amount of earnings from WriteLab since the acquisition date.


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Note 7. Goodwill and Intangible Assets

Goodwill consists of the following (in thousands):
 
Six Months Ended 
 June 30, 2018
 
Year Ended December 31, 2017
Beginning balance
$
125,272

 
$
116,239

Additions due to acquisition
10,797

 
9,024

Foreign currency translation adjustment
(227
)
 
9

Ending balance
$
135,842

 
$
125,272


Intangible assets as of June 30, 2018 and December 31, 2017 consist of the following (in thousands, except the weighted-average amortization period in months):
 
June 30, 2018
 
Weighted-Average Amortization
Period
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technologies
74

 
$
25,107

 
$
(11,555
)
 
$
13,552

Customer lists
47

 
9,970

 
(6,163
)
 
3,807

Trade names
46

 
5,793

 
(4,214
)
 
1,579

Non-compete agreements
30

 
1,798

 
(1,602
)
 
196

Master service agreements
21

 
1,030

 
(1,030
)
 

Indefinite-lived trade name

 
3,600

 

 
3,600

Foreign currency translation adjustment

 
(143
)
 

 
(143
)
Total intangible assets
61

 
$
47,155

 
$
(24,564
)
 
$
22,591

 
 
December 31, 2017
 
Weighted-Average Amortization
Period
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technologies
70

 
$
20,657

 
$
(10,220
)
 
$
10,437

Customer lists
47

 
9,970

 
(5,480
)
 
4,490

Trade names
46

 
5,793

 
(3,465
)
 
2,328

Non-compete agreements
30

 
1,798

 
(1,506
)
 
292

Master service agreements
21

 
1,030

 
(1,030
)
 

Indefinite-lived trade name

 
3,600

 

 
3,600

Foreign currency translation adjustment

 
6

 

 
6

Total intangible assets
57

 
$
42,854

 
$
(21,701
)
 
$
21,153


During the three and six months ended June 30, 2018, amortization expense related to our acquired intangible assets totaled approximately $1.4 million and $2.9 million, respectively. During the three and six months ended June 30, 2017, amortization expense related to our acquired intangible assets totaled approximately $1.4 million and $2.8 million, respectively.

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As of June 30, 2018, the estimated future amortization expense related to our finite-lived intangible assets is as follows (in thousands):
Remaining six months of 2018
$
2,795

2019
4,903

2020
3,431

2021
2,074

2022
1,631

Thereafter
4,157

Total
$
18,991


Note 8. Convertible Senior Notes

In April 2018, we issued $345 million in aggregate principal amount of 0.25% convertible senior notes due in 2023 (the notes), in a private placement to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended. The aggregate principal amount of the notes includes $45 million from initial purchasers fully exercising their option to purchase additional notes.

The total net proceeds from the notes are as follows (in thousands):
Principal amount
$
345,000

Less initial purchasers’ discount
(8,625
)
Less other issuance costs
(774
)
Net proceeds
$
335,601


The notes are our senior, unsecured obligations and bear interest of 0.25% per year which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2018. The notes will mature on May 15, 2023 (the maturity date), unless repurchased, redeemed or converted in accordance with their terms prior to such date. The terms of the notes are governed by an indenture agreement by and between us and Wells Fargo Bank, National Association, as Trustee (the indenture).

Each $1,000 principal amount of the notes will initially be convertible into 37.1051 shares of our common stock. This is equivalent to an initial conversion price of approximately $26.95 per share, which is subject to adjustment in certain circumstances. Prior to the close of business on the business day immediately preceding February 15, 2023, the notes are convertible at the option of holders only upon satisfaction of the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on June 30, 2018, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the notes on each applicable trading day;
during the five business day period after any ten consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
if we call any or all of the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
upon the occurrence of certain specified corporate events described in the indenture.

On or after February 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the notes may be settled in shares of our common stock, cash or a combination of cash and shares of our common stock, at our election.

If we undergo a fundamental change, as defined in the indenture, prior to the maturity date, subject to certain conditions, holders of the notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events, described in the indenture, occur prior to the applicable

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maturity date, we will also increase the conversion rate for a holder who elects to convert their notes in connection with such specified corporate events. During the three months ended June 30, 2018, the conditions allowing holders of the notes to convert have not been met. The notes are therefore not convertible during the three months ended June 30, 2018 and are classified as long-term debt.

In accounting for the issuance of the notes, we separated the notes into liability and equity components. The carrying amount of the liability component of approximately $280.8 million was calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the equity component of approximately $64.2 million, representing the conversion option, was determined by deducting the carrying amount of the liability component from the principal amount of the notes. This difference between the principal amount of the notes and the liability component represents the debt discount, presented as a reduction to the convertible debt on our condensed consolidated balance sheet, and is amortized to interest expense using the effective interest method over the remaining term of the notes. The equity component of the notes is included in additional paid-in capital on our consolidated balance sheet and is not remeasured as long as it continues to meet the conditions for equity classification.

We incurred issuance costs related to the notes of approximately $9.4 million, consisting of the initial purchasers' discount of $8.6 million and other issuance costs of approximately $0.8 million. In accounting for the issuance costs, we allocated the total amount incurred to the liability and equity components using the same proportions determined above for the principal amount of the notes. Transaction costs attributable to the liability component of approximately $7.7 million, were recorded as debt issuance cost, presented as a reduction to the convertible debt on our condensed consolidated balance sheet, and are amortized to interest expense using the effective interest method over the term of the notes. The issuance costs attributable to the equity component were approximately $1.7 million and were recorded as a reduction to the equity component included in additional paid-in capital.

The net carrying amount of the liability component of the notes is as follows (in thousands):
 
As of June 30, 2018
Principal
$
345,000

Unamortized debt discount
(61,136
)
Unamortized issuance costs
(7,286
)
Net carrying amount
$
276,578

    
The net carrying amount of the equity component of the notes is as follows (in thousands):

As of June 30, 2018
Debt discount for conversion option
$
64,193

Issuance costs
(1,749
)
Net carrying amount
$
62,444

    
As of June 30, 2018, the remaining life of the notes is approximately 4.9 years.

Based on the closing price of our common stock of $27.79 on June 30, 2018, the if-converted value of the notes was approximately $355.7 million and exceeds the principal amount of $345 million by approximately $10.7 million.

The effective interest rate of the liability component of the notes is 4.34% and is based on the interest rate of similar debt instruments that do not have an associated convertible feature. The following table sets forth the total interest expense recognized related to the notes (in thousands):

 
Three Months Ended June 30, 2018
Contractual interest expense
$
210

Amortization of debt discount
3,057

Amortization of issuance costs
364

Total interest expense
$
3,631


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Capped Call Transactions

Concurrently with the offering of the notes in April 2018, we used $39.2 million of the net proceeds to enter into privately negotiated capped call transactions which are expected to generally reduce or offset potential dilution to holders of our common stock upon conversion of the notes and/or offset the potential cash payments we would be required to make in excess of the principal amount of any converted notes. The capped call transactions cover approximately 12,801,260 shares of our common stock and are intended to effectively increase the overall conversion price from $26.95 to $40.68 per share. As these transactions meet certain accounting criteria, they are recorded in stockholders’ equity as a reduction of additional paid-in capital on our condensed consolidated balance sheet and are not accounted for as derivatives. The fair value of the capped call instrument is not remeasured each reporting period. The cost of the capped call is not expected to be deductible for tax purposes.

Impact to Earnings per Share

The notes will have no impact to diluted earnings per share until the average price of Chegg’s common stock exceeds the conversion price of $26.95 per share because we intend to settle the principal amount of the notes in cash upon conversion. Under the treasury stock method, in periods we report net income, we are required to include the effect of additional shares that may be issued under the notes when the average price of our common stock exceeds the conversion price. However, as a result of the capped call transactions described above, there will be no economic dilution from the notes up to $40.68, as exercise of the capped call instruments will reduce any dilution from the notes that would have otherwise occurred when the price of our common stock exceeds the conversion price.

Note 9. Revolving Line of Credit

In September 2016, we entered into a revolving line of credit, which was amended in March 2018, with an aggregate principal amount of $30.0 million (the Line of Credit) with an accordion feature that, subject to the lender's discretion, allows us to borrow up to a total of $50.0 million. The Line of Credit expires in September 2019 and requires us to repay the outstanding balance upon maturity. We will pay a fee equal to 0.25% per year on the average daily unused amount of the Line of Credit and a base interest rate equal to the LIBOR. In addition, we will pay a fee for each issued letter of credit which will be determined based on our current leverage ratio at the time the letter of credit is issued. If our leverage ratio is less than 1.00%, we will pay a fee equal to 1.50% per year and if our leverage ratio is greater than or equal to 1.00%, we will pay a fee equal to 2.50% per year. Our leverage ratio is a ratio of all obligations owed to the bank divided by our consolidated EBITDA. EBITDA for the purposes of calculating our leverage ratio is defined as net profit (loss) before tax, plus interest expense and amortized debt issuance costs, plus non-cash stock compensation (net of capitalized interest expense), plus depreciation expense, plus amortization expense and other non-cash expenses (assuming there are no future cash costs), plus expenses incurred in connection with permitted acquisitions (including without limitation accrued acquisition-related contingent expenses) in an amount not to exceed $6.0 million per calendar year, plus non-recurring expenses in an amount not to exceed $2.0 million per calendar year. We must maintain financial covenants under the Line of Credit as follows: (1) maintain a balance of unrestricted cash at the lender of not less than $30.0 million at all times, other than the three months ending March 31, 2017 and June 30, 2017, and not less than $25.0 million during the three months ending March 31, 2017 and June 30, 2017; and (2) achieve EBITDA, on a trailing 12 month basis, of not less than (i) $25.0 million for the period of time from September 30, 2016 through June 30, 2017, (ii) $30.0 million for the period of time from September 30, 2017 through June 30, 2018, and (iii) $35.0 million for the period of time from September 30, 2018 through the maturity of the Line of Credit. As of June 30, 2018, we were in compliance with the financial covenants of the Line of Credit. Further, we had no amounts outstanding and were able to borrow up to $30.0 million under the Line of Credit.

Note 10. Commitments and Contingencies

We lease our offices under operating leases, which expire at various dates through 2022. Our primary operating lease commitments at June 30, 2018 are related to our corporate headquarters in Santa Clara, California. We have additional offices in California, Oregon and New York in the United States and internationally in India, Israel and Berlin. We recognize rent expense on a straight-line basis over the lease period. Where leases contain escalation clauses, rent abatements, or concessions, such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line rent expense over the lease term. Rental expense, net of sublease income, was approximately $0.7 million and $1.4 million during the three and six months ended June 30, 2018, respectively and approximately $0.7 million and $1.4 million during the three and six months ended June 30, 2017, respectively.

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From time to time, third parties may assert patent infringement claims against us in the form of letters, litigation, or other forms of communication. In addition, we may from time to time be subject to other legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of trademarks, copyrights, and other intellectual property rights; employment claims; and general contract or other claims. We may also, from time to time, be subject to various legal or government claims, disputes, or investigations. Such matters may include, but not be limited to, claims, disputes, or investigations related to warranty, refund, breach of contract, employment, intellectual property, government regulation, or compliance or other matters.

We are not aware of any other pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on our consolidated financial position, results of operations, or cash flows. However, our determination of whether a claim will proceed to litigation cannot be made with certainty, nor can the results of litigation be predicted with certainty. Nevertheless, defending any of these actions, regardless of the outcome, may be costly, time consuming, distract management personnel, and have a negative effect on our business. An adverse outcome in any of these actions, including a judgment or settlement, may cause a material adverse effect on our future business, operating results, and/or financial condition.

Note 11. Guarantees and Indemnifications

We have agreed to indemnify our directors and officers for certain events or occurrences, subject to certain limits, while such persons are or were serving at our request in such capacity. We may terminate the indemnification agreements with these persons upon termination of employment, but termination will not affect claims for indemnification related to events occurring prior to the effective date of termination. We have a directors’ and officers’ insurance policy that limits our potential exposure up to the limits of our insurance coverage. In addition, we also have other indemnification agreements with various vendors against certain claims, liabilities, losses, and damages. The maximum amount of potential future indemnification is unlimited.

We believe the fair value of these indemnification agreements is immaterial. We have not recorded any liabilities for these agreements as of June 30, 2018.

Note 12. Stockholders' Equity

During the three months ended June 30, 2018, we repurchased 983,284 shares of our common stock at an average price per share of $20.34 in conjunction with our April 2018 offering of the notes.

Share-based Compensation Expense

Total share-based compensation expense recorded for employees and non-employees, is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Cost of revenues
$
103

 
$
88

 
$
197

 
$
155

Research and development
3,529

 
3,387

 
7,662

 
6,628

Sales and marketing
1,730

 
1,201

 
3,319

 
2,327

General and administrative
6,681

 
4,423

 
12,507

 
8,267

Total share-based compensation expense
$
12,043

 
$
9,099

 
$
23,685

 
$
17,377


There was no capitalized share-based compensation expense as of June 30, 2018 or 2017.


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RSU and PSU Activity

Activity for RSUs and PSUs is as follows:
 
 
RSUs and PSUs Outstanding
 
Number of RSUs and PSUs
Outstanding
 
Weighted 
Average Grant Date 
Fair Value
Balance at December 31, 2017
14,335,115

 
$
6.78

Granted
3,004,611

 
20.16

Released
(4,784,787
)
 
6.34

Canceled
(1,337,685
)
 
6.27

Balance at June 30, 2018
11,217,254

 
$
10.62


As of June 30, 2018, our total unrecognized share-based compensation expense related to RSUs and PSUs was approximately $76.5 million, which will be recognized over the remaining weighted-average vesting period of approximately 1.8 years.

Note 13. Income Taxes

We recorded an income tax provision of approximately $0.4 million and $1.0 million during the three and six months ended June 30, 2018, respectively, primarily due to federal and state tax benefit related to deferred tax liabilities of acquired intangible assets. We recorded an income tax provision of approximately $0.7 million and $1.4 million during the three and six months ended June 30, 2017, respectively, primarily due to state and foreign income tax expense and federal tax expense related to acquired indefinite lived intangible assets.

On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (Tax Act). In accordance with SAB 118, as of June 30, 2018, we had not yet completed our accounting for the tax effects of the enactment of the Tax Act. Our estimate of the effects the Tax Act have not materially changed from the amounts recorded during the year ended December 31, 2017.  We will continue to analyze certain aspects of the Tax Act and the newly issued Internal Revenue Service notifications and we expect future notices may continue to impact and refine our estimates.

Note 14. Restructuring Charges

2017 Restructuring Plan

In January 2017, we entered into a strategic partnership with NRCCUA where they will assume responsibility for managing, renewing, and maintaining our existing university contracts and become the exclusive reseller of our digital Enrollment Marketing services for colleges and universities. As a result of this strategic partnership, approximately 50 employees in China and the United States supporting the sales and account support functions of our Enrollment Marketing offering were terminated. Costs incurred to date are expected to be fully paid within 3 months.

2015 Restructuring Plan

Restructuring charges of $0.2 million recorded during the six months ended June 30, 2018 primarily related to our subtenant filing for bankruptcy and exiting our leased office. Costs incurred to date are expected to be fully paid by 2021.


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The following table summarizes the activity related to the accrual for restructuring charges (credits) (in thousands):
 
2017 Restructuring Plan
 
2015 Restructuring Plan
 
 
 
Workforce Reduction Costs
 
Lease Termination and Other Costs
 
Workforce Reduction Costs
 
Lease Termination and Other Costs
 
Total
Balance at January 1, 2017
$

 
$

 
$

 
$
306

 
$
306

Restructuring charges (credits)
941

 
148

 

 
(42
)
 
1,047

Cash payments
(897
)
 
(128
)
 

 
(43
)
 
(1,068
)
Write-offs

 
(20
)
 

 

 
(20
)
Balance at December 31, 2017
44

 

 

 
221

 
265

Restructuring charges
46

 
10

 

 
179

 
235

Cash payments
(42
)
 
(10
)
 

 
(112
)
 
(164
)
Write-offs

 

 

 
(18
)
 
(18
)
Balance at June 30, 2018
$
48

 
$

 
$

 
$
270

 
$
318


As of June 30, 2018, the $0.3 million liability was comprised of a short-term accrual of $0.2 million included within accrued liabilities and a long-term accrual of $0.1 million included within other liabilities on our condensed consolidated balance sheet.

Note 15. Related-Party Transactions

Our Chief Executive Officer is a member of the Board of Directors of Adobe Systems Incorporated (Adobe). During the three and six months ended June 30, 2018, we had purchases of $0.6 million and $2.3 million, respectively, and during the three and six months ended June 30, 2017, we had purchases of $1.3 million and $1.8 million, respectively, from Adobe. We had no revenues during the three months ended June 30, 2018 and $0.1 million of revenues during the six months ended June 30, 2018 from Adobe. We had no revenues during the three and six months ended June 30, 2017 from Adobe. We had $0.3 million in payables as of June 30, 2018 and December 31, 2017 to Adobe. We had no accounts receivables as of June 30, 2018 and an immaterial amount of accounts receivable as of December 31, 2017 from Adobe.

One of our board members is also a member of the Board of Directors of Cengage Learning, Inc. (Cengage).  During the three and six months ended June 30, 2018, we had purchases of $1.4 million and $6.5 million, respectively, and during the three and six months ended June 30, 2017, we had purchases of $1.3 million and $4.8 million, respectively, from Cengage.  We had $0.1 million and $2.0 million of revenues during the three and six months ended June 30, 2018, respectively, and $0.2 million and $0.6 million of revenues during the three and six months ended June 30, 2017, respectively, from Cengage. We had $0.9 million and $0.1 million in payables as of June 30, 2018 and December 31, 2017, respectively, to Cengage. We had no outstanding receivables as of June 30, 2018 and $0.3 million in outstanding receivables as of December 31, 2017 from Cengage.

The immediate family of one of our board members is also a member of the Board of Directors of PayPal Holdings, Inc. (PayPal). During the three and six months ended June 30, 2018, we incurred payment processing fees of $0.2 million and $0.6 million, respectively, and during the three and six months ended June 30, 2017, we incurred payment processing fees of $0.2 million and $0.5 million, respectively, to PayPal.

Note 16. Subsequent Event

Acquisition of StudyBlue, Inc.

On July 2, 2018, we acquired StudyBlue, Inc. (StudyBlue), a privately held online learning company based in San Francisco, California that provides a vast content library and tools for students to create their own study materials. Pursuant to the terms of the agreement, we paid $20.8 million in cash to the sellers at the closing of the acquisition. The initial accounting for this acquisition is in process as of the issuance date for our financial statements and therefore we are unable to make any additional disclosures.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes included in Part I, Item 1, “Financial Statements (unaudited)” of this Quarterly Report on Form 10-Q. 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 “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 Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”

Overview

Chegg is the smarter way to student. As the leading direct-to-student learning platform, we strive to improve educational outcomes by putting the student first in all our decisions. We support students on their journey from high school to college and into their career with tools designed to help them pass their test, pass their class, and save money on required materials. Our services are available online, anytime and anywhere, so we can reach students when they need us most.

Students subscribe to our digital products and services, which we collectively refer to as Chegg Services. These include Chegg Study, Chegg Writing, Chegg Tutors, Chegg Math Solver, Brand Partnership, Test Prep, Internships and Chegg CareerMatch. Our Chegg Study service provides step-by-step Textbook Solutions and Expert Answers, helping students with their course work. When students need help creating citations for their papers, they can use one of our Chegg Writing properties, including EasyBib, Citation Machine, BibMe, CiteThisForMe, and NormasAPA. When students need additional help on a subject, they can reach a live tutor online, anytime, anywhere through Chegg Tutors. Our recently launched Chegg Math Solver service helps students understand math by providing a step-by-step math solver and calculator. We work with leading brands to provide students with discounts, promotions, and other products. We provide access to internships to help students gain skills and experiences as well as Chegg CareerMatch that helps expose students to career opportunities. We provide students, through our partnership with Kaplan Test Prep (Kaplan), with an online adaptive test preparation service. Through our strategic partnership with Ingram Content Group (Ingram), we offer Required Materials, which includes an extensive print textbook and eTextbook library for rent and sale, helping students save money compared to the cost of buying new.

To deliver services to students, we partner with a variety of third parties. We source print textbooks, eTextbooks, and supplemental materials directly or indirectly from thousands of publishers in the United States, including Pearson, Cengage Learning, McGraw Hill, Wiley, and MacMillan. We have a large network of students and professionals who leverage our platform to tutor in their spare time and employers who leverage our platform to post their internships and jobs. In addition, because we have a large student user base, local and national brands partner with us to reach the college and high school demographics.

On May 15, 2018, we acquired WriteLab, Inc. (WriteLab), an AI-enhanced writing platform, based in Berkeley, California, that teaches students grammar, sentence structure, writing style, and offers instant feedback to help students revise, edit, and improve their written work. On July 2, 2018, we acquired StudyBlue, Inc. (StudyBlue), a privately held online learning company based in San Francisco, California that provides a vast content library and tools for students to create their own study materials. We anticipate these acquisitions will strengthen our existing Chegg Services, with the addition of new features, functionality, and content.

During the three and six months ended June 30, 2018, we generated net revenues of $74.2 million and $151.2 million, respectively, and in the same periods had net losses of $3.9 million and $6.5 million, respectively. During the three and six months ended June 30, 2017, we generated net revenues of $56.3 million and $118.9 million, respectively, and in the same periods had net losses of $6.0 million and $12.4 million, respectively. We plan to continue to invest in our long-term growth, particularly further investment in the technology that powers our learning platform and the development of additional products and services that serve students.

Our strategy for achieving profitability 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 products, will enable us to accomplish profitability and become cash-flow positive in the long-term. Our ability to achieve these long-term objectives is subject to numerous risks and uncertainties, including our

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ability to attract, retain, and increasingly engage the student population, intense competition in our markets, the ability to achieve sufficient contributions to revenue from Chegg Services and other factors described in greater detail in Part II, 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 for students primarily includes our Chegg Study service, our Chegg Writing service, our Chegg Tutors service, and our Chegg Math Solver service. We also work with leading brands to provide students with discounts, promotions, and other products that, based on student feedback, delight them. In addition, we provide internships and Chegg CareerMatch, and, through our partnership with Kaplan, our Test Prep services.

Students typically pay to access Chegg Services such as Chegg Study on a monthly or annual basis. In the aggregate, Chegg Services revenues were 83% and 78% of net revenues during the three and six months ended June 30, 2018, respectively, and 79% and 72% of net revenues during the three and six months ended June 30, 2017, respectively.

Required Materials

Our Required Materials product line includes a revenue share from Ingram and other partners, on the rental and sale of print textbooks, as well as revenues from eTextbooks. We offer our eTextbooks on a standalone basis or as a rental-equivalent solution and for free to students awaiting the arrival of their print textbook rental for select print textbooks. eTextbooks and supplemental course materials are available from approximately 120 publishers as of June 30, 2018.

We also use our website to rent and sell, on behalf of Ingram and other partners, as well as source for used print textbooks for our partner Ingram. We attract students to our website by offering more for their used print textbooks than they could generally get by selling them back to their campus bookstore.

In the aggregate, Required Materials revenues were 17% and 22% of net revenues during the three and six months ended June 30, 2018, respectively, and 21% and 28% of net revenues during the three and six months ended June 30, 2017, respectively.

Strategic Partnership with Ingram and Other Partners

Our strategic partnership with Ingram and agreements with other partners have helped to accelerate the growth of our Chegg Services products by allowing us to utilize capital otherwise historically spent on the purchase of print textbooks, and at the same time allowing us to maintain a leading position and high brand recognition through our iconic orange boxes. We entered into a definitive inventory purchase and consignment agreement with Ingram that allows us to focus on eTextbooks and Chegg Services. Under the agreement, since May 2015, Ingram has been responsible for all new investments in the print textbook library, fulfillment logistics, and has title and risk of loss related to print textbook rentals. We have also entered into agreements with other partners to provide our customers with better pricing and a wider variety of new editions of print textbooks. As a result of our strategic partnership with Ingram and agreements with other partners, our revenues include a revenue share on the total transaction amount that we earn upon Ingram's fulfillment of a rental transaction using print textbooks for which Ingram or the other partner has title and risk of loss, as opposed to the total rental transaction amount. These partnerships allow us to reduce and eliminate the capital requirements and operating expenses we historically incurred to acquire and maintain a print textbook library. We will continue to procure books on Ingram’s behalf including books through our buyback program and invoice Ingram at cost.

Seasonality of Our Business

The recognition of revenues from our eTextbooks and Chegg Services are primarily recognized ratably over the term a student rents our eTextbook or subscribes to our Chegg Services. 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 marketing activities remain highest in the first and third quarter such that our profitability may not provide meaningful insight on a sequential basis.


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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 operating results on a sequential basis may not provide meaningful insight into our overall financial performance.

Results of Operations
The following table summarizes our historical condensed consolidated statements of operations (in thousands, except percentage of total net revenues):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
$
74,222

 
100
 %
 
$
56,317

 
100
 %
 
$
151,171

 
100
 %
 
$
118,919

 
100
 %
Cost of revenues(1)
17,784

 
24

 
17,042

 
30

 
38,008

 
25

 
38,438

 
32

Gross profit
56,438

 
76

 
39,275

 
70

 
113,163

 
75

 
80,481

 
68

Operating expenses(1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
26,218

 
36

 
19,899

 
35

 
51,751

 
34

 
39,201

 
33

Sales and marketing
11,437

 
15

 
10,098

 
18

 
26,773

 
18

 
26,062

 
22

General and administrative
19,479

 
26

 
14,501

 
26

 
37,735

 
25

 
29,843

 
25

Restructuring charges
15

 

 
59

 

 
235

 

 
959

 
1

Gain on liquidation of textbooks

 

 

 

 

 

 
(4,766
)
 
(4
)
Total operating expenses
57,149

 
77

 
44,557

 
79

 
116,494

 
77

 
91,299

 
77

Loss from operations
(711
)
 
(1
)
 
(5,282
)
 
(9
)
 
(3,331
)
 
(2
)
 
(10,818
)
 
(9
)
Total interest expense and other income (expense), net
(2,770
)
 
(4
)
 
(27
)
 

 
(2,226
)
 
(1
)
 
(245
)
 

Loss before provision for income taxes
(3,481
)
 
(5
)
 
(5,309
)
 
(9
)
 
(5,557
)
 
(3
)
 
(11,063
)
 
(9
)
Provision for income taxes
428

 
(1
)
 
716

 
(1
)
 
969

 
(1
)
 
1,363

 
(1
)
Net loss
$
(3,909
)
 
(6
)%
 
$
(6,025
)
 
(10
)%
 
$
(6,526
)
 
(4
)%
 
$
(12,426
)
 
(10
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
$
103

 
 
 
$
88

 
 
 
$
197

 
 
 
$
155

 
 
Research and development
3,529

 
 
 
3,387

 
 
 
7,662

 
 
 
6,628

 
 
Sales and marketing
1,730

 
 
 
1,201

 
 
 
3,319

 
 
 
2,327

 
 
General and administrative
6,681

 
 
 
4,423

 
 
 
12,507

 
 
 
8,267

 
 
Total share-based compensation expense
$
12,043

 
 
 
$
9,099

 
 
 
$
23,685

 
 
 
$
17,377

 
 


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Three and Six Months Ended June 30, 2018 and 2017
    
Net Revenues    

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):
 
Three Months Ended 
 June 30,
 
Change
 
2018
 
2017
 
$
 
%
Chegg Services
$
61,849

 
$
44,700

 
$
17,149

 
38
%
Required Materials
12,373

 
11,617

 
756

 
7
%
Total net revenues
$
74,222

 
$
56,317

 
$
17,905

 
32
%

 
Six Months Ended 
 June 30,
 
Change
 
2018
 
2017
 
$
 
%
Chegg Services
$
118,126

 
$
85,735

 
$
32,391

 
38
 %
Required Materials
33,045

 
33,184

 
(139
)
 
 %
Total net revenues
$
151,171

 
$
118,919

 
$
32,252

 
27
 %

Chegg Services revenues increased $17.1 million, or 38%, and $32.4 million, or 38%, during the three and six months ended June 30, 2018, compared to the same periods in 2017 due to growth in subscriptions for our Chegg Study service and revenues from our Chegg Writing service. Chegg Services revenues were 83% and 78% of net revenues during the three and six months ended June 30, 2018, respectively, and 79% and 72% of net revenues during the three and six months ended June 30, 2017, respectively. Required Materials revenues increased $0.8 million, or 7%, during the three months ended June 30, 2018 and remained relatively flat during the six months ended June 30, 2018, compared to the same periods in 2017. Required Materials revenues were 17% and 22% of net revenues during the three and six months ended June 30, 2018, respectively, and 21% and 28% of net revenues during the three and six months ended June 30, 2017, respectively.
    
Cost of Revenues

The following table sets forth our cost of revenues for the periods shown (in thousands, except percentages):
 
Three Months Ended 
 June 30,
 
Change
 
2018
 
2017
 
$
 
%
Cost of revenues(1)
$
17,784

 
$
17,042

 
$
742

 
4
%
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense of:
$
103

 
$
88

 
$
15

 
17
%

 
Six Months Ended 
 June 30,
 
Change
 
2018
 
2017
 
$
 
%
Cost of revenues(1)
$
38,008

 
$
38,438

 
$
(430
)
 
(1
)%
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense of:
$
197

 
$
155

 
$
42

 
27
 %
    
Cost of revenues increased $0.7 million, or 4%, during the three months ended June 30, 2018, relatively flat compared to the same period in 2017. Gross margins increased to 76% during the three months ended June 30, 2018, from 70% in the same period in 2017.

Cost of revenues decreased $0.4 million, or 1%, during the six months ended June 30, 2018, relatively flat compared to the same period in 2017. Gross margins increased to 75% during the six months ended June 30, 2018, from 68% in the same period in 2017.


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Table of Contents

Operating Expenses
The following table sets forth our total operating expenses for the periods shown (in thousands, except percentages):

 
Three Months Ended 
 June 30,
 
Change
 
2018
 
2017
 
$
 
%
Research and development(1)
$
26,218

 
$
19,899

 
$
6,319

 
32
 %
Sales and marketing(1)
11,437

 
10,098

 
1,339

 
13

General and administrative(1)
19,479

 
14,501

 
4,978

 
34

Restructuring charges
15

 
59

 
(44
)
 
(75
)
Total operating expenses
$
57,149

 
$
44,557

 
$
12,592

 
28
 %
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense of:
 
 
 
 
 
 
 
Research and development
$
3,529

 
$
3,387

 
$
142

 
4
 %
Sales and marketing
1,730

 
1,201

 
529

 
44

General and administrative
6,681

 
4,423

 
2,258

 
51

Share-based compensation expense
$
11,940

 
$
9,011

 
$
2,929

 
33
 %

 
Six Months Ended 
 June 30,
 
Change
 
2018
 
2017
 
$
 
%
Research and development(1)
$
51,751

 
$
39,201

 
$
12,550

 
32
 %
Sales and marketing(1)
26,773

 
26,062

 
711

 
3

General and administrative(1)
37,735

 
29,843

 
7,892

 
26

Restructuring charges
235

 
959

 
(724
)
 
(75
)
Gain on liquidation of textbooks

 
(4,766
)
 
4,766

 
(100
)
Total operating expenses
$
116,494

 
$
91,299

 
$
25,195

 
28
 %
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense of:
 
 
 
 
 
 
 
Research and development
$
7,662

 
$
6,628

 
$
1,034

 
16
 %
Sales and marketing
3,319

 
2,327

 
992

 
43

General and administrative
12,507

 
8,267

 
4,240

 
51

Share-based compensation expense
$
23,488

 
$
17,222

 
$
6,266

 
36
 %

Research and Development

Research and development expenses increased $6.3 million, or 32%, during the three months ended June 30, 2018 compared to the same period in 2017. The increase was primarily attributable to an increase in employee-related expenses of $3.8 million, higher web hosting and software licensing fees of $1.5 million, higher outside services of $0.6 million, higher share-based compensation expense of $0.1 million, and higher depreciation and amortization expense of $0.4 million, compared to the same period in 2017. Research and development as a percentage of net revenues were 36% during the three months ended June 30, 2018 compared to 35% during the same period in 2017.

Research and development expenses increased $12.6 million, or 32%, during the six months ended June 30, 2018 compared to the same period in 2017. The increase was primarily attributable to an increase in employee-related expenses of $7.9 million, higher web hosting and software licensing fees of $1.8 million, higher outside services of $1.1 million, higher share-based compensation expense of $1.0 million, and higher depreciation and amortization expense of $0.7 million, compared to the same period in 2017. Research and development as a percentage of net revenues were 34% during the six months ended June 30, 2018 compared to 33% during the same period in 2017.
    

29

Table of Contents

Sales and Marketing

Sales and marketing expenses increased by $1.3 million