2017 ANNUAL REPORT
2017 ANNUAL REPORT
Dear Chegg Stockholder:
2017 was a break out year for Chegg. We successfully completed our first year as an all-digital company,
positioning us to be a high-growth, high-margin, more predictable business. For the full year of 2017,
our Chegg Services subscribers grew 45% to a record 2.2 million, which drove year-over-year Chegg
Services revenue growth of 44%. We dramatically improved our profitability, highlighting the leverage in
our model. We strengthened our balance sheet with a well-received follow-on offering and ended the
year with cash and investments of $229 million.
During 2017, we dedicated significant investment towards our future. We believe that the more we
invest in content and modalities the larger our opportunity gets. We invested in subject expansion inside
Chegg Study, with subjects like chemical engineering, nursing, anatomy and physiology; and invested in
new modalities, like video. We also made important investments in our new writing service, focusing on
teaching students how to improve their writing. We acquired Math 42 to expand our coverage of math.
We also continued to invest in our Careers service to help students with their professional endeavors.
The core of Chegg is Chegg Services, as it most closely aligns with the needs of today’s student; to
master the subject, get a better grade, and go on to graduate and pursue their career. Chegg Study, has
become a student mainstay. Chegg Study contains nearly 7 million textbook solutions, from 28,000
ISBNs, and more than 13 million unique questions that have been asked by students and answered by
our network of over 35,000 experts. We now have a library of over 20 million unique, proprietary,
expert answers and textbook solutions– an increase of nearly 6 million in 2017. Chegg Study content
views – which is how we measure engagement – surpassed 440 million in 2017, up over 60% year over
year.
We believe developing writing competency is critical for students, not only in school, but also well in to
their careers. We believe Chegg is uniquely positioned to meet this need because students already come
to us today when writing papers. We have over 100 million visits from students, on an annual basis, who
created over 150 million citations in Q4 alone, bringing our total number of citations in 2017 to over half
a billion.
Although we see homework help and writing as subjects that can be taught at scale using technology,
we still believe in the power of human help. This is why we endeavor to build the largest online
marketplace for tutors, and highlights the importance of integrating it in to our other services. We
continue to see 50% of our current Chegg Tutors customers coming from Chegg Services, which shows
the power of our inter-connected platform, and the importance of human help.
Chegg is focused on the modern students’ needs of making learning more convenient, more affordable
and more personalized, which drives our mission and priorities. Chegg has built services and a
data-driven platform that help solve some of the most important challenges facing today’s students. We
help students pick their best fit school, master subjects, pass their classes, lower their costs, and
ultimately, pursue the right career path. The deeper we get in to this market, the clearer it is that Chegg
can play a critical role to the 36 million high school and college students in the United States and,
eventually, expand to students internationally. We believe the need for Chegg is more important than
ever before, and if we continue to focus on making education more accessible, affordable, and efficient,
while delivering the outcome students desire, we find it hard to imagine any company being more
valuable for people between the ages of 15 and 30. We believe that the opportunity keeps getting
bigger and we are only just getting started.
1
On behalf of the entire management team, we want to thank you for your continued investment in
Chegg and in our shared commitment to put students first.
Sincerely,
Dan Rosensweig, President & CEO
Chegg, Inc.
Forward-Looking Statements
This letter contains forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, which include, without limitation statements regarding
Chegg's belief that there was a huge opportunity to realign the education industry; Chegg’s belief that
more it invests in content and modalities the larger its opportunity gets; Chegg’s desire to build the
largest marketplace of tutors; Chegg’s belief that 2017 marked the beginning of a bigger opportunity for
Chegg; Chegg’s position because of momentum and receptivity of its brand and awareness of Chegg
Services; Chegg’s ability to play a critical role in over 36 million high school and college students in the
United States; Chegg’s value to people between the ages of 15 and 30; Chegg’s belief that the need for
Chegg is more important than ever before; and Chegg’s belief that the opportunity keeps getting bigger.
The words "anticipate," "believe," "estimate," "expect," "intend," "project," "endeavor," "will," "should,"
"future," "transition," "outlook" and similar expressions, as they relate to Chegg, are intended to identify
forward-looking statements. These statements are not guarantees of future performance, and are based
on management's expectations as of the date of this press release and assumptions that are inherently
subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements to differ materially from any future results, performance or
achievements. Important factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements include the following: Chegg's ability to
attract new students, increase engagement and increase monetization; the rate of adoption of Chegg's
offerings; the effect of Chegg's acquisition of Imagine Easy Solutions and Cogeon; Chegg's ability to
strategically take advantage of new opportunities to leverage the Student Graph; competitive
developments, including pricing pressures; Chegg's anticipated growth of Chegg Services; Chegg's ability
to build and expand its services offerings; Chegg's ability to develop new products and services on a
cost-effective basis and to integrate acquired businesses and assets; the impact of seasonality on the
business; Chegg's partnership with Ingram and the parties' ability to achieve the anticipated benefits of
the partnership, including the potential impact of the economic risk-sharing arrangements between
Chegg and Ingram on Chegg's results of operations; Chegg's ability to effectively control operating costs;
changes in Chegg's addressable market; changes in the education market; and general economic,
political and industry conditions. All information provided in this release and in the conference call is as
of the date hereof and Chegg undertakes no duty to update this information except as required by law.
These and other important risk factors are described more fully in documents filed with the Securities
and Exchange Commission, including Chegg's Annual Report on Form 10-K for the year ended December
31, 2017 filed with the Securities and Exchange Commission on February 26, 2018.
2
Chegg, Inc.
2018 Proxy Statement
[THIS PAGE INTENTIONALLY LEFT BLANK]
April 26, 2018
To Our Stockholders,
You are cordially invited to attend the 2018 Annual Meeting of Stockholders of Chegg, Inc. The meeting will be held
at 3990 Freedom Circle, Santa Clara, California on Thursday, June 7, 2018 at 9:00 a.m. (Pacific Time).
We have elected to deliver our proxy materials to our stockholders over the Internet in accordance with Securities and
Exchange Commission rules. We believe that this delivery process reduces our environmental impact and lowers the costs of
printing and distributing our proxy materials without impacting our stockholders’ timely access to this important information.
On April 26, 2018, we sent a Notice of Internet Availability of Proxy Materials (the “Notice”) to our stockholders, which
contains instructions on how to access our proxy materials for our 2018 Annual Meeting of Stockholders, including our proxy
statement and annual report to stockholders. The Notice also provides instructions on how to vote by telephone or via the
Internet and includes instructions on how to receive a paper copy of the proxy materials by mail.
The matters to be acted upon are described in the accompanying notice of annual meeting of the stockholders and
proxy statement.
Please use this opportunity to take part in our company’s affairs by voting on the business to come before the meeting.
Whether or not you plan to attend the meeting, please vote by telephone or via the Internet or request, sign and return a proxy
card to ensure your representation at the meeting. Your vote is important.
Sincerely,
Dan Rosensweig
President and Chief Executive Officer
[This Page Intentionally Left Blank]
CHEGG, INC.
3990 Freedom Circle
Santa Clara, CA 95054
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Our Stockholders:
NOTICE IS HEREBY GIVEN that the 2018 Annual Meeting of Stockholders of Chegg, Inc. will be held on Thursday,
June 7, 2018, at 9:00 a.m. (Pacific Time) at our offices located at 3990 Freedom Circle, Santa Clara, California.
We are holding the meeting for the following purposes, which are more fully described in the accompanying proxy
statement:
1. To elect two Class II directors of Chegg, Inc., each to serve until the third annual meeting of stockholders following
this meeting and until his successor has been elected and qualified or until his earlier resignation or removal.
2. Vote, on a non-binding advisory basis, on the compensation paid by us to our named executive officers for the year
ended December 31, 2017.
3. Vote, on a non-binding advisory basis, on the frequency of future advisory votes on executive compensation.
4. To ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the
fiscal year ending December 31, 2018.
In addition, stockholders may be asked to consider and vote upon such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Only stockholders of record of our common stock at the close of business on April 10, 2018 are entitled to notice of,
and to vote at, the meeting and any adjournments or postponements thereof. For 10 days prior to the meeting, a complete list of
the stockholders entitled to vote at the meeting will be available during ordinary business hours at our headquarters for
examination by any stockholder for any purpose relating to the meeting.
Your vote is very important. Each share of our common stock that you own represents one vote. For questions
regarding your stock ownership, if you are a registered holder, you can contact our transfer agent, American Stock Transfer &
Trust Company, through their website at www.astfinancial.com or by phone at (800) 937-5449.
By Order of the Board of Directors,
Dave Borders Jr.
General Counsel and Secretary
Santa Clara, California
April 26, 2018
Whether or not you expect to attend the meeting, we encourage you to read the proxy statement and vote by telephone
or via the Internet or request, sign and return your proxy card as soon as possible, so that your shares may be
represented at the meeting. For specific instructions on how to vote your shares, please refer to the section entitled
“General Information About the Meeting” beginning on page 5 of the proxy statement and the instructions on the
Notice of Internet Availability of Proxy Materials that was mailed to you.
[This Page Intentionally Left Blank]
PROXY STATEMENT FOR 2018 ANNUAL MEETING OF STOCKHOLDERS
CHEGG, INC.
GENERAL PROXY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information About Solicitation and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internet Availability of Proxy Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General Information About the Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CORPORATE GOVERNANCE STANDARDS AND DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Governance Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Leadership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Board of Directors’ Role in Risk Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Independence of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Committees of Our Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board and Committee Meetings and Attendance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Attendance at Annual Stockholders’ Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Presiding Director of Non-Employee Director Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communication with Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Code of Business Conduct and Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOMINATIONS PROCESS AND DIRECTOR QUALIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nomination to the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL NO. 1 ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nominees to the Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Continuing Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL NO. 2 NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . .
Compensation Program and Philosophy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL NO. 3 NON-BINDING ADVISORY VOTE ON THE FREQUENCY OF FUTURE ADVISORY VOTES
ON EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL NO. 4 RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy on Audit Committee Pre-Approval on Audit and Permissible Non-Audit Services of Independent Registered
Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . .
OUR MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of the Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Termination and Change of Control Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EQUITY COMPENSATION PLAN INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRANSACTIONS WITH RELATED PARTIES, FOUNDERS AND CONTROL PERSONS. . . . . . . . . . . . . . . . . . . . . .
Review, Approval or Ratification of Transactions with Related Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REPORT OF THE AUDIT COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholder Proposals to be Presented at Next Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
5
5
5
9
9
9
9
10
10
12
12
12
12
12
13
14
14
14
15
15
16
17
19
19
20
21
21
22
23
26
27
27
34
35
40
43
44
44
45
46
46
46
46
“Householding” - Stockholders Sharing the Same Last Name and Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
48
49
CHEGG, INC.
3990 Freedom Circle
Santa Clara, CA 95054
PROXY STATEMENT FOR THE 2018 ANNUAL MEETING OF STOCKHOLDERS
April 26, 2018
Information About Solicitation and Voting
The accompanying proxy is solicited on behalf of the board of directors of Chegg, Inc. (“Chegg,” “we,” or “our”) for
use at Chegg’s 2018 Annual Meeting of Stockholders (the “meeting”) to be held at 3990 Freedom Circle, Santa Clara,
California on June 7, 2018, at 9:00 a.m. (Pacific Time), and any adjournment or postponement thereof.
Internet Availability of Proxy Materials
Under rules adopted by the U.S. Securities and Exchange Commission (the “SEC”), we are furnishing proxy materials
to our stockholders primarily via the Internet, instead of mailing printed copies of those materials to each stockholder. On
April 26, 2018, we sent a Notice of Internet Availability of Proxy Materials (the “Notice of Internet Availability”) to our
stockholders, which contains instructions on how to access our proxy materials, including our proxy statement and our annual
report. The Notice of Internet Availability also provides instructions on how to vote by telephone or via the Internet and
includes instructions on how to receive a paper copy of the proxy materials by mail.
This process is designed to reduce our environmental impact and lowers the costs of printing and distributing our
proxy materials without impacting our stockholders’ timely access to this important information. However, if you would prefer
to receive printed proxy materials, please follow the instructions included in the Notice of Internet Availability.
Purpose of the Meeting
General Information About the Meeting
At the meeting, stockholders will act upon the proposals described in this proxy statement. In addition, we will
consider any other matters that are properly presented for a vote at the meeting. As of April 26, 2018, we are not aware of any
other matters to be submitted for consideration at the meeting. If any other matters are properly presented for a vote at the
meeting, the persons named in the proxy, who are our officers, have the authority in their discretion to vote the shares of our
common stock represented by the proxy. Following the meeting, management will respond to questions from stockholders.
Record Date
Only holders of record of our common stock at the close of business on April 10, 2018, the record date, will be entitled
to vote at the meeting. At the close of business on April 10, 2018, we had 111,867,529 shares of our common stock outstanding
and entitled to vote.
Quorum
The holders of a majority of the voting power of the shares of our common stock entitled to vote at the meeting as of
the record date must be present at the meeting in order to hold the meeting and conduct business. This presence is called a
quorum. Your shares are counted as present at the meeting if you are present and vote in person at the meeting or if you have
properly submitted a proxy.
Voting Rights
Each holder of shares of our common stock is entitled to one vote for each share of our common stock held as of the
close of business on April 10, 2018, the record date. You may vote all shares owned by you as April 10, 2018, including
(1) shares held directly in your name as the stockholder of record, and (2) shares held for you as the beneficial owner in street
name through a broker, bank, trustee, or other nominee (collectively referred to in this proxy statement as your “broker”).
5
Stockholder of Record: Shares Registered in Your Name. If, on April 10, 2018, your shares of our common stock were
registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, then you are considered
the stockholder of record with respect to those shares. As a stockholder of record, you may vote at the meeting or vote by
telephone, via the Internet, or if you request or receive paper proxy materials by mail, by filling out and returning the proxy
card.
Beneficial Owner: Shares Registered in the Name of a Broker. If, on April 10, 2018, your shares of our common stock
were held in an account with a broker, then you are the beneficial owner of the shares held in street name. As a beneficial
owner, you have the right to direct your broker on how to vote the shares of our common stock held in your account. However,
the broker that holds your shares of our common stock is considered the stockholder of record for purposes of voting at the
meeting. Because you are not the stockholder of record, you may not vote your shares at the meeting unless you request and
obtain a valid proxy from the broker that holds your shares giving you the right to vote the shares at the meeting.
Required Vote
Proposal No. 1. Each director nominated in Proposal No. 1 will be elected by a plurality of the votes cast, which
means that the two individuals nominated for election to the board of directors at the meeting receiving the highest number of
“FOR” votes will be elected. You may either vote “FOR” one or more nominees or “WITHHOLD” your vote with respect to
one or more nominees.
Proposal No. 2. The affirmative “FOR” vote of a majority of the shares present, represented and entitled to vote on the
proposal is required to approve, on an advisory and non-binding basis, the compensation awarded to our named executive
officers for the year ended December 31, 2017. You may vote “FOR,” “AGAINST,” or “ABSTAIN” on this proposal.
Abstentions are deemed to be votes cast and have the same effect as a vote against the proposal. Although this say-on-pay vote
is advisory and, therefore, will not be binding on us, our compensation committee and our board of directors value the opinions
of our stockholders. Accordingly, to the extent there is a significant vote against the compensation of our named executive
officers, we will consider our stockholders’ concerns and the compensation committee will evaluate what actions may be
necessary or appropriate to address those concerns.
Proposal No. 3. The choice of frequency that receives the highest number of affirmative “FOR” votes will be
considered the advisory vote of our stockholders. You may vote for “ONE YEAR,” “TWO YEARS” or “THREE YEARS” or
“ABSTAIN.” A properly executed proxy marked “ABSTAIN” with respect to the frequency of the stockholder vote on
executive compensation will not be voted with respect to such proposal, although it will be counted for purposes of determining
whether there is a quorum. Even though your vote is advisory and, therefore, will not be binding on us, our board of directors
and compensation committee value the opinions expressed by our stockholders in their vote on this proposal and will consider
the outcome of the vote when making future decisions regarding the frequency of holding future non-binding advisory votes on
the compensation program of our named executive officers.
Proposal No. 4. Approval of Proposal No. 4 will be obtained if the number of votes cast “FOR” the proposal at the
meeting exceeds the number of votes cast “AGAINST” the proposal. Abstentions (shares of our common stock present at the
meeting and voted “ABSTAIN”) are counted for purposes of determining whether a quorum is present, and have no effect on
the outcome of the matters voted upon.
“Broker non-votes” occur when shares of our common stock held by a broker for a beneficial owner are not voted
either because (i) the broker did not receive voting instructions from the beneficial owner, or (ii) the broker lacked discretionary
authority to vote the shares. Broker non-votes are counted for purposes of determining whether a quorum is present, and have
no effect on the outcome of the matters voted upon. Note that if you are a beneficial holder and do not provide specific voting
instructions to your broker, the broker that holds your shares of our common stock will not be authorized to vote on the election
of directors. Accordingly, we encourage you to provide voting instructions to your broker, whether or not you plan to attend the
meeting.
Recommendations of the Board of Directors on Each of the Proposals Scheduled to be Voted on at the Meeting
The board of directors recommends that you vote:
• Proposal No. 1 - FOR each of the Class II directors named in this proxy statement.
• Proposal No. 2 - FOR the approval of the compensation of our named executive officers as disclosed in this
proxy statement.
6
• Proposal No. 3 - FOR “ONE YEAR” as the frequency with which stockholders are provided an advisory
vote on executive compensation.
• Proposal No. 4 - FOR the ratification of the appointment of Deloitte & Touche LLP as our independent
registered public accounting firm for the fiscal year ending December 31, 2018.
Voting Instructions; Voting of Proxies
If you are a stockholder of record, you may:
•
•
•
vote in person – we will provide a ballot to stockholders who attend the meeting and wish to vote in person;
vote via telephone or Internet – in order to do so, please follow the instructions shown on your Notice of
Internet Availability or proxy card; or
vote by mail – if you request or receive a paper proxy card and voting instructions by mail, simply complete,
sign and date the enclosed proxy card and return it before the meeting in the envelope provided.
Votes submitted by telephone or via the Internet must be received by 11:59 p.m., Eastern Time, on June 6, 2018.
Submitting your proxy (whether by telephone, via the Internet or by mail if you request or received a paper proxy card) will not
affect your right to vote in person should you decide to attend the meeting. If you are not the stockholder of record, please refer
to the voting instructions provided by your nominee to direct it how to vote your shares. For Proposal No. 1, you may either
vote “FOR” all of the nominees to the board of directors, or you may “WITHHOLD” your vote from any nominee you specify.
For Proposal No. 2, you may vote “FOR” or “AGAINST” or “ABSTAIN” from voting. For Proposal No. 3, you may vote for
“ONE YEAR,” “TWO YEARS” or “THREE YEARS” or “ABSTAIN” from voting. For Proposal No. 4, you may vote “FOR”
or “AGAINST” or “ABSTAIN” from voting. Your vote is important. Whether or not you plan to attend the meeting, we urge
you to vote by proxy to ensure that your vote is counted.
All proxies will be voted in accordance with the instructions specified on the proxy card. If you sign a physical proxy
card and return it without instructions as to how your shares of our common stock should be voted on a particular proposal at
the meeting, your shares will be voted in accordance with the recommendations of our board of directors stated above.
If you received a Notice of Internet Availability, please follow the instructions included on the notice on how to access
your proxy card and vote by telephone or via the Internet. If you do not vote and you hold your shares of our common stock in
street name, and your broker does not have discretionary power to vote your shares, your shares may constitute “broker non-
votes”(as described above) and will not be counted in determining the number of shares necessary for approval of the
proposals. However, shares of our common stock that constitute broker non-votes will be counted for the purpose of
establishing a quorum for the meeting.
If you receive more than one proxy card or Notice of Internet Availability, your shares of our common stock are
registered in more than one name or are registered in different accounts. To make certain all of your shares of our common
stock are voted, please follow the instructions included on the Notice of Internet Availability on how to access each proxy card
and vote each proxy card by telephone or via the Internet. If you requested or received paper proxy materials by mail, please
complete, sign and return each proxy card to ensure that all of your shares are voted.
Expenses of Soliciting Proxies
The expenses of soliciting proxies will be paid by Chegg. Following the original mailing of the soliciting materials,
Chegg and its agents may solicit proxies by mail, email, telephone, facsimile, by other similar means, or in person. Our
directors, officers, and other employees, without additional compensation, may solicit proxies personally or in writing, by
telephone, email, or otherwise. Following the original mailing of the soliciting materials, Chegg will request brokers to forward
copies of the soliciting materials to persons for whom they hold shares of our common stock and to request authority for the
exercise of proxies. In such cases, Chegg, upon the request of the record holders, will reimburse such holders for their
reasonable expenses. If you choose to access the proxy materials and/or vote via the Internet, you are responsible for any
Internet access charges you may incur.
Revocability of Proxies
A stockholder of record who has given a proxy may revoke it at any time before it is exercised at the meeting by:
•
delivering to the Corporate Secretary of Chegg (by any means, including facsimile) a written notice stating
that the proxy is revoked;
7
•
•
•
signing and delivering a proxy bearing a later date;
voting again by telephone or via the Internet; or
attending and voting at the meeting (although attendance at the meeting will not, by itself, revoke a proxy).
Please note, however, that if your shares of our common stock are held of record by a broker and you wish to revoke a
proxy, you must contact that firm to revoke any prior voting instructions. In the event of multiple online or telephone votes by
a stockholder, each vote will supersede the previous vote and the previous vote and the last vote cast will be deemed to be the
final vote of the stockholder unless revoked in person at the meeting.
Electronic Access to the Proxy Materials
The Notice of Internet Availability will provide you with instructions regarding how to:
•
•
view our proxy materials for the meeting via the Internet; and
instruct us to send our future proxy materials to you electronically by email.
Choosing to receive your future proxy materials by email will reduce the impact of our annual meetings of
stockholders on the environment and lower the costs of printing and distributing our proxy materials. If you choose to receive
future proxy materials by email, you will receive an email next year with instructions containing a link to those materials and a
link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it.
Voting Results
Voting results will be tabulated and certified by the inspector of elections appointed for the meeting. The preliminary
voting results will be announced at the meeting and posted on our website at investor.chegg.com. The final results will be
tallied by the inspector of elections and filed with the SEC in a Current Report on Form 8-K within four business days of the
meeting.
8
CORPORATE GOVERNANCE STANDARDS AND DIRECTOR INDEPENDENCE
Chegg is strongly committed to good corporate governance practices. These practices provide an important framework
within which our board of directors and management can pursue our strategic objectives for the benefit of our stockholders.
Corporate Governance Guidelines
Our board of directors has adopted Corporate Governance Guidelines that set forth our expectations for directors,
director independence standards, board committee structure and functions, and other policies regarding our corporate
governance. Our Corporate Governance Guidelines are available without charge on the Investor Relations section of our
website, which is located at http://investor.chegg.com, under “Corporate Governance.” The Corporate Governance Guidelines
are reviewed at least annually by our nominating and corporate governance committee, and any warranted changes are
recommended to our board of directors.
Board Leadership Structure
Our Corporate Governance Guidelines provide that our board of directors shall be free to choose its chairman in any
way that it considers in the best interests of our company, and that the nominating and corporate governance committee shall
periodically consider the leadership structure of our board of directors and make such recommendations related thereto to our
board of directors with respect thereto as the nominating and corporate governance committee deems appropriate. Our board of
directors does not have a policy on whether the role of the chairman and chief executive officer should be separate and believes
that it should maintain flexibility in determining a board leadership structure appropriate for us from time to time.
Our board of directors believes that we and our stockholders currently are best served by having Dan Rosensweig, our
chief executive officer, serve as chairman of our board of directors, considering his experience, expertise, knowledge of our
business and operations and strategic vision. As chairman of our board of directors, Mr. Rosensweig presides over meetings of
the board of directors, and holds such other powers and carries out such other duties as are customarily carried out by the
chairman of a board of directors. Our board of directors believes that its independence and oversight of management is
maintained effectively through this leadership structure, the composition of our board of directors and sound corporate
governance policies and practices.
Our Board of Directors’ Role in Risk Oversight
Our board of directors, as a whole, has responsibility for risk oversight, although the committees of our board of
directors oversee and review risk areas which are particularly relevant to them. The risk oversight responsibility of our board of
directors and its committees is supported by our management reporting processes, which are designed to provide visibility to
the board of directors and to our personnel that are responsible for risk assessment and information management about the
identification, assessment and management of critical risks and management’s risk mitigation strategies. These areas of focus
include, but are not limited to, competitive, economic, operational, financial (accounting, credit, liquidity and tax), legal,
regulatory, compliance and reputational risks.
Each committee of the board of directors meets in executive session with key management personnel and
representatives of outside advisors to oversee risks associated with their respective principal areas of focus. The audit
committee reviews our major financial risk exposures and the steps management has taken to monitor and control such
exposures, including our risk assessment and risk management policies and guidelines. The nominating and corporate
governance committee reviews our major legal compliance risk exposures and monitors the steps management has to mitigate
these exposures, including our legal risk assessment and legal risk management policies and guidelines.
The compensation committee reviews our major compensation-related risk exposures, including consideration of
whether compensation rewards and incentives encourage undue or inappropriate risk taking by our personnel, and the steps
management has taken to monitor or mitigate such exposures.
9
Independence of Directors
The rules, regulations and listing standards of the New York Stock Exchange (the “NYSE”) generally require that a
majority of the members of our board of directors be independent. In addition, the NYSE rules, regulations and listing
standards generally require that, subject to specified exceptions, each member of a listed company’s audit, compensation and
governance committees be independent.
Our board of directors determines the independence of our directors by applying the independence principles and
standards established by the NYSE. These provide that a director is independent only if the board of directors affirmatively
determines that the director has no direct or indirect material relationship with our company. They also specify various
relationships that preclude a determination of director independence. Material relationships may include commercial, industrial,
consulting, legal, accounting, charitable, family and other business, professional and personal relationships.
Applying these standards, our board of directors annually reviews the independence of our directors, taking into
account all relevant facts and circumstances. In its most recent review, the board considered, among other things, the
relationships that each non-employee director has with our company and all other facts and circumstances our board of
directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each
non-employee director.
Based upon this review, our board of directors has determined that none of the members of our board of directors,
other than Mr. Rosensweig, has a relationship that would interfere with the exercise of independent judgment in carrying out
the responsibilities of a director and that each of the members of our board of directors, other than Mr. Rosensweig, is
“independent” as that term is defined under the rules, regulations and listing standards of the NYSE.
All members of our audit committee, compensation committee, and nominating and corporate governance committee
must be independent directors as defined by our Corporate Governance Guidelines. Members of the audit committee must also
satisfy a separate SEC independence requirement, which provides that they may not accept directly or indirectly any
consulting, advisory or other compensatory fee from Chegg or any of its subsidiaries other than their directors’ compensation
(including in connection with such member’s service as a partner, member of principal of a law firm, accounting firm or
investment banking firm that accepts consulting or advisory fees from Chegg or any of its subsidiaries). Our board of directors
has determined that all members of our audit committee, compensation committee and nominating and corporate governance
committee are independent and all members of our audit committee satisfy the relevant SEC additional independence
requirements for the members of such committee.
Committees of Our Board of Directors
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate
governance committee. The composition and responsibilities of each committee are described below. Each committee is
governed by a charter. The charters for each committee can be obtained, without charge, on the investor relations section of our
website, http://investor.chegg.com, under “Corporate Governance.” Members serve on these committees until their resignations
or until otherwise determined by our board of directors.
Audit Committee
Our audit committee is comprised of Reneé Budig, who has served as the chair of the audit committee since her
appointment to our board of directors in November 2015, Richard Sarnoff and John York. The composition of our audit
committee meets the requirements for independence under the rules, regulations and listing standards of the NYSE and the
rules and regulations of the SEC. Each member of our audit committee is financially literate as required by the rules,
regulations and listing standards of the NYSE. In addition, our board of directors has determined that Ms. Budig is an audit
committee financial expert within the meaning of Item 407(d) of Regulation S-K of the Securities Act of 1933, as amended.
Our audit committee, among other things:
•
•
•
selects a qualified firm to serve as the independent registered public accounting firm to audit our financial
statements;
reviews the continuing independence and performance of and oversees our company’s relationship with the
independent registered public accounting firm;
discusses the scope, audit planning, and staffing of the independent registered public accounting firm;
10
•
•
•
•
•
discusses the results of the audit with the independent registered public accounting firm, and reviews, with
management and the independent registered public accounting firm, our interim and year-end operating
results;
develops procedures for employees to submit concerns anonymously about questionable accounting or
auditing matters;
considers and reviews the adequacy of our internal accounting controls and audit procedures;
oversees the activities of the internal audit function within the company; and
approves or, as required, pre-approves all audit and non-audit services not prohibited by law to be performed
by the independent registered public accounting firm.
Compensation Committee
Our compensation committee is comprised of Ted Schlein, who is the chair of the compensation committee, Jeffrey
Housenbold and Marne Levine. The composition of our compensation committee meets the requirements for independence
under the rules, regulations and listing standards of the NYSE and the rules and regulations of the SEC. Each member of our
compensation committee is a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the Securities Act of
1934, as amended, and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as
amended. The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to
the compensation of our executive officers and directors. Our compensation committee, among other things:
•
•
•
•
reviews and determines the compensation of our executive officers and recommends to our board of directors
the compensation for our directors;
administers our stock and equity incentive plans;
reviews and approves and makes recommendations to our board of directors regarding incentive
compensation equity-based grants and equity plans; and
establishes and reviews our company’s overall compensation strategy.
At least annually, our compensation committee reviews and approves our executive compensation strategy and
principles to assure that they promote stockholder interests and supports our strategic and tactical objectives, and that they
provide for appropriate rewards and incentives for our executives. Our compensation committee also reviews and makes
recommendations to our board of directors regarding the compensation of our non-employee directors and executive officers.
The compensation committee retains and does not delegate any of its exclusive power to determine all matters of executive
compensation and benefits. In determining the compensation of each of our executive officers, other than our chief executive
officer, our compensation committee considers the recommendations of our chief executive officer and our human resources
department. In the case of the chief executive officer, our compensation committee evaluates his performance and
independently determines whether to make any adjustments to his compensation.
Our compensation committee retained an independent compensation consultant, Frederic W. Cook & Co., Inc. (“FW
Cook”), to assist in structuring our executive officer compensation and non-employee director compensation for 2017. FW
Cook provided our compensation committee with market data and analyses from a peer group of similarly-sized technology
companies with similar business and financial characteristics. Other than the services described above, FW Cook has not
provided our company or our compensation committee with any other services. No work performed by FW Cook during 2017
raised a conflict of interest.
The compensation committee has delegated in accordance with applicable law, rules and regulations, and our
certificate of incorporation and bylaws, authority to an equity awards committee comprised of certain of our executive officers,
including our chief executive officer, who is also a member of the board of directors, the authority to make certain types of
equity award grants under the Chegg, Inc. 2013 Equity Incentive Plan to any employee who is not an executive officer or
director subject to the terms of such plan and equity award guidelines approved by our compensation committee.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee is comprised of Ms. Levine, who is the chair of the nominating
and corporate governance committee, and Messrs. Schlein and York. The composition of our nominating and corporate
governance committee meets the requirements for independence under the rules, regulations and listing standards of the NYSE.
Our nominating and corporate governance committee, among other things:
•
identifies, recruits, evaluates and recommends nominees to our board of directors and committees of our
board of directors;
11
•
•
•
conducts searches for qualified directors;
annually evaluates the performance of our board of directors and of individual directors;
considers and makes recommendations to the board of directors regarding the composition and leadership
structure of the board of directors and its committees;
reviews developments in corporate governance practices;
evaluates the adequacy of our corporate governance practices and reporting; and
•
•
• makes recommendations to our board of directors concerning corporate governance matters.
Compensation Committee Interlocks and Insider Participation
The members of our compensation committee during 2017 were Ms. Levine and Messrs. Housenbold and Schlein.
None of the members of our compensation committee in 2017 was at any time during the last fiscal year or at any other time an
officer or employee of Chegg or any of its subsidiaries, and none had or has any relationships with Chegg that are required to
be disclosed under Item 404 of Regulation S-K. None of our executive officers has served as a member of the board of
directors, or as a member of the compensation or similar committee, of any entity that has one or more executive officers who
served on our board of directors or compensation committee during 2017.
Board and Committee Meetings and Attendance
Our board of directors is responsible for the management and direction of Chegg and for establishing broad corporate
policies. The board of directors meets periodically during our fiscal year to review significant developments affecting us and to
act on matters requiring the board of directors’ approval. The board of directors held four meetings during 2017 and acted three
times by unanimous written consent, the audit committee held five meetings, and acted four time by unanimous written
consent, the compensation committee held three meeting, and also acted four times by unanimous written consent, and the
nominating and corporate governance committee held two meetings, and acted one time by unanimous written consent. During
2017, each member of the board of directors participated in at least 75% of the aggregate of all meetings of the board of
directors and of all meetings of committees on which such member served, that were held during the period in which such
director served.
Board Attendance at Annual Stockholders’ Meeting
Our policy is to invite and encourage each member of our board of directors to be present at our annual meetings of
stockholders. All of our then serving directors attended our last annual meeting of our stockholders held on June 1, 2017.
Presiding Director of Non-Employee Director Meetings
The non-employee directors meet in regularly scheduled executive sessions without management to promote open and
honest discussion. Ms. Levine, chair of the nominating and corporate governance committee, is the presiding director at these
meetings.
Communication with Directors
Stockholders and interested parties who wish to communicate with our board of directors, non-management members
of our board of directors as a group, a committee of the board of directors or a specific member of our board of directors
(including our chairman or lead independent director, if any) may do so by letters addressed to the attention of our Corporate
Secretary.
All communications are reviewed by the Corporate Secretary and provided to the members of the board of directors
consistent with a screening policy providing that unsolicited items, sales materials, and other routine items and items unrelated
to the duties and responsibilities of the board of directors not be relayed on to directors. Any communication that is not relayed
is recorded in a log and made available to our board of directors.
The address for these communications is:
Corporate Secretary
Chegg, Inc.
3990 Freedom Circle
Santa Clara, California 95054
12
Code of Business Conduct and Ethics
We have adopted Codes of Business Conduct and Ethics that apply to all of our board members, officers and
employees. Our Code of Business Conduct and Ethics is posted on the investor relations section of our website located at http://
investor.chegg.com, under “Corporate Governance.” To satisfy the disclosure requirement under Item 5.05 of Form 8-K
regarding any amendments or waivers of our Code of Business Conduct and Ethics pertaining to a member of our board of
directors or one of our executive officers will be disclosed on our website at the above-referenced address.
13
NOMINATIONS PROCESS AND DIRECTOR QUALIFICATIONS
Nomination to the Board of Directors
Candidates for nomination to our board of directors are selected by our board of directors based on the
recommendation of our nominating and corporate governance committee in accordance with the committee’s charter, our
certificate of incorporation and bylaws, our Corporate Governance Guidelines and criteria adopted by our board of directors
regarding director candidate qualifications. In recommending candidates for nomination, the nominating and corporate
governance committee considers candidates recommended by directors, officers, employees, stockholders and others, using the
same criteria to evaluate all candidates. Evaluations of candidates generally involve a review of background materials, internal
discussions and interviews with selected candidates as appropriate and, in addition, the committee may engage consultants or
third-party search firms to assist in identifying and evaluating potential nominees.
Additional information regarding the process for properly submitting stockholder nominations for candidates for
membership on our board of directors is set forth below under “Stockholder Proposals to Be Presented at the Next Annual
Meeting.”
Director Qualifications
With the goal of developing a diverse, experienced and highly-qualified board of directors, the nominating and
corporate governance committee is responsible for developing and recommending to our board of directors the desired
qualifications, expertise and characteristics of members of our board of directors, including the specific minimum qualifications
that the committee believes must be met by a committee-recommended nominee for membership to our board of directors and
any specific qualities or skills that the committee believes are necessary for one or more of the members of our board of
directors to possess.
Since the identification, evaluation and selection of qualified directors is a complex and subjective process that
requires consideration of many intangible factors, and will be significantly influenced by the particular needs of the board of
directors from time to time, our board of directors has not adopted a specific set of minimum qualifications, qualities or skills
that are necessary for a nominee to possess, other than those that are necessary to meet U.S. legal, regulatory and the listing
rules of the NYSE and the provisions of our certificate of incorporation, bylaws, Corporate Governance Guidelines, and
charters of the board committees. In addition, neither our board of directors nor our nominating and corporate governance
committee has a formal policy with regard to the consideration of diversity in identifying nominees. When considering
candidates for nomination, the nominating and corporate governance committee may take into consideration many factors
including, among other things, a candidate’s independence, integrity, skills, financial and other expertise, breadth of experience,
knowledge about our business or industry and ability to devote adequate time and effort to responsibilities of the board of
directors in the context of its existing composition. Through the nomination process, the nominating and corporate governance
committee seeks to promote board membership that reflects a diversity of business experience, expertise, viewpoints, personal
backgrounds and other characteristics that are expected to contribute to the board of directors’ overall effectiveness. The brief
biographical description of each director nominee set forth in Proposal No. 1 below includes the primary individual experience,
qualifications, attributes and skills of each of our director nominees that led to the conclusion that each director nominee should
serve as a member of our board of directors at this time.
14
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Our board of directors currently consists of seven directors and is divided into three classes, with each class serving
for three years and with the terms of office of the respective classes expiring in successive years. Directors in Class II will stand
for election at this meeting. The terms of office of directors in Class III and Class I do not expire until the annual meetings of
stockholders to be held in 2019 and 2020, respectively. At the recommendation of our nominating and corporate governance
committee, our board of directors proposes that each of the two Class II nominees named below be elected as a Class II director
for a three-year term expiring at the annual meeting of stockholders to be held in 2021 and until such director’s successor is
duly elected and qualified, or until such director’s earlier resignation or removal.
Shares of our common stock represented by proxies will be voted “FOR” the election of each of the two nominees
named below, unless the proxy is marked to withhold authority to so vote. If any nominee for any reason is unable to serve or
for good cause will not serve, the proxies may be voted for such substitute nominee as the proxy holder may determine. Each
nominee has consented to being named in this proxy statement and to serve if elected. Proxies may not be voted for more than
two directors. Stockholders may not cumulate votes in the election of directors.
Nominees to the Board of Directors
The nominees, and their ages, occupations and length of service on our board of directors are provided in the table
below. Additional biographical descriptions of each nominee are set forth in the text below the table. These descriptions include
the primary individual experience, qualifications, qualities and skills of each of our nominees that led to the conclusion that
each nominee should serve as a member of our board of directors at this time.
Name of Director/Nominee Age Principal Occupation
Marne Levine(1)(2) . . . . . . . . . .
47
Chief Operating Officer, Instagram (a subsidiary of Facebook,
Inc.)
Director Since
May 2013
Richard Sarnoff(3) . . . . . . . . . .
59 Managing Director and Head of the Media & Communications
August 2012
industry group, for the Pointe Equity platform of Kohlberg Kravis
Roberts & Co.
(1) Member of the nominating and corporate governance committee
(2) Member of the compensation committee
(3) Member of the audit committee
Marne Levine has served on our board of directors since May 2013. Since January 2015, Ms. Levine has served as the
Chief Operating Officer of Instagram, a social media company and wholly-owned subsidiary of Facebook, Inc. Previously, Ms.
Levine served as Vice President, Global Public Policy for Facebook, a social media company, from June 2010 to January 2015.
Prior to those roles, Ms. Levine served as Chief of Staff at the White House National Economic Council and Special Assistant
to the President for Economic Policy, from 2009 to 2010. She began her career at the U.S. Department of Treasury, where she
served in a variety of positions, including as the Deputy Assistant Secretary for banking and finance in the Office of Legislative
Affairs and Public Liaison. Ms. Levine holds a B.A. in political science and communications from Miami University and an
M.B.A. from Harvard Business School. We believe that Ms. Levine should continue to serve on our board of directors due to
her extensive experience in the policy, communications and technology fields.
Richard Sarnoff has served on our board of directors since August 2012. Since July 2014, Mr. Sarnoff has served as
the Managing Director and Head of the Media & Communications industry group for the Private Equity platform of Kohlberg
Kravis Roberts & Co., a private equity firm. From 2011 to July 2014, Mr. Sarnoff was a Senior Adviser to Kohlberg Kravis
Roberts & Co. Prior to that role, Mr. Sarnoff was employed by Bertelsmann, Inc., a diversified media and services company,
where he served as the Co-Chairman of Bertelsmann from 2008 to 2011, the President of Bertelsmann Digital Media
Investments from 2006 to 2011, and the Executive Vice President and Chief Financial Officer of Random House, a subsidiary
of Bertelsmann from 1998 to 2006. Mr. Sarnoff also served as a member of the supervisory board of Bertelsmann from 2002 to
2008 and served as a member of the boards of directors of The Princeton Review from 2000 to 2009, of Audible from 2001 to
2008 and of Amdocs from 2009 to 2011. Mr. Sarnoff currently serves on the boards of directors of several privately-held
companies. Mr. Sarnoff holds a B.A. in art and archeology from Princeton University and an M.B.A. from Harvard Business
School. We believe that Mr. Sarnoff should continue to serve on our board of directors due to his extensive experience serving
in senior leadership roles, including chief financial officer, and on the boards of directors of media and digital technology
companies.
15
Continuing Directors
The directors who are serving for terms that end in 2019 and 2020, and their ages, occupations and length of service
on our board of directors are provided in the table below. Additional biographical descriptions of each continuing director are
set forth in the text below the table. These descriptions include the primary individual experience, qualifications, qualities and
skills of each continuing director that led to the conclusion that each director should continue to serve as a member of our board
of directors at this time.
Name of Director
Class III Directors - Terms Expiring 2019:
Age
Principal Occupation
Director Since
Jeffrey Housenbold(1) . . . . . . . . . . . . . . . . . .
John York(2)(3) . . . . . . . . . . . . . . . . . . . . . . . .
48 Managing Partner, Softbank Investment Advisers
37 Chief Executive Officer of the San Francisco 49ers
May 2013
June 2013
Class I Directors - Terms Expiring 2020:
Reneé Budig(3) . . . . . . . . . . . . . . . . . . . . . . .
Dan Rosensweig . . . . . . . . . . . . . . . . . . . . . .
Ted Schlein(1)(2) . . . . . . . . . . . . . . . . . . . . . . .
Executive Vice President and Chief Financial
Officer, CBS Interactive (a division of CBS
Corporation)
57
56 President and Chief Executive Officer of Chegg
54 General Partner of Kleiner Perkins Caufield & Byers December 2008
November 2015
March 2010
(1) Member of the compensation committee
(2) Member of the nominating and corporate governance committee
(3) Member of the audit committee
Jeffrey Housenbold has served on our board of directors since May 2013. Since June 2017, Mr. Housenbold has been a
Founding Managing Partner at Softbank Investment Advisers, a venture capital fund. From February 2016 to June 2017, Mr.
Housenbold was an Entrepreneur-in-Residence at Sutter Hill Ventures, a venture capital fund. From 2005 to February 2016,
Mr. Housenbold served as the President, Chief Executive Officer and a director of Shutterfly, Inc., a manufacturer and digital
retailer of personalized products and services. From 2001 to 2005, Mr. Housenbold held several executive leadership roles
eBay Inc., an online marketplace for the sale of goods and services, including Vice President of Business Development &
Internet, Vice President & General Manager, Business-to-Consumer Group and as the Vice President, Mergers & Acquisitions.
Mr. Housenbold currently serves on the board of directors of several private companies and is on the board of trustees for
Carnegie Mellon University. Mr. Housenbold holds a B.S. in economics and a B.S. in business administration from Carnegie
Mellon and an M.B.A. from Harvard Business School. We believe that Mr. Housenbold is qualified to serve on our board of
directors due to his more than 20 years of experience in the consumer industry in senior roles at large, complex companies.
John York has served on our board of directors since June 2013. Since February 2012, Mr. York has served as the
Chief Executive Officer of the San Francisco 49ers, a professional football team in the National Football League, where he
previously served as Team President from 2008 to February 2012 and as Vice President of Strategic Planning from 2005 to
2008. Prior to those roles, Mr. York served as a financial analyst at Guggenheim Partners. Mr. York holds a B.A. in finance
from the University of Notre Dame. We believe that Mr. York is qualified to serve on our board of directors due to his extensive
leadership experience and strong corporate development background.
Reneé Budig has served on our board of directors since November 2015 and was appointed to fill the vacancy created
by the resignation of Mr. McCarthy. Since September of 2012, Ms. Budig has served as the Executive Vice President and Chief
Financial Officer of CBS Interactive, an online content network for information and entertainment and a division of CBS
Corporation. From May 2010 to September 2012, Ms. Budig served as Chief Financial Officer of Hightail, Inc. (formerly
branded YouSendIt), a cloud service that lets users send, receive, digitally sign and synchronize files. From May 2006 to June
2010, Ms. Budig was the Vice President of Finance at Netflix, a multinational provider of on-demand Internet streaming media.
From 2002 to 2005, Ms. Budig was the Vice President of Finance for Veritas Software, an Internet software company. Ms.
Budig holds a B.S. in Business Administration from the University of California, Berkeley. We believe that Ms. Budig should
continue to serve on our board of directors due to her extensive background in consumer technology companies and her
financial expertise through her service as a chief financial officer.
16
Dan Rosensweig has served as our President and Chief Executive Officer since February 2010 and as the chairman of
our board of directors since March 2010. From 2009 to 2010, Mr. Rosensweig served as President and Chief Executive Officer
of RedOctane, a business unit of Activision Publishing, Inc. and developer, publisher and distributor of Guitar Hero. From
2007 to 2009, Mr. Rosensweig was an Operating Principal at the Quadrangle Group, a private investment firm. From 2002 to
2007, Mr. Rosensweig served as Chief Operating Officer of Yahoo! Inc., an Internet content and service provider. Prior to
serving at Yahoo!, Mr. Rosensweig served as the President of CNET Networks and prior to that as Chief Executive Officer and
President of ZDNet, until it was acquired by CNET Networks. Mr. Rosensweig also currently serves on the board of directors
of Adobe Systems Incorporated. Mr. Rosensweig holds a B.A. in political science from Hobart and William Smith Colleges.
We believe that Mr. Rosensweig should continue to serve on our board of directors due to the perspective and experience he
brings as our chief executive officer and his extensive experience with high-growth consumer Internet and media companies.
Ted Schlein has served on our board of directors since December 2008. Mr. Schlein has served as a General Partner of
Kleiner Perkins Caufield & Byers, a venture capital firm, since November 1996. From 1986 to 1996, Mr. Schlein served in
various executive positions at Symantec Corporation, a provider of Internet security technology and business management
technology solutions, including as Vice President of Enterprise Products. Mr. Schlein currently serves on the boards of
directors of a number of privately held companies. Mr. Schlein holds a B.A. in economics from the University of
Pennsylvania. We believe that Mr. Schlein should continue to serve on our board of directors due to his extensive experience
working with early-stage technology companies in the infrastructure markets, including ventures within the network arena.
There are no familial relationships among our directors and officers.
Director Compensation
We compensate our non-employee directors with a combination of cash and equity. The form and amount of
compensation paid to our non-employee directors for serving on our board of directors and its committees is designed to be
competitive in light of industry practices and the obligations imposed by such service. In order to align the long-term interests
of our directors with those of our stockholders, a portion of the director compensation is provided in equity-based
compensation. The value of the annualized compensation of our non-employee directors is targeted to be at approximately at
50% and 75% of a peer group of similarly-sized technology companies with similar business and financial characteristics for
cash and equity, respectively. The director compensation practices of this peer group of companies was the benchmark used
when considering the competitiveness of our non-employee director compensation in 2017. Our compensation committee’s
independent compensation consultant, FW Cook, collected and developed the competitive data and analyses for benchmarking
independent director compensation.
Annual Fees. Our non-employee directors were compensated in 2017 as follows:
•
•
•
an annual cash retainer for serving on our board of directors of $40,000;
an annual cash retainer for serving in a non-chair position on the audit committee of $10,000, on the
compensation committee of $10,000 and on the nominating and corporate governance committee of $5,000;
and
an annual cash retainer for serving as the chair of the audit committee of $20,000, for serving as the chair of
the compensation committee of $20,000 and for serving as the chair of the nominating and corporate
governance committee of $10,000.
We pay the annual retainer fee and any additional fees to each director in arrears in equal quarterly installments.
Equity Awards. Our non-employee director equity compensation policy provides that upon initial appointment to the
board of directors, a non-employee director will be granted a restricted stock unit award having a fair market value on the grant
date equal to $300,000 that vests in equal quarterly installments over three years from the date of grant. Thereafter, upon
completion of each full year of service, each non-employee director will be granted, immediately following our annual meeting
of stockholders, an additional restricted stock unit award having a fair market value on the date of grant equal to $150,000 that
vests in full on the earlier of the one-year anniversary of the date of grant or immediately prior to the first annual meeting of
our stockholders to occur after the date of grant. Awards granted to non-employee directors under the policy described above
will accelerate and vest in full in the event of a change of control. In addition to the awards provided for above, non-employee
directors are eligible to receive discretionary equity awards.
Non-employee directors receive no other form of remuneration, perquisites or benefits, but are reimbursed for their
expenses in attending meetings, including travel, meals and other expenses incurred to attend meetings solely among the non-
employee directors.
17
The following table provides information for the year ended December 31, 2017 regarding all compensation awarded
to, earned by or paid to each person who served as a non-employee director for some portion or all of 2017. Mr. Rosensweig,
our current President and Chief Executive Officer, did not receive any compensation for his service as a director during the
fiscal year ended December 31, 2017.
2017 Director Compensation Table
Name
Reneé Budig . . . . . . . . . . . . . . . . . . . . . . .
Jeffrey Housenbold . . . . . . . . . . . . . . . . . .
Marne Levine. . . . . . . . . . . . . . . . . . . . . . .
Richard Sarnoff . . . . . . . . . . . . . . . . . . . . .
Ted Schlein . . . . . . . . . . . . . . . . . . . . . . . .
John York. . . . . . . . . . . . . . . . . . . . . . . . . .
Fees Earned
or Paid in
Cash
($)
All Other
Compensation
($)
RSU
Awards
($)(2)
Option
Awards
($)(2)
60,000
50,000
60,000
50,000
65,000
55,000
4,501.58(1)
149,990
149,990
149,990
149,990
149,990
149,990
—
—
—
—
—
—
Total
($)
209,990
199,990
209,990
204,492
214,990
204,990
(1) Represents reimbursement(s) to Mr. Sarnoff for travel expenses incurred to attend Board Meeting(s) in fiscal year
2017.
(2) Amounts shown in this column do not reflect dollar amounts actually received by non-employee directors. Instead
these amounts reflect the aggregate grant date fair value calculated in accordance with Financial Accounting Standards
Board, Accounting Standards Codification Topic 718, Compensation-Stock Compensation, (formerly SFAS 123R)
(“ASC 718”), for awards granted during 2017. During 2017, each non-employee member of the board of directors who
was a director after the close of our annual meeting of stockholders on June 1, 2017 was granted a restricted stock unit
(“RSU”) award covering 11,980 shares of our common stock. For purposes of determining the number of shares of
common stock subject to the RSU award, an aggregate grant date fair value of $150,000 was used. The grant date fair
value for RSU awards was determined using the closing share price of our common stock on the date of grant. For
information on other valuation assumptions with respect to stock awards, refer to note 13 of the notes to consolidated
financial statements contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. There
can be no assurance that this grant date fair value will ever be realized by the non-employee director.
Our non-employee directors held the following number of stock options and unvested RSU awards as of December 31,
2017.
Name
Reneé Budig . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jeffrey Housenbold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marne Levine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard Sarnoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ted Schlein. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
John York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option
Awards
RSU
Awards
146,620
116,917
175,092
243,586
—
216,456
11,980
11,980
11,980
11,980
11,980
11,980
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH
OF THE TWO DIRECTOR NOMINEES.
18
PROPOSAL NO. 2 - NON-BINDING ADVISORY VOTE
ON EXECUTIVE COMPENSATION
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21, 2010,
requires that we seek, on a non-binding advisory basis, stockholder approval of the compensation of our named executive
officers as described in this proxy statement. This proposal, commonly known as a “say-on-pay” proposal, gives our
stockholders the opportunity to express their views on the compensation of our named executive officers.
Compensation Program and Philosophy
Our executive compensation program is designed to:
• Attract, motivate and retain highly-qualified executive officers in a competitive market;
•
Provide compensation to our executives that are competitive and reward the achievement of challenging
business objectives; and
• Align our executive officers’ interests with those of our stockholders by providing a significant portion of
total compensation in the form of equity awards.
Our board of directors believes that our current executive compensation program has been effective at aligning our
executive officers’ interests with those of our stockholders. Stockholders are urged to read the “Executive Compensation”
section of this proxy statement, which further discusses how our executive compensation policies and procedures implement
our compensation philosophy and contains tabular information and narrative discussion about the compensation of our named
executive officers.
The compensation committee and the board of directors believe that these policies and procedures are effective in
implementing our compensation philosophy and in achieving our goals. Accordingly, we are asking our stockholders to indicate
their support for the compensation of our named executive officers as described in this proxy statement by voting in favor of
the following resolution:
“RESOLVED, that the stockholders approve, on a non-binding advisory basis, the compensation of Chegg, Inc.’s named
executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and
Analysis, the compensation tables, and the accompanying narrative disclosures set forth in the proxy statement relating to
Chegg, Inc.’s 2018 annual meeting of stockholders.”
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE COMPENSATION OF
OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.
19
PROPOSAL NO. 3 - NON-BINDING ADVISORY VOTE ON
THE FREQUENCY OF FUTURE ADVISORY VOTES ON EXECUTIVE COMPENSATION
As required by the Dodd-Frank Act, we also are asking our stockholders to provide their input with regard to the
frequency of future stockholder advisory votes on the compensation program for our named executive officers, such as
Proposal No. 2 of this proxy statement. In particular, we are asking whether the advisory vote on executive compensation
should occur once every year, every two years or every three years. This non-binding advisory vote as to whether the advisory
vote on executive compensation should occur once every year, every two years or every three years must be submitted to
stockholders at least once every six years.
After careful consideration of the frequency alternatives, our board of directors has determined that an annual advisory
vote on executive compensation is the most appropriate alternative for us and our stockholders at this time. The board of
director’s determination was influenced by the fact that the compensation of our named executive officers is evaluated, adjusted
and approved on an annual basis. As part of the annual review process, the board of directors believes that stockholder
sentiment should be a factor that is taken into consideration by the board of directors and the compensation committee in
making decisions with respect to executive compensation. By providing an advisory vote on executive compensation on an
annual basis, our stockholders will be able to provide us with direct input on our compensation philosophy, policies and
practices as disclosed in the proxy statement every year. We understand that our stockholders may have different views as to
what is the best approach for us and we look forward to hearing from our stockholders on this agenda item every year.
Stockholders are not voting to approve or disapprove the board of directors’ recommendation. Instead, stockholders may
indicate their preference regarding the frequency of future non-binding advisory “say-on-pay” votes by selecting one year, two
years or three years. Stockholders that do not have a preference regarding the frequency of future advisory votes may abstain
from voting on the proposal. For the reasons discussed above, we are asking our stockholders to vote to hold advisory votes on
the compensation for our named executive officers every year.
You may cast your vote by choosing the option of one year, two years, three years, or abstain from voting in response to
the resolution set forth below:
“RESOLVED, that the option of once every year, two years or three years that receives the highest number of votes cast
for this resolution will be determined to be the preferred frequency with which Chegg, Inc. is to hold an advisory vote by
stockholders to approve the compensation of Chegg, Inc. named executive officers as set forth in the proxy statement
relating to Chegg, Inc.’s Annual Meeting of Stockholders under the caption “Executive Compensation,” including the
section captioned “Compensation Discussion and Analysis,” the tabular disclosure regarding executive compensation and
the accompanying narrative disclosure.”
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” “ONE YEAR” AS THE FREQUENCY WITH
WHICH STOCKHOLDERS ARE PROVIDED AN ADVISORY VOTE ON EXECUTIVE COMPENSATION
20
PROPOSAL NO. 4
RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our audit committee is responsible for the appointment, compensation, retention and oversight of the work of our
independent registered public accounting firm. Our audit committee of the board of directors (the “audit committee”) has
selected Deloitte & Touche LLP (“Deloitte”) as our principal independent registered public accounting firm to perform the
integrated audit of our consolidated financial statements and our internal control over financial reporting for the year ending
December 31, 2018.
As previously disclosed by us in a Current Report on Form 8-K filed with the SEC on March 12, 2018 (the “March
Form 8-K”), on February 27, 2018, our management, at the direction of our audit committee, issued a request for proposal for
audit services for the 2018 fiscal year and beyond (the “RFP”) to several independent registered public accounting firms,
including our then-current independent registered public accounting firm, Ernst &Young LLP (“EY”), to provide us with the
opportunity to review auditor service levels, audit fees, and evaluate the benefits and risks of changing independent registered
public accounting firms. Responses to the RFP were due on March 8, 2018 and EY submitted a proposal. Our management and
the Audit Committee evaluated the proposals and met with all of the participants in the RFP on March 9, 2018. Following such
meetings on March 9, 2018, the audit committee approved the appointment of Deloitte as our independent registered public
accounting firm effective as of March 12, 2018 (the “Effective Date”). On March 10, 2018, our management, at the direction
of the audit committee, notified EY that it was terminating EY’s engagement as our independent registered public accounting
firm, effective as of the Effective Date.
During our two most recent fiscal years ended December 31, 2017 and 2016, respectively, and the subsequent interim
period through March 12, 2018, neither we nor anyone acting on our behalf consulted with Deloitte regarding any of the
matters described in Item 304(a)(2)(i) and (ii) of Regulation S-K.
EY’s reports on our financial statements for the two years ended December 31, 2017 and 2016, respectively, did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.
During our two most recent fiscal years ended December 31, 2017 and 2016, respectively, and the subsequent interim
period through March 12, 2018, there were no disagreements, within the meaning of Item 304(a)(1)(iv) of Regulation S-K and
the related instructions thereto, with EY on any matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the satisfaction of EY, would have caused it to make
reference to the subject matter of the disagreements in connection with its reports. Also during this same period, there were no
reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K and the related instructions thereto.
We provided EY with the disclosures made in the March Form 8-K prior to the time that the March Form 8-K was
filed with the SEC, and requested that EY to furnish us with a letter addressed to the SEC stating whether it agrees with the
above statements made by us in the March Form 8-K and, if not, stating the respects in which it does not agree. EY’s letter was
filed as Exhibit 16.01 to the March Form 8-K.
As a matter of good corporate governance, our audit committee has decided to submit its selection of its principal
independent registered public accounting firm to stockholders for ratification. In the event that the appointment of Deloitte is
not ratified by our stockholders, the audit committee will review its future selection of Deloitte as our principal independent
registered public accounting firm.
Representatives of Deloitte are expected to be present at the annual meeting, in which case they will be given an
opportunity to make a statement at the annual meeting if they desire to do so, and will be available to respond to appropriate
questions.
Principal Accountant Fees and Services
We regularly review the services and fees of our independent registered public accounting firm. These services and
fees are also reviewed with our audit committee annually.
In addition to performing the audit of Chegg’s consolidated financial statements, EY provided various other services
during 2017 and 2016. Our audit committee has determined that EY’s provisioning of these services, which are described
below, does not impair EY’s independence from Chegg. The aggregate fees for 2017 and 2016 for each of the following
21
categories of services are as follows:
Fees Billed to Chegg
Audit fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit related fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year 2017 Fiscal Year 2016
1,487,090
$
3,155,177
$
—
15,000
—
—
64,518
—
$
3,170,177 $
1,551,608
(1) “Audit fees” include fees for professional services rendered in connection with the audit of our annual financial
statement and the effectiveness of our internal control over financial reporting, including adoption of Financial
Accounting Standards Board, Accounting Standards Codification Section (“ASC Topic”) 606, and reviews of our
quarterly financial statements. In addition, this category also includes fees for services that were incurred in connection
with statutory and regulatory filings or engagements.
(2) We did not have any “Audit related fees” or “All other fees” in fiscal years 2016 and 2017.
(3) “Tax fees” include fees in connection with tax compliance and tax advisory and consulting services.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered
Public Accounting Firm
Our audit committee’s policy is to pre-approve all audit and permissible non-audit services provided by the
independent registered public accounting firm. These services may include audit services, audit-related services, tax services
and other services. Pre-approval is detailed as to the particular service or category of services and is generally subject to a
specific budget. The independent registered public accounting firm and management are required to periodically report to the
audit committee regarding the extent of services provided by the independent registered public accounting firm in accordance
with this pre-approval, and the fees for the services performed to date. Our audit committee may also pre-approve particular
services on a case-by-case basis. All of the services relating to the fees described in the table above were approved by our audit
committee.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF PROPOSAL NO. 4
22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of
April 10, 2018, by:
•
•
•
•
each stockholder known by us to be the beneficial owner of more than 5% of our common stock;
each of our directors or director nominees;
each of our named executive officers; and
all of our directors and executive officers as a group.
Percentage ownership of our common stock is based on 111,867,529 shares of our common stock outstanding on April
10, 2018. We have determined beneficial ownership in accordance with the rules of the SEC, and thus it represents sole or
shared voting or investment power with respect to our securities. Unless otherwise indicated below, to our knowledge, the
persons and entities named in the table have sole voting and sole investment power with respect to all shares that they
beneficially owned, subject to community property laws where applicable. We have deemed shares of our common stock
subject to equity awards that are currently vested or will become vested within 60 days of April 10, 2018 to be outstanding and
to be beneficially owned by the person holding the award for the purpose of computing the percentage ownership of that person
but have not treated them as outstanding for the purpose of computing the percentage ownership of any other person.
Unless otherwise indicated, the address of each of the individuals and entities named below is c/o Chegg, Inc., 3990
Freedom Circle, Santa Clara, California 95054.
Name of Beneficial Owner
Named Executive Officers and Directors:
Dan Rosensweig(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Brown(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nathan Schultz(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mike Osier(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Esther Lem(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charles Geiger(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Renee Budig(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jeffrey Housenbold(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marne Levine(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard Sarnoff(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ted Schlein(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
John York(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All executive officers and directors as a group (15 persons)(13) . . . . . . . . . . . . . . . . . .
5% Stockholders:
Gilder, Gagnon, Howe & Co. LLC(14). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PAR Investment Partners, L.P.(15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PRIMECAP Mgmt Co(16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sylebra HK Company Limited(17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
T. Rowe Price Associates, Inc.(18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Shares
Beneficially
Owned
Percentage
Owned
4,246,739
3.7%
974,671
518,150
485,765
507,298
—
143,859
128,897
206,679
285,566
3,847,375
230,436
12,509,603
7,337,758
6,241,298
10,195,390
6,956,896
8,897,311
*
*
*
*
*
*
*
*
*
3.4%
*
10.8%
6.6%
5.6%
9.1%
6.2%
8.0%
* Represents beneficial ownership of less than 1% of our outstanding shares of common stock.
(1) Consists of (a) 1,214,737 shares held by Mr. Rosensweig, (b) 69,346 shares held by The Daniel Lee and Linda
Rosensweig, Co-Trustees of the Rosensweig Family Revocable Trust U/A/D03-12-07, (c) 7,166 shares held by The Rachel
Rosensweig 2007 Irrevocable Trust U/A/D 03-12-07, (d) 7,166 shares held by The Samantha Rosensweig 2007 Irrevocable
Trust U/A/D 03-12-2007, (e) 68,251 shares subject to nonqualified options transferred to Daniel Lee Rosensweig and
Linda Rosensweig Co-Trustees of the Rosensweig 2012 Irrevocable Children’s Trust u/a/d 11/6/2012 on November 8,
2013, but reported under Mr. Rosensweig’s name for financial reporting purposes, and (f) 2,963,751 shares subject to stock
options held by Mr. Rosensweig that are exercisable within 60 days of April 10, 2018.
23
(2) Consists of (a) 127,530 shares held by Mr. Brown, (b) 17,117 shares held by The Andy and Pam Brown Family Trust, of
which Mr. Brown is a Co-Trustee, (c) 5,000 shares held by Kevin Brown, Mr. Brown’s son, and (e) 825,024 shares subject
to stock options held by Mr. Brown that are exercisable within 60 days of April 10, 2018.
(3) Consists of (a) 170,774 shares held by Mr. Schultz, and (b) 347,376 shares subject to stock options held by Mr. Schultz that
are exercisable within 60 days of April 10, 2018.
(4) Consists of (a) 245,284 shares held by Mr. Osier, and (b) 240,481 shares subject to stock options held by Mr. Osier that are
exercisable within 60 days of April 10, 2018.
(5) Consists of (a) 141,323 shares held by Ms. Lem, and (b) 365,975 shares subject to stock options held by Ms. Lem that are
exercisable within 60 days of April 10, 2018.
(6) Mr. Geiger stepped down as Chief Product Officer on September 29, 2017 and departed from Chegg on April 9, 2018.
(7) Consists of (a) 131,879 shares subject to stock options held by Ms. Budig that are exercisable within 60 days of April 10,
2018, and (b) 11,980 RSUs which are subject to vesting conditions expected to occur within 60 days of April 10, 2018.
(8) Consists of (a) 116,917 shares subject to stock options held by Mr. Housenbold that are exercisable within 60 days of April
10, 2018, and (b) 11,980 RSUs which are subject to vesting conditions expected to occur within 60 days of April 10, 2018.
(9) Consists of (a) 19,607 shares held by Ms. Levine, (b) 175,092 shares subject to stock options held by Ms. Levine that are
exercisable within 60 days of April 10, 2018, and (c) 11,980 RSUs which are subject to vesting conditions expected to
occur within 60 days of April 10, 2018.
(10) Consists of (a) 30,000 shares held by Mr. Sarnoff, (b) 243,586 shares subject to stock options held by Mr. Sarnoff that are
exercisable within 60 days of April 10, 2018, and (c) 11,980 RSUs which are subject to vesting conditions expected to
occur within 60 days of April 10, 2018.
(11) Consists of (a) 195,096 shares held by Mr. Schlein, (b) 45,000 shares held by the Schlein Family Trust Dtd 4/20/99,
(c) 11,980 RSUs which are subject to vesting conditions expected to occur within 60 days of April 10, 2018, and (d)
3,595,299 shares owned by Kleiner Perkins Caufield & Byers XIII, LLC (KPCB XIII). All shares are held for convenience
in the name of “KPCB Holdings, Inc. as nominee,” for the accounts of such individuals and entities who each exercise
their own voting and dispositive control over such shares. The managing member of KPCB XIII is KPCB XIII Associates,
LLC (KPCB XIII Associates). Brook H. Byers, L. John Doerr, Joseph Lacob, Raymond J. Lane and Ted Schlein, a member
of our board of directors, are the managing directors of KPCB XIII Associates and exercise shared voting and investment
power over the shares directly held by KPCB XIII. The principal business address for all entities and individuals affiliated
with Kleiner Perkins Caufield & Byers is 2750 Sand Hill Road, Menlo Park, CA 94025.
(12) Consists of (a) 2,000 shares held by Mr. York, (b) 216,456 shares subject to stock options held by Mr. York that are
exercisable within 60 days of April 10, 2018, and (c) 11,980 RSUs which are subject to vesting conditions expected to
occur within 60 days of April 10, 2018.
(13) Consists of (a) 6,392,908 shares, (b) 6,044,815 shares subject to stock options that are exercisable within 60 days of April
10, 2018, and (c) 71,880 RSUs which are subject to vesting conditions expected to occur within 60 days of April 10, 2018,
each of which are held by our directors and officers as a group.
(14) Based on information contained in Schedule 13G filed with the SEC by Gilder, Gagnon, Howe & Co. LLC on February
14, 2018, consists of 5,771,967 shares held in customer accounts over which partners and/or employees of Gilder, Gagnon,
Howe & Co. LLC have discretionary authority to dispose of or direct the disposition of the shares, 81,188 shares held in
the account of the profit sharing plan of Gilder, Gagnon, Howe & Co. LLC, and 1,484,603 shares held in accounts owned
by the partners of the Reporting Person and their families. The principal business address for all entities affiliated with
Gilder, Gagnon, Howe & Co. LLC is 475 10th Avenue, New York, NY 10018.
(15) Based on information contained in Amendment No. 4 to Schedule 13G/A filed with the SEC by PAR Investment Partners,
L.P. and its affiliates on February 14, 2018. The sole general partner of PAR Investment Partners, L.P. is PAR Group, L.P.
The sole general partner of PAR Group L.P., is PAR Capital Management, Inc. Each of PAR Group, L.P. and PAR Capital
Management, Inc. may be deemed to be the beneficial owner of all 6,241,298 shares held directly by PAR Investment
Partners, L.P.
(16) Based on information contained in Amendment No. 5 to Schedule 13G/A filed with the SEC by PRIMECAP Management
Company and its affiliates on February 27, 2018, consists of 10,195,390 shares held by PRIMECAP Management
Company. The principal business address for all entities affiliated with PRIMECAP Management Company is 177 E.
Colorado Blvd., 11th Floor, Pasadena, CA 91105.
(17) Based on information contained in Amendment No. 2 to Schedule 13G/A filed with the SEC by Sylebra HK Capital
Limited and its affiliates on February 15, 2018, consists of 6,956,896 shares owned by Sylebra Capital Management.
Sylebra HK Company Limited may be deemed to beneficially own the Shares by virtue of its position as the investment
advisor to Sylebra Capital Management in relation to Sylebra Capital Partners Master Fund, Ltd and other advisory clients.
The principal business address for all entitites affiliated with Sylebra HK Company Limited is 28 Hennessy Road, 20th
Floor, Wan Chai, Hong Kong (SAR).
24
(18) Based on information contained in Schedule 13G filed with the SEC by T. Rowe Price Associates, Inc. on February 14,
2018, consists of 8,897,311 shares held by T. Rowe Price Associates, Inc. Price Associates does not serve as custodian of
the assets of any of its clients; accordingly, in each instance only the client or the client's custodian or trustee bank has the
right to receive dividends paid with respect to, and proceeds from the sale of, such securities. The ultimate power to direct
the receipt of dividends paid with respect to, and the proceeds from the sale of, such securities, is vested in the individual
and institutional clients which Price Associates serves as investment adviser. Any and all discretionary authority which has
been delegated to Price Associates may be revoked in whole or in part at any time. The principal business address for all
entities affiliated with T. Rowe Price Associates, Inc. is 100 E. Pratt Street, Baltimore, MD 21202.
25
The names of our executive officers, their ages as of April 10, 2018, and their positions are shown below.
OUR MANAGEMENT
Name
Dan Rosensweig
Dave Borders Jr.
Jenny Brandemuehl
Andrew Brown
Esther Lem
Michael Osier
Nathan Schultz
Age
56
44
54
58
62
55
40
Position(s)
President, Chief Executive Officer and Chairman
General Counsel
Chief People Officer
Chief Financial Officer
Chief Marketing Officer
Chief Outcomes Officer
Chief Learning Officer
The board of directors chooses executive officers, who then serve at the discretion of the board of directors. There are
no familial relationships between any of our executive officers and directors.
For information regarding Mr. Rosensweig, please refer to Proposal No. 1 –“Election of Directors” above.
Dave Borders Jr. has served as our General Counsel since April 2016. From May 2013 until to March 2016,
Mr. Borders served as our Associate General Counsel and from March 2011 until April 2013, he served as our Senior Corporate
Counsel. Mr. Borders earned a B.S. in Economics and Business Administration from Trinity University and holds a J.D. from
Harvard Law School.
Jenny Brandemuehl has served as our Chief People Officer since August 2016. From January 2013 to July 2016,
Ms. Brandemuehl served as our Vice President, Human Resources. Previously, Ms. Brandemuehl served as the Vice President,
Global Talent Management at JDS Uniphase Corporation, a telecommunications equipment company from January 2009 to
November 2010. Prior to serving at JDS Uniphase, Ms. Brandemuehl held various management positions at Gap Inc. and
Hewlett Packard. Ms. Brandemuehl holds a B.A. in in Psychology from Wellesley College and a Master of Human Resource
and Organizational Development (M.H.R.O.D.) from the University of San Francisco.
Andrew Brown has served as our Chief Financial Officer since October 2011. From 2004 to 2009, Mr. Brown served
as the Chief Financial Officer of Palm, Inc., a smartphone provider. Mr. Brown was semi-retired following his departure from
Palm before he joined us. Prior to serving at Palm, Mr. Brown served as the Chief Financial Officer of Pillar Data Systems, a
computer data storage company, Legato Systems, a storage management company subsequently acquired by EMC, and ADPT
Corporation (formerly Adaptec, Inc.). Mr. Brown also serves on the business school advisory board at Eastern Illinois
University. Mr. Brown holds a B.S. in accounting from Eastern Illinois University.
Esther Lem has served as our Chief Marketing Officer since December 2010. In 2009, Ms. Lem served as the Vice
President, Hair Projects, Global Hair Category at Unilever, a global supplier of food, home and personal care products. From
2000 to 2009, Ms. Lem served as the Vice President of Brand Development for Unilever North America on the deodorants and
hair categories, a division of Unilever. Prior to 2000, Ms. Lem served as the Vice President of Marketing for Unilever Canada.
Ms. Lem holds an Honors Business Administration degree (H.B.A.) in business from the University of Western Ontario.
Michael Osier has served as our Chief Outcomes Officer since November 2015 and previously served as our Chief
Information Officer from October 2012 to November 2015 and our Vice President of Operations and Internet Technology from
2009 to October 2012. From 2000 to 2009, Mr. Osier served in various positions, including Vice President, Internet Technology
Operations at Netflix, Inc., a multinational provider of on-demand Internet streaming media. Prior to serving at Netflix,
Mr. Osier served in various senior management positions at Conner Peripherals, Seagate Technology and Quantum
Corporation.
Nathan Schultz has served as our Chief Learning Officer since June 2014 and previously served as our Chief Content
Officer from May 2012 until June 2014, our Vice President of Content Management from 2010 to May 2012 and our Director
of Textbook Strategy from 2008 to 2010. Prior to joining us, Mr. Schultz served in various management positions at R.R.
Bowker, a provider of bibliographic information and management solutions; Monument Information Resource, a marketing
intelligence resource acquired by R.R. Bowker; Pearson Education, an education publishing and assessment service; and
Jones & Bartlett Learning, a division of Ascend Learning and provider of education solutions. Mr. Schultz holds a B.A. in
history from Elon University.
26
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
EXECUTIVE SUMMARY
In this Compensation Discussion and Analysis, we address our compensation program for our executive officers and
specifically the compensation paid or awarded to the following executive officers of our company for the year ended December
31, 2017 who are listed in the Summary Compensation Table that follows this discussion and who we refer to as our “named
executive officers” or “NEOs”:
Dan Rosensweig
Andrew Brown
Michael Osier
Nathan Schultz
Esther Lem
Charles Geiger
Name
Title
President, Chief Executive Officer and Chairman
Chief Financial Officer
Chief Outcomes Officer
Chief Learning Officer
Chief Marketing Officer
Former Chief Product Officer(1)
(1) Mr. Geiger stepped down as Chief Product Officer on September 29, 2017 and departed from Chegg on
April 9, 2018.
References in this section to “fiscal year 2017”, “fiscal year 2016” and “fiscal year 2015” refer to our fiscal years
ended December 31, 2017, December 31, 2016, and December 31, 2015 respectively.
Business Highlights for Fiscal Year 2017
Our 2017 fiscal year was our best year for the company, including in terms of stock price appreciation, Chegg Services
revenues and earnings. For the fiscal year 2017, we:
Achieved absolute 1-year stock price appreciation of 121%
Chegg Services revenues grew 44% year-over-year to $185.7 million, or 73% of total net revenues, compared to 51% in 2016
Net loss of $20.3 million, with adjusted EBITDA of $46.4 million(1)
(1) Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of adjusted EBITDA to its most
directly comparable financial measure prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”), please refer to Appendix A to this proxy statement.
27
Compensation Practices
We designed our executive compensation program with the intention of aligning pay with performance while
balancing risk and reward. To help us accomplish these key objectives, we have adopted the following policies and practices:
What We Do
What We Don't Do
Maintain a compensation committee comprised solely
of independent directors
Provide defined benefit or contribution retirement plans or
arrangements, other than our Section 401(k) plan which is generally
available to all employees.
Use an independent compensation consultant
Provide excise tax gross-ups on change of control severance
payments
Use a representative and relevant peer group for
assessing compensation
Provide excessive benefits and/or perquisites to our executive
officers
Prohibit hedging of our stock by executive officers and
directors
Consider stockholder dilution and burn rate in our
equity compensation decisions
PROCESS FOR SETTING EXECUTIVE COMPENSATION
Compensation Philosophy and Objectives
Our executive compensation program is designed to:
• Attract, motivate and retain highly-qualified executive officers in a competitive market;
Provide compensation to our executives that is competitive;
•
• Reward the achievement of challenging business objectives; and
• Align our executive officers’ interests with those of our stockholders by providing a significant portion of
total compensation in the form of equity awards.
We operate in a fast-paced, innovative education software and services industry and in a highly competitive Bay Area
labor market. To retain key talent and remain competitive in our environment, we set the total target direct compensation of our
executives to be within 60th to 90th percentile of our compensation peer group, with any individual executive officer
potentially falling above or below this range due to the executive’s individual contribution, scope of responsibilities, level of
experience and tenure with our company. Our total direct compensation to our executive officers consists of two components:
base salaries and equity incentive compensation. We generally do not grant cash bonuses to our executives. While our base
salaries are above the 75th percentile of our peer group companies, base salaries for our executive officers are generally
positioned below the market median total cash compensation to account for the absence of an annual bonus opportunity and to
allocate a higher percentage of compensation to at-risk equity awards. Our equity incentive compensation is generally targeted
at market competitive ranges and further takes into account the company’s and each individual’s performance.
Competitive market data informs the pay decisions of the compensation committee of the Board of Directors (the
“compensation committee”) but is not the determinative factor in determining our executive’s compensation.
Role of Our Compensation Committee, Management and Independent Compensation Consultant
Role of Our Compensation Committee
The compensation committee is responsible for developing, implementing, and overseeing our compensation and
benefit programs and policies, including administering our equity incentive plans and performing assessments on
compensation-related risk. On an annual basis, the compensation committee reviews and approves compensation decisions
relating to our executive officers, including our CEO. To determine each executive officer’s compensation, the compensation
committee reviews compensation on a role-specific basis as well as positions at a similar level and for the executive team
overall. The compensation committee also reviews our corporate financial performance and financial condition. The
compensation committee also evaluates risk as it relates to our compensation programs, including our executive compensation.
28
As discussed under “Risk Considerations” below, the compensation committee does not believe that our compensation and
benefits programs and policies encourage excessive or inappropriate risk taking.
Role of Our Management
The CEO reviews annual performance of each executive (except the CEO’s own performance) and makes
recommendations to the compensation committee regarding each executive’s base salary and equity compensation. The CEO
does not make recommendations for his own compensation. The compensation committee may modify individual
compensation components for executive officers and is not bound to accept the CEO’s recommendations.
Role of Our External Compensation Consultant
The compensation committee has the authority under its charter to retain the services of an external consulting firm or
advisor to assist it in making its compensation decisions. For fiscal year 2017, the compensation committee retained Frederic
W. Cook & Co., Inc. (“FW Cook”) as its independent compensation consultant. The compensation committee determined FW
Cook is an independent compensation advisor including for purposes of the Dodd-Frank Act and other applicable SEC and
NYSE regulations. During fiscal year 2017, FW Cook was retained to review our compensation philosophy and objectives, to
develop a compensation peer group, to gather and analyze compensation data for our compensation peer group, and to evaluate
its executive compensation practices and pay levels. FW Cook performs no other services for the Company other than its work
for the compensation committee.
2017 Compensation Peer Group
Each year, the compensation committee, with the assistance of FW Cook, conducts an annual review of the
compensation practices of the competitive market using a peer group of similarly-sized companies, based on revenue, that may
compete with Chegg for executive talent. As part of the review, the compensation committee assesses the compensation peer
group to ensure the constituents continue to be suitable for compensation benchmarking purposes. In September 2016, the
compensation committee approved a compensation peer group based on the following industry and financial size criteria:
• GICS Industries: Internet & Catalog Retail and Internet Software & Services
• Financial Size: One-third to three times Chegg’s then-current total revenues and under three times Chegg’s
then-current market capitalization value
For 2017, our compensation peer group consisted of the 17 companies set forth below:
2U
Angie's List*
Bankrate*
Blucora
Blue Nile*
Box
Instructure
LivePerson
LogMeIn
Pandora Media
Quotient Technology
RetailMeNot*
Shutterstock
Stamps.com
WebMD Health*
XO Group
Yelp
*These peer companies have subsequently been acquired as of December 31, 2017.
The compensation committee also references surveys from Radford, an Aon Hewitt company (“Radford”), covering
general technology companies with annual revenues of between $200 million and $500 million. These surveys serve as data
points in determining the appropriate components of and overall compensation, but the compensation committee does not
benchmark its compensation to any particular level or against any specific member of our compensation peer group or such
surveys.
ELEMENTS OF FISCAL YEAR 2017 COMPENSATION
Fiscal Year 2017 Pay Mix
Consistent with our compensation philosophy and objectives, we provide compensation to our CEO and our executive
officers in the form of base salaries, time-vesting restricted stock units (“RSUs”), and performance-based stock units (“PSUs”).
We generally do not provide annual cash incentive opportunities to our executive officers, which are typically provided by our
peer companies, as our equity incentive compensation is intended to tie the majority of our executive officer’s pay with
29
delivering long-term stockholder value. Equity compensation constitutes 86% of the total pay mix for our CEO and 80% on
average for our other NEOs.
*Target pay mix represents annual base salary rates, RSUs at grant value, and PSUs at grant value when target performance level
is achieved.
Base Salaries
We pay an annual base salary to each of our executive officers in order to attract and retain executive talent and
provide them with a fixed rate of cash compensation during the year. Base salaries for our executive officers are reviewed by
the compensation committee annually during the first quarter of the calendar year. The compensation committee takes into
consideration a variety of factors when determining base salary adjustments, including our compensation objectives, each
executive’s responsibilities and individual performance, and the compensation peer group and Radford survey market analysis
provided by FW Cook.
The compensation committee approved the following base salary adjustments for our NEOs, effective as of March 1,
2017:
Named Executive Officer
Dan Rosensweig . . . . . . . . . .
Andrew Brown . . . . . . . . . . .
Michael Osier . . . . . . . . . . . .
Nathan Schultz . . . . . . . . . . .
Esther Lem . . . . . . . . . . . . . .
Charles Geiger(1) . . . . . . . . . .
Fiscal Year 2016
Fiscal Year 2017
Change
$920,000
$520,000
$426,720
$426,720
$390,000
$426,720
$920,000
$520,000
$450,000
$450,000
$390,000
$450,000
—%
—%
5.5%
5.5%
—%
5.5%
(1) Mr. Geiger’s base salary remained at $450,000 through the remainder of fiscal year 2017.
Equity Incentive Compensation
The compensation committee believes that equity compensation should represent a significant amount of our
executive officers’ total compensation so that the interests of our executive officers are aligned with those of our stockholders.
Like base salary, the compensation committee determines the amount of equity compensation appropriate for each NEO based
on a variety of factors, including our compensation objectives, each executive’s responsibilities, and the compensation peer
group and Radford survey market analysis provided by FW Cook. In determining the long-term incentive grant for the CEO,
the compensation committee considers our corporate operational and financial performance and relative stockholder return,
CEO incentive awards at companies in our compensation peer group, and historical equity grants made to the CEO.
In 2017, the compensation committee granted long- term equity compensation to our NEOs with a target mix of 50%
time-vesting restricted stock units (“RSUs”) and 50% performance-based RSUs (“PSUs”). The compensation committee
routinely evaluates and considers the type of awards granted under our equity incentive program and may, in the future, decide
that other types of awards are appropriate to provide incentives to our executive officers.
30
Restricted Stock Units
We grant RSUs because they provide retentive value for our executive officers and are linked to creating stockholder
value as the award value increases with stock price appreciation. On March 1, 2017, we granted RSUs to each of our NEOs
vesting in three equal annual installments over a period of three years.
Performance-Based Restricted Stock Units
We grant PSUs because they are linked to stockholder value creation, like RSUs, but are also leveraged to the
Company’s financial performance. On March 1, 2017, the compensation committee approved PSU grants to our NEOs subject
to the achievement of certain financial performance goals and conditioned on the executive officer's service up to and through
the applicable vesting dates. These PSUs will vest contingent on the achievement of two equally weighted performance metrics:
(1) 2017 Chegg Services Revenue and (2) 2017 adjusted EBITDA. These two metrics were selected because the compensation
committee believes that revenue growth and adjusted EBITDA, as a measure of profitability, are the most important drivers of
increasing stockholder value. Chegg Services is the primary component of the Company’s overall revenue growth and
profitability. The selection of these two measures as PSU metrics ensures our executive officers are incentivized in accordance
with the long-term interests of our stockholders. In addition, because we generally do not have an annual cash incentive bonus
plan as another form of compensation, a one-year financial measurement designed to reward annual financial performance is
appropriate as a PSU metric. The performance metrics and their timing are synchronized with the Board-approved strategic
plan, metrics and targets.
Upon the determination of the attainment of the performance metrics, a percentage of PSUs would be earned based on
the actual achievement. One-third of the earned PSUs vest on the later of the one-year anniversary of the grant date or the date
our compensation committee determines the 2017 performance metrics have been met, the Initial Vesting Date. One-third of the
earned PSUs vest on the second anniversary of the Initial Vesting Date and the remaining one-third on the three-year
anniversary of the Initial Vesting Date. Vesting is subject to the executive officer’s continued service up to and through the
applicable vesting dates. The time-based vesting element of the allocated PSUs provides additional retention of our executive
officers.
The number of PSUs that may be earned range from 0% to 100% of the total award depending on the level of
performance achieved for each goal. No payout will be made for performance below the threshold levels and the maximum
amount of PSUs that may vest is 100% of the total award. If actual performance falls between the threshold, target, or
maximum levels, linear interpolation will be used to determine the amount of PSUs earned, as set forth in the table below:
Performance Level
Payout % of Award
Chegg Services Revenue
Adjusted EBITDA*
Threshold
Target
Maximum
33%
160,000,000 $
30,000,000 $
66%
172,000,000 $
35,000,000 $
100%
184,000,000
45,000,000
$
$
*Adjusted EBITDA is a financial measure not prepared in accordance with generally accepted accounting principles in the
United States (“GAAP”), and is further defined and reconciled to the most directly comparable GAAP financial
measures in Appendix A to this proxy statement.
“Chegg Services Revenue” includes revenue from our Chegg Study service, our Chegg Writing service, our Chegg
Tutors service, Test Prep, through our partnership with Kaplan, Internship services, Brand Partnership services that we offer to
brands and Enrollment Marketing services to colleges, through our strategic partnership with NRCCUA, provided that any
revenue streams generated through acquisitions finalized in fiscal year 2017 was not included.
“Adjusted EBITDA” means earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted to
exclude share-based compensation expense, acquisition-related compensation costs, restructuring charges, and other income,
net, provided that any expenses related to acquisitions finalized in fiscal year 2017 was not included.
We granted RSUs and PSUs at target to our NEOs in fiscal year 2017 and the grant date fair value in accordance with
Financial Accounting Standards Board ASC Topic 718 (“ASC 718”) as set forth below, denominated at target and maximum
payout levels:
31
Number of Shares Granted
Grant Date Value of Awards
Named Executive
Officer
Dan Rosensweig . . . . . . . .
Andrew Brown . . . . . . . . .
Michael Osier . . . . . . . . . .
Nathan Schultz . . . . . . . . .
Esther Lem . . . . . . . . . . . .
Charles Geiger . . . . . . . . .
Time-Vesting RSUs
349,264
136,504
109,145
109,145
87,316
109,145
PSUs
(Target)*
349,264
136,504
109,145
109,145
87,316
109,145
Time-Vesting RSUs
$2,849,994
$1,113,873
$890,623
$890,623
$712,499
$890,623
PSUs
(Target)*
$2,849,994
$1,113,873
$890,623
$890,623
$712,499
$890,623
*PSUs (Target) represents approximately 66% of the total grant size. In the first quarter of 2018, the compensation committee
certified that, based on the performance of the Company in fiscal year 2017, the maximum number of PSUs granted in fiscal year
2017 (i.e., 100% of the grant size or approximately 150% of the amounts listed in the table above) were allocated to each NEO, and
eligible to be vested.
Other Programs and Policies
Benefits and Perquisites
Our executive officers participate in the same employee benefit programs that are generally provided to all other
employees. We do not provide additional benefits or perquisites to our NEOs that are not made available to other employees.
Severance and Change-in-Control Arrangements
We have entered into offer letter agreements with Messrs. Rosensweig, Brown and Geiger that provide severance
benefits, including equity award vesting acceleration, if termination occurs in connection with a change of control (i.e., double-
trigger severance protections). We do not provide tax gross-ups if an executive is subject to excise taxes as a result of
severance or change of control benefits. A detailed description of the terms of the agreements can be found under the section
titled “Termination and Change of Control Arrangements.”
Insider Trading and Hedging Policies
We have adopted an insider trading policy whereby our employees, officers, directors and consultants are prohibited
from trading our securities. We also prohibit any hedging of our securities by our executive officers and directors.
Rule 10b5-1 Plans
Certain of our directors and executive officers have adopted written plans, known as Rule 10b5-1 plans, in which they
have contracted with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a
broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further
direction from the director or officer. The director or officer may amend or terminate the plan in some circumstances. The
adoption, amendment, termination and certain other actions with respect to Rule 10b5-1 plans must comply with the terms of
our insider trading policy.
Accounting and Tax Considerations
Prior to its amendment by the Tax Cuts and Jobs Act (the “TCJA”), which was enacted December 22, 2017, section
162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”), disallowed a tax deduction to public companies
for compensation paid in excess of $1 million to “covered employees” under Section 162(m) (generally, such company’s chief
executive officer and its three other highest paid executive officers other than its chief financial officer). Prior to this
amendment, there was an exception to this $1 million limitation for performance-based compensation if certain requirements
set forth in Section 162(m) and the applicable regulations were met.
The Tax Cuts and Jobs Act of 2017 generally amended Section 162(m) to eliminate the exception for performance-
based compensation, effective for taxable years following December 31, 2017. The $1 million compensation limit was also
expanded to apply to a public company's chief financial officer and apply to certain individuals who were covered employees in
years other than the then-current taxable year. Although certain transition relief may apply with respect to compensation paid
32
pursuant to certain contracts in effect as of November 2, 2017, ambiguities in the TCJA prevent the compensation committee
from being able to definitively determine what compensation, if any, payable to the covered employees in excess of $1 million
will be deductible in future years. Interpretations of and changes in applicable tax laws and regulations as well as other factors
beyond the control of the compensation committee can affect deductibility of compensation, and there can be no assurance that
compensation paid to our executive officers in excess of $1 million who are covered by Section 162(m) will be deductible. As
in prior years, the compensation committee will continue to take into account the tax and accounting implications (including
with respect to the expected lack of deductibility under the revised Section 162(m)) when making compensation decisions, but
reserves its right to make compensation decisions based on other factors as well if the compensation committee determines it is
in its best interests to do so. Further, taking into account the elimination of the exception for performance-based compensation,
the compensation committee may determine to make changes or amendments to its existing compensation programs in order to
revise aspects of our programs that were initially designed to comply with Section 162(m) but that may no longer serve as an
appropriate incentive measure for our executive officers.
Risk Considerations
The compensation committee has discussed the concept of risk as it relates to our compensation programs, including
our executive compensation program, and the compensation committee does not believe that our compensation programs
encourage excessive or inappropriate risk taking. As described in further detail in this “Compensation Discussion and
Analysis,” we structure our pay to consist of both fixed and variable compensation. In fiscal year 2017, the compensation
committee and management considered whether our compensation programs for employees created incentives for employees to
take excessive or unreasonable risks that could materially harm our company. The compensation committee believes that our
compensation programs are typical for companies in our industry and that the risks arising from our compensation policies and
practices are not reasonably likely to have a material adverse effect on the company.
33
REPORT OF THE COMPENSATION COMMITTEE
The information contained in the following report of our compensation committee is not considered to be “soliciting
material,” “filed” or incorporated by reference in any past or future filing by us under the Securities Exchange Act of 1934 or
the Securities Act of 1933, as amended, unless and only to the extent that we specifically incorporate it by reference.
The compensation committee oversees our compensation policies, plans and benefit programs. The compensation
committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-
K with management. Based on such review and discussions, the compensation committee has recommended to the board of
directors that the “Compensation Discussion and Analysis” be included in this proxy statement.
Submitted by the Compensation Committee
Ted Schlein, Chair
Marne Levine
Jeff Housenbold
34
SUMMARY COMPENSATION TABLE
The following table provides information regarding all compensation awarded to, earned by or paid to our named
executive officers for all services rendered in all capacities to us during fiscal years 2017, 2016 and 2015.
Name and Principal Position(1)
Dan Rosensweig . . . . . . . . . . . . . . . .
President and Chief Executive
Officer
Andrew Brown . . . . . . . . . . . . . . . . .
Chief Financial Officer
Nathan Schultz . . . . . . . . . . . . . . . . .
Chief Learning Officer
Michael Osier . . . . . . . . . . . . . . . . . .
Chief Outcomes Officer
Esther Lem . . . . . . . . . . . . . . . . . . . .
Chief Marketing Officer
Charles Geiger(5) . . . . . . . . . . . . . . . .
Former Chief Product Officer
Year
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
2015
Salary ($) Bonus ($)
920,000
905,417
837,500
520,000
514,792
487,917
446,120
419,100
378,354
446,120
419,100
381,000
390,000
383,207
346,595
446,120
426,720
426,720
30,000(4)
200,000(6)
Stock Awards
($)(2)
7,124,994
5,609,900
8,999,989
2,784,681
2,152,831
2,999,992
2,226,553
1,568,750
1,999,999
2,226,553
1,568,750
1,999,999
1,781,246
1,255,000
1,499,989
2,226,553
1,568,750
1,999,999
All Other
Compensation
($)(3)
Total ($)
— 8,044,994
— 6,515,317
— 9,837,489
6,000
6,000
6,000
4,500
4,500
4,500
3,310,681
2,673,623
3,493,909
2,677,173
1,992,350
2,412,853
— 2,672,673
— 1,987,850
— 2,380,999
6,000
2,177,246
— 1,638,207
— 1,846,584
4,500
4,500
4,500
2,677,173
2,199,970
2,431,219
(1) Messrs. Schultz and Osier and Ms. Lem were not NEOs in 2015, 2016 and 2017. Mr. Geiger was an NEO in 2015.
(2) The amounts reported in this column represent the aggregate grant date fair value of RSU awards granted under our 2013
Equity Incentive Plan, as computed in accordance with ASC 718. The grant date fair value was determined using the
closing share price of our common stock on the date of grant. For fiscal year 2017, the amounts include PSUs, valued at
the grant date based upon the probable outcome of the performance conditions. The aggregate grant date fair values of the
PSUs reflect the maximum potential value of the PSUs (assuming the highest level of performance achievement) and
were $4,275,000 for Mr. Rosensweig, $1,670,809 for Mr. Brown, $1,335,931 for Mr. Osier, $1,335,931 for Mr. Schultz,
$1,068,748 for Ms. Lem, and $1,335,931 for Mr. Geiger.
(3) Represents our contributions to the account under our 401(k) plan with respect to each of Messrs. Brown, Schultz and
(4)
Geiger and Ms. Lem.
In January 2015, the Compensation Committee approved a one-time $30,000 discretionary bonus to Mr. Schultz, in
recognition of his new role and responsibilities as Chief Learning Officer.
(5) Mr. Geiger stepped down as Chief Product Officer on September 29, 2017 and departed from Chegg on April 9, 2018.
(6) On February 23, 2016, the Compensation Committee approved a $200,000 discretionary bonus to Mr. Geiger, in
recognition of his expanded responsibilities, including his leadership role in the Company’s mobile and other strategic
initiatives.
35
GRANTS OF PLAN-BASED AWARDS
The following table sets forth certain information regarding grants of plan-based awards to each of our NEOs during fiscal year
2017.
Name
Dan Rosensweig . . .
Grant
Date
3/01/2017
Board
Approval
Date
2/1/2017
3/01/2017
1/11/2017
Andrew Brown . . . .
3/01/2017
2/1/2017
3/01/2017
1/11/2017
Nathan Schultz . . . .
3/01/2017
2/1/2017
3/01/2017
1/11/2017
Michael Osier . . . . .
3/01/2017
2/1/2017
3/01/2017
1/11/2017
Esther Lem . . . . . . .
3/01/2017
2/1/2017
3/01/2017
1/11/2017
Charles Geiger. . . . .
3/01/2017
2/1/2017
3/01/2017
1/11/2017
Award
Type
PSU
RSU
PSU
RSU
PSU
RSU
PSU
RSU
PSU
RSU
PSU
RSU
Estimated Possible Payout
Under Equity Incentive
Plan Awards(1)
Threshold
(#)
172,886
Target
(#)
349,264
Maximum
(#)
523,897
All Other
Stock
Awards:
Number of
Shares of
Stock or Units
(#)(2)
—
—
—
—
349,264
67,568
136,504
204,756
—
—
—
—
136,504
54,026
109,145
163,717
—
—
—
—
109,145
Market
Value of
Shares that
Have Not
Vested ($)(3)
4,667,922
2,849,994
1,824,376
1,113,873
1,458,718
890,623
54,026
109,145
163,717
—
1,458,718
—
—
—
109,145
890,623
43,220
87,316
130,974
—
1,166,978
—
—
—
87,316
54,026
109,145
163,717
109,145
712,499
1,458,718
890,623
(1) Upon the achievement by December 31, 2017 of certain company performance metric measurements approved by the
compensation committee as described under the heading "—Elements of Fiscal Year Compensation—Equity Incentive
Compensation—Performance-Based Restricted Stock Units," the RSU allocated (if any) to each performance metric shall
vest as to one-third no later than March 15, 2018, one-third on the one year anniversary of the initial determined vesting
date, and the remaining one-third shall vest on the two-year anniversary of the initial determined vesting date, subject in
each case to the applicable officer’s continued service up to and through the applicable vesting dates. In the first quarter of
2018, the Compensation Committee determined that 100% of the shares subject to the PSUs were allocable.
(2) One-third of the shares shall vest annually on each anniversary of the vesting commencement date of March 1, 2017 (e.g.,
March 1, 2018, March 1, 2019, and March 1, 2020). The vesting is subject to continued service through each vesting date.
(3) Reflects the grant date fair value of each equity award at the maximum performance level computed in accordance with
ASC Topic 718 and described in footnote 2 to the Summary Compensation Table. The assumptions used in the valuation of
these awards are set forth in the notes to our consolidated financial statements included in our Annual Report on Form 10-
K filed with the SEC for the year ended December 31, 2017. These amounts may not correspond to the actual value that
may be realized by the NEOs.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
The following table provides information with respect to outstanding equity awards as of December 31, 2017 with
respect to our named executive officers.
Name
Grant
Date(1)
Exercisable
(#)
Unexercisable
(#)
Exercise
Price ($)
Expiration
Date
Number of Securities
Underlying Unexercised
Options
Number of
Shares that
Have Not
Vested (#)
Market
Value of
Shares that
Have Not
Vested ($)(2)
Option Awards
Stock Awards
Dan Rosensweig . . .
3/17/2011(3)
5/4/2011
11/7/2012
11/12/2013
11/12/2013
1,000,000
333,333
717,596
314,407
666,666
7.88
7.88
6.92
12.50
12.50
2/3/2020
5/3/2021
11/6/2022
11/11/2023
11/11/2023
—
—
—
—
—
36
Name
Andrew Brown . . . .
Nathan Schultz . . . .
Michael Osier . . . . .
Esther Lem . . . . . . .
Charles Geiger . . . .
Grant
Date(1)
2/23/2016(4)
3/14/2016(5)
3/01/2017(6)
3/01/2017(7)
11/2/2011
11/7/2012
11/12/2013
11/12/2013
2/23/2016(8)
3/14/2016(5)
3/01/2017(6)
3/01/2017(11)
5/16/2012
11/7/2012
11/12/2013
11/12/2013
2/23/2016(10)
3/14/2016(9)
3/01/2017(11)
3/01/2017(7)
2/24/2012
11/7/2012
11/12/2013
11/12/2013
2/23/2016(10)
3/14/2016(9)
3/01/2017(11)
3/01/2017(7)
2/9/2011
11/7/2012
11/12/2013
11/12/2013
2/23/2016(10)
3/14/2016(5)
3/01/2017(11)
3/01/2017(7)
2/23/2016(9)
3/14/2016(5)
3/01/2017(6)
3/01/2017(7)
Option Awards
Stock Awards
Number of Securities
Underlying Unexercised
Options
Exercisable
(#)
Unexercisable
(#)
Exercise
Price ($)
Expiration
Date
7.88
6.92
12.50
12.50
11/1/2021
11/6/2022
11/11/2023
11/11/2023
7.88
6.92
12.50
12.50
5/15/2022
11/6/2022
11/11/2023
11/11/2023
7.88
6.92
12.50
12.50
2/23/2022
11/6/2022
11/11/2023
11/11/2023
7.88
6.92
12.50
12.50
2/8/2021
11/6/2022
11/11/2023
11/11/2023
441,270
40,000
77,088
266,666
100,000
66,666
47,376
200,000
46,666
66,666
40,481
200,000
150,000
53,333
29,309
133,333
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
37
Number of
Shares that
Have Not
Vested (#)
500,000
750,000
349,264
523,897
Market
Value of
Shares that
Have Not
Vested ($)(2)
8,160,000
12,240,000
5,699,988
8,549,999
195,416
293,125
136,504
204,756
3,189,189
4,783,800
2,227,745
3,341,618
156,250
234,375
109,145
163,717
2,550,000
3,825,000
1,781,246
2,671,861
156,250
234,375
109,145
163,717
2,550,000
3,825,000
1,781,246
2,671,861
125,000
187,500
87,316
130,974
156,250
234,375
109,145
163,717
2,040,000
3,060,000
1,424,997
2,137,496
2,550,000
3,825,000
1,781,246
2,671,861
(1) All of the outstanding equity awards granted prior to November 12, 2013 were granted under our 2005 Stock Incentive
Plan. All of the outstanding equity awards granted on or after November 12, 2013 were granted under our 2013 Equity
Incentive Plan.
(2) The market price for our common stock is based on the closing price per share of our common stock as listed on the New
York Stock Exchange on December 29, 2017 of $16.32.
(3) Includes 68,251 shares subject to stock options transferred as a gift to Daniel Lee Rosensweig and Linda Rosensweig
CoTrustees of the Rosensweig 2012 Irrevocable Children’s Trust u/a/d 11/6/2012 on November 8, 2013.
(4) The award of RSUs vested with respect to 170,000 RSUs on October 1, 2016, and 50% of the remaining RSUs shall vest
on February 23, 2018, and the remaining 50% of the awarded RSUs on February 23, 2019. The vesting is subject to
continued service through each vesting date and acceleration as described in “—Termination and Change in Control
Arrangements” below.
(5) The shares subject to the PSU award are earned only upon achievement by December 31, 2016 of company performance
metrics consisting of Chegg Services Revenue and adjusted EBITDA as approved by the Compensation Committee. The
Compensation Committee determined that the weighted average percentage of 54.8% of the measurements had been
achieved, therefore a weighted average of 54.8% of the shares subject to the PSU award were allocable. 50% of the
allocated shares subject to each PSU award will vest on February 27, 2018 and the remaining 50% of the allocated shares
will vest on February 27, 2019, subject in each case to the officers continued service up to and through the applicable
vesting date.
(6) One-third of the shares shall vest annually on each anniversary of the vesting commencement date, March 1, 2017. The
vesting is subject to continued service through each vesting date and acceleration as described in "—Termination and
Change in Control Arrangements" below.
(7) Upon the achievement by December 31, 2017 of certain company performance metric measurements approved by the
compensation committee, the RSU allocated (if any) to each performance metric shall vest as to one-third no later than
March 15, 2018; one-third on the one year anniversary of the initial determined vesting date; and the remaining one-third
shall vest on the two-year anniversary of the initial determined vesting date, subject in each case to the applicable officer's
continued service up to and through the applicable vesting dates.
(8) The award of RSUs vested in respect to 55,000 RSUs on October 1, 2016, and 50% of the remaining RSUs shall vest on
February 23, 2018, and the remaining unvested RSUs shall vest on February 23, 2019. The vesting is subject to continued
service through each vesting date and acceleration as described in "—Termination and Change in Control Arrangements"
below.
(9) The award of RSUs shall vest with respect to 50% of the shares on February 23, 2018, and the remaining 50% of the shares
on February 23, 2019. The vesting is subject to continued service through each vesting date and acceleration as described
in “—Termination and Change in Control Arrangements” below.
(10) The award of RSUs shall vest with respect to 50% of the shares on February 23, 2018, and the remaining 50% of the
shares on February 23, 2019. The vesting is subject to continued service through each vesting date.
(11) One-third of the shares shall vest annually on each anniversary of the vesting commencement date, March 1, 2017. The
vesting is subject to continued service through each vesting date.
OPTION EXERCISES AND STOCK VESTED TABLE
The following table presents information concerning the aggregate number of shares of our common stock for which
options were exercised during fiscal year 2017 for each of the NEOs. In addition, the table presents information on shares of
our common stock that were acquired upon the vesting of stock awards during 2017 for each of the NEOs on an aggregated
basis.
Name
Dan Rosensweig . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Brown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nathan Schultz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michael Osier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Esther Lem. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charles Geiger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise
Value
Realized on
Exercise
($)(1)
Number of
Shares
Acquired on
Vesting(2)
—
—
31,776
200,000
—
—
—
338,256
1,871,000
—
1,077,986
9,098,763
862,046
293,113
205,018
205,018
158,085
205,018
Value
Realized
on Vesting
($)(3)
6,654,063
2,265,288
1,588,988
1,588,988
1,227,178
1,588,988
(1) The value realized on the shares acquired is the fair market value of the shares on the date of exercise, which was the
closing price of our common stock on such date as traded on the New York Stock Exchange (“NYSE”), less the exercise
price for the stock option award.
(2) Amounts reflect the vesting of RSUs and PSUs.
(3) The value realized on the shares acquired is the fair market value of the shares on the date of vesting, which was the closing
price of our common stock on such date as traded on the NYSE.
39
TERMINATION AND CHANGE OF CONTROL ARRANGEMENTS
Pursuant to the offer letters we entered into with Messrs. Rosensweig, Brown and Geiger, we have agreed to make
certain payments upon their termination or resignation, or a change in control of our company. We have not entered into any
termination and change of control arrangements with Mr. Schultz or Ms. Lem.
Dan Rosensweig
We entered into an offer letter agreement with Mr. Rosensweig, our President and Chief Executive Officer, on
December 3, 2009. The offer letter provides for at-will employment and has no specific term. Pursuant to Mr. Rosensweig’s
offer letter, in the event we terminate Mr. Rosensweig’s employment without “cause” or he resigns from his employment with
us for “good reason,” then we will pay Mr. Rosensweig a lump sum payment equal to 12 months of his then-current annual
salary and his monthly insurance premiums, until the earlier of 12 months following his termination or resignation or the date
upon which he commences full-time employment or consulting services with another company and is eligible for participation
in any health insurance program provided by such company.
Additionally, Mr. Rosensweig will be entitled to immediate vesting of 25% of his then-unvested stock options and
25% of his then-unvested RSUs. Mr. Rosensweig will also have a period of up to 24 months from the effective date of his
termination or resignation to exercise all vested options. These benefits are subject to Mr. Rosensweig releasing us from all
claims, resigning from our Board and returning all of our property to us.
Additionally, if Mr. Rosensweig is terminated without “cause” or he resigns from his employment with us for “good
reason”within 12 months following a “change of control” of our company, we will pay Mr. Rosensweig a lump sum payment
equal to his then current annual salary and his monthly insurance premiums, until the earlier of 12 months following his
termination or resignation or the date upon which he commences full time employment or consulting services with another
company and is eligible for participation in any health insurance program provided by such company. Additionally,
Mr. Rosensweig will be entitled to immediate vesting of 100% of his then-unvested stock options and 100% of his then-
unvested RSUs. Mr. Rosensweig will have a period of up to 24 months from the effective date of his termination or resignation
to exercise all vested options. These benefits are subject to Mr. Rosensweig releasing us from all claims.
Andrew Brown
We entered into an offer letter agreement with Mr. Brown, our Chief Financial Officer, on October 2, 2011. The offer
letter provides for at-will employment and has no specific term. Pursuant to Mr. Brown’s offer letter, in the event we terminate
Mr. Brown's employment without “cause” or he resigns from his employment with us for “good reason,” then we will pay Mr.
Brown a lump sum payment equal to 12 months of his then-current annual salary and his monthly insurance premiums, until
the earlier of 12 months following his termination or resignation or the date upon which he commences full-time employment
or consulting services with another company and is eligible for participation in any health insurance program provided by such
company. Additionally, Mr. Brown will be entitled to immediate vesting of 50% of his then-unvested stock options and 50% of
his then-unvested RSUs. These benefits are subject to Mr. Brown releasing us from all claims and returning all of our property
to us.
Additionally, if Mr. Brown is terminated without “cause” or he resigns from his employment with us for “good
reason” within 12 months following a “change of control” of our company, Mr. Brown will be entitled to immediate vesting of
50% of his then-unvested stock options and 50% of his then-unvested RSUs. These benefits are subject to Mr. Brown releasing
us from all claims.
Charles Geiger
We entered into an offer letter agreement with Mr. Geiger, who initially served as our Chief Technology Officer and
then our Chief Product Officer, on June 30, 2009. The offer letter provides for at-will employment and has no specific term.
Pursuant to Mr. Geiger's offer letter, if Mr. Geiger is terminated without cause or he is “constructively terminated” within 12
months following a “change of control” of our company, Mr. Geiger will be entitled to immediate vesting of 50% of his then-
unvested RSUs.
Mike Osier
We entered into an offer letter agreement with Mr. Osier, our Chief Outcomes Officer who initially served as our VP
or Operations and IT, on September 9, 2009. The offer letter provides for at-will employment and has no specific term.
40
Pursuant to Mr. Osier’s offer letter, if Mr. Osier is “involuntary terminated” by the Company for reasons other than “cause”, he
will be entitled to a cash payment equal to six months of his then-current annual salary.
“Cause,” “Change of Control,” “Constructive Termination,” “Good Reason” and “Involuntary Termination” Definitions
For purposes of this section, “cause” means a determination by our board of directors that employment is terminated
because of (i) a failure or refusal to comply in any material respect with lawful policies, standards or regulations of our
company within 30 days after written notice to of such violations and/or failure to comply; (ii) a material violation of a federal
or state law or regulation applicable to our business; (iii) a conviction or plea of no contest to a felony or other crime of moral
turpitude under the laws of the United States or any state; (iv) fraud or material misappropriation of property belonging to us or
our affiliates; (v) a material breach of the terms of any confidentiality, invention assignment or proprietary information
agreement with us or with a former employer and failure to correct or cure such material breach within thirty days after written
notice of such breach; or (vi) material misconduct or gross negligence in connection with the performance of duties.
For purposes of this section, “change of control”means (i) a merger, reorganization, consolidation or other acquisition
(or series of related transactions of such nature) pursuant to which more than 50% of the voting power of all of our equity
would be transferred by the holders our outstanding shares (excluding a reincorporation to effect a change in domicile); (ii) a
sale of all or substantially all of our assets; or (iii) any other transaction or series of transactions (other than capital raising
transactions) in which our stockholders immediately prior to such transaction or transactions own immediately after such
transaction less than 50% of the voting equity securities of the surviving corporation or its parent.
For purposes of this section, a “constructive termination” occurs upon (i) a material change of the executive’s position,
(ii) a reduction of then-current annual base compensation (other than a similar reduction that applies to our other senior
executives), or (iii) relocation to a primary work location more than 50 miles from our principal office in Santa Clara,
California.
For purposes of this section, “good reason’ occurs upon (i) removal from the executive’s current position (Chief
Executive Officer or no longer reporting directly to our Board for Mr. Rosensweig; Chief Financial Officer for Mr. Brown),
(ii) any material change or reduction in duties in the executive’s current position or assignment to duties inconsistent with such
position, responsibilities, authority or status, (iii) reduction of then-current annual base compensation (other than a similar
reduction that applies to our other senior executives), or (iv) relocation to a primary work location more than 50 miles from our
principal office in Santa Clara, California.
For purposes of this section, an “involuntary termination” means involuntary discharge for reasons other than (i)
unauthorized use or disclosure of our confidential information or trade secrets, which use or disclosure causes material harm to
us, (ii) material breach of any agreement with us, (iii) material failure to comply with our written policies or rules, (iv)
conviction of, or plea of “guilty” or “no contest” to a felony under the laws of the United States or any state, (v) gross
misconduct, (vi) continuing failure to perform reasonable assigned duties after receiving written notification of the failure from
the hiring manager or (vii) failure to cooperate in good faith with a governmental or internal investigation of our company or
our directions, officer or employees, if we have requested cooperation.
41
Estimated Payments and Benefits as of December 31, 2017
The following table sets forth the estimated payments and benefits that would be received by each of the NEOs upon a
change in control of Chegg, upon a termination of employment without cause or following a resignation for good reason, or in
the event of a termination of employment without cause or following a resignation for good reason in connection with a change
in control in Chegg. This table reflects amounts payable to each NEO assuming that his or her employment was terminated on
December 31, 2017, and the change in control of Chegg also occurred on that date. The closing market price per share of our
common stock on the NYSE on December 29, 2017, was $16.32.
Termination of Employment
No Change of Control
Termination of Employment
Change of Control
Named
Executive
Officer
Dan
Rosensweig .
Andrew
Brown . . . . .
Nathan
Schultz . . . .
Michael
Osier . . . . . .
Esther Lem .
Charles
Geiger . . . . .
Severance
Payment ($)
Medical
Benefits
Continuation
($)(2)
Accelerated
Vesting of
Equity
Awards ($)(1)
Total ($)
Severance
Payment ($)
Medical
Benefits
Continuation
($)(2)
Accelerated
Vesting of
Equity
Awards ($)(1)
Total ($)
920,000
28,881
3,464,997
4,413,878
920,000
28,881 13,859,988
14,808,869
520,000
24,896
2,708,467
3,253,363
520,000
24,896
2,708,467
3,253,363
—
225,000
—
—
—
—
—
—
—
—
—
—
—
—
225,000
225,000
—
—
—
—
—
—
—
—
—
—
—
225,000
—
— 2,165,623
2,165,623
(1) The value of the accelerated vesting of unvested equity awards has been calculated based on the closing market price of
our common stock on the NYSE on December 29, 2017, which was $16.32 per share. All outstanding stock options are
fully vested and not included in the total.
(2) The amounts reported represent costs for COBRA.
42
EQUITY COMPENSATION PLAN INFORMATION
The following table presents information as of December 31, 2017 with respect to compensation plans under which
shares of our common stock may be issued. The category “Equity compensation plans approved by security holders” in the
table below consists of the 2005 Stock Incentive Plan (the “2005 Plan”), the 2013 Equity Incentive Plan (the “2013 Plan”) and
the 2013 Employee Stock Purchase Plan (the “2013 ESPP”). The table does not include information with respect to shares of
our common stock subject to outstanding options or other equity awards granted under equity compensation plans or
arrangements assumed by us in connection with our acquisition of the companies that originally granted those awards.
Plan category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders(4)
Number of securities to be
issued upon exercise
of outstanding options,
warrants and rights
Weighted-
average exercise price of
outstanding options,
warrants and rights
(a)
22,398,975(1)
—
(b)
$8.97(2)
—
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
17,027,161(3)
—
(1) Excludes purchase rights accruing under the 2013 ESPP and includes 14,335,115 shares subject to outstanding RSUs.
(2) The weighted average exercise price relates solely to outstanding stock option shares since shares subject to RSUs have
no exercise price.
(3) Consists of 11,177,175 shares available for issuance under the 2013 Plan and 5,849,986 shares available for issuance
under the 2013 ESPP.
The number of shares reserved for issuance under the 2013 Plan will increase automatically on the first day of January of
each of the first ten calendar years during the term of the plan by a number of shares of common stock equal to the lesser
of (i) 5% of the total outstanding shares our common stock as of the immediately preceding December 31st or (ii) a
number of shares determined by our board of directors.
The number of shares reserved for issuance under our 2013 ESPP will increase automatically on January 1st of each of
the first ten calendar years following the first offering date by the number of shares equal to the lesser of (i) 1% of the
total outstanding shares of our common stock as of the immediately preceding December 31st (rounded to the nearest
whole share) or (ii) a number of shares determined by our board of directors.
Pursuant to the terms of our 2013 Plan and 2013 ESPP, an additional 5,483,382 shares and 1,096,676 shares were added
to the number of shares reserved for issuance under the each plan, respectively, effective January 1, 2018.
(4) Excludes information for options and other equity awards assumed by us in connection with mergers and acquisitions
and warrants issued by us in connection with financing transactions. As of December 31, 2017, a total of 2,986 shares of
our common stock were issuable upon exercise of outstanding options assumed and 100,000 shares of our common stock
were issuable upon exercise of outstanding warrants issued in connection with financing transactions. The weighted
average exercise price of those outstanding options and warrants was $3.79 per share and $12.00 per share, respectively.
No additional equity awards may be granted under any equity compensation plans or arrangements assumed by us in
connection with mergers and acquisitions.
43
TRANSACTIONS WITH RELATED PARTIES, FOUNDERS AND CONTROL PERSONS
Other than the compensation arrangements, including employment, termination of employment and change of control
arrangements and indemnification arrangements, discussed, when required, above in the section entitled “Executive
Compensation,” since January 1, 2017, we have not been a party to any transaction or series of similar transactions in which:
• we have been or are to be a participant;
•
•
the amount involved exceeded or exceeds $120,000; and
any of our directors, executive officers or holders of more than 5% of our capital stock, or any immediate
family member of or person sharing the household with any of these individuals, had or will have a direct or
indirect material interest.
Review, Approval or Ratification of Transactions with Related Parties
Our related-party transactions policy requires approval of transactions to which we are a party and in which an officer,
director, nominee for director, stockholder beneficially owning more than five percent of our outstanding capital stock or an
immediate family member of such person has a material interest. Any transaction that we intend to undertake with such
persons, irrespective of the amounts involved (unless such transaction is subject to standing pre-approval as provided under the
policy or pursuant to a resolution adopted by our compensation committee), will be submitted to our ethics counselor for his or
her determination of what approvals are required under the related-party transactions policy. The ethics counselor will refer to
the chair of our audit committee (or another member of our audit committee if the chair is a party to the transaction) any such
transaction for review. In the event our ethics counselor becomes aware of a transaction with a related person that has not been
previously approved or previously ratified under the related-party transactions policy that required such approval, it will be
submitted promptly to the chair or other member of our audit committee for review. Based on the conclusions reached, the chair
or other member of our audit committee will evaluate all options, including but not limited to ratification, amendment or
termination of the transaction with the related person.
In approving or rejecting the proposed transaction, the chair or other member of our audit committee will consider the
relevant and available facts and circumstances, including such facts as (i) the impact on a director’s independence in the event
the related person is a director, immediate family member of a director or an entity with which a director is affiliated; (ii) the
terms of the transaction; and (iii) any other relevant information and considerations with respect to the proposed transaction.
The chair or other member of our audit committee will approve only those transactions with related persons that, in light of
known circumstances, are in or are not inconsistent with, the best interests of our company and our stockholders, as such chair
or other member of our audit committee determines in the good faith exercise of his or her discretion.
44
REPORT OF THE AUDIT COMMITTEE
The information contained in the following report of Chegg’s Audit Committee is not considered to be “soliciting
material,” “filed” or incorporated by reference in any past or future filing by Chegg under the Securities Exchange Act of
1934, as amended, or the Securities Act of 1933, as amended, unless and only to the extent that Chegg specifically incorporates
it by reference.
The Audit Committee has reviewed and discussed with Chegg’s management and Ernst & Young LLP the audited
consolidated financial statements of Chegg as of and for the year ended December 31, 2017, and the effectiveness of internal
control over financial reporting as of December 31, 2017. The Audit Committee has also discussed with Ernst & Young LLP
the matters required to be discussed by AS 1301, “Communications with Audit Committees” issued by the Public Company
Accounting Oversight Board.
The Audit Committee has received and reviewed the written disclosures and the letter from Ernst & Young LLP
required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent
accountant’s communications with the Audit Committee concerning independence, and has discussed with Ernst & Young LLP
its independence from Chegg.
Based on the review and discussions referred to above, the Audit Committee recommended to the board of directors
that the audited consolidated financial statements be included in Chegg’s annual report on Form 10-K for the year ended
December 31, 2017 for filing with the Securities and Exchange Commission.
Submitted by the Audit Committee
Reneé Budig, Chair
Richard Sarnoff
John York
45
Stockholder Proposals to be Presented at the Next Annual Meeting
ADDITIONAL INFORMATION
Chegg’s bylaws provide that, for stockholder nominations to the board or other proposals to be considered at an annual
meeting, the stockholder must give timely notice thereof in writing to the Corporate Secretary at Chegg, Inc., 3990 Freedom
Circle, Santa Clara, California 95054, Attn: Corporate Secretary.
To be timely for the 2019 annual meeting, a stockholder’s notice must be delivered to or mailed and received by our
Corporate Secretary at the principal executive offices of Chegg not earlier than 5:00 p.m. Pacific Time on February 22, 2019
and not later than 5:00 p.m. Pacific Time on March 24, 2019. A stockholder’s notice to the Corporate Secretary must set forth
as to each matter the stockholder proposes to bring before the annual meeting the information required by Chegg’s bylaws.
Stockholder proposals submitted pursuant to Rule 14a-8 under the Exchange Act and intended to be presented at
Chegg’s 2019 annual meeting must be received by us no later than December 27, 2018 in order to be considered for inclusion
in Chegg’s proxy materials for that meeting. A stockholder’s notice to the Corporate Secretary must set forth as to each matter
the stockholder proposes to bring before the annual meeting the information required by applicable law and our bylaws.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act requires Chegg’s directors, executive officers and any persons who own more than
10% of Chegg’s common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Such
persons are required by SEC regulation to furnish Chegg with copies of all Section 16(a) forms that they file. Based solely on
its review of the copies of such forms furnished to Chegg and written representations from the directors and executive officers,
Chegg believes that all Section 16(a) filing requirements were timely met in 2017.
Available Information
Chegg will mail without charge, upon written request, a copy of Chegg’s annual report on Form 10-K for the year
ended December 31, 2017, including the financial statements and list of exhibits, and any exhibit specifically requested.
Requests should be sent to:
Investor Relations
Chegg, Inc.
3990 Freedom Circle
Santa Clara, California 95054
The Annual Report is also available at http://investor.chegg.com.
“Householding” - Stockholders Sharing the Same Last Name and Address
The SEC has adopted rules that permit companies and intermediaries (such as brokers) to implement a delivery
procedure called “householding.” Under this procedure, multiple stockholders who reside at the same address may receive a
single copy of our annual report and proxy materials, including the Notice of Internet Availability, unless the affected
stockholder has provided contrary instructions. This procedure reduces printing costs and postage fees, and helps protect the
environment as well.
We expect that a number of brokers with account holders who are our stockholders will be “householding” our annual
report and proxy materials, including the Notice of Internet Availability. A single Notice of Internet Availability and, if
applicable, a single set of annual report and other proxy materials will be delivered to multiple stockholders sharing an address
unless contrary instructions have been received from the affected stockholders. Once you have received notice from your
broker that it will be “householding” communications to your address, “householding” will continue until you are notified
otherwise or until you revoke your consent. Stockholders may revoke their consent at any time by contacting Broadridge, either
by calling toll-free (800) 542-1061, or by writing to Broadridge, Householding Department, 51 Mercedes Way, Edgewood,
New York, 11717.
46
Upon written or oral request, Chegg will promptly deliver a separate copy of the Notice of Internet Availability and, if
applicable, annual report and other proxy materials to any stockholder at a shared address to which a single copy of any of
those documents was delivered. To receive a separate copy of the Notice of Internet Availability and, if applicable, annual
report and other proxy materials, you may write or call Chegg’s Investor Relations department at 3990 Freedom Circle, Santa
Clara, California 95054, Attn: Investor Relations, telephone number (408) 855-5735.
Any stockholders who share the same address and currently receive multiple copies of Chegg’s Notice of Internet
Availability or annual report and other proxy materials who wish to receive only one copy in the future can contact their broker
to request information about householding or Chegg’s Investor Relations department at the address or telephone number listed
above.
47
OTHER MATTERS
Our board of directors does not presently intend to bring any other business before the meeting and, so far as is known
to our board of directors, no matters are to be brought before the meeting except as specified in the notice of the meeting. As to
any business that may arise and properly come before the meeting, however, it is intended that proxies, in the form enclosed,
will be voted in respect thereof in accordance with the judgment of the persons voting such proxies.
48
APPENDIX A
RECONCILIATION OF NET LOSS TO EBITDA AND ADJUSTED EBITDA
We believe that certain non-GAAP financial measures, including adjusted EBITDA, when taken together with the
corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by
excluding items that may not be indicative of our core business, operating results or future outlook. Our management uses these
non-GAAP financial measures in assessing our operating results, as well as when planning, forecasting and analyzing future
periods and believes that such measures enhance investors' overall understanding of our current financial performance. These
non-GAAP financial measures also facilitate comparisons of our performance to prior periods. The presentation of additional
information is not meant to be considered in isolation or as a substitute for or superior to net income (loss) determined in
accordance with GAAP. Management strongly encourages stockholders to review our financial statements and publicly-filed
reports in their entirety and not to rely on any single financial measure.
The following is a reconciliation of net loss to EBITDA and adjusted EBITDA for the year ended December 31, 2017
(in thousands, unaudited):
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related compensation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended
December 31,
2017
(20,283)
74
1,802
19,337
930
38,359
(560)
1,047
6,623
46,399
49
[This Page Intentionally Left Blank]
Chegg, Inc.
2017 Form 10-K
[THIS PAGE INTENTIONALLY LEFT BLANK]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-36180
CHEGG, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
Delaware
20-3237489
3990 Freedom Circle
Santa Clara, CA, 95054
(Address of principal executive offices)
(408) 855-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
•
•
•
•
•
•
•
•
•
•
No
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
No
No
No
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging growth company
Accelerated filer
Smaller reporting 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
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2017, the last business day of the registrant’s most recently completed
second fiscal quarter, based upon the closing price of such stock on such date as reported by the New York Stock Exchange on such date, was approximately $1,009,536,032.
Shares of Common Stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of January 31, 2018, the Registrant had 109,962,798 outstanding shares of Common Stock.
No
Portions of the Registrant's definitive proxy statement for the Registrant's 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report
on Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the Registrant's fiscal year ended December 31, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Item 5.
Item 7.
Item 6.
Item 9A.
Item 9B.
Item 8.
Item 9.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management's Discussion and Analysis of Financial Condition and Result of Operations. . . . . . .
Consolidated Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in and Disagreements with Accountants On Accounting and Financial Disclosure . . . . . .
Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Directors, Executive Officers and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Item 12.
Item 10.
Item 15.
Item 14.
Item 13.
Item 16.
Page
4
10
34
34
35
35
36
37
39
55
91
91
91
92
92
92
92
92
93
93
96
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 Annual Report on Form 10-K. Solely for
convenience, our trademarks, trade names and service marks referred to in this Annual Report on Form 10-K 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 Annual Report
on Form 10-K are the property of their respective holders.
2
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K 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 I,
Item 1A, “Risk Factors” in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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
Annual Report on Form 10-K 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.
3
PART I
ITEM 1. BUSINESS
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.
Our Chegg Services include Chegg Study, Chegg Writing, Chegg Tutors, Brand Partnership, Test Prep and Internships.
Our Chegg Study service combines both step-by-step Textbook Solutions and Expert Answers, which help students understand
and master their course work. Chegg Writing is comprised of our writing tools properties, including EasyBib, Citation
Machine, BibMe, CiteThisForMe, RefMe and NormasAPA, which help students create citations for their papers. Additionally,
in October 2017, we launched a service, on our BibMe writing tools property, that helps students prevent unintentional
plagiarism and find grammar and spelling mistakes in their writing. For students who need additional human help, Chegg
Tutors provides live online help for a wide variety of topics online, anywhere and anytime. In October 2017, we acquired
Cogeon GmbH (Cogeon), a provider of adaptive math technology and developer of the math application, Math 42, which will
become Chegg Math, and which leverages artificial intelligence to provide additional homework help for students specifically
struggling with math. We offer unique and compelling ways for student-relevant brands to reach and engage high school and
college students through our Brand Partnerships. Chegg and Kaplan Test Prep (Kaplan) have launched co-branded test prep
programs, in December 2017, starting as low as $99 to provide students with an online adaptive test preparation service. Our
platform also provides access to internships to help students gain skills and experiences that are critical to securing their first
job. In 2017, over 2.2 million students subscribed to our Chegg Services, an increase of 45% year over year from 1.5 million in
2016.
Through our strategic partnership with Ingram Content Group (Ingram) and agreements with other partners, 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. In 2017, students rented or bought over 5.4 million textbooks and eTextbooks from
Chegg.
To deliver these services, we partner with several third parties. We have a large network of students and professionals
who leverage our platform to earn money by tutoring in their spare time. In 2017, we sourced print textbooks through our
strategic partnership with Ingram and agreements with other partners as well as eTextbooks and supplemental materials directly
or indirectly from thousands of publishers in the United States, including Pearson, Cengage Learning, McGraw Hill, Wiley and
MacMillan. Further, thousands of employers leverage our platform to post their internships and jobs. In addition, because we
have a large student audience, local and national brands partner with us to reach the college and high school demographic
through our Brand Partnership service.
Our Offering
We offer products and services that help students improve their outcomes throughout their educational journey. Our
offerings fall into two categories: Chegg Services, which encompasses all of our digital products and services, and Required
Materials, which primarily includes our print textbook and eTextbook offering.
Chegg Services
Chegg Study. Our Chegg Study service helps students master challenging concepts on their own. For high demand
print textbooks and eTextbooks, primarily in the subjects of sciences, technology, engineering, mathematics, statistics, business
and economics, we offer “Textbook Solutions,” which are step-by-step explanations that help students understand how to solve
the questions at the end of each chapter in their textbooks. For non-textbook questions, we offer our “Expert Answers” service,
which allows students to ask questions on our website and receive similarly detailed explanations from subject matter experts.
As of December 31, 2017, Chegg had an archive of 7 million Textbook Solutions and 13 million Expert Answers, which
students can immediately access through their paid subscription. These services are available on our website and on mobile
devices through our native application and our mobile website.
Chegg Writing. In May 2016 we acquired Imagine Easy Solutions (Imagine Easy), the provider of the popular
EasyBib, Citation Machine, BibMe, CiteThisForMe, NormasAPA and other tools with capabilities such as citation,
4
bibliography and anti-plagiarism. When students need to cite their sources in written work, they can use our writing tools to
automatically generate sources in the required formats. These tools offer a variety of advertising-supported and paid
subscription products. In 2017, students logged more than 304 million individual online sessions, lasting on average more than
8 minutes per session. Since the launch of EasyBib, students worldwide have created more than 2.1 billion citations using
Imagine Easy's writing productivity tools. Additionally, in October 2017, we launched a service, on our BibMe writing tools
property, that helps students prevent unintentional plagiarism and find grammar and spelling mistakes in their writing.
Chegg Tutors. Complementing our other study tools, students can find human help on our learning platform through
our network of live tutors. Students can access help online, anywhere, anytime, either synchronously or asynchronously.
Instead of paying for expensive, offline tutors that require scheduling and travel time, students can come to Chegg to find tutors
whenever they need additional help on a subject and pay as little as $0.40 per minute. Our tutors are qualified to help students
with a wide range of topics, including science, technology, engineering, mathematics, business, history, foreign languages, and
English literature, along with test prep and a variety of other highly-requested subjects. Students can subscribe to weekly or
monthly packages, or choose to use the service on a pay-as-you-go basis.
Chegg Math. In October 2017, we acquired Cogeon, a provider of adaptive math technology and developer of the
math application, Math 42. With this acquisition, students in both high school and college will be able to get math help through
self-guided and individualized math solutions. We expect to leverage Cogeon's unique A.I.-driven math technology to enhance
current capabilities inside Chegg Study and expect to launch an integrated new product, Chegg Math, in the second half of
2018.
Brand Partnership. We offer unique and compelling ways for student-relevant brands to reach and engage high school
and college students. Our Brand Partnership service includes digital advertising on our platform, product samples, white label
integrations, discounts, and other promotions shipped directly to students in our distinctive orange Chegg boxes and
experiential offerings that may include, for example, on-campus events, sponsorships and other brand ambassador work.
Test Prep. We entered into a partnership with Kaplan in August 2017 to provide students with an online adaptive test
preparation service. Chegg and Kaplan have launched co-branded test preparation programs, in December 2017, starting as
low as $99. Additionally, we provide students access to Kaplan's test prep courses, practice products, and books through our
website.
Internships. For students who are seeking job-ready skills through work experience before graduation, we offer our
internships service. Students can search for internships, upload their resume, and apply for open positions and employers can
post their internships and connect with students who are actively seeking positions. As of December 31, 2017, we provide
students access to approximately 250,000 internships across the country. We currently offer internships as a free service to both
students and employers.
Required Materials
Print Textbooks and eTextbooks. For students looking to save on the cost of required materials, we rent and sell print
textbooks and eTextbooks. Most of the print textbook transactions are rentals, although we also offer both new and used books
for sale at a slight markup to our acquisition cost. In 2014, we implemented a partnership with Ingram, which we expanded in
May 2015, so that Ingram fulfills all of our print textbook rentals and sales. We have also entered into agreements with other
partners to provide their textbooks for rental or sale. In participation with certain publishers, we also offer “Instant Access” to
eTextbooks that is a one-week free trial of our eTextbook service, and allows the student to access the eTextbook while the
print copy is in transit. All eTextbooks obtained from Chegg are accessed through the VitalSource Bookshelf which provides
students with access to eTextbooks on PCs, tablets and smart phones, providing access anytime, anywhere that students are
connected to the Internet and students can save a portion of the book for offline access. The eTextbook reader enables fast and
easy navigation, keyword search, text highlighting, note taking and further preserves those notes in an online notepad with
persistence of highlighting and notes across platforms.
Supplemental Materials. In addition to textbooks, we offer students access to other materials from publishers,
professors, students and subject matter experts. These include related materials like study guides, lab manuals or digital
services provided by publishers, commonly known as “Whole Course Solutions” or “Integrated Learning Systems.” We tailor
our merchandising of these materials based on the student’s core textbook.
Textbook Buyback. We offer students, on behalf of our fulfillment partner Ingram, the ability to sell us their textbooks,
even if they were not originally purchased from us, and in turn those textbooks are offered to other students for purchase or
5
rent, or sold to wholesalers. If our buy-back offer to the student is accepted, we provide a pre-printed label and shipping
instructions. Ingram reimburses us the amounts we pay to students for these purchases.
Technology and Platform Integration
Our technology is designed to create a direct-to-student learning platform that will continue to enable our growth at
scale. We employ technological innovations whenever possible to increase efficiency and scale in our business. Our products
rely upon and leverage the information underlying our Student Graph discussed in more detail below. We will continue to
invest in building technologies around our data, search and solutions. The key elements of our technology platform are:
Personalization and Merchandising Technology. We create a personalized experience for each student throughout
our learning platform, building awareness of our multiple services and also connecting them with opportunities
through third-party partners and brands. We are able to accomplish this personalization and customization as a
result of our Student Graph and our search technology.
Student Graph. Our Student Graph is the accumulation of the collective activity of students in our learning
platform. Students generate valuable information each time they engage with our learning platform. Our
Student Graph also includes information we access from public and private sources such as textbook
information, information about colleges and scholarship data. We are able to collect, organize and process
this information to algorithmically create a personalized experience for each student on our network.
Search. Search is an easy on-ramp for students to discover all of our services. Students can search by book,
ISBN, author’s name or course. Many students come to us for textbook rentals, and in our search results we
not only provide the relevant textbook, but also begin to build awareness of our other services. For instance,
when a student searches for a textbook, we can also expose that student to relevant Chegg Study solutions
and available Chegg Tutors that are knowledgeable about the searched textbook.
Data Sourcing and Graph Technology. Not all information relevant to students on our platform is made available
by service, product, list or user-input. Therefore, we have developed proprietary technologies to collect disparate,
distributed sets of data. For example, we access data from public and private sources to integrate into our platform
to inform our decisions about our textbook catalog and pricing.
Mobile Solutions. We have mobile applications on Apple iOS and Google Android. Our mobile apps are built as
hybrid applications leveraging the Chegg application programming interface (API) and server-side HTML5. We
also maintain a mobile version of our website: m.chegg.com. Taking advantage of capabilities unique to the mobile
platform, we offer some functionality on mobile that is not available on our website, such as textbook barcode
scanning for price comparisons and Chegg Flashcards.
Content Conversion Platform. We have developed a proprietary set of technologies that ingests each publisher’s
unique source files and creates HTML5-based documents. The web-based eTextbook Reader we utilize, which is
embedded with digital rights management, allows us to provide our content across technology platforms, have a
deep understanding of how content is consumed and deliver content securely.
Real-time Sourcing and Pricing Technologies. We have internally developed proprietary pricing and sourcing
systems which consider market price, content selection and availability, and other factors, in determining price and
origin of content and services we offer to students.
Programmatic Advertising. With our acquisition of Imagine Easy, we acquired programmatic advertising
technology under the brand StudyBreak Media (SBM). Through SBM, we combine a deep understanding of
programmatic technology trends with data science, engineering and machine learning. The result is a mediation
platform that blends with our direct sales force to maximize the value of the digital impressions we serve.
Infrastructure. Our technology resides at a major cloud-hosting provider divided between the U.S. West Coast and
U.S. East Coast. We use one region for our test/development/stage/failover environment and the other for our
production environment. The architecture is also designed to allow for expansion into new international markets.
Network Security. Our platform includes encryption, antivirus, firewall and patch-management technologies to
help protect our systems distributed across cloud-hosting providers and our business offices.
6
Internal Management Systems. We rely on third-party technology solutions and products as well as internally
developed and proprietary systems, in which we have made substantial investment, to provide rapid, high-quality
customer service, internal communication, software development, deployment, and maintenance.
Our technology and development expenses were $81.9 million, $66.3 million and $59.4 million for the years ended
December 31, 2017, 2016 and 2015, respectively. For more information about our technology and development expenses, see
Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Years Ended
December 31, 2017, 2016 and 2015 - Technology and Development.”
Customers
In 2017, 4.2 million individuals paid for our products and services, up from approximately 3.5 million and 3.1 million
in 2016 and 2015, respectively.
Sales and Marketing
Students
We use several major direct marketing channels to reach students. We deploy search engine optimization (SEO)
techniques designed to increase the visibility of Chegg.com content in organic, unpaid search engine result listings. We
supplement our SEO efforts through search engine marketing using keyword simulation and bid management tools to analyze
and categorize search keywords, optimize bidding, increase impressions and drive conversion. We also drive brand awareness
through the use of streaming radio and display advertising on major online and mobile advertising networks, such as Google
Display Network. We integrate our textbook services on affiliates’ websites and work with a large advertising network that
recruits individual online affiliates in exchange for pre-determined revenue share or commissions. We utilize three types of
email marketing campaigns: onboarding programs to drive activation and retention, personalized cross-sell campaigns to
deepen engagement, and promotional campaigns to drive sales and interests. We use social media to manage organic and paid
programs across top websites, including Facebook, Instagram, Twitter and YouTube. We also acquire and engage students
through content generated by student bloggers, syndicated through partners, around key student concerns and interests such as
admissions, transition to college, picking a major, and resume preparation. Through our campus activation programs, we
partner with brands and influencers to bring entertainment events, such as concerts, trial promotions, and product giveaways to
students.
Colleges and Brands
We secure contracts with brands through direct sales by our field sales organization, which sells brand advertising
services to large brand advertisers and advertising agencies seeking to reach and engage college and high school students. This
team has field sales people and inside client success managers as well as operations and marketing support. In January 2017,
we signed a strategic alliance agreement with NRCCUA. Under this agreement, we provide fulfillment services for digital
targeting products which NRCCUA sells to colleges and universities.
Student Advocacy
We are committed to providing a high level of customer service to our students. We trust our students, understand the
critical role our products and services have in their education, and strive to resolve all problems quickly and thoroughly. Our
student advocacy team can be reached directly through phone, email, and online chat during business hours. We also
proactively monitor social media to identify and solve problems before we are otherwise informed of their existence. We
endeavor to respond to students’ concerns within five minutes.
Competition
While we do not have any competitors that compete with us across our business in its entirety, we face significant
competition in each aspect of our business. The actual and potential competition in each of our primary areas of operations is
described below.
Products and Services for Students. Our Chegg Services face competition from different businesses depending
on the offering. For Chegg Study, our competitors primarily include publishers that provide study materials and
7
online instructional systems. Additionally, we face competition from free services such as Yahoo! Answers and
Brain.ly for our Expert Answers service. For our Chegg Writing service, we primarily face competition from
other citation generating services such as Noodle Tools. For our Chegg Tutors services, we face competition from
other online tutoring services such as Wyzant, Tutors.com and Varsity Tutors. The market for textbooks and
supplemental materials is intensely competitive and subject to rapid change. We face competition from college
bookstores, some of which are operated by Follett and Barnes & Noble Education, online marketplaces such as
Amazon.com and providers of eTextbooks such as Apple iTunes and Blackboard, as well as various private
textbook rental websites. Many students purchase from multiple textbook providers, are highly price sensitive and
can easily shift spending from one provider or format to another. As a consequence, our Required Materials
product line, which includes eTextbooks, competes primarily on price and further on selection and functionality
and compatibility of the eTextbook Reader we utilize across a wide variety of desktop and mobile devices.
Brands Advertising. With respect to brands, we compete with online and offline outlets that generate revenues
from advertisers and marketers, especially those that target high school and college students. In this area, we seek
to partner with brands that have offerings that will interest or delight students and have received very positive
comments and feedback from students on these offerings. We provide these brands with preferential access to our
audience, which we believe represents a highly engaged portion of the target demographic of our brand partners.
We believe that we have competitive strengths, some of which are discussed above, that position us favorably in each
aspect of our business. However, the education industry is evolving rapidly and is increasingly competitive. A variety of
business models are being pursued or may be considered for the provision of digital learning tools, print textbooks and
eTextbooks, some of which may be more profitable or successful than our business model.
Intellectual Property
We use proprietary technology to operate our business and our success depends, in part, on our ability to protect our
technology and intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as
contractual restrictions, to establish and protect our intellectual property. We maintain a policy requiring our employees,
contractors, consultants and other third parties to enter into confidentiality and proprietary rights agreements to control access
to our proprietary information. These laws, procedures and restrictions provide only limited protection and any of our
intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of
certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain
jurisdictions, we may be unable to protect our proprietary technology.
As of December 31, 2017, we had 20 patents which will expire between 2032 and 2037 and 18 patent applications
pending in the United States. We own three U.S. copyrights registrations and have unregistered copyrights in our software
documentation, marketing materials and website content that we develop. We own the registered U.S. trademarks “Chegg,”
“Chegg.com,” “Chegg Study,” “Chegg for Good,” “Student Hub,” “internships.com,” “Research Ready,” “EasyBib” and
“#1 In Textbook Rentals,” among others as well as a variety of service marks. As of December 31, 2017, we owned over 600
registered domain names. We also have a number of pending trademark applications in the United States and foreign
jurisdictions and unregistered marks that we use to promote our brand. From time to time we expect to file additional patent,
copyright and trademark applications in the United States and abroad.
Government Regulation
We are subject to a number of laws and regulations that affect companies conducting business on the Internet and in
the education industry, many of which are still evolving and could be interpreted in ways that could harm our business. The
manner in which existing laws and regulations will be applied to the Internet and students in general and how they will relate to
our business in particular, are often unclear. For example, we often cannot be certain how existing laws will apply in the e-
commerce and online context, including with respect to such topics as privacy, defamation, pricing, credit card fraud,
advertising, taxation, sweepstakes, promotions, content regulation, financial aid, scholarships, student matriculation and
recruitment, quality of products and services and intellectual property ownership and infringement.
Numerous laws and regulatory schemes have been adopted at the national and state level in the United States, and in
some cases internationally, that have a direct impact on our business and operations. For example:
The CAN-SPAM Act of 2003 and similar laws adopted by a number of states, regulate unsolicited commercial
emails, create criminal penalties for emails containing fraudulent headers and control other abusive online
8
marketing practices. Similarly, the U.S. Federal Trade Commission (FTC) has guidelines that impose
responsibilities on us with respect to communications with consumers and impose fines and liability for failure
to comply with rules with respect to advertising or marketing practices they may deem misleading or deceptive.
The Telephone Consumer Protection Act of 1991 (TCPA) restricts telemarketing and the use of automated
telephone equipment. The TCPA limits the use of automatic dialing systems, artificial or prerecorded voice
messages, SMS text messages and fax machines. It also applies to unsolicited text messages advertising the
commercial availability of goods or services. Additionally, a number of states have enacted statutes that address
telemarketing. For example, some states, such as California, Illinois and New York, have created do-not-call
lists. Other states, such as Oregon and Washington, have enacted “no rebuttal statutes” that require the
telemarketer to end the call when the consumer indicates that he or she is not interested in the product being
sold. Restrictions on telephone marketing, including calls and text messages, are enforced by the FTC, the
Federal Communications Commission, states and through the availability of statutory damages and class action
lawsuits for violations of the TCPA.
The Credit Card Accountability Responsibility and Disclosure Act of 2009, or CARD Act, and similar laws and
regulations adopted by a number of states regulate credit card and gift certificate use fairness, including
expiration dates and fees. Our business also requires that we comply with payment card industry data security
and other standards. In particular, we are subject to payment card association operating rules, certification
requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it
difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data
security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines
and higher transaction fees and lose our ability to accept credit and debit card payments from our customers,
process electronic funds transfers or facilitate other types of online payments, and our business and operating
results could be adversely affected.
Regulations related to the Program Participation Agreement of the U.S. Department of Education and other
similar laws and regulate the recruitment of students to colleges and other institutions of higher learning.
The Children’s Online Privacy Protection Act imposes additional restrictions on the ability of online services to
collect information from minors. In addition, certain states, including Utah and Massachusetts, have laws that
impose criminal penalties on the production and distribution of content that is “harmful to a minor.”
The Digital Millennium Copyright Act (DMCA) provides relief for claims of circumvention of copyright
protected technologies and includes a safe harbor intended to reduce the liability of online service providers for
hosting, listing or linking to third-party content that infringes copyrights of others.
The Communications Decency Act provides that online service providers will not be considered the publisher or
speaker of content provided by others, such as individuals who post content on an online service provider’s
website.
Employees
As of December 31, 2017, we had 893 full-time employees. We also engage temporary, seasonal employees and
consultants. None of our employees are represented by labor unions or covered by a collective bargaining agreement. We have
not experienced any work stoppages and we consider our relations with our employees to be good.
Seasonality
Information about seasonality is set forth in the section “Seasonality of Our Business” in Part II, Item 7 of this Annual
Report on Form 10-K.
Information about Segment and Geographic Revenues
Information about segment and geographic revenues is set forth in Note 18 of the Notes to Consolidated Financial
Statements included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on
Form 10-K.
9
Corporate History
We were incorporated in Delaware in July 2005. We launched our online print textbook rental business in 2007. We
hired our current Chief Executive Officer in 2010, who implemented our current business strategy to create the leading direct-
to-student learning platform for students to help them improve their outcomes. Beginning in 2010, we made a series of strategic
acquisitions to expand our Chegg Services, including Cramster in 2010 to add Chegg Study, InstaEDU in 2014 to add Chegg
Tutors, internships.com in 2014 to add to our Internship service, Imagine Easy Solutions in 2016 to add our Chegg Writing
service and programmatic advertising, and Cogeon GmbH in 2017 to add what will become Chegg Math. We completed our
initial public offering (IPO) in November 2013 and follow-on offering in August 2017. Our common stock is listed on the New
York Stock Exchange under the symbol “CHGG.” Our principal executive offices are located at 3990 Freedom Circle, Santa
Clara, California 95054 and our telephone number is (408) 855-5700.
Available Information
Our website address is www.chegg.com and our Investor Relations website address is investor.chegg.com. Our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed
pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), are filed with the
U.S. Securities and Exchange Commission (SEC). We are subject to the informational requirements of the Exchange Act and
file or furnish reports, proxy statements, and other information with the SEC. Such reports and other information filed by the
Company with the SEC are available free of charge on our website at investor.chegg.com when such reports are available on
the SEC’s website. We use our www.chegg.com/mediacenter website as a means of disclosing material non-public information
and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor
www.chegg.com/mediacenter, in addition to following our press releases, SEC filings and public conference calls and
webcasts.
The public may read and copy any materials filed by Chegg with the SEC at the SEC’s Public Reference Room at 100
F Street, NE, Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
The contents of the websites referred to above are not incorporated into this filing. Further, our references to the URLs
for these websites are intended to be inactive textual references only.
ITEM 1A. RISK FACTORS
The risks and uncertainties set forth below, as well as other risks and uncertainties described elsewhere in this Annual
Report on Form 10-K including in our consolidated financial statements and related notes and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” or in other filings by Chegg with the SEC, could adversely affect
our business, financial condition, results of operations and the trading price of our common stock. Additional risks and
uncertainties that are not currently known to us or that are not currently believed by us to be material may also harm our
business operations and financial results. Because of the following risks and uncertainties, as well as other factors affecting our
financial condition and operating results, past financial performance should not be considered to be a reliable indicator of
future performance, and investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to Our Business and Industry
Our limited operating history, recent business model transition and evolving digital offerings make it difficult to evaluate
our current business and future prospects.
Although we began our operations in July 2005, we did not launch our online print textbook rental business until 2007
or begin generating revenues at scale from print textbook rentals until 2010. We began transitioning to a new model for our
Required Materials product line in August 2014 through our strategic partnership with Ingram to accelerate our transition away
from the more capital intensive aspects of the print textbook rental business. We completed our transition to a fully digital
company as of November 2016 as Ingram now fulfills all print textbook rental orders. We continue to market, use our branding
and maintain the customer experience around print textbook rentals, while Ingram or other partners fund all rental textbook
inventory and have title and risk of loss related to textbook rentals for the textbooks they own.
Since July 2010, we also have been focused on expanding our other offerings, in many instances through the
acquisition of other companies, to include supplemental materials, Chegg Study, Chegg Writing, Chegg Tutors, Chegg Test
10
Prep, College Admissions and Scholarship Services, internships, careers, college counseling and brand advertising. For
example, in August 2017, we entered into a partnership with Kaplan to provide their test preparation courses, practice products,
and books through our website. Our newer products and services, or any other products and services we may introduce or
acquire, may not be integrated effectively into our business, achieve or sustain profitability or achieve market acceptance at
levels sufficient to justify our investment.
Our ability to fully integrate new products and services into our learning platform or achieve satisfactory financial
results from them is unproven. Because we have a limited operating history, in particular operating a fully digital platform, and
the market for our products and services, including newly acquired or developed products and services, is rapidly evolving, it is
difficult for us to predict our operating results, particularly with respect to our newer offerings, and the ultimate size of the
market for our products and services. If the market for a learning platform does not develop as we expect, or if we fail to
address the needs of this market, our business will be harmed.
We face the risks, expenses and difficulties typically encountered by companies in their early stage of development,
including, but not limited to our ability to successfully:
•
•
•
•
•
•
•
•
•
•
•
•
•
execute on our relatively new and evolving business model;
develop new products and services, both independently and with developers or other third parties;
attract and retain students and increase their engagement with our learning platform and our mobile applications;
attract and retain brands, colleges, universities and other academic institutions to our marketing services;
manage the growth of our business, including increasing or unforeseen expenses;
develop and scale a high performance technology infrastructure to efficiently handle increased usage by students,
especially during peak periods prior to each academic term;
maintain and manage relationships with strategic partners, including Ingram, NRCCUA, and other distributors,
publishers, wholesalers, colleges and brands;
develop a profitable business model and pricing strategy;
compete with companies that offer similar services or products;
expand into adjacent markets;
navigate the ongoing evolution and uncertain application of regulatory requirements, such as privacy laws, to our
business, including our new products and services;
integrate and realize synergies from businesses that we acquire; and
expand into foreign markets.
We have encountered and will continue to encounter these risks and if we do not manage them successfully, our
business, financial condition, results of operations and prospects may be materially and adversely affected.
Our operating results are expected to be difficult to predict based on a number of factors.
We expect our operating results to fluctuate in the future based on a variety of factors, many of which are outside our
control and are difficult to predict. As a result, period-to-period comparisons of our operating results may not be a good
indicator of our future or long-term performance. The following factors may affect us from period-to-period and may affect our
long-term performance:
•
•
•
•
•
•
•
•
our ability to attract and retain students and increase their engagement with our learning platform and mobile
applications, particularly related to our Chegg Services subscribers;
the rate of adoption of our offerings;
our ability to successfully utilize the information gathered from our learning platform to enhance our Student
Graph and target sales of complementary products and services to our students;
changes in demand and pricing for print textbooks and eTextbooks; Ingram's ability to manage fulfillment
processes to handle significant volumes during peak periods and as a result of the potential growth in volume of
transactions over time; changes by our competitors to their product and service offerings;
price competition and our ability to react appropriately to such competition;
our ability and Ingram's ability to manage their textbook library;
our ability to execute on our strategic partnership with Ingram;
disruptions to our internal computer systems and our fulfillment information technology infrastructure,
particularly during peak periods; the amount and timing of operating costs and capital expenditures relating to
expansion of our business, operations and infrastructure;
11
•
•
•
our ability to successfully manage the integration of operations, technology and personnel resulting from our
acquisitions;
governmental regulation in particular regarding privacy and advertising and taxation policies; and
general macroeconomic conditions and economic conditions specific to higher education.
We have a history of losses and we may not achieve or sustain profitability in the future.
We have experienced significant net losses since our incorporation in July 2005, and we may continue to experience
net losses in the future. Our net losses for the years ended December 31, 2017, 2016 and 2015 were $20.3 million, $42.2
million and $59.2 million, respectively. As of December 31, 2017, we had an accumulated deficit of $391.6 million. We expect
to make significant investments in the development and expansion of our business and our cost of revenues and operating
expenses may increase. We may not succeed in increasing our revenues sufficiently to offset these higher expenses, and our
efforts to grow the business may prove more expensive than we currently anticipate. We may incur significant losses in the
future for a number of reasons, including slowing demand for print textbook rentals or our other products and services;
increasing competition, particularly for the price of textbooks; decreased spending on education; and other risks described in
this Annual Report on Form 10-K. We may encounter unforeseen expenses, challenges, complications and delays and other
unknown factors as we pursue our business plan and our business model continues to evolve. While Chegg Services revenues
have grown in recent periods, this growth may not be sustainable and we may not be able to achieve profitability. To achieve
profitability, we may need to change our operating infrastructure and scale our operations more efficiently. We also may need to
reduce our costs or implement changes in our product offerings to improve the predictability of our revenues. For example, we
recently transitioned substantially all of our print textbook rental revenues to commissions-based revenues. If we fail to
implement these changes on a timely basis or are unable to implement them due to factors beyond our control, our business
may suffer. If we do achieve profitability, we may not be able to sustain or increase such profitability.
We intend to offer new products and services to students to grow our business. If our efforts are not successful, our business
and financial results would be adversely affected.
Our ability to attract and retain students and increase their engagement with our learning platform depends on our
ability to connect them with the product, person or service they need to save time, save money, and get smarter. Part of our
strategy is to offer students new products and services in an increasingly relevant and personalized way. We may develop such
products and services independently, by acquisition or in conjunction with developers and other third parties. For example, in
2016, we acquired our Writing Tools service in the acquisition of Imagine Easy Solutions and in October 2017 we acquired
Math 42, in the acquisition of Cogeon, and we developed Chegg Test Prep internally, which we offer as a free service to
students. We recently partnered with Kaplan in August 2017, to provide their test preparation courses, practice products, and
books through our website. The markets for these new products and services may be unproven, and these products may include
technologies and business models with which we have little or no prior development or operating experience or may
significantly change our existing products and services. In addition, we may be unable to obtain long-term licenses from third-
party content providers necessary to allow a product or service, including a new or planned product or service, to function. If
our new or enhanced products and services fail to engage our students or attract new students, or if we are unable to obtain
content from third parties that students want, we may fail to grow our student base or generate sufficient revenues, operating
margin or other value to justify our investments, and our business would be adversely affected.
In the future, we may invest in new products and services and other initiatives to generate revenues, but there is no
guarantee these approaches will be successful. Acquisitions of new companies, products and services create integration risk,
while development of new products and services and enhancements to existing products and services involve significant time,
labor and expense and are subject to risks and challenges including managing the length of the development cycle, entry into
new markets, integration into our existing business, regulatory compliance, evolution in sales and marketing methods and
maintenance and protection of intellectual property and proprietary rights. If we are not successful with our new products and
services, we may not be able to maintain or increase our revenues as anticipated or recover any associated acquisition or
development costs, and our financial results could be adversely affected.
12
We may not realize the anticipated benefits of acquisitions, which could disrupt our business and harm our financial
condition and results of operations.
As part of our business strategy, we have made and intend to make acquisitions to add specialized employees,
complementary businesses, products, services, operations or technologies. Realizing the benefits of acquisitions depends, in
part, on our successful integration of acquired companies including their technologies, products, services, operations and
personnel in a timely and efficient manner. We may incur significant costs integrating acquired companies and if our integration
efforts are not successful we may not be able to offset our acquisition costs. Acquisitions involve many risks that may
negatively impact our financial condition and results of operations, including the risks that the acquisitions may:
•
•
•
•
require us to incur charges and substantial debt or liabilities;
cause adverse tax consequences, substantial depreciation or deferred compensation charges;
result in acquired in-process research and development expenses or in the future may require the amortization,
write-down or impairment of amounts related to deferred compensation, goodwill and other intangible assets;
and
give rise to various litigation risks, including the increased likelihood of litigation.
In addition:
•
•
•
•
•
•
•
we may not generate sufficient financial return to offset acquisition costs;
we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products,
services, operations and personnel of any company that we acquire, particularly if key personnel of the acquired
company decide not to work for us;
an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our
management;
an acquisition may delay adoption rates or reduce engagement rates for our products and services and those of
the company acquired by us due to student uncertainty about continuity and effectiveness of service from either
company;
we may encounter difficulties in, or may be unable to, successfully sell or otherwise monetize any acquired
products and services;
an acquisition may not ultimately be complementary to our evolving business model; and
an acquisition may involve the entry into geographic or business markets in which we have little or no prior
experience.
Acquired companies, businesses and assets can be complex and time consuming to integrate. For example, we recently
expanded into internships with the acquisition of internships.com in October 2014, into writing tools with the acquisition of
Imagine Easy Solutions in 2016, and math technology with the acquisition of Cogeon in 2017. We are currently in the process
of transitioning these users to the Chegg platform and integrating these brands into the Chegg platform. We may not
successfully transition these users to the Chegg platform.
Our ability to acquire and integrate larger or more complex businesses, products, services, operations or technologies
in a successful manner is unproven. We may not be able to find suitable acquisition candidates, and we may not be able to
complete acquisitions on favorable terms, if at all. To finance any future acquisitions we may issue equity, which could be
dilutive, or debt, which could be costly, potentially dilutive, and require substantial restrictions on the conduct of our business.
If we fail to successfully complete any acquisitions, integrate the services, products, personnel, operations or technologies
associated with such acquisitions into our company, or identify and address liabilities associated with the acquired business or
assets, our business, revenues and operating results could be adversely affected. Any future acquisitions we complete may not
achieve our goals.
We operate in a rapidly changing market and we have recently transitioned our business model to a fully digital business. If
we do not successfully adapt to known or unforeseen market developments, our business may be harmed.
The market for our learning platform is still unproven and rapidly changing. Historically, we generated the majority of
our revenues from print textbook rental, which is highly capital intensive and presents both business planning and logistical
challenges that are complex. To reduce our investment in the highly capital intensive nature of print textbook rentals, we
entered into a partnership with Ingram wherein Ingram makes all new investments in the rental library of print textbooks, taking
title and risk of loss for the books, and provides logistical and fulfillment services for the print textbooks that we rent and sell.
The partnership allows us to market, use our branding and maintain the customer experience around print textbook rentals,
while reducing our investments in print textbook inventory, fulfillment and logistics operations. As a result of this change, we
13
stopped making additional investments in our print textbook library beginning in May 2015 and we liquidated our remaining
inventory of print textbooks during the first quarter of 2017 and have now fully transitioned these aspects of our print textbook
offerings to Ingram. Our partnership with Ingram is non-exclusive and subject to significant risks, including Ingram's ability to
acquire textbooks and manage logistical and fulfillment activities for us, our ability to create a successful and profitable
partnership, and that we or Ingram may elect to terminate the partnership sooner than anticipated.
We have added and plan to continue to add new offerings to our learning platform, including, for example, writing and
math tools, to diversify our sources of revenues, which will require us to make substantial investments in the products and
services we develop or acquire. New offerings may not achieve market success at levels that recover our investment or
contribute to profitability. Because these offerings are not as capital intensive as our print textbook rental service, the barriers to
entry for existing and future competitors may be lower and allow for even more rapid changes to the market. Furthermore, the
market for these other products and services is relatively new and may not develop as we expect. If the market for our offerings
does not develop as we expect, or if we fail to address the needs of this market, our business may be harmed. We may not be
successful in executing on our evolving business model, and if we cannot provide an increasing number of products and
services that students, colleges and brands find compelling, we will not be able to continue our recent growth and increase our
revenues, margins and profitability. For all of these reasons, the evolution of our business model is ongoing and the future
revenues and income potential of our offerings is uncertain.
If our efforts to attract new students to use our products and services and increase student engagement with our learning
platform are not successful, our business will be adversely affected.
The growth of our business depends on our ability to attract new students to use our products and services and to
increase the level of engagement by existing students with our learning platform. The substantial majority of our revenues
depends on small transactions made by a widely dispersed student population with an inherently high rate of turnover primarily
as a result of graduation. Many of the students we desire to attract are accustomed to obtaining textbooks through bookstores or
used booksellers. The rate at which we expand our student user base and increase student engagement with our learning
platform may decline or fluctuate because of several factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
our ability to engage high school students with our Chegg Writing, Chegg Tutors, Chegg Test Prep and College
Admissions and Scholarship Services;
our ability to produce compelling supplemental materials and services for students to improve their outcomes
throughout their educational journey;
our ability to produce engaging mobile applications and websites for students to engage with our learning
platform;
our ability and Ingram's ability to consistently provide students with a convenient, high quality experience for
selecting, receiving and returning print textbooks;
our ability and Ingram's ability to accurately forecast and respond to student demand for print textbooks;
the pricing of our physical textbooks and eTextbooks for rental or sale in relation to other alternatives, including
the prices offered by publishers or by other competing textbook rental providers;
the quality and prices of our offerings compared to those of our competitors;
the rate of adoption of eTextbooks and our ability to capture a significant share of that market;
changes in student spending levels;
changes in the number of students attending college;
the effectiveness of our sales and marketing efforts; and
our ability to introduce new products and services that are favorably received by students.
If we do not attract more students to our learning platform and the products and services that we offer or if students do
not increase their level of engagement with our platform, our revenues may grow more slowly than expected or decline. Many
students use our print textbook service as a result of word-of-mouth advertising and referrals from students who have used this
service in the past. If our efforts to satisfy our existing student user base are not successful, we may not be able to attract new
students and, as a result, our business will be adversely affected.
Our future revenues depend on our ability to continue to attract new students from a high school and college student
population that has an inherently high rate of turnover primarily due to graduation, requiring us to invest continuously in
marketing to the student population to build brand awareness and loyalty, which we may not be able to accomplish on a
cost-effective basis or at all.
We are dependent on the acquisition of new students from a high school and college student population that has an
inherently high rate of turnover primarily due to graduation. Most incoming college students will not have previously used
14
products and services like the ones we provide which are geared towards the college market. We rely heavily on word-of-mouth
and other marketing channels, including online advertising, search engine marketing and social media. The student
demographic is characterized by rapidly changing tastes, preferences, behavior, and brand loyalty. Developing an enduring
business model to serve this population is particularly challenging. Our ability to attract new students depends not only on
investment in our brand and our marketing efforts, but also on the perceived value of our products and services versus
competing alternatives among our extremely price conscious student user base. If our marketing initiatives are not successful or
become less effective, or if the cost of such initiatives were to significantly increase, we may not be able to attract new students
as successfully or efficiently and, as a result, our revenues and results of operations would be adversely affected. Even if our
marketing initiatives succeed in establishing brand awareness and loyalty, we may be unable to maintain and grow our student
user base if our competitors, some of whom are substantially larger and have greater financial resources, adopt aggressive
pricing strategies to compete against us. If we are unable to offer competitive prices for our products and services fewer
students may use our learning platform, products or services.
If we are not able to manage the growth of our business both in terms of scale and complexity, our operating results and
financial condition could be adversely affected.
We have expanded rapidly since we launched our online print textbook rental service in 2007. We anticipate further
expanding our operations to offer additional products, services and content to help grow our student user base and to take
advantage of favorable market opportunities. As we grow, our operations and the technology infrastructure we use to manage
and account for our operations will become more complex, and managing these aspects of our business will become more
challenging. Any future expansion will likely place significant demands on our resources, capabilities and systems, and we may
need to develop new processes and procedures and expand the size of our infrastructure to respond to these demands. If we are
not able to respond effectively to new and increasingly complex demands that arise because of the growth of our business, or, if
in responding to such demands, our management is materially distracted from our current operations, our operating results and
financial condition may be adversely affected.
If our efforts to build a strong brand are not successful, we may not be able to grow our student user base, which could
adversely affect our operating results.
We believe our brand is a key asset of our business. Developing, protecting and enhancing the “Chegg” brand is
critical to our ability to expand our student user base and increase student engagement with our learning platform. A strong
brand also helps to counteract the significant student turnover we experience from year to year as students graduate and
differentiates us from our competitors.
To succeed in our efforts to strengthen our brand identity, we must, among other activities:
•
•
•
•
•
•
•
•
•
•
•
•
maintain our reputation as a trusted source of content, services and textbooks for students;
maintain the quality of and improve our existing products, services and technologies;
maintain and control the quality of our brand while Ingram handles our textbook fulfillment logistics;
introduce products and services that are favorably received;
adapt to changing technologies, including developing and enhancing compelling mobile offerings for our
learning platform;
adapt to students’ rapidly changing tastes, preferences, behavior and brand loyalties;
protect our students’ data, such as passwords and personally identifiable information;
protect our trademark and other intellectual property rights;
continue to expand our reach to students in high school, graduate school and internationally;
ensure that the content posted to our website by students is reliable and does not infringe on third-party
copyrights or violate other applicable laws, our terms of use or the ethical codes of those students’ colleges;
adequately address students’ concerns with our products and services; and
convert and fully integrate the brands and students that we acquire, including Math 42, Imagine Easy Solutions
and internships.com, into the Chegg brand and Chegg.com.
Our ability to successfully achieve these goals is not entirely within our control and we may not be able to maintain the
strength of our brand or do so in a cost-effective manner. Factors that could negatively affect our brand include:
•
•
changes in student sentiment about the quality or usefulness of our learning platform and our products and
services;
problems that prevent Ingram from delivering textbooks reliably or timely;
15
•
•
•
•
•
•
technical or other problems that prevent us from providing our products and services reliably or otherwise
negatively affect the student experience on our website or our mobile application;
concern from colleges about the ways students use our content offerings, such as our Expert Answers service;
brand conflict between acquired brands and the Chegg brand;
student concerns related to privacy and the way in which we use student data as part of our products and services;
the reputation or products and services of competitive companies; and
students’ misuse of our products and services in ways that violate our terms of services, applicable laws or the
code of conduct at their colleges.
If Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, student
engagement with our website could decline.
We depend in part on various Internet search engines, such as Google, Bing and Yahoo!, to direct a significant amount
of traffic to our website. Similarly, we depend on mobile app stores such as iTunes and Google Play to allow students to locate
and download Chegg mobile applications that enable our service. Our ability to maintain the number of students directed to our
website is not entirely within our control. Our competitors’ search engine optimization (SEO) efforts may result in their
websites receiving a higher search result page ranking than ours, or Internet search engines could revise their methodologies in
an attempt to improve their search results, which could adversely affect the placement of our search result page ranking. If
search engine companies modify their search algorithms in ways that are detrimental to our search result page ranking or in
ways that make it harder for students to find our website, or if our competitors’ SEO efforts are more successful than ours,
overall growth could slow, student engagement could decrease, and fewer students may use our platform. These modifications
may be prompted by search engine companies entering the online networking market or aligning with competitors. Our website
has experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any
reduction in the number of students directed to our website could harm our business and operating results.
Any significant disruption, including those related to cybersecurity or arising from cyber-attacks, to our computer systems,
especially during peak periods, could result in a loss of students, colleges and/or brands which could harm our business,
results of operations and financial condition.
We rely on computer systems housed in six facilities, three located on the East Coast and three located on the West
Coast, to manage our operations. We have experienced and expect to continue to experience periodic service interruptions and
delays involving our systems. While we maintain a fail-over capability that would allow us to switch our operations from one
facility to another in the event of a service outage, that process would still result in service interruptions that could be
significant in duration. These service interruptions could have a disproportionate effect on our operations if they were to occur
during one of our peak periods. Our facilities are vulnerable to damage or interruption from earthquakes, floods, fires, power
loss, telecommunications failures and similar events.
Our facilities and information systems also are subject to break-ins, sabotage, intentional acts of vandalism,
cybersecurity risks including cyber-attacks such as computer viruses and denial of service attacks, the failure of physical,
administrative and technical security measures, terrorist acts, natural disasters, human error, the financial insolvency of our
third-party vendors, and other unanticipated problems or events. These information systems periodically experience directed
attacks intended to lead to interruptions and delays in our operations as well as loss, misuse or theft of data. We have
implemented physical, technical and administrative safeguards to protect our systems. To date, unauthorized users have not had
a material effect on our systems; however, there can be no assurance that attacks will not be successful in the future. In addition,
our information systems must be constantly updated, patched, and upgraded to protect against known vulnerabilities and
optimize performance. Material disruptions or slowdown of our systems, including a disruption or slowdown could occur if we
are unable to successfully update, patch and upgrade our systems. For instance, in December 2017, researchers identified
significant CPU architecture vulnerabilities commonly known as “Spectre” and “Meltdown” that have affected both private and
public cloud services, including AWS, that have required software updates and patches to mitigate such vulnerabilities and such
updates and patches have required servers to be offline and potentially slow their performance.
We also rely on Internet systems and infrastructure to operate our business and provide our services. The information
systems used by our third-party service providers and the Internet generally are vulnerable to these risks as well. In particular,
we are heavily reliant on SaaS enterprise resource planning systems to conduct our e-commerce and financial transactions and
reporting. In addition, we utilize third-party cloud computing services in connection with our business operations. Problems
faced by us or our third-party hosting/cloud computing providers, or interruptions in our own systems or in the infrastructure of
the Internet, including technological or business-related disruptions, as well as cybersecurity threats, could hinder our ability to
operate our business, damage our reputation or brand and result in a loss of students, colleges or brands which could harm our
business, results of operations and financial condition.
16
Difficulties that could arise from our partnership with Ingram and other partners may have an adverse effect on our
business and results of operations.
We rely on Ingram to make new investments in the print textbook library and fulfill print textbook rental and sales
orders. We purchase used print textbooks on Ingram’s behalf, including books through our buyback program, and invoice
Ingram at cost. As we no longer own print textbooks, we have become increasingly committed to this strategic partnership. If
our continuing partnership with Ingram is interrupted or if Ingram experiences disruptions in its business or is not able to
perform as anticipated, Ingram may not be able to reimburse us for the books we have procured on its behalf or we may
experience operational difficulties, an inability to fulfill print textbook orders, increased costs and a loss of business, as well as
a greater than expected deployment of capital for textbook acquisition, that may have a material adverse effect on our business,
results of operations and financial condition. Furthermore, if we are unable to achieve the financial return targets set forth in our
agreement with Ingram, we could be required to make additional payments to Ingram which could adversely affect our results
of operations. Our strategic partnership with Ingram expires on May 20, 2020, subject to the early termination rights of the
parties.
In addition to our strategic partnership with Ingram, we have entered into agreements with other partners to provide their
textbooks for rental or sale through our website for which Ingram provides logistics and fulfillment for all print textbook rental
or sale orders. We have also entered into partnerships with NRCCUA to become the exclusive reseller of our digital enrollment
marketing services and with Kaplan to provide students with an online adaptive test preparation service. If we are unable to
enter into or renew our agreements with our partners or if any of our partners perform significantly below our expectations, we
may experience a material adverse effect on our business, results of operations and financial condition.
Ingram purchases, and we price, textbooks based on anticipated levels of demand and other factors that we estimate based
on historical experience and various other assumptions. If actual results differ materially from our estimates, our gross
margins may decline.
The print textbook rental distribution model requires our fulfillment partner, Ingram, to make substantial investments
in its print textbook library based on our expectations regarding numerous factors, including ongoing demand for these titles in
print form. To realize a return on its investments, we must rent each purchased textbook multiple times, and as such, we are
exposed to the risk of not achieving financial return targets set forth in our agreement with Ingram, which could result in
additional payments to Ingram and adversely affect our results of operations. We typically plan the textbook purchases based on
factors such as pricing, our demand forecast for the most popular titles, estimated timing of edition changes, estimated
utilization levels and planned liquidations of stale, old or excess titles in the print textbook library. These factors are highly
unpredictable and can fluctuate substantially, especially if pricing pressure becomes more intense, as we have seen in recent
rush cycles, or demand is reduced due to seasonality or other factors, including increased use of eTextbooks. We rely on a
proprietary model to analyze and optimize the purchasing decisions and rely on inputs from third parties including publishers,
distributors, wholesalers and colleges to make our decisions. We also rely on students to return print textbooks to Ingram in a
timely manner and in good condition so that the print textbooks can be re-rented or sold. If the information we receive from
third parties is not accurate or reliable, if students fail to return books or return damaged books, or if we for any other reason
forecast demand inaccurately and cause Ingram to acquire insufficient copies of specific textbooks, we may be unable to satisfy
student demand or we may have to incur significantly increased costs in order to do so, in which event our student satisfaction
and results of operations could be affected adversely. Conversely, if we attempt to mitigate this risk and cause Ingram to acquire
more copies than needed to satisfy student demand, then our textbook utilization rates would decline and we may be required to
make additional payments to Ingram and our gross margins would be affected adversely.
When deciding whether to offer a textbook for rent and the price we charge for that rental, we also must weigh a
variety of factors and assumptions and if our judgments or assumptions are incorrect, our gross margins may be adversely
affected. Certain textbooks cost more to acquire depending on the source from which they are acquired and the terms on which
they are acquired. We must factor in some projection of the number of rentals we will be able to achieve with such textbooks
and at what rental price, among other factors, to determine whether we believe it will be profitable to cause Ingram to acquire
such textbooks and for us to offer them for rent. If the textbooks Ingram acquires are lost, determined to be unauthorized copies,
or damaged prematurely, Ingram may not be able to recover its costs or generate revenues on those textbooks. If we are unable
to effectively make decisions about whether to cause Ingram to acquire textbooks and the price we charge to rent those
textbooks, including if the assumptions upon which our decisions are made prove to be inaccurate, our gross margins may
decline significantly and if, as a result, we are unable to achieve the financial return targets set forth in our agreement with
Ingram, we could be required to make additional payments to Ingram which could adversely affect our results of operations.
17
If Ingram's relationships with the shipping providers that deliver textbooks directly to our students are terminated or
impaired, if shipping costs increase or if these vendors are unable to timely deliver textbooks to our students, our business
and results of operations could be substantially harmed.
Ingram predominantly relies on UPS to deliver textbooks from its textbook warehouse and to return textbooks to
Ingram from our students. To a lesser extent Ingram relies on FedEx for delivery of print textbook rentals and on publishers,
distributors and wholesalers to fulfill a certain portion of textbook sales orders and liquidations. As a result, our business could
be subject to carrier disruptions and increased costs due to factors that are beyond our control, including labor difficulties,
inclement weather, increased fuel costs and other rising costs of transportation and terrorist activity. If UPS were to limit its
services or delivery areas, such as by the discontinuation of Saturday delivery service, Ingram's ability to timely deliver
textbooks could diminish, and our student satisfaction could be adversely affected. If Ingram's relationships with its shipping
vendors are terminated or impaired or if Ingram's shipping vendors are unable to deliver merchandise for us, Ingram would be
required to rely on alternative carriers for delivery and return shipments of textbooks to and from students. Ingram may be
unable to sufficiently engage alternative carriers on a timely basis or on terms favorable to them, if at all. If textbooks are not
delivered on time to students, they could become dissatisfied and discontinue their use of our service, which could adversely
affect our operating results.
We rely on third-party software and service providers, including Amazon Web Services (AWS), to provide systems, storage
and services for our website. Any failure or interruption experienced by such third parties could result in the inability of
students to use our products and services, result in a loss of revenues and harm our reputation.
We rely on third-party software and service providers, including AWS, to provide systems, storage and services,
including user log in authentication, for our website. Any technical problem with, cyber-attack on, or loss of access to such third
parties’ systems, servers or technologies could result in the inability of our students to rent or purchase print textbooks, interfere
with access to our digital content and other online products and services or result in the theft of end-user personal information.
Our reliance on AWS makes us vulnerable to any errors, interruptions, or delays in their operations. Any disruption in
the services provided by AWS could harm our reputation or brand or cause us to lose students or revenues or incur substantial
recovery costs and distract management from operating our business. For instance, in February 2017, AWS experienced a
widespread outage for half a business day, when during such time our learning platform was unavailable. Additionally, in
December 2017, researchers identified significant CPU architecture vulnerabilities commonly known as “Spectre” and
“Meltdown” that have affected both private and public cloud services, including AWS, that have required software updates and
patches to mitigate such vulnerabilities and such updates and patches have required servers to be offline and potentially slow
their performance.
AWS may terminate its agreement with us upon 30 days' notice. Upon expiration or termination of our agreement with
AWS, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including
service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to
operational delays and inefficiencies until the transition is complete.
Increased activity during peak periods places substantially increased strain on our operations and any failure to deliver our
products and services during these periods will have an adverse effect on student satisfaction and our revenues.
We historically experience a disproportionate amount of activity on our website at the beginning of each academic
term as students search our textbook catalog and place orders for course materials. If too many students access our website
within a short period of time due to increased demand, we may experience system interruptions that make our website
unavailable, slowed or prevent Ingram from efficiently fulfilling rental orders, which may reduce the volume of textbooks we
are able to rent or sell and may also impact our ability to sell marketing services to colleges and brands. In addition, during peak
periods, we utilize, and Ingram utilizes, independent contractors and temporary personnel to supplement the workforce
primarily in our student advocacy organizations and in Ingram's warehouses. Competition for qualified personnel has
historically been intense, and we or Ingram may be unable to adequately staff our student advocacy organizations or Ingram's
warehouses during these peak periods. Any understaffing could lead to an increase in both the amount of time required to ship
textbooks, which could lead to student dissatisfaction, and increase the amount of time required to process a rental return,
which could result in an inability to achieve the financial return targets set forth in our agreement with Ingram. Moreover, UPS
and FedEx, the third-party carriers that Ingram primarily relies on to deliver textbooks to students, and publishers, wholesalers
and distributors that ship directly to our students may be unable to meet our shipping and delivery requirements during peak
periods, especially during inclement weather. Any such disruptions to our business could cause our customers to be dissatisfied
with our products and services and have an adverse effect on our revenues.
18
Computer malware, viruses, hacking, phishing attacks and spamming could harm our business and results of operations.
Computer malware, viruses, physical or electronic break-ins and similar disruptions could lead to interruptions and
delays in our services and operations and loss, misuse or theft of data. For instance, in December 2017, researchers identified
significant CPU architecture vulnerabilities commonly known as “Spectre” and “Meltdown” that allow malicious programs to
gain access to data. While chip makers and companies that provide widely used operating systems have released patches and
updates, this process is still ongoing. Computer malware, viruses, computer hacking and phishing attacks against online
networking platforms have become more prevalent and may occur on our systems in the future. We believe that we could be a
target for such attacks because of the incidence of hacking among students.
Any attempts by hackers to disrupt our website service or our internal systems, if successful, could harm our business,
be expensive to remedy and damage our reputation or brand. Our network security business disruption insurance may not be
sufficient to cover significant expenses and losses related to direct attacks on our website or internal systems. Efforts to prevent
hackers from entering our computer systems are expensive to implement and may limit the functionality of our services.
Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to
maintain performance, reliability, security and availability of our products and services and technical infrastructure may harm
our reputation, brand and our ability to attract students to our website. Any significant disruption to our website or internal
computer systems could result in a loss of students, colleges or brands and, particularly if disruptions occur during the peak
periods at the beginning of each academic term, could adversely affect our business and results of operations.
We rely heavily on our proprietary technology to process deliveries and returns of the textbooks and to manage other aspects
of our operations. The failure of this technology to operate effectively, particularly during peak periods, could adversely
affect our ability to retain and attract student users.
We use complex proprietary software to process deliveries and returns of the textbooks and to manage other aspects of
our operations, including systems to consider the market price for textbooks, general availability of textbook titles and other
factors to determine how to buy textbooks and set prices for textbooks and other content in real time. We rely on the expertise
of our engineering and software development teams to maintain and enhance the software used for our distribution operations.
We cannot be sure that the maintenance and enhancements we make to our distribution operations will achieve the intended
results or otherwise be of value to students. If we are unable to maintain and enhance our technology to manage the shipping
and return of textbooks in a timely and efficient manner, particularly during peak periods, our ability to retain existing students
and to add new students may be impaired.
We may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure that our
learning platform is accessible and delivers a satisfactory user experience to students.
It is important to our success that students be able to access our learning platform at all times. We have previously
experienced, and may in the future experience, service disruptions, outages and other performance problems due to a variety of
factors, including infrastructure changes, third-party service providers, human or software errors and capacity constraints due to
an overwhelming number of students accessing our platform simultaneously. If our learning platform is unavailable when
students attempt to access it or it does not load as quickly as they expect, students may seek other services to obtain the
information for which they are looking and may not return to our platform as often in the future, or at all. This would negatively
impact our ability to attract students and brands and the frequency with which they use our website and mobile applications.
Our platform functions on software that is highly technical and complex and may now or in the future contain
undetected errors, bugs, or vulnerabilities. Some errors in our software code may only be discovered after the code has been
deployed. Any errors, bugs, or vulnerabilities discovered in our code after deployment, inability to identify the cause or causes
of performance problems within an acceptable period of time or difficultly maintaining and improving the performance of our
platform, particularly during peak usage times, could result in damage to our reputation or brand, loss of students, colleges and
brands, loss of revenues, or liability for damages, any of which could adversely affect our business and financial results.
We expect to continue to make significant investments to maintain and improve the availability of our platform and to
enable rapid releases of new features and products. To the extent that we do not effectively address capacity constraints,
upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and
anticipated changes in technology, our business and operating results may be harmed.
We have a disaster recovery program to transition our operating platform and data to a failover location in the event of
a catastrophe and have tested this capability under controlled circumstances, however, there are several factors ranging from
human error to data corruption that could materially lengthen the time our platform is partially or fully unavailable to our
19
student user base as a result of the transition. If our platform is unavailable for a significant period of time as a result of such a
transition, especially during peak periods, we could suffer damage to our reputation or brand, loss of students, colleges and
brands or loss of revenues any of which could adversely affect our business and financial results.
Our reputation and relationships with students and tutors would be harmed if our users’ data, particularly billing data, were
to be accessed by unauthorized persons.
We maintain personal data regarding students and tutors who use our platform, including names and, in many cases,
mailing addresses, and, in the case of tutors, information necessary for payment and tax filings. We take measures to protect
against unauthorized intrusion into our users’ and tutors’ data. However, despite these measures, if we or our payment
processing services experience any unauthorized intrusion into our users’ and tutors’ data, current and potential users and tutors
may become unwilling to provide the information to us necessary for them to engage with our platform, we could face legal
claims and our business and reputation could be adversely affected. The breach of a third-party’s website, resulting in theft of
user names and passwords, could result in the fraudulent use of that user login information on our platform. In addition, we do
not obtain signatures from students in connection with the use of credit cards by them. Under current credit card practices, to
the extent we do not obtain cardholders’ signatures, we are liable for fraudulent credit card transactions, even when the
associated financial institution approves payment of the orders. From time to time, fraudulent credit cards may be used. We may
experience some loss from these fraudulent transactions. As an example, we discovered in 2014 that certain individuals
fraudulently obtained several thousand textbooks from us. While we do have safeguards in place, we cannot be certain that
other fraudulent schemes will not be successful. A failure to adequately control fraudulent transactions would harm our business
and results of operations.
Our wide variety of accepted payment methods subjects us to third-party payment processing-related risks.
We accept payments from students using a variety of methods, including credit cards, debit cards and PayPal. As we
offer new payment options to students, we may be subject to additional regulations, compliance requirements and incidents of
fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase
over time and raise our operating costs and lower our profit margins. For example, we have in the past experienced higher
transaction fees from our third-party processors as a result of chargebacks on credit card transactions.
We rely on third parties to provide payment processing services, including the processing and information storage of
credit cards and debit cards. If these companies become unwilling or unable to provide these services to us, our business could
be disrupted. We are also subject to payment card association operating rules, certification requirements and rules governing
electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail
to comply with these rules or requirements, we may be subject to additional fines and higher transaction fees and lose our
ability to accept credit and debit card payments from our students, process electronic funds transfers or facilitate other types of
online payments, and our business and operating results could be adversely affected.
We face significant competition in each aspect of our business, and we expect such competition to increase, particularly in
the market for textbooks.
Our products and services compete for students, colleges and advertisers and we expect such competition to increase,
as described below.
•
Products and Services for Students. Our Chegg Services face competition from different businesses depending on
the offering. For Chegg Study, our competitors primarily include publishers that provide study materials and
online instructional systems. Additionally, we face competition from free services such as Yahoo! Answers and
Brain.ly for our Expert Answers service. For our Chegg Writing service, we primarily face competition from
other citation generating services such as Noodle Tools. For our Chegg Tutors services, we face competition from
other online tutoring services such as Wyzant, Tutors.com and Varsity Tutors. The market for textbooks and
supplemental materials is intensely competitive and subject to rapid change. We face competition from college
bookstores, some of which are operated by Follett and Barnes & Noble Education, online marketplaces such as
Amazon.com and providers of eTextbooks such as Apple iTunes and Blackboard, as well as various private
textbook rental websites. Many students purchase from multiple textbook providers, are highly price sensitive
and can easily shift spending from one provider or format to another. As a consequence, our Required Materials
product line, which includes eTextbooks, competes primarily on price and further on selection and functionality
and compatibility of the eTextbook Reader we utilize across a wide variety of desktop and mobile devices.
20
•
Brand Advertising. With respect to brands, we compete with online and offline outlets that generate revenues
from advertisers and marketers, especially those that target high school and college students. In this area, we seek
to partner with brands that have offerings that will interest or delight students and have received very positive
comments and feedback from students on these offerings. We provide these brands with preferential access to our
audience, which we believe represents a highly engaged portion of the target demographic of our brand partners.
Our industry is evolving rapidly and is becoming increasingly competitive. Many of our competitors have longer
operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other
resources than we do. Some of our competitors have adopted, and may continue to adopt, aggressive pricing policies and devote
substantially more resources to marketing, website and systems development than we do. In addition, a variety of business
models are being pursued for the provision of print textbooks, some of which may be more profitable or successful than our
business model. For example, a recent U.S. Supreme Court decision may make it easier for third parties to import low-cost
“gray market” textbooks for resale in the United States, and these textbooks may compete with our offerings. In addition,
Follett has partnered with some colleges through its includED program, which allows schools to deliver required course
materials directly to students by including them in the cost of college as part of tuition and fees. Such strategic alliances may
eliminate our ability to compete favorably with our Required Materials product line because of the added convenience they
offer to students, which may result in reduced textbook rentals, loss of market share and reduced revenues. In addition, our
competitors also may form or extend strategic alliances with publishers that could adversely affect Ingram's ability to obtain
textbooks on favorable terms. We face similar risks from strategic alliances by other participants in the education ecosystem
with respect to our newer offerings. We may, in the future, establish alliances or relationships with other competitors or
potential competitors. To the extent such alliances are terminated or new alliances and relationships are established, our
business could be harmed.
Our business is seasonal and we have increased risk from disruption during peak periods which makes our operating results
difficult to predict.
We derive a significant portion of our net revenues from print textbook rental and, to a lesser extent, sale transactions,
which occur in large part during short periods of time around the commencement of the fall, winter and spring academic terms.
In particular, we and Ingram experience the largest increase in rental and sales volumes during the last two weeks of August and
first two weeks of September and to a lesser degree in December and in January. The increased volume of orders that we and
Ingram have to process during these limited periods of time means that any shortfalls or disruptions in our operations during
these peak periods will have a disproportionately large impact on our annual operating results and the potential future growth of
our business.
As a result of this seasonality, which corresponds to the academic calendar, our revenues fluctuate significantly quarter
to quarter depending upon the timing of where we are in our “rush” cycle and sequential quarter-over-quarter comparisons of
our revenues and operating results are not likely to be meaningful. In addition, our operating results for any given quarter
cannot be used as an accurate indicator of our results for the year. In particular, we anticipate that our ability to accurately
forecast financial results for future periods will be most limited at the time we present our second quarter financial results,
which will generally occur midsummer and precede the “fall rush.” In addition, our other offerings, in particular services
unrelated to textbooks, are relatively new and, as a result, we have limited experience with forecasting revenues from them.
The fourth quarter has typically been our highest performing quarter as we were recognizing a full quarter of revenues
on print textbooks that we owned from peak volumes in August and September and partial revenues from peak volumes in
December, while the second quarter has typically been our lowest performing quarter as students start their summer vacations
and the volume of our textbook rentals and sales and purchases of supplemental materials and Chegg Study decreases. With
Ingram fulfilling our print textbook rental orders, we now expect our first and third quarters print textbook revenue to be higher
as we now recognize a commission immediately on the transaction of an Ingram-owned print textbook rather than recognizing
the revenues ratably over the term the student rents one of our print textbooks.
We base our operating expense budgets on expected net revenue trends. Operating expenses, similar to revenues and
cost of revenues, fluctuate significantly quarter to quarter due to the seasonality of our business and are generally higher during
the first and third quarters as we incur marketing expense in connection with our peak periods at the beginning of each
academic term. Because our revenues were historically concentrated in the fourth quarter and expenses are concentrated in the
first and third quarters, we have experienced operating losses in the first and third quarters and operating income in the fourth
quarter. As a result, sequential quarterly comparison of our financial results has not been meaningful. We expect our
seasonality to shift as a result of our strategic partnership with Ingram and our highest quarters for revenues and operating
expense to coincide. Further, a portion of our expenses, such as office space lease obligations and personnel costs, are largely
fixed and are based on our expectations of our peak levels of operations. The Ingram partnership has resulted in our operating
21
expenses related to textbook acquisition, shipping and fulfillment and warehouse facility lease obligations either decreasing or
being eliminated and we expect that our overall operating expenses to be more evenly distributed throughout the year.
Nonetheless, we expect to continue to incur significant marketing expenses during peak periods and to have fixed expenses for
office space and personnel and as such, we may be unable to adjust spending quickly enough to offset any unexpected revenues
shortfall. Accordingly, any shortfall in net revenues may cause significant variation in operating results in any quarter.
Growing our student user base and their engagement with our learning platform through mobile devices depends upon the
effective operation of our mobile applications with mobile operating systems, networks and standards that we do not control.
There is no guarantee that students will use our mobile applications, such as the mobile version of our website,
m.chegg.com, Chegg Flashcards and Chegg Textbook Solutions, rather than competing products. We are dependent on the
interoperability of our mobile applications with popular mobile operating systems that we do not control, such as Google's
Android and Apple's iOS, and any changes in such systems that degrade our products’ functionality or give preferential
treatment to competitive products could adversely affect the usage of our applications on mobile devices. Additionally, in order
to deliver high quality mobile products, it is important that our products work well with a range of mobile technologies,
systems, networks and standards that we do not control. We may not be successful in developing relationships with key
participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks
or standards. In the event that it is more difficult for students to access and use our applications on their mobile devices, or if
students choose not to access or use our applications on their mobile devices or use mobile products that do not offer access to
our applications, our student growth and student engagement levels could be harmed.
If the third party eTextbook Reader that we utilize does not remain compatible with third-party operating systems, demand
for our eTextbooks may decline and could have an adverse effect on our revenues.
The third-party eTextbook Reader that we utilize is designed to provide students with access to eTextbooks from any
device with an Internet connection and an Internet browser, including PCs, iPads, Android tablets, Kindles, Nooks and mobile
phones. The third-party eTextbook Reader can be used across a variety of third-party operating systems. If this compatibility is
not maintained, demand for our eTextbooks could decline and revenues could be adversely affected.
If the transition from print textbooks to eTextbooks does not proceed as we expect, our business and financial condition will
be adversely affected.
The textbook distribution market has begun shifting toward digital distribution. If demand for eTextbooks accelerates
more rapidly than we expect, we could be required to make additional payments to Ingram under our inventory purchase and
consignment agreement. Conversely, if the transition to digital distribution of textbooks does not gain market acceptance as we
expect, capital requirements over the long term may be greater than we expect and our opportunities for growth may be
diminished. In that case, we may need to raise additional capital, which may not be available on reasonable terms, or at all, and
we may not realize the potential long-term benefits of a shift to digital distribution, including greater pricing flexibility and the
ability to distribute a larger library of eTextbooks compared to print textbooks.
If publishers refuse to grant us distribution rights to digital content on acceptable terms or terminate their agreements with
us, or if we are unable to adequately protect their digital content rights, our business could be adversely affected.
We rely on licenses from publishers to distribute eTextbooks to our customers and to provide some of our other
products and services. We do not have long-term contracts or arrangements with most publishers that guarantee the availability
of such digital content. If we are unable to secure and maintain rights to distribute, or otherwise use, the digital content upon
terms that are acceptable to us, or if publishers terminate their agreements with us, we would not be able to acquire such digital
content from other sources and our ability to attract new students and retain existing students could be adversely impacted.
Some of our licenses give the publisher the right to withdraw our rights to distribute or use the digital content without cause
and/or give the publisher the right to terminate the entire license agreement without cause. If a publisher exercises such a right,
this could adversely affect our business and financial results. Moreover, to the extent we are able to secure and maintain rights
to distribute eTextbooks, our competitors may be able to obtain the same rights on more favorable terms.
In addition, our ability to distribute eTextbooks depends on publishers’ belief that we include effective digital rights
management technology to control access to digital content. If the digital rights management technology that we use is
compromised or otherwise malfunctions, we could be subject to claims, and publishers may be unwilling to include their
content in our service. If users are able to circumvent the digital rights management technology that we use, they may acquire
unauthorized copies of the textbooks that they would otherwise rent from us, which could decrease our textbook rental volume
and adversely affect our results of operations.
22
If we fail to convince brands of the benefits of advertising on our platform or to use our marketing services, our business
could be harmed.
Our business strategy includes increasing our revenues from brand advertising. Brands may view our learning platform
as experimental and unproven. They may not do business with us, or may reduce the amounts they are willing to spend to
advertise with us, if we do not deliver ads, sponsorships and other commercial content and marketing programs in an effective
manner, or if they do not believe that their investment in advertising with us will generate a competitive return relative to other
alternatives. Our ability to grow the number of brands that use our brand advertising, and ultimately to generate advertising and
marketing services revenues, depends on a number of factors, including our ability to successfully:
•
•
•
•
•
•
•
•
•
•
compete for advertising and marketing dollars from colleges, brands, online marketing and media companies and
advertisers;
penetrate the market for student-focused advertising;
develop a platform that can deliver advertising and marketing services across multiple channels, including print,
email, Internet, mobile applications and other connected devices;
improve our analytics and measurement solutions to demonstrate the value of our advertising and marketing
services;
maintain the retention, growth and engagement of our student user base;
strengthen our brand and increase our presence in media reports and with publicity companies that utilize online
platforms for advertising and marketing purposes;
create new products that sustain or increase the value of our advertising and marketing services and other
commercial content;
manage changes in the way online advertising and marketing services are priced;
weather the impact of macroeconomic conditions and conditions in the advertising industry and higher education
in general; and
manage legal developments relating to data privacy, advertising or marketing services, legislation and regulation
and litigation.
Our core value of putting students first may conflict with the short-term interests of our business.
We believe that adhering to our core value of putting students first is essential to our success and in the best interests of
our company and the long-term interests of our stockholders. In the past, we have forgone, and in the future we may forgo,
short-term revenue opportunities that we do not believe are in the best interests of students, even if our decision negatively
impacts our operating results in the short term. For example, we offer free services to students that require investment by us,
such as our Internships service, in order to promote a more comprehensive solution. We also developed the Chegg for Good
program to connect students and employees with partners to engage them in causes related to education and the environment.
We formed the Chegg Foundation, a California nonprofit public benefit corporation, to engage in charitable and education-
related activities, which we funded with one percent of the net proceeds from our IPO in November 2013. Our philosophy of
putting students first may cause us to make decisions that could negatively impact our relationships with publishers, colleges
and brands, whose interests may not always be aligned with ours or those of our students. Our decisions may not result in the
long-term benefits that we expect, in which case our level of student satisfaction and engagement, business and operating
results could be harmed.
If we are required to discontinue certain of our current marketing activities, our ability to attract new students may be
adversely affected.
Laws or regulations may be enacted which restrict or prohibit use of emails or similar marketing activities that we
currently rely on. For example:
•
•
•
the CAN-SPAM Act of 2003 and similar laws adopted by a number of states regulate unsolicited commercial
emails, create criminal penalties for emails containing fraudulent headers and control other abusive online
marketing practices;
the U.S. Federal Trade Commission (FTC) has guidelines that impose responsibilities on companies with respect
to communications with consumers and impose fines and liability for failure to comply with rules with respect to
advertising or marketing practices they may deem misleading or deceptive; and
the TCPA restricts telemarketing and the use of automated telephone equipment. The TCPA limits the use of
automatic dialing systems, artificial or prerecorded voice messages and SMS text messages. It also applies to
unsolicited text messages advertising the commercial availability of goods or services. Additionally, a number of
23
states have enacted statutes that address telemarketing. For example, some states, such as California, Illinois and
New York, have created do-not-call lists. Other states, such as Oregon and Washington, have enacted “no rebuttal
statutes” that require the telemarketer to end the call when the consumer indicates that he or she is not interested
in the product being sold. Restrictions on telephone marketing, including calls and text messages, are enforced by
the FTC, the Federal Communications Commission, states and through the availability of statutory damages and
class action lawsuits for violations of the TCPA.
Even if no relevant law or regulation is enacted, we may discontinue use or support of these activities if we become
concerned that students or potential students deem them intrusive or they otherwise adversely affect our goodwill and brand. If
our marketing activities are curtailed, our ability to attract new students may be adversely affected.
Our business and growth may suffer if we are unable to hire and retain key personnel.
We depend on the continued contributions of our senior management and other key personnel. In particular, we rely on
the contributions of our Chief Executive Officer, Dan Rosensweig. All of our executive officers and key employees are at-will
employees, meaning they may terminate their employment relationship at any time. We compensate our employees through a
combination of salary, benefits and equity compensation. Volatility or a decline in our stock price may affect our ability to
retain and motivate key employees, each of whom has been granted stock options, RSUs or both. Competition for qualified
personnel can be intense, and we may not be successful in retaining and motivating such personnel, particularly to the extent
our stock price is volatile or at a depressed level, as equity compensation plays an important role in how we compensate our
employees. Such individuals may elect to seek employment with other companies that they believe have better long-term
prospects. If we lose the services of one or more members of our senior management team or other key personnel, or if one or
more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to
successfully manage our business or achieve our business objectives. Our future success also depends on our ability to identify,
attract and retain highly skilled technical, managerial, finance and media procurement personnel. Qualified individuals are in
high demand, particularly in the San Francisco Bay Area where our executive offices are located, and we may incur significant
costs to attract them. If we are unable to attract or retain the personnel we need to succeed, our business may suffer.
We may need additional capital, and we cannot be sure that additional financing will be available or on favorable terms.
Historically, investments in our business have substantially exceeded the cash we have generated from our operations.
We have funded our operating losses and capital expenditures through proceeds from equity and debt financings, equipment
leases and cash flow from operations. Although we currently anticipate that our available funds and cash flow from operations
will be sufficient to meet our cash needs for the foreseeable future, we may require additional financing, particularly if the
investment required to fund our operations is greater than we anticipate or we choose to invest in new technologies or
complementary businesses or change our business model. Our ability to obtain financing will depend, among other things, on
our development efforts, business plans, operating performance and condition of the capital markets at the time we seek
financing. Additional financing may not be available to us on favorable terms when required, or at all especially considering
that we no longer own a print textbook library, which we previously used as collateral for our debt financings. If we raise
additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or
privileges senior to the rights of our common stock, and our stockholders may experience substantial dilution.
Government regulation of education and student information is evolving, and unfavorable developments could have an
adverse effect on our operating results.
We are subject to regulations and laws specific to the education sector because we offer our products and services to
students and collect data from students. Data privacy and security with respect to the collection of personally identifiable
information from students continues to be a focus of worldwide legislation and regulation. This includes significant regulation
in the European Union and legislation and compliance requirements in various jurisdictions around the world. Within the
United States, several states have enacted legislation that goes beyond any federal requirements relating to the collection and
use of personally identifiable information and other data from students. Examples include statutes adopted by the State of
California and most other States that require online services to report certain breaches of the security of personal data and a
California statute that requires companies to provide choice to California customers about whether their personal data is
disclosed to direct marketers or to report to California customers when their personal data has been disclosed to direct
marketers. In this regard, there are a large number of legislative proposals before the U.S. Congress and various state legislative
bodies regarding privacy issues related to our business. It is not possible to predict whether or when such legislation may be
adopted, and certain proposals, if adopted, could harm our business through a decrease in student registrations and revenues.
These decreases could be caused by, among other possible provisions, the required use of disclaimers or other requirements
before students can utilize our services. We post our privacy policies and practices concerning the use and disclosure of student
24
data on our website. However, any failure by us to comply with our posted privacy policies, FTC requirements or other privacy-
related laws and regulations could result in proceedings by governmental or regulatory bodies or by private litigants that could
potentially harm our business, results of operations and financial condition.
Our business may also be subject to laws specific to students, such as the Family Educational Rights and Privacy Act,
the Delaware Higher Education Privacy Act and a California statute which restricts the access by postsecondary educational
institutions of prospective students’ social media account information. Compliance levels include disclosures, consents, transfer
restrictions, notice and access provisions for which we may in the future need to build further infrastructure to further support.
We cannot guarantee that we have been or will be fully compliant in every jurisdiction, as it is not entirely clear how existing
laws and regulations governing educational institutions affect our business. Moreover, as the education industry continues to
evolve, increasing regulation by federal, state and foreign agencies becomes more likely. Recently, California adopted the
Student Online Personal Information Protection Act which prohibits operators of online services used for K-12 school purposes
from using or sharing student personal information and Colorado adopted House Bill 16-1423 designed to protect the use of
student personal data in elementary and secondary school. These acts do not apply to general audience Internet websites but it is
not clear how these acts will be interpreted and the breadth of services that will be restricted by it. Other states may adopt
similar statutes. The adoption of any laws or regulations that adversely affect the popularity or growth in the use of the Internet
particularly for educational services, including laws limiting the content that we can offer, and the audiences that we can offer
that content to, may decrease demand for our service offerings and increase our cost of doing business. Future regulations, or
changes in laws and regulations or their existing interpretations or applications, could also hinder our operational flexibility,
raise compliance costs and result in additional historical or future liabilities for us, resulting in adverse impacts on our business
and our operating results.
While we expect and plan for new laws, regulations and standards to be adopted over time that will be directly
applicable to the Internet and to our student-focused activities, any existing or new legislation applicable to our business could
expose us to substantial liability, including significant expenses necessary to comply with such laws and regulations and
potential penalties or fees for non-compliance, and could negatively impact the growth in the use of the Internet for educational
purposes and for our services in particular. We may also run the risk of retroactive application of new laws to our business
practices that could result in liability or losses. Due to the global nature of the Internet, it is possible that the governments of
other states and foreign countries might attempt to change previous regulatory schemes or choose to regulate transmissions or
prosecute us for violations of their laws. We might unintentionally violate such laws, such laws may be modified and new laws
may be enacted in the future. Any such developments could harm our business, operating results and financial condition. We
may be subject to legal liability for our offerings.
We collect, process, store and use personal information and data, which subjects us to governmental regulation and other
legal obligations related to privacy and our actual or perceived failure to comply with such obligations could harm our
business.
In the ordinary course of business, and in particular in connection with merchandising our service to students, we
collect, process, store and use personal information and data supplied by students and tutors. We may enable students to share
their personal information with each other and with third parties and to communicate and share information into and across our
platform. Other businesses have been criticized by privacy groups and governmental bodies for attempts to link personal
identities and other information to data collected on the Internet regarding users’ browsing and other habits. There are numerous
federal, state and local laws regarding privacy and the collection, storing, sharing, using, processing, disclosing and protecting
of personal information and other user data, the scope of which are changing, subject to differing interpretations, and which
may be costly to comply with and may be inconsistent between countries and jurisdictions or conflict with other rules.
We currently face certain legal obligations regarding the manner in which we treat such information. Increased
regulation of data utilization practices, including self-regulation or findings under existing laws, or new regulations restricting
the collection, use and sharing of information from minors under the age of 18, that limit our ability to use collected data could
have an adverse effect on our business. In addition, if unauthorized access to our students’ data were to occur or if we were to
disclose data about our student users in a manner that was objectionable to them, our business reputation and brand could be
adversely affected, and we could face legal claims that could impact our operating results. Our reputation and brand and
relationships with students would be harmed if our billing data were accessed by unauthorized persons.
We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to
privacy and data protection. However, U.S. federal, U.S. state and international laws and regulations regarding privacy and data
protection are rapidly evolving and may be inconsistent and we could be deemed out of compliance as such laws and their
interpretation change. In addition, foreign privacy, data protection, and other laws and regulations, particularly in Europe and
including the DPD and the GDPR, are often more restrictive than those in the United States. The costs of compliance with, and
25
other burdens imposed by, such laws and regulations that are applicable to our business operations may limit the use and
adoption of our services and reduce overall demand for them. Furthermore, foreign court judgments or regulatory actions could
impact our ability to transfer, process and/or receive transnational data, including data relating to students or partners outside
the United States. Such judgments or actions could affect the manner in which we provide our services or adversely affect our
financial results if foreign students and partners are not able to lawfully transfer data to us. For example, the European Court of
Justice recently invalidated the U.S.-EU Safe Harbor framework that had been in place since 2000, which allowed companies to
meet certain European legal requirements for the transfer of personal data from the European Economic Area to the United
States. While other adequate legal mechanisms to lawfully transfer such data remain, the invalidation of the U.S.-EU Safe
Harbor framework may result in different European data protection regulators applying differing standards for the transfer of
personal data, which could result in increased regulation, cost of compliance and limitations on data transfer for us and our
customers. In addition, some countries are considering or have passed legislation implementing data protection requirements or
requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering
our services.
Any failure or perceived failure by us to comply with our privacy policies, our privacy or data-protection obligations
to students or other third parties, our privacy or data-protection legal obligations or any compromise of security that results in
the unauthorized release or transfer of sensitive information, which may include personally identifiable information or other
data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups
or others and could cause students to lose trust in us, which could have an adverse effect on our business. Additionally, if third
parties we work with, such as colleges and brands, violate applicable laws or our policies, such violations may also put our
student users’ information at risk and could in turn have an adverse effect on our business.
Public scrutiny of Internet privacy issues may result in increased regulation and different industry standards, which could
deter or prevent us from providing our current products and services to students, thereby harming our business.
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the
foreseeable future. Practices regarding the collection, use, storage, display, processing, transmission and security of personal
information by companies offering online services have recently come under increased public scrutiny. The U.S. government,
including the White House, the FTC and the U.S. Department of Commerce, are reviewing the need for greater regulation of the
collection and use of information concerning consumer behavior with respect to online services, including regulation aimed at
restricting certain targeted advertising practices. The FTC in particular has approved consent decrees resolving complaints and
their resulting investigations into the privacy and security practices of a number of online, social media companies. Similar
actions may also impact us directly, particularly because high school students who use our Chegg Writing, Chegg Tutors, Chegg
Test Prep and College Admissions and Scholarship Services are typically under the age of 18, which subjects our business to
laws covering the protection of minors. For example, various U.S. and international laws restrict the distribution of materials
considered harmful to children and impose additional restrictions on the ability of online services to collect information from
minors. The FTC has also revised the rules under the Children’s Online Privacy Protection Act effective July 1, 2013. Although
our services are not primarily directed to children under 13, our Chegg Writing service, in particular, could be used by students
as early as in middle school, and the FTC could decide that our site now or in the future has taken inadequate precautions to
prevent children under 13 from accessing our site and providing us information.
In 2012, the White House published a report calling for a consumer privacy Bill of Rights that could impact the
collection of data, and the Department of Commerce seeks to establish a consensus-driven Do-Not-Track standard that could
impact on-line and mobile advertising. The State of California and several other states have adopted privacy guidelines with
respect to mobile applications. Our business, including our ability to operate internationally, could be adversely affected if
legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business
practices and that require changes to these practices, the design of our websites, mobile applications, products, features or our
privacy policy. In particular, the success of our business has been, and we expect will continue to be, driven by our ability to
responsibly use the data that students share with us. Therefore, our business could be harmed by any significant change to
applicable laws, regulations or industry standards or practices regarding the use or disclosure of data that students choose to
share with us or regarding the manner in which the express or implied consent of consumers for such use and disclosure is
obtained. Such changes may require us to modify our products and services, possibly in a material manner, and may limit our
ability to develop new products and services that make use of the data that we collect about our student users.
If we become subject to liability for the Internet content that we publish or that is uploaded to our websites by students, our
results of operations could be adversely affected.
As a publisher and distributor of online content, we face potential liability for negligence, copyright or trademark
infringement or other claims based on the nature and content of materials that we publish or distribute. We also may face
26
potential liability for content uploaded by students in connection with our community-related content. If we become liable, then
our business may suffer. Third parties may initiate litigation against us without warning. For example, in June 2017, the
Examinations Institute of the American Chemical Society filed a complaint against us in the U.S. District Court for the
Northern District of California claiming, among other things, that we infringed their copyrights by answering and displaying
questions uploaded by our users to our Q&A service. Others may send us letters or other communications that make allegations
without initiating litigation. We have in the past and may in the future receive such communications, which we assess on a case-
by-case basis. We may elect not to respond to the communication if we believe it is without merit or we may attempt to resolve
disputes out-of-court by removing content or services we offer or paying licensing or other fees. If we are unable to resolve
such disputes, litigation may result. Litigation to defend these claims could be costly and harm our results of operations. We
may not be adequately insured to cover claims of these types or indemnified for all liability that may be imposed on us. Any
adverse publicity resulting from actual or potential litigation may also materially and adversely affect our reputation, which in
turn could adversely affect our results of operations.
In addition, the Digital Millennium Copyright Act (DMCA) has provisions that limit, but do not necessarily eliminate,
our liability for caching or hosting or for listing or linking to, content or third-party websites that include materials or other
content that infringe copyrights or other intellectual property or proprietary rights, provided we comply with the strict statutory
requirements of the DMCA. The interpretations of the statutory requirements of the DMCA are constantly being modified by
court rulings and industry practice. Accordingly, if we fail to comply with such statutory requirements or if the interpretations
of the DMCA change, we may be subject to potential liability for caching or hosting, or for listing or linking to, content or
third-party websites that include materials or other content that infringe copyrights or other intellectual property or proprietary
rights.
We maintain content usage review systems that, through a combination of manual and automated blocks, monitors for
and makes us aware of potentially infringing content on our platform. Nevertheless, claims may continue to be brought and
threatened against us for negligence, intellectual property infringement, or other theories based on the nature and content of
information, its origin and its distribution and there is no guarantee that we will be able to resolve any such claims quickly and
without damage to us, our business model, our reputation or our operations. From time to time, we have been subject to
copyright infringement claims, some of which we have settled. While these settlements have not had a material impact on our
financial condition, we may be subject to similar lawsuits in the future, including in connection with our other services. The
outcome of any such lawsuits may not be favorable to us and could have a material adverse effect on our financial condition.
Failure to protect or enforce our intellectual property and other proprietary rights could adversely affect our business and
financial condition and results of operations.
We rely and expect to continue to rely on a combination of trademark, copyright, patent and trade secret protection
laws, as well as confidentiality and license agreements with our employees, consultants and third parties with whom we have
relationships to protect our intellectual property and proprietary rights. As of December 31, 2017, we had 20 issued patents and
18 patent applications pending in the United States. We own three U.S. copyright registrations and have unregistered copyrights
in our software documentation, marketing materials and website content that we develop. We own 40 U.S. trademark
registrations and 26 foreign registrations. As of December 31, 2017, we owned over 600 registered domain names. We also
have a number of pending trademark applications in the United States and foreign jurisdictions and unregistered marks that we
use to promote our brand. From time to time we expect to file additional patent, copyright and trademark applications in the
United States and abroad. Nevertheless, these applications may not be approved or otherwise provide the full protection we
seek. Third parties may challenge any patents, copyrights, trademarks and other intellectual property and proprietary rights
owned or held by us. Third parties may knowingly or unknowingly infringe, misappropriate or otherwise violate our patents,
copyrights, trademarks and other proprietary rights and we may not be able to prevent infringement, misappropriation or other
violation without substantial expense to us.
Furthermore, we cannot guarantee that:
•
•
•
•
•
our intellectual property and proprietary rights will provide competitive advantages to us;
our competitors or others will not design around our intellectual property or proprietary rights;
our ability to assert our intellectual property or proprietary rights against potential competitors or to settle current
or future disputes will not be limited by our agreements with third parties;
our intellectual property and proprietary rights will be enforced in jurisdictions where competition may be
intense or where legal protection may be weak;
any of the patents, trademarks, copyrights, trade secrets or other intellectual property or proprietary rights that we
presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned; or
27
•
we will not lose the ability to assert our intellectual property or proprietary rights against or to license our
intellectual property or proprietary rights to others and collect royalties or other payments.
If we pursue litigation to assert our intellectual property or proprietary rights, an adverse decision in any of these legal
actions could limit our ability to assert our intellectual property or proprietary rights, limit the value of our intellectual property
or proprietary rights or otherwise negatively impact our business, financial condition and results of operations. If the protection
of our intellectual property and proprietary rights is inadequate to prevent use or misappropriation by third parties, the value of
our brand and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and
methods of operations, the perception of our business and service to customers and potential customers may become confused
in the marketplace and our ability to attract customers may be adversely affected.
We are a party to a number of third-party intellectual property license agreements. For example, we have entered into
agreements with textbook publishers that provide access to textbook solutions content or questions for our Chegg Study service,
for which we often pay an upfront license fee. In addition, we have agreements with certain eTextbook publishers under which
we incur non-refundable fees at the time we provide students access to an eTextbook. We cannot guarantee that the third-party
intellectual property we license will not be licensed to our competitors or others in our industry. In the future, we may need to
obtain additional licenses or renew existing license agreements. We are unable to predict whether these license agreements can
be obtained or renewed on acceptable terms, or at all. Any failure to obtain or renew such third-party intellectual property
license agreements on commercially competitive terms could adversely affect our business and financial results.
We are, and may in the future be, subject to intellectual property claims, which are costly to defend and could harm our
business, financial condition and operating results.
From time to time, third parties have alleged and are likely to allege in the future that we or our business infringes,
misappropriates or otherwise violates their intellectual property or proprietary rights. Many companies, including various “non-
practicing entities” or “patent trolls,” are devoting significant resources to developing or acquiring patents that could potentially
affect many aspects of our business. There are numerous patents that broadly claim means and methods of conducting business
on the Internet. We have not exhaustively searched patents related to our technology. In addition, the publishing industry has
been, and we expect in the future will continue to be, the target of counterfeiting and piracy. We have in the past and may
continue to receive communications alleging that physical textbooks sold or rented by us are counterfeit. For example, we
recently cooperated, and continue to cooperate, with a group of publishers in a series of audits which have identified several
thousand potentially fraudulent textbooks which we have removed from our inventory. While our fulfillment partner, Ingram,
has a system for inspecting the physical textbooks in our catalog of books, many of the books sold or rented to students are
shipped directly from our suppliers, and, despite this inspection, unauthorized or counterfeit textbooks may inadvertently be
included in the catalog of books we offer and may be subsequently sold or rented by us to students, or purchased by us through
our buyback program, including on behalf of other buyers participating in our buyback program, and we may be subject to
allegations of civil or criminal liability. We may implement measures in an effort to protect against these potential liabilities
that could require us to spend substantial resources. Any costs incurred as a result of liability or asserted liability relating to
sales of unauthorized or counterfeit textbooks could harm our business, reputation and financial condition.
Third parties may initiate litigation against us without warning. Others may send us letters or other communications
that make allegations without initiating litigation. We have in the past and may in the future receive such communications,
which we assess on a case-by-case basis. We may elect not to respond to the communication if we believe it is without merit or
we may attempt to resolve disputes out-of-court by electing to pay royalties or other fees for licenses. If we are forced to defend
ourselves against intellectual property claims, whether they are with or without merit or are determined in our favor, we may
face costly litigation, diversion of technical and management personnel, inability to use our current website or inability to
market our service or merchandise our products. As a result of a dispute, we may have to develop non-infringing technology,
enter into licensing agreements, adjust our merchandising or marketing activities or take other action to resolve the claims.
These actions, if required, may be unavailable on terms acceptable to us or may be costly or unavailable. If we are unable to
obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices, as appropriate,
on a timely basis, our reputation or brand, our business and our competitive position may be affected adversely and we may be
subject to an injunction or be required to pay or incur substantial damages and/or fees.
In addition, we use open source software in connection with certain of our products and services. Companies that
incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open
source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming
ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open
source software licenses require users who distribute or use open source software as part of their software to publicly disclose
all or part of the source code to such software and/or make available any derivative works of the open source code on
28
unfavorable terms or at no cost. Any requirement to disclose our proprietary source code or pay damages for breach of contract
could have a material adverse effect on our business, financial condition and results of operations.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and
proprietary information.
We have devoted substantial resources to the development of our intellectual property and proprietary rights. In order
to protect our intellectual property and proprietary rights, we rely in part on confidentiality agreements with our employees,
book vendors, licensees, independent contractors and other advisors. These agreements may not effectively prevent disclosure
of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential
information. In addition, others may independently discover trade secrets and proprietary information and in such cases we
could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce
and determine the scope of our proprietary rights and failure to obtain or maintain trade secret protection could adversely affect
our competitive business position.
If we are unable to protect our domain names, our reputation and brand could be adversely affected.
As of December 31, 2017, we owned over 600 registered domain names relating to our brand, including Chegg.com.
Failure to protect our domain names could affect adversely our reputation and brand and make it more difficult for students to
find our website, our content and our services. The acquisition and maintenance of domain names generally are regulated by
governmental agencies and their designees. The regulation of domain names in the United States may change in the near future.
Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names.
Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar
intellectual property and proprietary rights is unclear. We may be unable to prevent third parties from acquiring and using
domain names that are similar to, infringe upon or otherwise decrease the value of our brand name, trademarks or other
intellectual property or proprietary rights.
Our business depends on general economic conditions and their effect on funding levels of colleges, spending behavior by
students and advertising budgets.
Our business is dependent on, among other factors, general economic conditions, which affect college funding, student
spending and brand advertising. While the U.S. economy has recovered since the "Great Recession," state and federal funding
levels at colleges across the United States remain below historic levels, which has led to increased tuition and decreased
amounts of financial aid offered to students. To the extent that these trends continue or the economy stagnates or worsens,
students may reduce the amount they spend on textbooks and other educational content, which could have a serious adverse
impact on our business. In addition to decreased spending by students, the colleges and brands that use our marketing services
have advertising budgets that are often constrained during periods of stagnant or deteriorating economic conditions. In a
difficult economic environment, customer spending in each of our products and services is likely to decrease, which could
adversely affect our operating results and financial condition. A deterioration of the current economic environment may also
have a material adverse effect on our ability to fund our growth and strategic business initiatives.
Our international operations are subject to increased challenges and risks.
We have employees in Germany, Israel, and India, we indirectly contract with individuals in the Ukraine and we own a
minority stake in a learning platform for high school and college students in Brazil. Although today our international operations
represent approximately 5% of our total consolidated operating expenses and we currently do not expect our international
operations to materially increase in the near future, we expect to continue to expand our international operations and such
operations may expand more quickly than we currently anticipate. However, we have limited operating history as a company
outside the United States and our ability to manage our business and conduct our operations internationally requires
considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing
business in an environment of multiple languages, cultures, customs, tax systems, legal systems, alternative dispute systems,
regulatory systems and commercial infrastructures. Operating internationally has required and will continue to require us to
invest significant funds and other resources, subjects us to new risks and may increase the risks that we currently face,
including risks associated with:
•
•
recruiting and retaining talented and capable employees in foreign countries and maintaining our company
culture across all of our offices;
compliance with applicable foreign laws and regulations;
29
•
•
•
•
•
compliance with anti-bribery laws including, without limitation, compliance with the Foreign Corrupt Practices
Act;
currency exchange rate fluctuations;
additional taxation of international costs and intercompany payments to our international subsidiaries associated
with the Tax Cuts and Jobs Act of 2017;
political and economic instability; and
higher costs of doing business internationally.
As part of our business strategy, we may make our products and services available in more countries outside of the
U.S. market, where we are currently focused. The markets in which we may undertake international expansion may have
educational systems, technology and online industries that are different or less well developed than those in the United States,
and if we are unable to address the challenges of operating in international markets, it could have an adverse effect on our
results of operations and financial condition.
Colleges and certain governments may restrict access to the Internet or our website, which could lead to the loss of or
slowing of growth in our student user base and their level of engagement with our platform.
The growth of our business and our brand depends on the ability of students to access the Internet and the products and
services available on our website. Colleges that provide students with access to the Internet either through physical computer
terminals on campus or through wired or wireless access points on campus could block or restrict access to our website, content
or services or the Internet generally for a number of reasons including security or confidentiality concerns, regulatory reasons,
such as compliance with the Family Educational Rights and Privacy Act, which restricts the disclosure of student information or
concerns that certain of our products and services, such as Chegg Study, may contradict or violate their policies.
We depend in part on colleges to provide their students with access to the Internet. If colleges modify their policies in
ways that are detrimental to the growth of our student user base or in ways that make it harder for students to use our website,
or if our competitors’ are able to reach more students than us, the overall growth in our student user base would slow, student
engagement would decrease and we would lose revenues. Any reduction in the number of students directed to our website
would harm our business and operating results.
Our operations are susceptible to earthquakes, floods, rolling blackouts and other types of power loss. If these or other
natural or man-made disasters were to occur, our operations and operating results would be adversely affected.
Our business and operations could be materially adversely affected in the event of earthquakes, blackouts or other
power losses, floods, fires, telecommunications failures, break-ins, acts of terrorism, inclement weather, shelving accidents or
similar events. Our executive offices are located in the San Francisco Bay Area, an earthquake-sensitive area. If floods, fire,
inclement weather including extreme rain, wind, heat or cold or accidents due to human error were to occur and cause damage
to a warehouse of Ingram or its textbook library, Ingram's ability to fulfill orders for textbook rental and sales transactions could
be materially and adversely affected and our results of operations would suffer, especially if such events were to occur during
peak periods. We may not be able to effectively shift our operations due to disruptions arising from the occurrence of such
events, and our business could be affected adversely as a result. Moreover, damage to or total destruction of our executive
offices resulting from earthquakes may not be covered in whole or in part by any insurance we may have.
If we are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy,
and timeliness of our financial reporting may be adversely affected.
The Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires, among other things, that we assess the
effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and
procedures quarterly. If we are not able to comply with the requirements of the Sarbanes-Oxley Act in a timely manner, the
market price of our stock could decline and we could be subject to sanctions or investigations by the New York Stock
Exchange, the SEC or other regulatory authorities, which would require additional financial and management resources.
If we conclude in future periods that our internal control over financial reporting is not effective, we may be required to expend
significant time and resources to correct the deficiency and could be subject to one or more investigations or enforcement
actions by state or federal regulatory agencies, stockholder lawsuits or other adverse actions requiring us to incur defense costs,
pay fines, settlements or judgments and causing investor perceptions to be adversely affected and potentially resulting in a
decline in the market price of our stock.
Additionally, our independent registered public accounting firm is required to attest to the effectiveness of our internal
control over financial reporting pursuant to Section 404. An independent assessment of the effectiveness of our internal controls
30
could detect problems that our management’s assessment might not. Material weaknesses in our internal controls could lead to
financial statement restatements and require us to incur the expense of remediation. If we are unable to maintain effective
internal control over financial reporting to meet the demands placed upon us as a public company, including the requirements of
the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes
required by law or exchange regulations.
We may be subject to greater than anticipated liabilities for income, property, sales and other taxes, and any successful
action by federal, state, foreign or other authorities to collect additional taxes could adversely harm our business.
We are subject to regular review and audit by both U.S. federal and state and foreign tax authorities and such
jurisdictions may assess additional taxes against us. Although we believe our tax estimates are reasonable, the final
determination of tax audits and any related litigation could be materially different from our historical tax provisions and
accruals and could have a negative effect on our financial position and results of operations. The taxing authorities of the
jurisdictions in which we operate may challenge our methodologies for valuing and allocating income from our intercompany
transactions, which could increase our worldwide effective income tax rate. Further, we file sales tax returns in a number of
states within the United States as required by law and collect and remit sales tax for some content owners. We do not collect
sales or other similar taxes in some U.S. and foreign jurisdictions, with respect to some of our sale, rental or service transactions
because we believe that they do not apply to the relevant transactions. However, these and other tax laws and regulations are
ambiguous or their application to our business is uncertain and the interpretation of them may be subject to change. In addition,
one or more states could seek to impose new or additional sales, use or similar tax collection and record-keeping obligations on
us. Any successful action by federal, state, foreign or other authorities to impose or collect additional income or property taxes,
or compel us to collect and remit sales, use or similar taxes, either retroactively, prospectively or both, could harm our business,
financial position and results of operations.
We may not be able to utilize a significant portion of our net operating loss or tax credit carryforwards, which could
adversely affect our profitability.
At December 31, 2017, we had federal and state net operating loss carryforwards due to prior period losses of
approximately $257 million and $195 million, respectively, which if not utilized will begin to expire in 2028 and 2018 for
federal and state purposes, respectively. A portion of the state net operating loss carryforwards expired in 2017. At
December 31, 2017, we also had federal tax credit carryforwards of approximately $5.6 million, which if not utilized will begin
to expire in 2030, and state tax credit carryforwards of approximately $6.4 million, which do not expire. These net operating
loss and tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could
adversely affect our profitability. For example, we have net operating loss carryforwards of $22 million related to our previous
operations in Kentucky that will expire unused unless we have similar operations in Kentucky.
The Tax Cuts and Jobs Act of 2017 changed both the federal deferred tax value of the net operating loss carryforwards
and the rules of utilization of federal net operating loss carryforwards. The Tax Cuts and Jobs Act of 2017 lowered the
corporate tax rate from 35% to 21% effective for our 2018 financial year. For net operating loss carryforwards generated in
years prior to 2018, there is no annual limitation on the utilization and the carryforward period remains at 20 years. However,
net operating loss carryforwards generated in years after 2017 will only be available to offset 80% of future taxable income in
any single year but will not expire.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), our ability to utilize net
operating loss carryforwards or other tax attributes, such as tax credits, in any taxable year may be limited if we experience an
“ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders
who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership
percentage within a rolling three-year period. Similar rules may apply under state tax laws. As a result of prior equity issuances
and other transactions in our stock, we have previously experienced “ownership changes” under Section 382 of the Code and
comparable state tax laws. We may experience ownership changes in the future as a result of future issuances and other
transactions of our stock. It is possible that any future ownership change could have a material effect on the use of our net
operating loss carryforwards or other tax attributes, which could adversely affect our profitability.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law, enacting a broad range of changes to the U.S.
Internal Revenue Code. The Tax Cuts and Jobs Act, among other things, includes changes to U.S. federal tax rates, imposes
significant additional limitations on the deductibility of interest, executive compensation, other expenses, and future net
operating losses, allows for the expensing of certain capital expenditures, and puts into effect a number of changes impacting
31
operations outside of the United States. In the fourth quarter of 2017, we reduced our net deferred tax asset by approximately
$42 million as a result. The revaluation of our deferred tax assets including U.S. federal net operating losses is offset by an
equal reduction in our valuation allowance and therefore there were no additional changes to our results of operations. We will
continue to assess the impact of the new tax legislation on our net deferred tax assets and liabilities including state conformity,
and will continue to examine the impact this tax legislation may have on our cash taxes and on our business.
Our effective tax rate may fluctuate as a result of new tax laws and our interpretations of those new tax laws, which are
subject to significant judgments and estimates. The ongoing effects of the new tax laws and the refinement of provisional
estimates could make our results difficult to predict.
Our effective tax rate may fluctuate in the future as a result of the U.S. Tax Cuts and Jobs Act (the Act), which was enacted
on December 22, 2017. The Act introduces significant changes to U.S. income tax law that will have a meaningful impact on our
provision for income taxes once we release our valuation allowance. Accounting for the income tax effects of the Act requires
significant judgments and estimates in the interpretation and calculations of the provisions of the Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Act, we made reasonable
estimates of the effects and recorded provisional amounts in our financial statements for the year ended December 31, 2017. The
U.S. Treasury Department, the Internal Revenue Service (IRS), and other standard-setting bodies may issue guidance on how
provisions of the Act will be applied or otherwise administered that is different from our interpretation. As we collect and prepare
necessary data, and interpret the Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make
adjustments to the provisional amounts that could materially affect our financial position and results of operations as well as our
effective tax rate in the period in which the adjustments are made. Further, foreign governments may enact local tax laws in
response to the Act which may result in additional changes that could materially affect our financial position and results of operations.
Our failure to comply with the terms of our revolving line of credit could have a material adverse effect on us.
We have a revolving line of credit pursuant to a credit facility with Wells Fargo Bank, National Association (Bank) that
provides an aggregate principal amount of $30.0 million with an accordion feature that, subject to the Bank's discretion, allows
us to borrow up to a total of $50.0 million (the Line of Credit). The Line of Credit expires in September 2019. We currently
have no amount drawn down under our Line of Credit. Our personal property secures the Line of Credit. If we default on our
credit obligations, the Bank may, among other things, require immediate repayment of amounts drawn on the Line of Credit or
terminate the Line of Credit or may foreclose on our personal property that secures the Line of Credit.
The agreements governing our indebtedness contain various covenants, including those that restrict our ability to,
among other things:
•
•
•
•
•
•
•
borrow money and guarantee or provide other support for indebtedness of third-parties;
pay dividends on, redeem or repurchase our capital stock;
acquire entities or assets;
make investments in entities that we do not control, including joint ventures;
consummate a merger, consolidation or sale of all or substantially all of our assets;
enter into certain asset sale transactions; and
enter into secured financing arrangements;
These covenants may limit our ability to effectively operate our businesses. Any failure to comply with the restrictions
of any agreement governing our other indebtedness may result in an event of default under those agreements.
Our reported financial results may be harmed by changes in the accounting principles generally accepted in the
United States.
Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting
Standards Board (FASB), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A
change in these principles or interpretations could have a significant effect on our reported financial results, and may even
affect the reporting of transactions completed before the announcement or effectiveness of a change. For example, in May 2014
the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended (Topic 606), for which certain
elements affected our accounting for revenue and costs incurred to acquire contracts. We have adopted Topic 606 using the
modified retrospective transition method. Other companies in our industry may apply these accounting principles differently
than we do, adversely affecting the comparability of our financial statements. See Note 2 to our accompanying financial
statements for information about Topic 606.
32
Risks Related to Ownership of Our Common Stock
Our stock price has been and will likely continue to be volatile.
The trading price of our common stock has been, and is likely to continue to be, volatile. Since shares of our common
stock were sold in our IPO in November 2013 at a price of $12.50 per share, our stock price has ranged from $3.15 to $16.67
through December 31, 2017. In addition to the factors discussed in this Annual Report on Form 10-K, the trading price of our
common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our financial condition and operating results, including as a result of the
seasonality in our business that results from the academic calendar;
our announcement of actual results for a fiscal period that are higher or lower than projected results or our
announcement of revenues or earnings guidance that is higher or lower than expected, including as a result of
difficulty forecasting seasonal variations in our financial condition and operating results or the revenues
generated by our offerings;
issuance of new or updated research or reports by securities analysts, including the publication of unfavorable
reports or change in recommendation or downgrading of our common stock;
announcements by us or our competitors of significant products or features, technical innovations, acquisitions,
strategic relationships and partnerships, joint ventures or capital commitments;
actual or anticipated changes in our growth rate relative to our competitors;
changes in the economic performance or market valuations of companies perceived by investors to be
comparable to us;
the expiration of market standoff or contractual lock-up agreements and future sales of our common stock by our
officers, directors and existing stockholders or the anticipation of such sales;
issuances of additional shares of our common stock in connection with acquisitions;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
lawsuits threatened or filed against us;
regulatory developments in our target markets affecting us, students, colleges or brands, publishers or our
competitors;
political climate in the United States, with a focus on cutting or limiting budgets, higher education and taxation;
terrorist attacks or natural disasters or other such events impacting countries where we have operations;
international stock market conditions; and
general economic and market conditions, such as recessions, unemployment rates, the limited availability of
consumer credit, interest rate changes and currency fluctuations.
Furthermore, both domestic and international stock markets have experienced extreme price and volume fluctuations
that have affected and continue to affect the market prices of equity securities of companies in general and technology
companies in particular. These fluctuations often have been unrelated or disproportionate to the operating performance of those
companies. We believe our stock price may be particularly susceptible to volatility as the stock prices of technology and
Internet companies have often been subject to wide fluctuations. In the past, companies that have experienced volatility in the
market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation
in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other
business concerns, which could seriously harm our business.
Our management, with the oversight of the board of directors, has broad discretion as to the use of the proceeds from
previous and future sales of securities and we may not use the proceeds effectively.
Our management, with the oversight of the board of directors, has broad discretion in the application of the net proceeds
from our past and future sales of securities and could spend the proceeds in ways that do not improve our results of operations
or enhance the value of our common stock or with which our stockholders otherwise disagree. The failure of our management
to apply these funds effectively could result in unfavorable returns and uncertainty about our prospects, each of which could
cause the price of our common stock to decline.
33
If securities or industry analysts do not publish research reports about our business or publish inaccurate or unfavorable
research about our business, our stock price could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry
analysts publish about us or our business. If one or more of the analysts who cover us downgrade our common stock or publish
inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these
analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial
markets, which could cause our share price or trading volume to decline.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings
to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable
future. As a result, our stockholders may only receive a return on their investment in our common stock if the market price of
our common stock increases. In addition, our credit facility contains restrictions on our ability to pay dividends.
Delaware law and provisions in our restated certificate of incorporation and restated bylaws could make a merger, tender
offer or proxy contest difficult, thereby depressing the trading price of our common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may
discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested
stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be
beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain
provisions that may make the acquisition of our company more difficult, including the following:
•
•
•
•
•
•
•
•
•
our board of directors is classified into three classes of directors with staggered three-year terms and directors
can only be removed from office for cause and by the approval of the holders of at least two-thirds of our
outstanding common stock;
subject to certain limitations, our board of directors has the sole right to set the number of directors and to fill a
vacancy resulting from any cause or created by the expansion of our board of directors, which prevents
stockholders from being able to fill vacancies on our board of directors;
only our board of directors is authorized to call a special meeting of stockholders;
certain litigation against us can only be brought in Delaware;
our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be
established and shares of which may be issued, without the approval of the holders of common stock;
advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring
matters before an annual meeting of stockholders;
our stockholders cannot act by written consent;
our restated bylaws can only be amended by our board of directors or by the approval of the holders of at least
two-thirds of our outstanding common stock; and
certain provisions of our restated certificate of incorporation can only be amended by the approval of the holders
of at least two-thirds of our outstanding common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Santa Clara, California and consist of approximately 45,000 square feet of
space under a lease that expires in February 2019. We have additional offices in California, Oregon and New York in the United
States and internationally in India, Israel and Berlin, under leases that expire at varying times between 2018 and 2022. We
believe our facilities are adequate for our current needs and for the foreseeable future; however, we will continue to seek
additional space as needed to accommodate our growth. We also have an office space in Georgia, which we are subleasing,
under a lease that expires in January 2021.
34
ITEM 3. LEGAL PROCEEDINGS
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
analysis of whether a claim may proceed to litigation cannot be predicted 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
35
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been listed on the New York Stock Exchange under the symbol “CHGG” since November 13,
2013.
The following table sets forth for the indicated periods the high and low closing sales prices of our common stock as
reported by the New York Stock Exchange.
Years Ended December 31, 2017
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31, 2016
Fourth quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Stockholders of Record
High
Low
16.49 $
15.36 $
12.99 $
8.46 $
8.48 $
7.21 $
5.08 $
6.56 $
13.99
11.96
8.05
6.89
6.54
4.90
4.27
3.47
As of January 31, 2018, there were 55 stockholders of record of our common stock, and the closing price of our
common stock was $17.32 per share as reported on the New York Stock Exchange. Because many of our shares of common
stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders.
Dividend Policy
We have never declared or paid any cash dividend on our common stock. We intend to retain any future earnings and
do not expect to pay dividends in the foreseeable future. In addition, our credit facility contains restrictions on our ability to pay
dividends.
Unregistered Sales of Securities
We had no unregistered sales of our securities in 2017 not previously reported.
Issuer Repurchases
We did not repurchase any of our common stock in 2017, other than in connection with the forfeiture of common
stock by holders of restricted stock units in exchange for payments by the Company of statutory tax withholding amounts on
behalf of the holders arising as a result of the vesting of restricted stock units.
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of
Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be
incorporated by reference into any filing of Chegg under the Securities Act or the Exchange Act.
The following graph shows a comparison from November 13, 2013 (the date our common stock commenced trading
on the New York Stock Exchange) through December 31, 2017 of the cumulative total return for our common stock, the
36
Standard & Poor’s 500 Stock Index (S&P 500) and the Russell 2000 Index (Russell 2000). The graph assumes that $100 was
invested at the market close on November 13, 2013 in the common stock of Chegg, Inc., the S&P 500 Index and the Russell
2000 Index and data for the S&P 500 Index and the Russell 2000 Index assumes reinvestments of dividends. The stock price
performance of the following graph is not necessarily indicative of future stock price performance.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read together with Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes
included in Part II, Item 8, “Consolidated Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Our historical results are not necessarily indicative of our results in any future period.
Years Ended December 31,
2017
2016
2015
2014
2013
(in thousands, except per share amounts)
Consolidated Statements of Operations Data:
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 255,066
80,515
174,891
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(55,850)
(20,283)
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed dividend to preferred stockholders (1) . . . . . . . . . . .
— (102,557)
—
Net loss attributable to common stockholders . . . . . . . . . . . . $ (20,283) $ (42,245) $ (59,210) $ (64,758) $ (158,407)
134,489
(42,245)
—
111,524
(59,210)
—
93,849
(64,758)
$ 254,090
$ 304,834
$ 301,373
$ 255,575
Net loss per share attributable to common stockholders,
basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average shares used to compute net loss per
share attributable to common stockholders, basic and
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
______________________________
(0.20) $
(0.47) $
(0.68) $
(0.78) $
(7.58)
100,022
90,534
86,818
83,205
20,902
(1) The completion of our IPO resulted in certain accounting effects and cash tax payments related to the issuance of 11,667,254 shares of our
common stock in the form of a deemed stock dividend to the holders of our Series D and Series E convertible preferred stock valued at approximately $102.6
million and the share-based compensation expense associated with RSUs that we had granted prior to our IPO that vested as a result of the completion of our
IPO. These RSUs vested upon satisfaction of both a time-based service component and a performance condition which occurred on March 15, 2014.
37
December 31,
2017
2016
2015
2014
2013
(in thousands)
Consolidated Balance Sheet Data:
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 446,930
13,440
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock and additional paid-in capital . . . . . . . . . . . .
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
782,955
391,062
$ 290,652
$ 291,356
$ 318,127
$ 327,371
14,836
593,443
221,939
14,971
560,330
231,075
24,591
516,929
247,043
22,804
479,361
274,240
38
ITEM 7. 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
audited consolidated financial statements and the related notes included in Part II, Item 8, “Consolidated Financial Statements
and Supplementary Data” of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly in Part I, 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, Brand Partnership, Test Prep and Internships. 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. 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 that are critical to securing their
first job. We provide students with an online adaptive test preparation service currently covering the ACT and SAT exams and,
in August 2017, we entered into a partnership with Kaplan Test Prep (Kaplan) to provide their test prep courses, practice
products, and books through our website. Additionally, Chegg and Kaplan recently launched co-branded new test prep
programs starting as low as $99. 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.
During the years ended December 31, 2017, 2016 and 2015, we generated net revenues of $255.1 million, $254.1
million and $301.4 million, respectively, and in the same periods had net losses of $20.3 million, $42.2 million and $59.2
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 and maintaining 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 October 2017, we acquired
Cogeon GmbH, a privately held online learning company based in Berlin, Germany that provides adaptive math technology,
primarily through its application, Math 42. We anticipate this acquisition to increase value to existing subscribers and deepen
our reach into the high school market which will allow us to drive further growth in our existing Chegg Services. 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 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 I, Item 1A, “Risk Factors.”
39
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, and our Chegg
Tutors service. We also work with leading brands, such as Proctor & Gamble, Sallie Mae, Discover, Truth, DIRECTV and
YouTube to provide students with discounts, promotions, and other products that, based on student feedback, delight them. For
example, for Proctor & Gamble, we inserted free laundry care samples in our print textbook rental shipments to students, and
for DIRECTV, we promoted a 50% off college student discount to the popular NFL Sunday Ticket streaming service via our
email and digital channels. All of our brand advertising services and the discounts, promotions, and other products provided to
students are paid for by the brands. We additionally provide Internship services and, through our partnership with Kaplan, our
Test Prep services covering a variety of exams.
Students typically pay to access Chegg Services such as Chegg Study on a monthly or annual basis. In the aggregate,
Chegg Services revenues were 73%, 51% and 31% of net revenues during the years ended December 31, 2017, 2016 and 2015,
respectively.
Required Materials
Our Required Materials product line includes commissions 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 December 31, 2017.
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 27%, 49%, and 69% of net revenues during the years ended
December 31, 2017, 2016 and 2015, respectively.
Strategic Partnership with Ingram and Agreements with 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
commission 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
Historically, a substantial majority of our revenues were recognized ratably over the term a student rents our print
textbooks and eTextbooks or has access to our Chegg Services. This has generally resulted in our highest revenues in the fourth
quarter as it reflects more days of the academic year and our lowest revenues in the second quarter as colleges conclude their
academic year for summer and there are fewer days of rentals. The recognition of revenues from our eTextbooks and Chegg
Services will continue to follow these trends. As a result of our strategic partnership with Ingram, however, revenues from all
print textbook transactions will now be higher in the first and third quarters as we recognize a commission on the transaction
immediately rather than recognizing the revenues ratably over the term the student rents the print textbooks.
40
The variable expenses associated with our shipments of print textbooks and marketing activities historically were
highest in the first and third quarters as shipping and other fulfillment costs and marketing expenses are expensed when
incurred, generally at the beginning of academic terms. However, these variable expenses related to the shipments of print
textbooks have decreased as we have completely transitioned the shipping and fulfillment activities related to print textbooks to
Ingram.
As a result of these factors, the most concentrated periods for our revenues and expenses did 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. Our strategic partnership with Ingram has shifted peak revenues in the periods that a student
rents a textbook as a result of the immediate revenue recognition as well as our revenue sharing agreement such that we believe
our revenues will provide more meaningful insight on a sequential basis going forward. Further, while our expenses associated
with the print textbook rental business have decreased, our variable expenses related to marketing activities continue to remain
highest in the first and third quarter such that our profitability may not provide meaningful insight on a sequential basis.
Components of Results of Operations
Net Revenues
We derive our revenues from our Chegg Services, the rental or sale of print textbooks and eTextbooks, commissions
earned from Ingram and other partners from the rental or sale of their textbooks, net of allowances for refunds or charge backs
from our payment processors who process payments from credit cards, debit cards and PayPal. As of December 2016, we no
longer rent or sell our print textbooks and therefore all revenues from print textbook rental and sale orders from this date
forward are commission-based.
Our Chegg Services product line includes our Chegg Study service, our Chegg Writing service, our Chegg Tutors
service, Test Prep, through our partnership with Kaplan, Internship services, Brand Partnership services that we offer to brands
and Enrollment Marketing services to colleges, through our strategic partnership with NRCCUA. Chegg Services are offered to
students through weekly, monthly or annual subscriptions, and we recognize revenues ratably over the respective 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. 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.
We historically generated revenues from the rental of print textbooks and to a lesser extent, through the sales of print
textbooks through our website on a just-in-time basis. Rental revenues for textbooks that we owned were previously recognized
ratably over the term of the rental period, generally two to five months. Commissions earned on rental textbooks owned by
Ingram and other partners are recognized immediately when a book ships to the student. During the year ended December 31,
2017, revenues from selling textbooks on a just-in-time basis are commission based as a result of the transition to Ingram and
other partners. Our customers pay for the rental and sale of print textbooks on our website primarily by credit card, resulting in
immediate settlement of our accounts receivable. We did not recognize any revenues from the rental or sale of our own print
textbooks during the year ended December 31, 2017 and net revenues from the rental or sale of print textbooks represented
27% and 54% of our net revenues in the years ended December 31, 2016 and 2015, respectively, reflecting our transition of
print textbook rentals to Ingram and the increasing growth in our Chegg Services. 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,
and our customers pay for these services through payment processors, resulting in immediate settlement of our accounts
receivable.
As a result of our strategic partnership with Ingram and other partners, we no longer recognize rental revenues or sales
revenues from the rental or sale of a print textbook. Instead, our services revenues includes a commission on the total
transaction amount that we earn from Ingram and other partners upon Ingram's fulfillment of a rental transaction using books
for which Ingram or other partner has title and risk of loss, as opposed to the total rental transaction amount.
When deciding the most appropriate basis for presenting revenues or costs of revenues, both the legal form and
substance of the agreement between us and our business partners are reviewed to determine each party’s respective role in the
41
transaction. Where our role in a transaction is that of principal, revenues are recognized on a gross basis. This requires revenue
to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged
as a cost of revenues. Where our role in a transaction is that of an agent, revenues are recognized on a net basis with revenues
representing the margin earned. In relation to our partnership with Ingram and other partners and the rental and sale of print
textbooks, we recognize revenues on a net basis based on our role in the transaction as an agent.
Deferred revenue primarily consists of advance payments from students and customers related to rentals and
subscriptions that have not been recognized and marketing services that have yet to be performed. Deferred revenue is
recognized as revenues ratably over the term or when the services are provided and all other revenue recognition criteria have
been met.
Cost of Revenues
Our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and
services. Certain cost of revenues, including textbook depreciation expense, the cost of textbooks sold, write-offs and
allowances related to the print textbook library, have decreased during 2016 and in to 2017 as we have completely transitioned
the shipping and fulfillment activities related to the rental and sale of print textbooks to Ingram. Cost of revenues consists of
publisher content fees for eTextbooks, content amortization expense related to content that we develop or license, including
publisher agreements for which we pay one-time license fees for published content, payment processing costs, the payments
made to tutors through our Chegg Tutors service, Enrollment Marketing services leads purchased from third-party suppliers to
fulfill leads that we are unable to fulfill through our internal database, personnel costs and other direct costs related to providing
content or services. In addition, cost of revenues includes allocated information technology and facilities costs.
Changes in our cost of revenues may be disproportionate to changes in our revenues because unrecoverable costs, such
as outbound shipping and other fulfillment and payment processing fees, are expensed in the period they are incurred while our
revenues may be recognized ratably over the subscription or rental term. This effect is particularly pronounced in the first and
third quarters, corresponding to the beginning of academic terms.
We anticipate that to the extent Chegg Services revenues grow and the execution of our strategic partnership with
Ingram is successful, our gross margins will continue to improve over time.
Operating Expenses
We classify our operating expenses into five categories: technology and development, sales and marketing, general and
administrative, restructuring charges (credits) and gain on liquidation of textbooks. One of the most significant components of
our operating expenses is employee-related costs, which include share-based compensation expenses. We expect to continue to
hire new employees in order to support our current and anticipated growth. In any particular period, the timing of additional
hires could materially affect our operating expenses, both in absolute dollars and as a percentage of revenues. Our costs and
expenses contain information technology expenses and facilities expenses such as webhosting, depreciation on our
infrastructure systems, lease expense and the employee-related costs for information technology support staff. We allocate these
costs to each expense category, including cost of revenues, technology and development, sales and marketing and general and
administrative. The allocation is primarily based on the headcount in each group at the end of a period. As our business grows,
our operating expenses may increase over time to expand capacity and sustain our workforce.
Technology and Development
Our technology and development expenses consist of salaries, benefits and share-based compensation expense for
employees in our product and web design, engineering and technical teams who are responsible for maintaining our website,
developing new products and improving existing products. Technology and development costs also include amortization of
acquired intangible assets, webhosting costs, third-party development costs, research and development expenses and allocated
information technology and facilities expenses. We expense substantially all of our technology and development expenses as
they are incurred. In the past three years, our expenses have increased to support new products and services as well as to
expand our infrastructure capabilities to support back-end processes associated with our revenue transactions and internal
systems. We intend to continue making significant investments in developing new products and services and enhancing the
functionality of existing products and services.
42
Sales and Marketing
Our sales and marketing expenses consist of user and advertiser-facing marketing and promotional expenditures through
a number of targeted online marketing channels, sponsored search, display advertising, email marketing campaigns and other
initiatives. We incur salaries, benefits and share-based compensation expenses for our employees engaged in marketing,
business development and sales and sales support functions and amortization of acquired intangible assets and allocated
information technology and facilities costs. Our marketing expenses are largely variable; and we tend to incur these in the first
and third quarters of the year due to our efforts to target students at the beginning of academic terms. To the extent there is
increased or decreased competition for these traffic sources, or to the extent our mix of these channels shifts, we would expect
to see a corresponding change in our marketing expense. Sales and marketing expenses also include lead generation services
and sales commissions for our Enrollment Marketing services and brand advertising.
General and Administrative
Our general and administrative expenses consist of salaries, benefits and share-based compensation expense for certain
executives as well as our finance, legal, human resources and other administrative employees. In addition, general and
administrative expenses include outside consulting, legal and accounting services, provision for doubtful accounts and
allocated information technology and facilities costs. We have incurred additional costs as we transitioned from an “emerging
growth company” to a large accelerated filer including increased audit, legal, regulatory and other related fees.
Restructuring Charges (Credits)
Restructuring charges (credits) are primarily comprised of severance costs, contract and program termination costs, asset
impairments and costs of facility consolidation and closure. Restructuring charges are recorded upon approval of a formal
management plan and are included in the operating results of the period in which such plan is approved and the expense
becomes estimable.
Gain on Liquidation of Textbooks
Gain on liquidation of textbooks consists of proceeds we receive from the sale of previously rented print textbooks,
through our website or to wholesalers and other channels, offset by the net book value of such textbooks. Our gain on
liquidation of textbooks is driven by several factors including age of the books liquidated, the volume of books liquidated at a
given point in time and the channel through which we liquidate. When the proceeds received exceed the net book value of the
textbooks liquidated, we record a gain on liquidation of textbooks.
Interest Expense, Net and Other Income (Expense), Net
Interest expense, net consists primarily of interest expense on our debt obligations. Other income (expense), net consists
primarily of interest income on our cash and cash equivalents and investment balances as well as the accretion of the deferred
cash consideration as a result of our acquisition of Imagine Easy Solutions.
Provision for Income Taxes
Provision for income taxes consists primarily of federal and state income taxes in the United States and income taxes in
foreign jurisdictions in which we conduct business. Due to the uncertainty as to the realization of the benefits of our domestic
deferred tax assets, we have recorded a full valuation allowance against such assets. We intend to continue to maintain a full
valuation allowance on our domestic deferred tax assets until there is sufficient evidence to support the reversal of all or some
portion of these allowances.
43
Results of Operations
The following table summarizes our historical consolidated statements of operations (in thousands, except percentage of
total net revenues):
Net revenues:
Years Ended December 31,
2017
2016
2015
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
—
255,066
—
255,066
— % $
100
—
100
Cost of revenues(1):
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues. . . . . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses(1):
Technology and development . . . . . . . . . . . . . . . . .
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . .
Restructuring charges (credits) . . . . . . . . . . . . . . . .
Gain on liquidation of textbooks . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . .
Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense, net and other income
(expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before provision for income taxes. . . . . . . . . .
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . .
486
(18,481)
1,802
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (20,283)
—
80,175
—
80,175
174,891
81,926
51,240
64,411
1,047
(4,766)
193,858
(18,967)
—
31
—
31
69
32
20
25
1
(2)
76
(7)
39,837
182,399
31,854
254,090
28,637
56,206
34,758
119,601
134,489
66,331
53,949
55,372
(423)
(670)
174,559
(40,070)
—
(7)
(468)
(40,538)
(1)
1,707
(8)% $ (42,245)
16 % $ 120,365
133,095
72
47,913
12
301,373
100
40 %
44
16
100
11
22
14
47
53
26
21
22
—
—
69
(16)
98,162
45,458
46,229
189,849
111,524
59,391
64,082
45,209
4,868
(4,326)
169,224
(57,700)
—
(16)
(31)
(57,731)
(1)
1,479
(17)% $ (59,210)
33
15
15
63
37
20
21
15
2
(2)
56
(19)
—
(19)
(1)
(20)%
(1) Includes share-based compensation expense as follows:
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Technology and development. . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative. . . . . . . . . . . . . . . . . . . . . . . .
Total share-based compensation expense . . . . . . . . . . $
316
14,333
5,007
18,703
38,359
$
$
172
14,771
6,124
20,718
41,785
$
$
262
11,992
7,901
18,620
38,775
44
Years Ended December 31, 2017, 2016 and 2015
Net Revenues
Net revenues in the year ended December 31, 2017 increased $1.0 million, remaining relatively flat, compared to the
same period in 2016. Rental revenues decreased $39.8 million, or 100%, while services revenues increased $72.7 million,
or 40%, and sales revenues decreased $31.9 million, or 100%.
Net revenues in the year ended December 31, 2016 decreased $47.3 million, or 16%, compared to the same period
in 2015. Rental revenues decreased $80.5 million or 67%, while services revenues increased $49.3 million, or 37%, and sales
revenues decreased $16.1 million, or 34%.
The decrease in rental revenues and sales revenues during the years ended December 31, 2017 and 2016 was due to our
strategic partnership with Ingram. As a result of our strategic partnership, our rental revenues and sales revenues are classified
as services revenues to represent the commission on the total transaction amount that we earn from Ingram upon their
fulfillment of a rental transaction using books for which Ingram has title and risk of loss rather than recognizing the total rental
or sales revenues from transactions using our print textbooks. The increase in services revenues during the years ended
December 31, 2017 and 2016 was driven primarily from growth across our other offerings for students which included
increased revenues from Chegg Study and Chegg Writing services as well as an increase in the commissions earned from
Ingram.
The following table sets forth our total net revenues for the periods shown for our Chegg Services and Required
Materials product lines (dollars in thousands):
Years Ended December 31,
Change in 2017
Change in 2016
Chegg Services . . . . . . . . . . . . . . . . . . $ 185,683
69,383
Required Materials . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . $ 255,066
2017
2016
$ 129,335
124,755
$ 254,090
$
2015
94,285
207,088
$ 301,373
$
56,348
(55,372)
976
$
$
$
%
35,050
44 % $
(82,333)
(44)%
— % $ (47,283)
%
37 %
(40)%
(16)%
Chegg Services revenues increased $56.3 million, or 44%, in the year ended December 31, 2017, compared to the same
period in 2016 due to growth in our Chegg Study and Chegg Writing services. Chegg Services revenues represented 73% and
51% of net revenues during the years ended December 31, 2017 and 2016, respectively. Required Materials revenues
decreased $55.4 million, or 44%, in the year ended December 31, 2017 compared to the same period in 2016 primarily due to
our strategic partnership with Ingram. Our Required Materials revenues are comprised of a commission on the total transaction
amount that we earn from Ingram rather than recognizing the total rental or sales revenues from transactions using our print
textbooks.. Required Materials revenues decreased throughout 2017 as we fully transitioned new investments in the print
textbook library and logistics and fulfillment for print textbook rental and sale orders to Ingram. Required Materials revenues
represented 27% and 49% of net revenues during the years ended December 31, 2017 and 2016, respectively.
Chegg Services revenues increased $35.1 million, or 37%, in the year ended December 31, 2016, compared to the same
period in 2015 due to growth in subscribers for our Chegg Study and Chegg Tutors services as well as revenues from our
acquisition of Imagine Easy in the second quarter of 2016. Chegg Services revenues represented 51% and 31% of net revenues
during the years ended December 31, 2016 and 2015, respectively. Required Materials revenues decreased $82.3 million,
or 40%, in the year ended December 31, 2016 compared to the same period in 2015 primarily due to our strategic partnership
with Ingram. Our Required Materials revenues are increasingly comprised of a commission on the total transaction amount that
we earn from Ingram rather than recognizing the total rental or sales revenues from transactions using our print textbooks..
Required Materials revenues decreased throughout 2016 as we fully transitioned new investments in the print textbook library
and logistics and fulfillment for print textbook rental and sale orders to Ingram. Required Materials revenues
represented 49% and 69% of net revenues during the years ended December 31, 2016 and 2015, respectively.
45
Cost of Revenues
The following table sets forth our cost of revenues for the periods shown (dollars in thousands):
Cost of revenues(1) . . . . . . . . . . . . . . . . . $
(1) Includes share-based compensation expense
of:
$
Years Ended December 31,
Change in 2017
Change in 2016
2017
80,175
2016
$ 119,601
2015
$ 189,849
$
$ (39,426)
%
(33)% $ (70,248)
$
%
(37)%
316
$
172
$
262
$
144
84 % $
(90)
(34 )%
Cost of revenues in the year ended December 31, 2017 decreased by $39.4 million, or 33%, compared to the same period
in 2016. The decrease was primarily attributable to a decrease in textbook depreciation of $9.3 million, lower order fulfillment
costs of $11.3 million, and lower cost of print textbooks sold of $25.3 million. These decreases were partially offset by higher
amortization of digital content of $2.6 million, higher payment processing fees of $1.0 million, and higher employee-related
expenses of $1.2 million. As a result, gross margins increased to 69% in the year ended December 31, 2017, from 53% during
the same period in 2016.
Cost of revenues in the year ended December 31, 2016 decreased by $70.2 million, or 37%, compared to the same period
in 2015. The decrease was primarily attributable to a decrease in textbook depreciation of $34.3 million, lower order fulfillment
costs of $18.3 million, lower write-offs related to our print textbook library of $4.2 million, lower warehouse personnel costs
of $3.1 million and lower cost of print textbooks sold of $16.4 million. These decreases were partially offset by higher
amortization of digital content of $5.3 million. As a result, gross margins increased to 53% in the year ended December 31,
2016, from 37% during the same period in 2015.
The decreases in cost of revenues in the year ended December 31, 2017 compared to the same period in 2016 and in the
year ended December 31, 2016 compared to the same period in 2015 resulted primarily from Ingram's fulfillment of print
textbook rental and sale orders.
Operating Expenses
The following table sets forth our total operating expenses for the periods shown (dollars in thousands):
Years Ended December 31,
Change in 2017
Change in 2016
2017
81,926
Technology and development(1) . . . . . . $
Sales and marketing(1) . . . . . . . . . . . . . .
General and administrative(1) . . . . . . . .
Restructuring charges (credits) . . . . . .
Gain on liquidation of textbooks . . . .
(4,766)
Total operating expenses. . . . . . . . . . . $ 193,858
64,411
51,240
1,047
$
2016
66,331
53,949
55,372
(423)
(670)
$ 174,559
$
2015
59,391
64,082
45,209
4,868
(4,326)
$ 169,224
$
$
$
15,595
(2,709)
9,039
1,470
(4,096)
19,299
%
24% $
(5)
16
n/m
611
$
6,940
(10,133)
10,163
(5,291)
3,656
11% $
5,335
%
12%
(16)
22
n/m
(85)
3%
(1) Includes share-based compensation expense
of:
Technology and development . . . . . . . . . . . $
14,333
$
14,771
$
11,992
$
Sales and marketing . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . .
5,007
18,703
6,124
20,718
7,901
18,620
(438)
(1,117)
(2,015)
Share-based compensation expense. . . . $
38,043
$
41,613
$
38,513
$
(3,570)
(9)% $
_______________________________________
n/m - not meaningful
46
(3)% $
2,779
23 %
(18)
(10)
(1,777)
2,098
3,100
(22)
11
8 %
Technology and Development
Technology and development expenses during the year ended December 31, 2017 increased $15.6 million, or 24%,
compared to the same period in 2016. The increase was primarily attributable to higher employee-related expenses of $10.4
million, higher web hosting and software license fees of $3.4 million, higher outside services of $0.9 million, higher
depreciation of $0.7 million, compared to the same period in 2016. Technology and development as a percentage of net
revenues were 32% during the year ended December 31, 2017 compared to 26% of net revenues during the same period in
2016.
Technology and development expenses during the year ended December 31, 2016 increased $6.9 million, or 12%,
compared to the same period in 2015. The increase was primarily attributable to higher employee-related expenses of $2.7
million, higher share-based compensation expense of $2.8 million, and higher web hosting and software licensing fees of $2.0
million, compared to the same period in 2015. Technology and development as a percentage of net revenues were 26% during
the year ended December 31, 2016 compared to 20% of net revenues during the same period in 2015.
Sales and Marketing
Sales and marketing expenses during the year ended December 31, 2017 decreased by $2.7 million, or 5%, compared to
the same period in 2016. The decrease was primarily attributable to lower employee-related expenses of $2.7 million, lower
share-based compensation expense of $1.1 million, and lower marketing expenses of $1.3 million, compared to the same period
in 2016. These decreases were partially offset by higher software license fees of $1.3 million and higher outside services of
$1.0 million compared to the same period in 2016. Sales and marketing expenses as a percentage of net revenues were 20%
during the year ended December 31, 2017 compared to 21% of net revenues during the same period in 2016.
Sales and marketing expenses during the year ended December 31, 2016 decreased by $10.1 million, or 16%, compared
to the same period in 2015. The decrease was primarily attributable to lower employee-related expenses of $1.5 million, lower
share-based compensation expense of $1.8 million, and lower marketing expenses of $7.4 million, compared to the same period
in 2015. Sales and marketing expenses as a percentage of net revenues remained flat during the year ended December 31, 2016
compared the same period in 2015.
General and Administrative
General and administrative expenses in the year ended December 31, 2017 increased $9.0 million, or 16%, compared to
the same period in 2016. The increase was primarily attributable to higher employee-related expenses of $4.6 million, higher
professional fees of $4.1 million primarily the result of the transition to Section 404(b) of the Sarbanes-Oxley Act of 2002,
implementation of Accounting Standards Codification 606, and legal fees, higher facilities expenses of $1.1 million, and higher
office expenses of $1.0 million, compared to the same period in 2016. These increases were partially offset by lower share-
based compensation expense of $2.0 million, compared to the same period in 2016. General and administrative expenses as a
percentage of net revenues were 25% during the year ended December 31, 2017 compared to 22% of net revenues during the
same period in 2016.
General and administrative expenses in the year ended December 31, 2016 increased $10.2 million, or 22%, compared to
the same period in 2015. The increase was primarily attributable to higher employee-related expenses of $5.3 million, higher
share-based compensation expenses of $2.1 million, higher technology expenses of $0.9 million, higher outside services of $0.7
million, and higher professional fees of $0.9 million, compared to the same period in 2015. General and administrative
expenses as a percentage of net revenues were 22% during the year ended December 31, 2016 compared to 15% of net
revenues during the same period in 2015.
Restructuring Charges (Credits)
Restructuring charges of $1.0 million recorded during the year ended December 31, 2017 were related to our strategic
partnership with NRCCUA which resulted in the termination of employees supporting the sales and account support functions
of our Enrollment Marketing offering. We expect costs incurred to date related to workforce reduction to be fully paid in 2018.
Restructuring credits of $0.4 million recorded during the year ended December 31, 2016 were primarily related to a
partial reversal of previously accrued lease termination costs due to our subtenant leasing additional space. We expect costs
incurred to date related to the lease termination and other costs are expected to be fully paid by 2021.
47
Gain on Liquidation of Textbooks
During the years ended December 31, 2017, 2016 and 2015, we recorded a gain on liquidation of print textbooks of $4.8
million, $0.7 million and $4.3 million, respectively, resulting from proceeds received from liquidation of previously rented
print textbooks on our website and through various other liquidation channels.
Interest Expense, Net and Other Income (Expense), Net
The following table sets forth our interest expense, net, and other income (expense), net, for the periods shown (dollars
in thousands):
Interest expense, net . . . . . . . . . . . . . . $
Other income (expense), net . . . . . . . .
Total interest expense, net and other
income (expense), net . . . . . . . . . . . . . $
_______________________________________
n/m - not meaningful
Years Ended December 31,
Change in 2017
Change in 2016
2017
2016
2015
$
(74) $
560
(171) $
(297)
(247) $
216
486
$
(468) $
(31) $
97
857
954
%
(57)% $
n/m
$
76
(513)
%
(31)%
n/m
n/m $
(437)
n/m
Interest expense, net, decreased during the year ended December 31, 2017 compared to the same period in 2016 and in
the year ended December 31, 2016 compared to the same period in 2015. During the year ended December 31, 2016 we
replaced our previous expired credit facility with a new line of credit that carries a lower interest rate.
Other income (expense), net, was a net income during the year ended December 31, 2017 compared to a net expense in
the same period in 2016, primarily attributable to interest earned on investments purchased in 2017 with the net proceeds from
our follow-on offering compared to the accretion of the deferred cash consideration as a result of our acquisition of Imagine
Easy Solutions. Other income (expense), net, was a net expense during the year ended December 31, 2016 compared to a net
income in the same period in 2015, primarily attributable to the accretion of the deferred cash consideration as a result of our
acquisition of Imagine Easy Solutions.
Provision for Income Taxes
The following table sets forth our provision for income taxes for the periods shown (dollars in thousands):
Provision for income taxes . . . . . . . . . $
1,802
$
1,707
$
1,479
$
95
6% $
228
15%
Years Ended December 31,
2017
2016
2015
Change in 2017
$
%
Change in 2016
$
%
We recorded an income tax provision of approximately $1.8 million, $1.7 million, and $1.5 million for the years ended
December 31, 2017, 2016, and 2015, respectively, which was primarily due to state and foreign income tax expense and federal
and state tax expense related to the tax amortization of acquired indefinite lived intangible assets.
48
Liquidity and Capital Resources
As of December 31, 2017, our principal sources of liquidity were cash, cash equivalents, and investments totaling
$228.5 million, which were held for working capital purposes. In August 2017, we completed a follow-on offering in which we
raised net proceeds of $147.6 million after deducting underwriting discounts, commissions and offering costs. The substantial
majority of our net revenues are from e-commerce transactions with students, which are settled immediately through payment
processors, as opposed to our accounts payable, which are settled based on contractual payment terms with our suppliers. We
also have an aggregate principal amount of $30.0 million available under our 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. As of December 31, 2017, 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.
As a result of our strategic partnership with Ingram, we will continue to buy used print textbooks on Ingram’s behalf,
including print textbooks through our buyback program, and invoice Ingram at cost. We provided Ingram with extended
payment terms in 2015 and 2016 for the purchase of print textbooks, before moving to normal payment terms in January 2017.
We had a reimbursement balance included within other current assets on our consolidated balance sheets related to the purchase
of these textbooks of $4.2 million and $18.8 million as of December 31, 2017 and 2016, respectively. As a result of our
strategic partnership with Ingram, we anticipate having significantly more working capital.
During the years ended December 31, 2017, 2016, and 2015, our proceeds from print textbook liquidations exceeded our
purchases of print textbooks and resulted in a cash inflow of $6.9 million, $24.8 million, and $6.0 million, respectively. As a
result of our strategic partnership with Ingram, we no longer make new investments in the print textbook library and since May
1, 2015, Ingram has been responsible for all new investments in the print textbook library.
As of December 31, 2017, we have incurred cumulative losses of $391.6 million from our operations and we expect to
incur additional losses in the future. Our operations have been financed primarily by our initial public offering of our common
stock (IPO), our 2017 follow-on public offering, and cash generated from operations.
We believe that our existing sources of liquidity will be sufficient to fund our operations and debt service obligations for
at least the next 12 months. Our future capital requirements will depend on many factors including our rate of revenue growth,
our investments in technology and development activities, our acquisition of new products and services and our sales and
marketing activities. To the extent that existing cash and cash from operations are insufficient to fund our future activities, we
may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on
terms favorable to us or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately
fund our business plans and it could have a negative effect on our business, operating cash flows and financial condition.
Most of our cash is held in the United States. As of December 31, 2017, our foreign subsidiaries held an insignificant
amount of cash in foreign jurisdictions. We currently do not foresee a need to repatriate these funds however we may take
advantage of the transition tax in the 2017 Tax Cuts and Jobs Act that taxes any previously deferred foreign earnings and profits
in 2017 at a reduced tax rate. In addition, based on our current and future needs, we believe our current funding and capital
resources for our international operations are adequate.
The following table sets forth our cash flows (in thousands):
Consolidated Statements of Cash Flows Data:
$
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (136,234) $
$
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,214
51,148
24,938
$
(5,963) $
(8,675) $
(82)
8,271
2,723
Years Ended December 31,
2017
2016
2015
Cash Flows from Operating Activities
Although we incurred net losses during the years ended December 31, 2017, 2016 and 2015, our net losses were fully or
partially offset by non-cash expenditures such as other depreciation and amortization expense, share-based compensation
expense, and historically from print textbook library depreciation expense.
Net cash provided by operating activities during the year ended December 31, 2017 was $51.1 million. Our net loss of
49
$20.3 million was offset by significant non-cash operating expenses, including other depreciation and amortization expense of
$19.3 million, share-based compensation expense of $38.4 million, and the change in our prepaid and other current assets of
$13.6 million, which was primarily driven by the decline in the reimbursement balance from Ingram as they moved to normal
payment terms in 2017.
Net cash provided by operating activities during the year ended December 31, 2016 was $24.9 million. Our net loss
of $42.2 million was offset by significant non-cash operating expenses, including print textbook library depreciation expense of
$9.3 million, other depreciation and amortization expense of $14.6 million, share-based compensation expense of $41.8
million and loss from write-offs of print textbooks of $1.1 million.
Net cash used in operating activities during the year ended December 31, 2015 was $0.1 million. Our net loss of $59.2
million was increased by the change in our prepaid expenses and other current assets of $27.9 million and partially offset by
significant non-cash operating expenses, including print textbook library depreciation expense of $43.6 million, other
depreciation and amortization expense of $11.7 million, share-based compensation expense of $38.8 million and loss from
write-offs of print textbooks of $5.3 million. During the year ended December 31, 2015, we saw a decline in our textbook
depreciation expense and an increase in the change of our prepaid expenses and other current assets, which was a result of our
strategic partnership with Ingram, where we are no longer making investments in our print textbook library yet continue to buy
books on Ingram's behalf, while providing them with extended payment terms. The effects of these two items were the primary
reasons we had net cash used in operating activities for the year ended December 31, 2015.
Cash Flows from Investing Activities
Cash flows from investing activities have been primarily related to the purchase of marketable securities, acquisition of
businesses, purchases of property and equipment, and historically from the purchases of print textbooks, offset by proceeds
from the sale and maturity of marketable securities and the proceeds from the liquidation of print textbooks.
Net cash used in investing activities during the year ended December 31, 2017 was $136.2 million and was primarily
used for the purchases of marketable securities of $128.2 million, purchases of property and equipment of $26.1 million, and
the acquisition of business of $14.9 million, partially offset by proceeds from the sale or maturity of marketable securities of
$26.1 million and proceeds from the liquidation of print textbooks of $6.9 million.
Net cash used in investing activities during the year ended December 31, 2016 was $6.0 million and was primarily used
for the purchases of marketable securities of $7.6 million, purchases of property and equipment of $24.7 million, acquisition of
businesses of $27.1 million, and the purchase of a strategic equity investment in a third party of $1.0 million, partially offset by
proceeds from the sale or maturity of marketable securities of $29.7 million and proceeds from the liquidation of print
textbooks of $25.6 million.
Net cash provided by investing activities during the year ended December 31, 2015 was $8.3 million and was primarily
used for the purchases of print textbooks of $32.3 million, purchases of marketable securities of $35.6 million, purchases of
property and equipment of $8.3 million, and the purchase of a strategic equity investment in a third party of $2.0 million,
partially offset by proceeds from the sale or maturity of marketable securities of $48.2 million and proceeds from the
liquidation of print textbooks of $38.3 million.
Cash Flows from Financing Activities
Cash flows from financing activities have been primarily related to the issuance of common stock under stock plans
offset by the payment of taxes related to the net share settlement of equity awards.
Net cash provided by financing activities during the year ended December 31, 2017 was $134.2 million and was related
to the proceeds from our follow-on offering, net of offering costs, of $147.6 million and the proceeds from the issuance of
common stock under stock plans of $23.7 million partially offset by the payment of $20.1 million in taxes related to the net
share settlement of equity awards and the payment of deferred cash consideration related to prior acquisitions of $16.9 million.
Net cash used in financing activities during the year ended December 31, 2016 was $8.7 million and was related to the
payment of $10.8 million in taxes related to the net share settlement of equity awards partially offset by the proceeds from the
issuance of common stock under stock plans of $2.1 million.
Net cash provided by financing activities during the year ended December 31, 2015 was $2.7 million and was related to
the proceeds from the issuance of common stock under stock plans of $13.7 million partially offset by the payment of $8.7
50
million in taxes related to the net share settlement of equity awards, and the repurchase of common stock of $2.3
million associated with a put option granted in connection with a prior acquisition.
Contractual Obligations and Other Commitments
The following is a summary of the contractual commitments associated with our lease obligations as of December 31,
2017 (in thousands):
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating lease obligations (1) . . . . . . . . . . . . . . . . . . . . . . . .
Total contractual obligations . . . . . . . . . . . . . . . . . . . . . . . . . $
Less than
More than
Total
22,245
6,626
28,871
1 Year
14,457
2,934
17,391
$
$
1-3 Years
3-5 Years
5 Years
$
$
7,688
2,977
10,665
$
$
100
715
815
$
$
—
—
—
_____________________________________________________
(1) Our offices are leased under operating leases, which expire at various dates through 2022.
In addition, our other liabilities include $2.0 million related to uncertain tax positions as of December 31, 2017. The
timing of the resolution of these positions is uncertain and we are unable to make a reasonably reliable estimate of the timing of
payments in individual years beyond one year. As a result, this amount is not included in the above table.
Off-Balance Sheet Arrangements
Through December 31, 2017, we did not have any relationships with unconsolidated organizations or financial
partnerships, such as structured finance or special purpose entities that would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies, Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the
United States (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. These
estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily
apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our
actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used,
or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that
assumptions and estimates of the following accounting policies involve a greater degree of judgment and complexity.
Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial
condition and results of operations. For further information on all of our significant accounting policies, see Note 2 of our
accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, "Consolidated Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K.
Revenue Recognition and Deferred Revenue
We evaluate whether we are acting as a principal or an agent in a transaction, and therefore whether we would record the
gross sales amount and related costs as revenues or the net amount earned as commissions from the sale of third-party products.
Our determination is based on our evaluation of certain indicators including whether we are responsible for fulfillment of the
products or services in the transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers,
none of which is presumptive or determinative. Our evaluation requires management to make a judgment based on the terms of
an arrangement in our determination of whether we act as a principal or an agent. If our evaluation of an arrangement was
incorrect, this could impact the amount of revenues and cost of revenues recognized in a given period.
51
Some of our customer arrangements for Enrollment Marketing and Brand Partnership services include multiple
deliverables, which include the delivery of student leads as well as other services to the end customer. We have determined
these deliverables qualify as separate units of accounting, as they have value to the customer on a standalone basis and our
arrangements do not contain a right of return. For these arrangements that contain multiple deliverables, we allocate the
arrangement consideration based on the relative selling price method in accordance with the selling price hierarchy, which
includes: (i) vendor-specific objective evidence of fair value (VSOE), when available; (ii) third-party evidence of selling price
(TPE), if VSOE does not exist; and (iii) estimated selling price (ESP), if neither VSOE nor TPE is available.
We determine VSOE based on our historical pricing and discounting practices for the specific solution when sold
separately and when a substantial majority of the selling prices for these services fall within a narrow range. TPE is determined
based on competitor prices for similar deliverables when sold separately. Generally our go-to-market strategy differs from that
of our peers, and our offerings contain a significant level of differentiation such that the comparable pricing of services with
similar functionality cannot be obtained.
As we have not established VSOE or TPE for our marketing services, we have used ESP in our allocation of
arrangement consideration. We have determined ESP by considering multiple factors including, but not limited to, prices
charged for similar offerings, sales volume, geographies, market conditions, the competitive landscape and pricing practices.
Our determination of ESP requires management to make a judgment in which factors to consider when determining ESP. If
different factors were considered we could conclude a different determination of ESP and this could have a material impact to
the amount of revenues recognized. We believe the factors considered best represent the price at which we would transact a
sale if the services were sold on a standalone basis, and we regularly assess the method used to determine ESP.
Impairment of Acquired Intangible Assets and Other Long-Lived Assets
We assess the impairment of acquired intangible assets and other long-lived assets at least annually and whenever events
or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Factors that we consider
in determining when to perform an impairment review include significant negative industry or economic trends or significant
changes or planned changes in the use of the assets. When measuring the recoverability of these assets, we will make
assumptions regarding our estimated future cash flows expected to be generated by the assets. If our estimates or related
assumptions change in the future, we may be required to impair these assets. We did not record any impairment charges related
to acquired intangible assets or other long-live assets during the years ended December 31, 2017, 2016, and 2015. As of
December 31, 2017 and 2016, we had intangible assets, net, of $21.2 million and $20.7 million, respectively and property and
equipment, net of $47.5 million and $35.3 million, respectively.
Goodwill and Indefinite Lived Intangible Asset
Goodwill and our indefinite lived intangible asset are tested for impairment at least annually or whenever events or
changes in circumstances indicate that their carrying values may not be recoverable. We first assess qualitative factors to
determine whether it is necessary to perform the two-step quantitative impairment test. In our qualitative assessment, we
consider factors including economic conditions, industry and market conditions and developments, overall financial
performance and other relevant entity-specific events in determining whether it is more likely than not that the fair value of our
reporting unit is less than the carrying amount. Our qualitative assessment requires management to make judgments based on
the factors listed above in our determination of whether events or changes in circumstances indicate that the carrying values
may not be recoverable. Should we conclude that it is more likely than not that our carrying values have been impaired, we
would perform a two-step impairment test. The two-step impairment test requires us to perform a valuation of our goodwill
and indefinite lived intangible asset which includes making assumptions regarding our estimated future cash flows to determine
the fair value of our business. If our estimates or related assumptions change in the future, we may be required to record
impairment loss. We have not recognized any impairment of goodwill or our indefinite lived intangible asset since our
inception. As of December 31, 2017 and 2016, we had goodwill of $125.3 million and $116.2 million, respectively, and an
indefinite lived intangible asset related to the internships.com trade name of $3.6 million.
Share-based Compensation
We measure and recognize share-based compensation expense for all awards made to employees, directors and
consultants, including restricted stock units (RSUs), performance-based RSUs (PSUs) and our employee stock purchase plan
(ESPP) based on estimated fair values.
52
We must estimate a forfeiture rate to calculate the share-based compensation expense related to our awards. Estimated
forfeitures are determined based on historical data and management’s expectation of exercise behaviors. We will continue to
evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and
other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our share-based compensation
expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised
forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the
share-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the
previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation
expense recognized in the financial statements.
Share-based compensation expense recognized related to PSUs is subject to the achievement of performance objectives
and requires significant judgment by management in determining the current level of attainment of such performance
objectives. Management may consider factors such as the latest revenue forecasts and general business trends in the
assessment of whether or not a PSU award will be obtained. Subsequent changes to these considerations may have a material
impact on the amount of share-based compensation expense recognized in the period related to PSU awards, which may lead to
volatility of share-based compensation expense period-to-period.
We will continue to use judgment in evaluating the assumptions related to our share-based compensation expense on a
prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates,
which could materially impact our future share-based compensation expense.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements. We
currently are providing a valuation allowance on domestic deferred tax assets. If or when recognizing deferred tax assets in the
future, we will consider all available positive and negative evidence including future reversals of existing taxable temporary
differences, projected future taxable income, tax-planning strategies, and results of recent operations.
We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more likely
than not that the tax positions will be sustained on the basis of technical merits of the position and (2) for those tax positions
that meet the more likely than not recognition threshold, we recognize the tax benefit as the largest amount that is cumulative
more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Recent Accounting Pronouncements
For relevant recent accounting pronouncements, see Note 2-Significant Accounting Policies of our accompanying Notes
to Consolidated Financial Statements included in Part II, Item 8, "Consolidated Financial Statements and Supplementary Data"
of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes to foreign currency exchange rates, interest rates and inflation.
Foreign Currency Exchange Risk
International revenues as a percentage of net revenues is not significant and our sales contracts are denominated
primarily in U.S. dollars. A portion of our operating expenses are incurred outside the United States and are denominated in
foreign currencies, which are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in
the Chinese Renminbi and Indian Rupee. To date, we have not entered into derivatives or hedging strategies as our exposure to
foreign currency exchange rates has not been material to our historical operating results. There were no significant foreign
exchange gains or losses in the years ended December 31, 2017, 2016 and 2015.
Interest Rate Sensitivity
We had cash and cash equivalents totaling $126.5 million and $77.3 million as of December 31, 2017 and 2016,
respectively. Additionally, we had investments of $102.0 million as of December 31, 2017 which were purchased during the
year ended December 31, 2017. Our cash and cash equivalents and investments consist of cash, money market funds,
53
commercial paper, corporate securities, and U.S. treasury securities. Our investment policy and strategy are focused on
preservation of capital, supporting our liquidity requirements, and delivering competitive returns subject to prevailing market
conditions. Changes in U.S. interest rates affect the interest earned on our cash and cash equivalents and investments and the
market value of those securities. A hypothetical 100 basis point increase in interest rates would not result in a material impact in
the fair value of our available-for-sale securities as of December 31, 2017. Any realized gains or losses resulting from such
interest rate changes would only occur if we sold the investments prior to maturity. We were not exposed to material risks due
to changes in market interest rates given the liquidity of the cash and money market accounts and investments in which we
invested our cash.
Interest rate risk also reflects our exposure to movements in interest rates associated with our Line of Credit. The
interest-bearing credit facility is denominated in U.S. dollars and the interest expense is based on the LIBOR interest rate. As of
December 31, 2017, we did not have an outstanding balance on our Line of Credit.
54
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
56
59
60
61
62
63
64
55
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Chegg, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Chegg, Inc. (the Company) as of December 31, 2017 and
2016, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2017, and the related notes and the financial statement schedules listed in the
Index at Item 15.2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and
2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 26, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/S/ Ernst & Young LLP
We have served as the Company’s auditor since 2009.
San Jose, California
February 26, 2018
56
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Chegg, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Chegg Inc.’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), (the COSO criteria). In our opinion, Chegg Inc. (the Company) maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
As indicated in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of Cogeon GmbH, which is included in the 2017 consolidated financial statements of the Company and constituted
less than 1% and 1% of total and net assets, respectively, as of December 31, 2017 and less than 1% and 1% of revenues and
net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not
include an evaluation of the internal control over financial reporting of Cogeon GmbH.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2017 consolidated financial statements of the Company and our report dated February 26, 2018 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
57
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ Ernst & Young LLP
San Jose, California
February 26, 2018
58
CHEGG, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)
December 31,
2017
December 31,
2016
Assets
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $259 and $436 at December
31, 2017 and December 31, 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Textbook library, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Liabilities and stockholders' equity
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities
Total other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 10)
Stockholders' equity:
126,457
81,742
$
77,329
—
10,855
2,043
7,845
228,942
20,305
—
47,493
125,272
21,153
3,765
446,930
7,049
13,440
31,074
51,563
4,305
55,868
$
$
10,451
2,579
21,014
111,373
—
2,575
35,305
116,239
20,748
4,412
290,652
5,175
14,836
44,319
64,330
4,383
68,713
Preferred stock, $0.001 par value – 10,000,000 shares authorized, no shares issued and
outstanding at December 31, 2017 and December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.001 par value – 400,000,000 shares authorized; 109,667,640 and
91,708,839 shares issued and outstanding at December 31, 2017 and December 31, 2016,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
110
782,845
(282)
(391,611)
391,062
446,930
$
92
593,351
(176)
(371,328)
221,939
290,652
See Notes to Consolidated Financial Statements.
59
CHEGG, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years Ended December 31,
2017
2016
2015
Net revenues:
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues:
Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Technology and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges (credits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on liquidation of textbooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net and other income (expense), net:
— $
255,066
—
255,066
—
80,175
—
80,175
174,891
81,926
51,240
64,411
1,047
(4,766)
193,858
(18,967)
$
39,837
182,399
31,854
254,090
28,637
56,206
34,758
119,601
134,489
66,331
53,949
55,372
(423)
(670)
174,559
(40,070)
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense, net and other income (expense), net. . . . . . . . . . . . . . . . .
Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net loss per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares used to compute net loss per share, basic and diluted .
(74)
560
486
(18,481)
1,802
(20,283) $
(0.20) $
(171)
(297)
(468)
(40,538)
1,707
(42,245) $
(0.47) $
100,022
90,534
See Notes to Consolidated Financial Statements.
120,365
133,095
47,913
301,373
98,162
45,458
46,229
189,849
111,524
59,391
64,082
45,209
4,868
(4,326)
169,224
(57,700)
(247)
216
(31)
(57,731)
1,479
(59,210)
(0.68)
86,818
60
CHEGG, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive loss:
Years Ended December 31,
2017
(20,283) $
2016
(42,245) $
2015
(59,210)
Change in unrealized (loss) gain on available for sale investments. . . . . . . . .
Change in foreign currency translation adjustments, net of tax. . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(187)
81
(106)
(20,389) $
25
(29)
(4)
(42,249) $
(8)
(151)
(159)
(59,369)
See Notes to Consolidated Financial Statements.
61
CHEGG, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
(269,873) $
(13) $
Total
Stockholders’
Equity
Balances at December 31, 2014. . . . . . . . . . . . . . . . . . . . .
Issuance of common stock upon exercise of stock options
and ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net issuance of common stock for settlement of restricted
stock units (RSUs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrant exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in connection with acquisition .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2015. . . . . . . . . . . . . . . . . . . . .
Issuance of common stock upon exercise of stock options
and ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net issuance of common stock for settlement of RSUs. . . .
Share-based compensation expense. . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2016. . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in connection with follow-on
offering, net of offering costs. . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock upon exercise of stock options
and ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net issuance of common stock for settlement of RSUs. . . .
Warrant exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense. . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2017. . . . . . . . . . . . . . . . . . . . .
Common Stock
Shares
84,008
Par
Value
$ 84
2,165
1,624
368
125
(190)
—
—
—
88,100
590
3,019
—
—
—
91,709
11,500
3,280
3,155
24
—
—
—
2
2
—
—
—
—
—
—
88
1
3
—
—
—
92
12
3
3
—
—
—
—
$
516,845
$
13,694
(8,712)
—
825
(1,185)
38,775
—
—
560,242
2,103
(10,779)
41,785
—
—
593,351
147,597
23,653
(20,115)
—
38,359
—
—
—
—
—
—
—
—
(159)
—
(172)
—
—
—
(4)
—
(176)
—
—
—
—
—
—
—
—
—
—
—
(59,210)
(329,083)
—
—
—
—
(42,245)
(371,328)
—
—
—
—
—
(106)
—
(282) $
—
—
(20,283)
(391,611) $
247,043
13,696
(8,710)
—
825
(1,185)
38,775
(159)
(59,210)
231,075
2,104
(10,776)
41,785
(4)
(42,245)
221,939
147,609
23,656
(20,112)
—
38,359
(106)
(20,283)
391,062
109,668
$ 110
$
782,845
$
See Notes to Consolidated Financial Statements.
62
CHEGG, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Textbook library depreciation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of warrants and deferred loan costs . . . . . . . . . . . . . . . . . . . . . . . . .
Other depreciation and amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (release) for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on liquidation of textbooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from write-offs of textbooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized loss (gain) on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from write-off of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest accretion on deferred consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in assets and liabilities net of effect of acquisition of businesses:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities
Purchases of textbooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from liquidations of textbooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities of marketable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of strategic equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by investing activities. . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
Common stock issued under stock plans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of taxes related to the net share settlement of equity awards . . . . . . . . .
Repurchase of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of deferred cash consideration related to acquisitions. . . . . . . . . . . . . . .
Proceeds from follow-on offering, net of offering costs . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2016
2015
2017
(20,283) $
(42,245) $
(59,210)
—
—
19,337
38,359
47
(4,766)
314
21
1,368
(626)
(175)
13,550
647
2,649
(1,396)
2,087
15
51,148
—
6,943
(128,247)
16,393
9,750
(26,142)
(14,931)
—
(136,234)
23,659
(20,115)
—
(16,939)
147,609
134,214
49,128
77,329
126,457
9,267
105
14,520
41,785
58
(670)
1,090
(11)
—
—
(127)
10,039
1,437
(728)
(272)
(9,499)
189
24,938
(886)
25,646
(7,633)
22,830
6,844
(24,689)
(27,055)
(1,020)
(5,963)
2,104
(10,779)
—
—
—
(8,675)
10,300
67,029
77,329
50
1,094
$
$
$
$
$
$
43,553
151
11,511
38,775
(77)
(4,326)
5,297
—
967
—
712
(27,878)
(592)
(4,236)
(9,620)
5,237
(346)
(82)
(32,297)
38,260
(35,610)
350
47,840
(8,253)
—
(2,019)
8,271
13,696
(8,710)
(2,263)
—
—
2,723
10,912
56,117
67,029
95
827
1,771
825
Supplemental cash flow data:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
85
1,790
Non-cash investing and financing activities:
Accrued purchases of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Issuance of common stock related to prior acquisition . . . . . . . . . . . . . . . . . . . . . $
3,573
$
— $
2,333
$
— $
See Notes to Consolidated Financial Statements.
63
CHEGG, INC.
NOTES TO 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
Our fiscal year ends on December 31 and in this report, we refer to the year ended December 31, 2017, December 31,
2016, and December 31, 2015 as 2017, 2016, and 2015, respectively.
Reclassification of Prior Period Presentation
In order to conform with current period presentation, $1.1 million of sales revenues during each of the years
ended December 31, 2016 and 2015 have been reclassified to services revenues and $1.4 million and $1.7 million of sales cost
of revenues during the years ended December 31, 2016 and 2015, respectively, have been reclassified to services cost of
revenues on our condensed consolidated statements of operations. Additionally, we have reclassified $1.2 million from other
current assets to accounts receivable on our consolidated balance sheet as of December 31, 2016. These changes in presentation
do not affect previously reported results.
Note 2. Significant Accounting Policies
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, recoverability of accounts receivable, restructuring charges (credits), share-based compensation
expense including estimated forfeitures, accounting for income taxes, useful lives assigned to long-lived assets for depreciation
and amortization, impairment of goodwill and long-lived assets, and the valuation of acquired intangible assets. We base our
estimates on historical experience, knowledge of current business conditions, and various other factors we believe to be
reasonable under the circumstances. These estimates are based on management’s knowledge about current events and
expectations about actions we may undertake in the future. Actual results could differ from these estimates, and such
differences could be material to our financial position and results of operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Chegg and our wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been
prepared in accordance with U.S. GAAP.
Cash and Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an original maturity date of three months or less from the date of purchase
to be cash equivalents. Cash and cash equivalents, which consist of cash, money market accounts, and commercial paper at
financial institutions, are stated at cost, which approximates fair value.
We classify certain restricted cash balances within other current assets and other assets on the accompanying
consolidated balance sheets based upon the term of the remaining restrictions.
64
As of December 31, 2017 and 2016, we had approximately $0.5 million and $0.1 million, respectively, of restricted cash
that consisted of a security deposits for our corporate offices. As of December 31, 2017, $0.1 million of restricted cash is
classified in other current assets and $0.4 million is classified in other assets in our consolidated balance sheets. As of
December 31, 2016, $0.1 million of restricted cash is classified in other assets in our consolidated balance sheets.
Investments
We hold investments in commercial paper, corporate securities and U.S. treasury securities. We classify our marketable
securities as available-for-sale investments that are either short or long-term based on the nature of each security based on the
contractual maturity of the investment when purchased. Our available-for-sale investments are carried at estimated fair value
with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive loss in stockholders’ equity.
Unrealized losses are charged against other income (expense), net when a decline in fair value is determined to be other-than-
temporary. We did not record any such impairment charges in the periods presented. We determined realized gains or losses on
the sale of marketable securities on a specific identification method, and recorded such gains or losses as other income
(expense), net. For the years ended December 31, 2017 and 2016, the Company's gross realized gains and losses on short-term
investments were not significant.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and are non-interest bearing. We generally grant
uncollateralized credit terms to our customers, which include textbook wholesalers, and marketing services customers, and
maintain an allowance for doubtful accounts to account for potentially uncollectible receivables.
Allowance for Doubtful Accounts
We assess the creditworthiness of our customers based on multiple sources of information, and analyze such factors as
our historical bad debt experience, industry and geographic concentrations of credit risk, economic trends, and customer
payment history. This assessment requires significant judgment. Because of this assessment, we maintain an allowance for
doubtful accounts for estimated losses resulting from the inability of certain customers to make all of their required payments.
In making this estimate, we analyze historical payment performance and current economic trends when evaluating the adequacy
of the allowance for doubtful accounts. Accounts receivable are written off as a decrease to the allowance for doubtful accounts
when all collection efforts have been exhausted and an account is deemed uncollectible.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash
equivalents, restricted cash, and marketable securities invested in highly liquid instruments in accordance with our investment
policy. We place the majority of our cash and cash equivalents and restricted cash with financial institutions in the United States
that we believe to be of high credit quality, and accordingly minimal credit risk exists with respect to these instruments. Certain
of our cash balances held with financial institutions are in excess of Federal Deposit Insurance Corporation limits. Our
investment portfolio consists of investment-grade marketable securities diversified among security types, industries and issuers.
Our investments were held and managed by recognized financial institutions that followed our investment policy with the main
objective of preserving capital and maintaining liquidity.
Concentrations of credit risk with respect to trade receivables exist to the full extent of amounts presented in the financial
statements. We had no textbook wholesalers or other customers that represented greater than 10% of our net accounts receivable
balance as of December 31, 2017 and 2016. No customers represented over 10% of net revenues in 2017, 2016 or 2015.
65
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and content amortization. Depreciation and
content amortization are computed using the straight-line method over the following estimated useful lives of the assets:
Classification
Computers and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Useful Life
3 years
3 years
5 years
Shorter of the remaining lease term or the
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
estimated useful life of 5 years
Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shorter of the licensed content term or the
estimated useful life of 5 years
We capitalize content costs related to the purchase or development of Chegg Study and Test Prep content and amortize
these costs over a period of five years.
Depreciation and content amortization expense are generally classified within the corresponding cost of revenues and
operating expenses categories in our consolidated statements of operations. Depreciation and content amortization expense
during the years ended December 31, 2017, 2016 and 2015 were approximately $13.8 million, $9.9 million and $6.8 million,
respectively.
The cost of maintenance and repairs is expensed as incurred. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation and amortization are removed from their respective accounts, and any gain or loss on such
sale or disposal is reflected in loss from operations.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible
assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values
of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant
estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets
include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a
market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may
differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may
record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the
conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Goodwill and Indefinite-Lived Intangible Asset
Goodwill represents the excess of the fair value of consideration paid over the estimated fair value of assets acquired and
liabilities assumed in a business acquisition. Our indefinite-lived intangible asset represents the internships.com trade name.
Goodwill and our indefinite-lived intangible asset are not amortized but rather tested for impairment at least annually on
October 1, or more frequently if certain events or indicators of impairment occur between annual impairment tests. We first
assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test. In our
qualitative assessment, we consider factors including economic conditions, industry and market conditions and developments,
overall financial performance and other relevant entity-specific events in determining whether it is more likely than not that the
fair value of our reporting unit is less than the carrying amount. We completed our annual impairment test on October 1 of 2017
and 2016, each of which did not result in any impairment as our qualitative assessment did not indicate that it is more likely
than not that the fair value of our reporting unit is less than the carrying amount.
Acquired Intangible Assets and Other Long-Lived Assets
Acquired intangible assets with finite useful lives, which include developed technology, customer lists, trade names, non-
compete agreements, and master service agreements, are amortized over their estimated useful lives. We assess the impairment
66
of acquired intangible assets and other long-lived assets when events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable.
Revenue Recognition and Deferred Revenue
Revenues are recognized when the four basic criteria for revenue recognition have been met as follows: persuasive
evidence of an arrangement exists, delivery has occurred and title has transferred, the sale price is fixed or determinable, and
collection is reasonably assured. 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, or charge backs from our payment processors who process payments
from credit cards, debit cards, and PayPal, are recorded as a reduction to revenues.
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, Internship services, Brand Partnership
services that we offer to brands and Enrollment Marketing services to colleges, through our strategic partnership with
NRCCUA. Chegg Services are offered to students through weekly, monthly or annual subscriptions, and we recognize revenues
ratably over the respective 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. 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 Enrollment Marketing and Brand Partnership services include multiple
deliverables, which include the delivery of student leads as well as other services to the end customer. We have determined
these deliverables qualify as separate units of accounting, as they have value to the customer on a standalone basis and our
arrangements do not contain a right of return. For these arrangements that contain multiple deliverables, we allocate the
arrangement consideration based on the relative selling price method in accordance with the selling price hierarchy, which
includes: (1) vendor-specific objective evidence of fair value (VSOE), when available; (2) third-party evidence of selling price
(TPE), if VSOE does not exist; and (3) estimated selling price (ESP), if neither VSOE nor TPE is available.
We determine VSOE based on our historical pricing and discounting practices for the specific solution when sold
separately and when a substantial majority of the selling prices for these services fall within a narrow range. TPE is determined
based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that
of our peers, and our offerings contain a significant level of differentiation such that the comparable pricing of services with
similar functionality cannot be obtained. If we have not established VSOE or TPE for our Enrollment Marketing services, we
have used ESP in our allocation of arrangement consideration. Additionally, we limit the amount of revenues recognized for
delivered elements to the amount that is not contingent on future delivery of services or other future performance obligations.
Deferred revenue primarily consists of advanced payments from students related to rentals and subscriptions that have
not been recognized, and marketing services that have yet to be performed. Deferred revenue is recognized as revenues ratably
over the term or when the services are provided and all other revenue recognition criteria have been met.
We historically generated revenues from the rental of print textbooks and to a lesser extent, through the sales of print
textbooks through our website on a just-in-time basis. Rental revenues for textbooks that we owned were previously recognized
ratably over the term of the rental period, generally two to five months. Commissions earned on rental textbooks owned by
Ingram and other partners are recognized immediately when a book ships to the student. We did not recognize any revenues
from the rental or sale of our own print textbooks during the year ended December 31, 2017 reflecting our transition of print
textbook rentals to Ingram and the increasing growth in our Chegg Services. Revenues from selling textbooks on a just-in-time
basis were historically recognized upon shipment. During the year ended December 31, 2017, revenues from selling textbooks
on a just-in-time basis are commission based as a result of the transition to Ingram and other partners. 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.
We evaluate whether we are acting as a principal or an agent in a transaction, and therefore would record the gross sales
amount and related costs as revenues or the net amount earned as commissions from the sale of third-party products. Our
67
determination is based on our evaluation of certain indicators including whether we are the principal in the transaction, are
subject to inventory risk, have latitude in establishing prices and selecting suppliers, none of which is presumptive or
determinative. We generally operate as the principal and so in those instances revenues are recorded at the gross sale price. We
generally record the net amounts as commissions earned when such amounts are determined using a fixed percentage of the
transaction price, we are not subject to inventory risk or responsible for the fulfillment of the textbooks. We operate as an agent
in our strategic partnership with Ingram and agreements with other partners and therefore our revenues include a commission
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.
We also present our revenues separately for rental, services and sales. Rental revenues historically included the rental of
print textbooks for which we take title and bear the risk of loss, service revenues includes Chegg Study, Chegg Writing, Chegg
Tutors, Enrollment Marketing, Brand Partnership, eTextbooks, and commissions we earn from Ingram, other partners, and e-
commerce partners; sales revenues includes just-in-time sale of print textbooks and the sale of other required materials. As a
result of our strategic partnership with Ingram and other partners, we no longer recognize rental revenues or sales revenues
from the rental or sale of a print textbook. Instead, our services revenues includes a commission on the total transaction amount
that we earn from Ingram and other partners upon Ingram's fulfillment of a rental transaction using books for which Ingram or
other partner has title and risk of loss, as opposed to the total rental transaction amount.
Cost of Revenues
Our cost of revenues consists primarily of expenses associated with the delivery and distribution of our products and
services. Certain cost of revenues, including textbook depreciation expense, the cost of textbooks sold, write-offs and
allowances related to the print textbook library, have decreased during 2016 and in to 2017 as we have completely transitioned
the shipping and fulfillment activities related to the rental and sale of print textbooks to Ingram. Cost of revenues consists of
publisher content fees for eTextbooks, content amortization expense related to content that we develop or license, including
publisher agreements for which we pay one-time license fees for published content, payment processing costs, the payments
made to tutors through our Chegg Tutors service, Enrollment Marketing services leads purchased from third-party suppliers to
fulfill leads that we are unable to fulfill through our internal database, personnel costs and other direct costs related to providing
content or services. In addition, cost of revenues includes allocated information technology and facilities costs.
Technology and Development Costs
Our technology and development expenses consist of salaries, benefits and share-based compensation expense for
employees in our product and web design, engineering and technical teams who are responsible for maintaining our website,
developing new products and improving existing products. Technology and development costs also include amortization of
acquired intangible assets, webhosting costs, third-party development costs, research and development expenses and allocated
information technology and facilities expenses. We expense substantially all of our technology and development expenses as
they are incurred.
Advertising Costs
Advertising costs are expensed as incurred and consist primarily of online advertising and marketing promotional
expenditures. During years ended December 31, 2017, 2016 and 2015, advertising costs were approximately $16.5
million, $18.4 million, and $25.0 million, respectively.
Share-based Compensation
Share-based compensation expense for stock options, restricted stock units (RSUs), performance-based restricted stock
units (PSUs), and employee stock purchase plan (ESPP) are accounted for under the fair value method, which requires us to
measure the cost of employee share-based compensation awards based on the grant-date fair value of the award. Share-based
compensation expense for stock options and our ESPP is estimated at the date of grant using the Black-Scholes-Merton option
pricing model while expense for RSUs and PSUs is measured based on the closing fair market value of the Company’s common
stock on the date of grant. We recognize share-based compensation expense over the requisite service period, which is generally
the vesting period, on a straight line basis for RSUs and on a graded basis for PSUs, contingent on the achievement of
performance conditions. These amounts are reduced by estimated forfeitures, which are estimated at the time of the grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Equity awards issued to non-employees are recorded at their fair value on the measurement date and are subject to
adjustment each period as the underlying awards vest or consulting services are performed.
68
Income Taxes
We account for income taxes under an asset and liability method whereby deferred tax asset and liability account
balances are determined based on differences between the financial reporting and the tax basis of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation
allowances are established, when necessary, to reduce deferred tax assets to an amount that is more likely than not to be
realized. We recognize the benefit from a tax position only if it is more likely than not that the position would be sustained upon
audit based solely on the technical merits of the tax position. Our policy is to include interest and penalties related to
unrecognized tax benefits as a component of income tax expense.
Restructuring Charges
Restructuring charges are primarily comprised of severance costs, contract and program termination costs, asset
impairments and costs of facility consolidation and closure. Restructuring charges are recorded upon approval of a formal
management plan and are included in the operating results of the period in which such plan is approved and the expense
becomes estimable. To estimate restructuring charges, management utilizes assumptions of the number of employees that would
be involuntarily terminated and of future costs to operate and eventually vacate duplicate facilities. Severance and other
employee separation costs are accrued when it is probable that benefits will be paid and the amount is reasonably estimable.
The rates used in determining severance accruals are based on our policies and practices and negotiated settlements.
Restructuring charges for employee workforce reductions are recorded upon employee notification for employees whose
required continuing service period is 60 days or less and ratably over the employee’s continuing service period for employees
whose required continuing service period is greater than 60 days.
Strategic Investment
We have entered into an equity investment in a privately-held foreign entity to explore expanding our reach
internationally. Our investment is accounted for under the cost method and we periodically review this investment for other-
than-temporary declines in fair value based on the specific identification method and write down the value of our investment
when an other-than-temporary decline has occurred. Any fair value estimates are made based on consideration of the current
cash position, recent operational performance, and forecasts of the investees. During years ended December 31,
2017, 2016 and 2015, we did not record any other-than-temporary declines in the value of our investment.
Net Loss Per Share
Basic net loss per share is computed by dividing the 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):
Numerator:
Years Ended December 31,
2017
2016
2015
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(20,283) $
(42,245) $
(59,210)
Denominator:
Weighted average shares used to compute net loss per share, basic and
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,022
90,534
86,818
Net loss per share, basic and diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.20) $
(0.47) $
(0.68)
69
The following potential weighted-average shares of common stock outstanding were excluded from the computation of
diluted net loss per share attributable to common stockholders because including them would have been anti-dilutive (in
thousands):
Options to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and PSUs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants to purchase common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total common stock equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign Currency Translation
Years Ended December 31,
2017
2016
2015
3,045
153
5
—
10,799
1,239
15
200
11,446
200
—
299
3,203
12,253
11,945
The functional currency of our foreign subsidiaries is the local currency. Adjustments resulting from the translation of
foreign currencies into U.S. dollars for balance sheet amounts are based on the exchange rates as of the consolidated balance
sheet date. Non-monetary balance sheet items denominated in a currency other than the applicable functional currency are
translated using the historical rate. Revenues and expenses are translated at average exchange rates during the period. Foreign
currency translation gains or losses are included in accumulated other comprehensive loss as a component of stockholders’
equity on the consolidated balance sheets. Gains or losses resulting from foreign currency transactions, which are denominated
in currencies other than the entity’s functional currency, are included in other income (expense), net in the consolidated
statements of operations and were not material during 2017, 2016 or 2015.
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 clarifies when
changes to the terms or conditions of a share-based payment award must be accounted for as a modification. The guidance is
effective for annual periods beginning after December 15, 2017, with early adoption permitted, and the guidance requires a
prospective application to awards modified on or after the adoption date. We elected to early adopt this standard as of July 1,
2017 and will account for any modifications after this date under the new guidance.
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
comparison of the implied fair value of a reporting unit's goodwill with the carrying amount of goodwill. Early adoption is
permitted and the guidance requires a prospective application. The guidance is effective for annual periods beginning after
December 15, 2019, and we are currently in the process of evaluating the impact of this guidance.
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 will analyze the clarified definition of a business for potential future
transactions to determine whether they should be accounted for as an asset acquisition or business combination under the new
guidance. Early adoption is permitted and the guidance requires a prospective application. The guidance is effective for annual
periods beginning after December 15, 2017 and we will adopt the guidance on January 1, 2018.
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 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. Early adoption is permitted, and the guidance requires a retrospective adoption. The
guidance is effective for annual periods beginning after December 15, 2017, and we will adopt the guidance on January 1, 2018.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting to provide for simplification involving several aspects of the accounting for share-
based payment transactions. The new standard requires excess tax benefits and tax deficiencies to be recorded in our
consolidated statements of operations as a component of provision for income taxes when stock awards vest or are settled and
an option to recognize gross share-based compensation expense with actual forfeitures recognized as they occur. In addition, it
eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities
70
on the consolidated statements of cash flows and clarifies that all cash payments made to tax authorities on an employee’s
behalf for withheld shares should be presented as a financing activity on the consolidated statements of cash flows. The
standard also allows us to withhold more of an employee’s vesting shares for tax withholding purposes without triggering
liability accounting.
We adopted this standard in the first quarter of 2017 and the adoption had no impact to our consolidated financial
statements. The requirement to record excess tax benefits and deficiencies in our consolidated statements of operations as a
component of provision of income taxes when stock awards vest or are settled does not impact our provision of income taxes as
we currently have a full valuation allowance recorded against our deferred tax assets related to share-based compensation.
Additionally, we have elected to continue to recognize share-based compensation expense net of estimated forfeitures. We have
not recorded an adjustment to retained earnings to reflect the modified retrospective adoption of this standard update as neither
of these updates change the accounting of the prior period financial results.
We have elected to adopt the elimination of the requirement to reclassify cash flows related to excess tax benefits from
operating activities to financing activities on the consolidated statements of cash flows prospectively and therefore prior periods
have not been adjusted. Further, there was no change related to the requirement that all payments made to tax authorities on an
employees' behalf for withheld shares be presented as a financing activity on the consolidated statements of cash flows as we
have always recorded such amounts as a financing activity.
In February 2016, the FASB issued 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. We will continue to
evaluate ASU 2016-02 as we near our adoption date.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended (Topic
606) (ASU 2014-09), which will change the way we recognize revenue and significantly expand the disclosure requirements for
revenue arrangements. In July 2015, the FASB approved a one-year deferral of the effective date of ASU 2014-09 for public
companies and further amendments and technical corrections were made to ASU 2014-09 during 2016. ASU 2014-09 allows
for companies to choose to apply the standard retrospectively to each prior reporting period presented (full retrospective
application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening
balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective
application). ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim
periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. We will adopt ASU 2014-09 on January 1, 2018
under the modified retrospective application and our adjustment to the opening balance of retained earnings is immaterial.
We have determined the impact ASU 2014-09 will have on our consolidated financial statements, accounting policies,
and related disclosures. We will continue to operate as an agent in our strategic partnership with Ingram and agreements with
other partners under the new guidance and therefore continue to recognize a commission on print textbook rental transactions.
We have determined two areas of impact. First, the timing of revenue recognition relating to our Enrollment Marketing and
Brand Partnership product offerings will be recognized earlier in the contract life under ASU 2014-09 than under the current
guidance. Second, we will estimate and account for the variable consideration earned relating to our performance related
obligation with Ingram over the period in which it is earned under ASU 2014-09 as opposed to at the completion of the period
under the current guidance. These are the significant areas that we have identified will be different under ASU 2014-09.
71
Note 3. Cash and Cash Equivalents, and Investments
The following table shows our cash and cash equivalents, restricted cash and investments’ adjusted cost, net unrealized
loss and fair value as of December 31, 2017 (in thousands):
December 31, 2017
Cost
Net Unrealized
Loss
Fair Value
Cash and cash equivalents:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Money market funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. treasury securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
98,370
5,358
22,729
126,457
38,850
23,001
19,978
81,829
Long-term corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20,405
$
$
$
$
$
— $
—
—
— $
(27) $
(43)
(17)
(87) $
98,370
5,358
22,729
126,457
38,823
22,958
19,961
81,742
(100) $
20,305
The adjusted cost and fair value of available-for-sale investments as of December 31, 2017 by contractual maturity were
as follows (in thousands):
Due in 1 year or less. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due in 1-2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments not due at a single maturity date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost
104,558
20,405
5,358
Fair Value
$
104,471
20,305
5,358
130,321
$
130,134
Investments not due at a single maturity date in the preceding table consist of money market fund deposits.
As of December 31, 2017, we considered the declines in market value of our investment portfolio to be temporary in
nature and did not consider any of our investments to be other-than-temporarily impaired. We typically invest in highly-rated
securities with a minimum credit rating of A- and a weighted average maturity of 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 year ended December 31,
2017, we did not recognize any impairment charges.
As of December 31, 2016, we did not carry a balance of cash equivalents, short-term or long-term investments.
Restricted Cash
As of December 31, 2017 and 2016, we had approximately $0.5 million and $0.1 million, respectively, of restricted cash
that consisted of a security deposits for our corporate offices. As of December 31, 2017, $0.1 million of restricted cash is
classified in other current assets and $0.4 million is classified in other assets in our consolidated balance sheets. As of
December 31, 2016, $0.1 million of restricted cash is classified in other assets in our consolidated balance sheets.
72
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 consolidated balance sheets. We did not record other-than-temporary impairment charges on this
investment during the years ended December 31, 2017, 2016, and 2015, as there were no significant identified events or
changes in circumstances that would be considered an indicator for impairment.
Note 4. Fair Value Measurement
We have established a fair value hierarchy used to determine the fair value of our financial instruments as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the
assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the
financial instruments.
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 December 31, 2017 are classified
based on the valuation technique level in the tables below (in thousands):
December 31, 2017
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs (Level
2)
Total
Assets:
Cash equivalents:
Money market funds(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17) $
5,358
$
5,358
$
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)Commercial paper(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)
22,729
Short-term investments:
Commercial paper(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)
Corporate securities(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)
U.S. treasury securities(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)
Long-term corporate securities(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)
Total assets measured and recorded at fair value(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17)(cid:3)(cid:17) $
38,823
22,958
19,961
20,305
—
—
—
19,961
—
—
22,729
38,823
22,958
—
20,305
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 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.
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.
73
Note 5. Long-Lived Assets
Textbook Library, Net
Textbook library, net consisted of the following (in thousands):
Textbook library . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Textbook library, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
33,980
(31,405)
2,575
December 31,
2016
As of December 31, 2017, we did not carry a balance of textbook library, net.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
Computer and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2017
2016
2,449
$
5,317
2,893
7,154
70,110
87,923
(40,430)
47,493
$
1,597
4,324
2,148
5,342
49,725
63,136
(27,831)
35,305
Note 6. Acquisitions
2017 Acquisition
In October 2017, we acquired all of the outstanding interests of Cogeon GmbH (Cogeon), a provider of adaptive math
technology and developer of the math application, Math 42, based in Germany. With this acquisition, Chegg will be able to
provide self-guided and individualized math solutions to more students, deepening our reach in to the high school market. The
total fair value of the purchase consideration was $15.0 million which included an escrow amount of $2.2 million for general
representations and warranties and potential post-closing adjustments. The escrow amount will be released in 24 months after
the acquisition date.
The acquisition date fair value of the purchase consideration for the above transactions consisted of the following (in
thousands):
Initial cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net working capital adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of purchase consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12,717
53
2,244
15,014
Included in the purchase agreement for the acquisition of Cogeon are additional contingent payments of up to
approximately $9.0 million subject to achievement of specified milestones and continued employment of the sellers. These
payments will be expensed ratably as technology and development expense on our consolidated statements 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 $0.6 million as of December 31, 2017 included within accrued liabilities on our consolidated balance
74
sheet for these contingent payments. Additionally, included in the purchase agreement are contingent equity grants of up to
approximately $3.8 million subject to achievement of the above specified milestones, continued employment of the sellers, and
an adverse tax ruling on the additional contingent payments from the German tax authority. We have not recorded any expense
amounts related to these contingent equity grants as the definition of a grant has not been met in accordance with share-based
compensation accounting guidance.
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 goodwill are expected to be deductible for tax purposes.
The following table presents the total allocation of purchase consideration recorded in our consolidated balance sheets as
of the acquisition date (in thousands):
Net tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquired intangible assets:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade name. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domain names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Content Library . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total acquired intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
50
230
70
5,510
70
5,930
5,990
9,024
Total fair value of purchase consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
15,014
During the year ended December 31, 2017, we incurred $0.7 million of acquisition-related expenses associated with the
above acquisition which have been included in general and administrative expenses in our consolidated statements of
operations.
2016 Acquisitions
In May 2016, we acquired all of the outstanding interests of Imagine Easy Solutions, LLC (Imagine Easy), a privately
held online learning company based in New York that provides a portfolio of online writing tools. We anticipate this acquisition
will enhance our ability to acquire new students, increase the value of our platform to our existing students, and have a
meaningful and positive impact on their outcomes. The total fair value of the purchase consideration was $42.3 million which
included deferred cash consideration of $17.0 million. We recorded the present value of the deferred cash consideration of
$16.4 million at the acquisition date and recorded accretion expense until it was paid to the sellers in April 2017. During the
year ended December 31, 2017 and 2016, we recorded accretion expense of $0.2 million and $0.4 million, respectively, through
other income (expense), net on our consolidated statement of operations. Further, the consideration included an escrow and a
hold-back amount of $4.2 million and $0.5 million, respectively, for general representations and warranties and potential post-
closing adjustments. The escrow amount was released in July 2017 and the hold-back amount was released during the third
quarter of 2016.
In December 2016, we acquired certain assets of RefME Ltd., a privately held online learning company based in
London, England, to enhance our already existing portfolio of writing tools. The total fair value of the purchase consideration
was $1.8 million. The purchase consideration included deferred cash consideration of $0.8 million, which was paid out in four
quarterly installments during the years ended December 31, 2017 and 2016.
75
The acquisition date fair value of the purchase consideration for the above transactions consisted of the following (in
thousands):
Initial cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net working capital adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of deferred cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hold-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of purchase consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
22,007
200
17,127
4,200
500
44,034
Included in the purchase agreement for the acquisition of Imagine Easy are additional contingent payments of up to
$18.0 million, of which $3.0 million relates to the achievement of performance conditions for the fiscal year ended 2016.
These performance conditions were achieved therefore these payments will be made through April 2019, subject to continued
employment of the sellers, and will be expensed ratably as technology and development and general and administrative
expense on our consolidated statements 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 $0.4 million as of December 31, 2017 included within prepaid
expenses on our consolidated balance sheet and $1.0 million as of December 31, 2016 included within accrued liabilities on our
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 goodwill are expected to be deductible for tax purposes.
The following table presents the total allocation of purchase consideration recorded in our consolidated balance sheets as
of the acquisition date (in thousands):
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Favorable lease acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other acquired assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired intangible assets:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domain names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertiser relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
User base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total acquired intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net identifiable assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of purchase consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
59
2,610
300
212
1,840
1,330
6,600
550
508
5,660
16,488
19,669
(573)
19,096
24,938
44,034
During the year ended December 31, 2016, we incurred $1.1 million of acquisition-related expenses associated with the
above acquisitions which have been included in general and administrative expenses in our consolidated statements of
operations.
76
Note 7. Goodwill and Intangible Assets
Goodwill consists of the following (in thousands):
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions due to acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2017
116,239
9,024
9
December 31,
2016
$
91,301
24,938
—
125,272
$
116,239
Intangible assets as of December 31, 2017 and December 31, 2016 consist of the following (in thousands, except
weighted-average amortization period):
December 31, 2017
Weighted-
Average
Amortization
Period
(in months)
Gross
Carrying
Amount
Developed technologies and content library . . . . . . . . . . . . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade names. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Master service agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite-lived trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70
47
46
30
21
—
—
57
Developed technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade names. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Master service agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indefinite-lived trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-
Average
Amortization
Period
(in months)
60
47
47
30
21
—
51
$
$
$
$
Accumulated
Amortization
$
(10,220) $
(5,480)
(3,465)
(1,506)
(1,030)
—
—
(21,701) $
20,657
9,970
5,793
1,798
1,030
3,600
6
42,854
December 31, 2016
Gross
Carrying
Amount
15,077
9,970
5,513
1,728
1,030
3,600
36,918
Accumulated
Amortization
$
(8,245) $
(3,673)
(1,998)
(1,249)
(1,005)
—
(16,170) $
$
$
Net
Carrying
Amount
10,437
4,490
2,328
292
—
3,600
6
21,153
Net
Carrying
Amount
6,832
6,297
3,515
479
25
3,600
20,748
During the years ended December 31, 2017, 2016 and 2015, amortization expense related to our acquired intangible
assets totaled approximately $5.5 million, $4.6 million and $4.8 million, respectively.
As part of our acquisition of internships.com in October 2015, we acquired an indefinite-lived trade name intangible
asset valued at $3.6 million. We assess this asset for impairment annually during the fourth quarter or whenever events or
changes in circumstances indicate that the carrying value may not be recoverable and have not recorded any impairment
charges during the years ended December 31, 2017, 2016 and 2015.
77
As of December 31, 2017, the estimated future amortization expense related to our finite-lived intangible assets is as
follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,311
4,347
2,874
1,518
1,075
2,428
17,553
Note 8. Balance Sheet Details
Other Current Assets
Other current assets consist of the following (in thousands):
Reimbursement from Ingram and other partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,219
3,626
7,845
$
$
18,759
2,255
21,014
December 31,
2017
2016
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Payable to Ingram and other partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chegg credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued purchases of long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued deferred cash consideration related to acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Note 9. Debt Obligations
December 31,
2017
2016
8,001
$
3,337
2,457
3,573
—
13,706
31,074
$
8,237
2,927
2,341
2,333
17,378
11,103
44,319
In September 2016, we entered into a revolving line of credit 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. This new line of credit replaced the previous line of credit that expired in August 2016. The Line of Credit matures
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, plus non-cash stock compensation (net of capitalized interest expense), depreciation
expense, 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
78
cash at the Bank 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 December 31, 2015, we had a revolving credit facility with an aggregate principal amount of $30.0 million (the
Revolving Credit Facility) with an accordion feature that, subject to certain financial criteria, allowed us to borrow up to a total
of $65.0 million beginning the quarter ended December 31, 2015. The Revolving Credit Facility carried, at our election, a base
interest rate of the greater of the Federal Funds Rate plus 0.5% or one-month LIBOR plus 1% or a LIBOR based interest rate
plus additional interest of up to 4.5% depending on our leverage ratio. The Revolving Credit Facility expired in August 2016.
As of December 31, 2017, 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 December 31, 2017 related to our headquarters in Santa Clara, California and our office in San Francisco,
California. 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 $2.7
million, $1.9 million and $2.5 million in the years ended December 31, 2017, 2016 and 2015, respectively.
The aggregate future minimum lease payments as of December 31, 2017, are as follows (in thousands):
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,934
2,038
939
485
230
—
6,626
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.
79
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 minimal. We have not recorded any liabilities for these
agreements as of December 31, 2017.
Note 12. Common Stock
We are authorized to issue 400 million shares of common stock, with a par value per share of $0.001. As of December 31,
2017, we have reserved the following shares of common stock for future issuance:
Warrants to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding RSUs and PSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares available for grant under the stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares available for issuance under employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total common shares reserved for future issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2017
100,000
8,066,846
14,335,115
11,177,175
5,849,986
39,529,122
Stock Plans
2013 Equity Incentive Plan
On June 6, 2013, the Board of Directors adopted our 2013 Equity Incentive Plan (the 2013 Plan), which was
subsequently approved by our stockholders on August 29, 2013. The 2013 Plan became effective on November 11, 2013 and
replaced the 2005 Plan. On the effective date of the 2013 Plan, 12,000,000 shares of our common stock were reserved for
issuance, plus an additional 3,838,985 shares reserved but not issued or subject to outstanding awards under our 2005 Plan on
the effective date of the 2013 Plan, plus, on and after the effective date of the 2013 Plan, (i) shares that are subject to
outstanding awards under the 2005 Plan which cease to be subject to such awards, (ii) shares issued under the 2005 Plan that
are forfeited or repurchased at their original issue price and (iii) shares subject to awards under the 2005 Plan that are used to
pay the exercise price of an option or withheld to satisfy the tax withholding obligations related to any award. As
of December 31, 2017 there were 11,177,175 shares available for grant under the 2013 Plan. The 2013 Plan permits the
granting of incentive stock options, non-qualified stock options, RSUs, stock appreciation rights, restricted shares of common
stock and performance share awards. The exercise price of stock options may not be less than the 100% of the fair market value
of the common stock on the date of grant. Options granted pursuant to the 2013 Plan generally expire no later than ten years.
2013 Employee Stock Purchase Plan
On June 6, 2013, our board of directors adopted our 2013 Employee Stock Purchase Plan (the 2013 ESPP) and our
stockholders subsequently approved the 2013 ESPP Plan on August 29, 2013. The 2013 ESPP permits eligible employees to
acquire shares of our common stock by accumulating funds through periodic payroll deductions of up to 15% of base salary.
Our 2013 ESPP is intended to qualify as an ESPP under Section 423 of the Code and employees will receive a 15% discount to
the lesser of the fair market value of our common stock on (i) the first trading day of the applicable offering period or (ii) the
last day of each purchase period in the applicable offering period. Each offering period may run for no more than six months.
We have reserved 4,000,000 shares of our common stock under our 2013 ESPP. The aggregate number of shares issued over the
term of our 2013 ESPP will not exceed 20,000,000 shares of our common stock. As of December 31, 2017, there
were 5,849,986 shares of common stock available for future issuance under the 2013 ESPP.
80
Note 13. Stockholders' Equity
Share-based Compensation
Total share-based compensation expense recorded for employees and non-employees, is as follows (in thousands):
Cost of revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Technology and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
316
14,333
5,007
18,703
38,359
$
$
172
14,771
6,124
20,718
41,785
$
$
262
11,992
7,901
18,620
38,775
Years Ended December 31,
2017
2016
2015
Total share-based compensation expense for consultants was $44 thousand, $0.5 million and $0.4 million in the
years ended December 31, 2017, 2016 and 2015, respectively. There was no capitalized share-based compensation expense
as of December 31, 2017, 2016 or 2015.
Fair Value of Stock Options
We estimate the fair value of each stock option award using the Black-Scholes-Merton option-pricing model, which
utilizes the fair value of our common stock based on active market and requires input on the following subjective
assumptions:
Expected Term. The expected term for options granted to employees, officers, and directors is calculated as the
midpoint between the vesting date and the end of the contractual term of the options. The expected term for options
granted to consultants is determined using the remaining contractual life.
Expected Volatility. The expected volatility was historically based on the average volatility of public companies
within our peer group as our common stock had previously not been publicly trading for a long enough period to
rely on our own expected volatility. Beginning with stock options granted during the fourth quarter of 2015, we
have based the expected volatility on the average volatility of our stock price as we now have over two years of
trading history.
Expected Dividends. The dividend assumption is based on our historical experience. To date we have not paid any
dividends on our common stock.
Risk-Free Interest Rate. The risk-free interest rate used in the valuation method is the implied yield currently
available on the United States treasury zero-coupon issues, with a remaining term equal to the expected life term of
our options.
The following table summarizes the key assumptions used to determine the fair value of our stock options granted
to employees, officers and directors:
Years Ended December 31,
Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant-date fair value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
We did not grant any stock option awards during the year ended December 31, 2017.
81
2016
5.50
2015
5.50-6.00
56.94% 50.68%-51.6
9%
—%
1.43% 1.75%-1.86
%
2.58
—%
3.54
$
Fair Value of Restricted Stock Units (RSUs) and of Performance-Based Restricted Stock Units (PSUs)
RSUs and PSUs are converted into shares of our common stock upon vesting on a one-for-one basis. Vesting of
RSUs is subject to the employee’s continuing service to us, while vesting of PSUs is subject to our achievement of specified
corporate financial performance objectives in addition to the employee's continuing service to us. We recognize share-based
compensation expense over the requisite service period, which is generally the vesting period, on a straight line basis for
RSUs and on a graded basis for PSUs, contingent on the achievement of performance conditions. RSUs are typically fully
vested at the end of three or four years while PSUs vest subject to the achievement of performance objectives and if
achieved, typically vest over two to three years. We assess the achievement of performance objectives on a quarterly basis
and adjust our share-based payment expense as appropriate.
Fair Value of 2013 ESPP
Under the 2013 ESPP, rights to purchase shares are generally granted during the second and fourth quarter of each
year. We estimate the fair value of rights granted under the 2013 ESPP at the date of grant using the Black-Scholes-Merton
option-pricing model. The following table summarizes the key assumptions used to determine the fair value of rights
granted under the 2013 ESPP:
Years Ended December 31,
2017
2016
2015
Expected term (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.50
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.15%-45.57% 35.10%-75.74% 36.20%-49.59%
—%
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.09%-0.31%
Weighted-average grant-date fair value per share . . . . . . . . . . . . . . . $
—%
0.38%-0.62%
—%
1.04%-1.42%
1.98
0.50
1.79
3.55
0.50
$
$
There were 377,530 shares purchased under the 2013 ESPP for the year ended December 31, 2017 at an average
price per share of $7.88 with cash proceeds from the issuance of shares of $3.0 million.
There were 467,979 shares purchased under the 2013 ESPP for the year ended December 31, 2016 at an average
price per share of $3.76 with cash proceeds from the issuance of shares of $1.8 million.
Stock Option Activity
Stock option activity under our equity incentive plans was as follows:
Balance at December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017. . . . . . . . . . . . . . . . . . . . . . . .
Number of
Options
Outstanding
11,333,624
—
(2,902,403)
(364,375)
8,066,846
As of December 31, 2017
Options exercisable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options vested and expected to vest . . . . . . . . . . . . . . . .
8,033,749
8,064,829
Options Outstanding
Weighted-
Average
Exercise
Price per
Share
$
$
$
$
8.60
—
7.13
12.23
8.97
8.98
8.97
Weighted-
Average
Remaining
Contractual
Term in Years
5.22
Aggregate
Intrinsic
Value
$ 6,608,611
4.64
$ 59,318,983
4.63
4.64
$ 59,002,312
$ 59,299,650
The total intrinsic value of options exercised during 2017, 2016 and 2015, was approximately $16.8 million, $0.6
million and $3.2 million, respectively.
82
As of December 31, 2017, our total unrecognized compensation expense for stock options granted to employees,
officers, directors, and consultants was approximately $0.1 million, which will be recognized over a weighted-average
vesting period of approximately 0.8 years.
We recognize only the portion of the stock options granted to employees that is ultimately expected to vest as
compensation expense. Estimated forfeitures are determined based on historical data and management’s expectation of
exercise behaviors. Forfeiture rates and the resulting compensation expense are revised in subsequent periods if actual
forfeitures differ from the estimate.
RSU and PSU Activity
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 PSU Grants
RSUs and PSUs Outstanding
Number of
RSUs and
PSUs
Outstanding
14,142,109
6,800,381
(5,362,478)
(1,244,897)
14,335,115
$
$
Weighted
Average
Grant Date
Fair Value
5.20
9.10
5.73
6.16
6.78
In February 2015, we granted PSUs under the 2013 Plan to certain of our key employees (the February 2015
grants). The PSUs entitle the employees to receive a certain number of shares of our common stock based on our
satisfaction of certain financial and strategic performance targets during 2015 (the 2015 Performance Period) and 2016 (the
2016 Performance Period). Based on the achievement of the performance conditions during the 2015 Performance Period
for the February 2015 grants, the final settlement met the minimum threshold for the 2015 Performance Period based on a
specified objective formula approved by the Compensation Committee of the Board of Directors (the Compensation
Committee). The PSUs related to the 2015 Performance Period vest annually over a one or three-year period depending on
the employee, with the initial vesting occurring in February 2016. In March 2016, the financial and strategic performance
targets were set by the Compensation Committee for the 2016 Performance Period for the February 2015 grants. Based on
the achievement of the performance conditions during the 2016 Performance Period for the February 2015 grants, the final
settlement met the minimum threshold for the 2016 Performance Period based on a specified objective formula approved by
the Compensation Committee. The PSUs related to the 2016 Performance Period vest over a one-year period with vesting
occurring in March 2017.
During the year ended December 31, 2016, the Compensation Committee approved a modification of the
performance targets related to the 2015 Performance Period of the February 2015 grant for 26 employees. As a result of the
modification, we recorded an expense of $1.5 million during the year ended December 31, 2016.
The number of shares underlying the PSUs granted during the year ended December 31, 2015 totaled 2,300,824
shares and had a weighted average grant date fair value of $6.59 per share. During the year ended December 31, 2017 and
2016, 850,066 and 688,464 shares, respectively, were released relating to the February 2015 grants.
2016 PSU Grants
In March 2016, we granted PSUs under the 2013 Plan to certain of our key executives. The PSUs entitle the
executives to receive a certain number of shares of our common stock based on our satisfaction of certain financial and
strategic performance targets during 2016. Based on the achievement of the performance conditions for the March 2016
grant, the final settlement met the minimum threshold based on a specified objective formula approved by the
Compensation Committee. These PSUs will vest over a three-year period depending on the employee, with the initial
vesting occurring in March 2018.
The number of shares underlying the PSUs granted during the year ended December 31, 2016 totaled 2,377,842
shares and had a weighted average grant date fair value of $4.32 per share.
83
2017 PSU Grants
In March 2017, we granted PSUs under the 2013 Plan to certain of our key executives. The PSUs entitle the
executives to receive a certain number of shares of our common stock based on our satisfaction of certain financial and
strategic performance targets during 2017. Based on the achievement of the performance conditions for the March 2017
grant, the final settlement met the maximum threshold based on a specified objective formula approved by the
Compensation Committee. These PSUs will vest over a three-year period, with the initial vesting occurring in March 2018.
The number of shares underlying the PSUs granted during the year ended December 31, 2017 totaled 1,822,284
shares and had a grant date fair value of $8.91 per share.
As of December 31, 2017, we had a total of approximately $52.1 million of unrecognized compensation costs
related to RSUs and PSUs that is expected to be recognized over the remaining weighted average period of 1.7 years.
Stock Warrants
As of December 31, 2017, we had a total of 100,000 common stock warrants exercisable at an exercise price of
$12.00.
During the year ended December 31, 2017, 100,000 common stock warrants were exercised at an exercise price of
$12.00. No common stock warrants were exercised in the year ended December 31, 2016. During the year ended December
31, 2015, 795,549 common stock warrants were exercised at a weighted average exercise price of $4.12.
Note 14. Income Taxes
We recorded an income tax provision of approximately $1.8 million, $1.7 million and $1.5 million for the years ended
December 31, 2017, 2016 and 2015, respectively. The income tax provision for the years ended December 31, 2017, 2016 and
2015 was primarily due to state and foreign income tax expense and federal and state tax expense related to tax amortization of
acquired indefinite lived intangible assets.
Our income tax provision consisted of the following (in thousands):
Years Ended December 31,
2017
2016
2015
Current income taxes:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(103) $
100
1,523
1,520
(18) $
321
959
1,262
—
263
778
1,041
484
56
(102)
438
(992)
75
1,199
282
503
48
(106)
445
1,802
$
1,707
$
1,479
Deferred income taxes:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
84
Loss before provision for income taxes consisted of the following (in thousands):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2017
(20,983) $
2,502
(18,481) $
2016
(42,687) $
2,149
(40,538) $
2015
(59,376)
1,645
(57,731)
The differences between our income tax provision as presented in the accompanying consolidated statements of
operations and the income tax expense computed at the federal statutory rate consists of the items shown in the following table
as a percentage of pretax loss (in percentages):
Income tax at U.S. statutory rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign rate differential. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Cuts and Jobs Act impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2017
2016
2015
34.0 %
34.0 %
34.0 %
8.3
(3.8)
38.2
(1.1)
7.8
(220.2)
0.4
126.6
1.7
(0.3)
(9.1)
(0.2)
(0.4)
—
(0.7)
(29.2)
3.7
(0.2)
(7.0)
(0.2)
1.4
—
(1.2)
(33.1)
(9.8)%
(4.2)%
(2.6)%
On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was signed into law, enacting significant changes to the
U.S. Internal Revenue Code. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to,
reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; requiring companies to pay a one-time transition tax
on certain unrepatriated earnings of foreign subsidiaries; generally eliminating U.S. federal income taxes on dividends from foreign
subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations;
creating a global intangible low-taxed income inclusion (GILTI) and the base erosion anti-abuse tax (BEAT), a new minimum tax.
The Tax Act, also imposes significant limitations on the deductibility of interest, executive compensation and future net operating
losses. The Tax Act allows for the expensing of certain capital expenditures.
On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of US
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 Act. In accordance with SAB 118, as of December
31, 2017, we had not yet completed our accounting for the tax effects of the enactment of the Act. Our provision for income
taxes for the year ended December 31, 2017 is based in part on our best estimate of the effects of the transition tax and existing
deferred tax balances with our understanding of the Tax Act and guidance available as of the date of this filing. For the amounts
which we were able to reasonably estimate, we recognized a provisional remeasurement of certain deferred tax assets and
liabilities based on the rates at which they are expected to reverse in the future of $42 million, which is offset by a valuation
allowance. The provisional amount related to the one-time transition tax on the mandatory deemed repatriation of foreign
earnings was a benefit of $0.1 million. We also provided withholding tax on the deemed repatriation of foreign earnings of
$1.2 million. We are still analyzing certain aspects of the Tax Act and refining the estimate of the expected reversal of our
deferred tax balance. This can potentially affect the measurement of these balances or potentially give rise to new deferred tax
amounts.
The Act also includes provisions for the GILTI tax inclusion, wherein taxes on foreign income are imposed in excess of
a deemed return on tangible assets of foreign corporations. This income will effectively be taxed at a 10.5% tax rate in general.
As a result, our deferred tax assets and liabilities are being evaluated if the deferred tax assets and liabilities should be recognized
for the basis differences expected to reverse as a result of GILTI provisions that are effective for us after the calendar year ending
December 31, 2017, or should the tax on GILTI provisions be recognized in the period the Act was signed into law. Because of
85
the complexity of the new provisions, we are continuing to evaluate on how the provisions will be accounted for under the U.S.
generally accepted accounting principles wherein companies are allowed to make an accounting policy election of either (i) account
for GILTI as a component of tax expense in the period in which we are subject to the rules (the “period cost method”), or (ii)
account for GILTI in our measurement of deferred taxes (the “deferred method”). Currently, we have not elected a method and
will only do so after our completion of the analysis of the GILTI provisions and our election method will depend, in part, on
analyzing our global income to determine whether we expect to have future U.S. inclusions in our taxable income related to GILTI
and, if so, the impact that is expected.
A summary of our deferred tax assets is as follows (in thousands):
Years Ended December 31,
2017
2016
Deferred tax assets:
Accrued expenses and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, textbooks and intangibles assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,665
$
14,430
—
71,653
3,905
960
92,613
(91,183)
1,430
5,069
23,864
1,085
73,708
5,168
1,407
110,301
(110,045)
256
Deferred tax liabilities:
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,869)
(2,869)
(1,413)
(1,413)
Net deferred tax liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1,439) $
(1,157)
At December 31, 2017 and 2016 the deferred tax liability is created by the tax amortization of acquired indefinite lived
intangible assets. Under the accounting guidance this deferred tax liability can be used as a source of income for recognition of
deferred tax assets when determining the amount of valuation allowance to be recorded. The 2017 Tax Cuts and Job Acts
changed the expiration of post 2017 net operating losses. Under the Act, post 2017 net operating losses can only be used to
offset 80% of future taxable income; however, they do not expire. The indefinite-lived deferred tax liabilities are therefore a
source of income for the indefinite-lived net operating loss carryforward and no valuation allowance is necessary on 80% of the
deferred tax liabilities.
Realization of the deferred tax assets is dependent upon future taxable income, the amount and timing of which are
uncertain. Accordingly, the federal and state gross deferred tax assets have been fully offset by a valuation allowance. The
valuation allowance decreased by approximately $18.9 million during the year ended December 31, 2017 and increased
by $11.8 million during the year ended December 31, 2016.
As of December 31, 2017, we had net operating loss carryforwards for federal and state income tax purposes of
approximately $257 million and $195 million, respectively, which will begin to expire in years beginning 2028 and 2018,
respectively.
As of December 31, 2017, we had tax credit carryforwards for federal and state income tax purposes of
approximately $5.6 million and $6.4 million, respectively. The federal credits expire in various years beginning in 2030. The
state credits do not expire.
Utilization of our net operating losses and tax credit carryforwards may be subject to substantial annual limitations due
to ownership change limitations provided by the Internal Revenue Code of 1986, as amended (IRC), and similar state
86
provisions. Such annual limitations could result in the expiration of the net operating losses and tax credit carryforwards before
utilization.
As describe above, the Tax Act includes a transition tax in 2017 that taxes any previously deferred foreign earnings
and profits in 2017 at a reduced tax rate. As a result of this tax and the accrual of associated withholding tax, we have no
unrecorded tax liabilities associated with unremitted foreign retained earnings as of December 31, 2017. As of December 31,
2016, we permanently reinvested approximately $6.0 million of earnings from our international subsidiaries.
We recognize interest and penalties related to uncertain tax positions as a component of income tax expense.
During the years ended December 31, 2017, 2016 and 2015, we recognized an increase of $0.2 million, a decrease of $18
thousand and an increase of $0.1 million of interest and penalties, respectively. Accrued interest and penalties as of
December 31, 2017 and 2016 were approximately $0.8 million and $0.6 million, respectively.
During the year ended December 31, 2017, we settled an audit relating to an examination by the tax authorities in
India for the fiscal filing period ending March 31, 2015. During the year ended December 31, 2017, we also settled two years,
2012 and 2013, of a four-year tax audit in Israel. The remaining years under audit, 2014 and 2015 are waiting on the settlement
of similar court decisions prior to assessments by the Israel Tax Authority.
We file tax returns in U.S. federal, state, and certain foreign jurisdictions with varying statutes of limitations. Due to
net operating loss and credit carryforwards, all of the tax years since inception through the 2017 tax year remain subject to
examination by the U.S. federal and some state authorities. Foreign jurisdictions remain subject to examination up to
approximately seven years from the filing date, depending on the jurisdiction.
A reconciliation of the beginning and ending balances of the total amount of unrecognized tax benefits, excluding
accrued interest and penalties, is as follows (in thousands):
Beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Increase in tax positions for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in tax positions for prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in tax positions for prior year settlement . . . . . . . . . . . . . . . . . . . . . .
Decrease in tax positions for prior years due to statutes lapsing . . . . . . . . . . . .
Increase in tax positions for current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change due to translation of foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2017
2016
2015
4,882
$
4,849
$
4,272
280
(101)
(172)
(169)
978
74
5,772
$
478
(855)
(32)
(76)
595
(77)
4,882
82
(416)
(61)
—
948
24
$
4,849
The actual amount of any taxes due could vary significantly depending on the ultimate timing and nature of any
settlement. We believe that the amount by which the unrecognized tax benefits may increase or decrease within the next 12
months is not estimable. The amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $1.2
million for the year ended December 31, 2017. One or more of these unrecognized tax benefits could be subject to a valuation
allowance if, and when recognized in a future period, which could impact the timing of any related effective tax rate benefit.
Note 15. Restructuring Charges (Credits)
2017 Restructuring Plan
In January 2017, we entered into a strategic partnership with the National Research Center for College & University
Admissions (NRCCUA) where NRCCUA 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, resulting in one-time workforce
reduction costs of $0.9 million and lease termination and other costs of $0.1 million recorded during the year ended
December 31, 2017. We expect costs incurred to date related to this workforce reduction to be fully paid within three months.
87
2015 Restructuring Plan
During the years ended December 31, 2017 and 2016, we recorded restructuring credits of $42 thousand and $0.4
million, respectively, primarily related to a partial reversal of previously accrued lease termination costs due to our subtenant
leasing additional space. Costs incurred to date related to the lease termination and other costs are expected to be fully paid by
2021.
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
Balance at January 1, 2016 . . . . . . . . . . . . . . . $
Restructuring credits . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . . .
Restructuring charges (credits) . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . .
Write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . $
— $
—
—
—
941
(897)
—
44
$
— $
—
—
—
148
(128)
(20)
— $
$
55
—
(55)
—
—
—
—
— $
2,463
(423)
(1,734)
306
(42)
(43)
—
221
$
$
Total
2,518
(423)
(1,789)
306
1,047
(1,068)
(20)
265
As of December 31, 2017, the $0.3 million liability was comprised of a short-term accrual of $0.1 million included
within accrued liabilities and a long-term accrual of $0.2 million included within other liabilities on the consolidated balance
sheet.
Note 16. Related-Party Transactions
Our Chief Executive Officer is a member of the Board of Directors of Adobe Systems Incorporated (Adobe). During the
years ended December 31, 2017, 2016 and 2015, we had purchases of $3.2 million, $3.1 million and $2.9 million, respectively,
from Adobe. We had $0.1 million in revenues year ended December 31, 2017, no revenues in the year ended December 31,
2016 and $0.1 million in revenues in the year ended December 31, 2015 from Adobe. We had $0.3 million in payables as of
December 31, 2017 and 2016 to Adobe. We had an immaterial amount of outstanding receivables as of December 31, 2017 and
no outstanding accounts receivables as of December 31, 2016 from Adobe.
One of our board members is also a member of the Board of Directors of Cengage Learning, Inc. (Cengage). During the
years ended December 31, 2017, 2016 and 2015, we had purchases of $11.5 million, $10.2 million and $11.5 million,
respectively, from Cengage. We had $1.9 million, $0.6 million and $0.1 million in revenues from Cengage in the years ended
December 31, 2017, 2016 and 2015, respectively. We had $0.1 million in payables as of December 31, 2017 and an immaterial
amount in payables as of December 31, 2016 to Cengage. We had $0.3 million and $0.1 million in outstanding accounts
receivables as of December 31, 2017 and 2016, respectively, from Cengage.
One of our board members is also a member of the Board of Directors of Synack, Inc. (Synack). During the years ended
December 31, 2017, 2016 and 2015, we had purchases of $0.1 million, $0.2 million and $0.1 million, respectively, of services
from Synack.
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 year ended December 31, 2017, 2016 and 2015, we incurred payment processing fees of $1.0 million,
$0.9 million and $0.7 million, respectively, to PayPal.
Note 17. Employee Benefit Plan
We sponsor a 401(k) savings plan for eligible employees and their beneficiaries. Contributions by us are discretionary.
Participants may contribute, on a pretax basis, a percentage of their annual compensation, but not to exceed a maximum
contribution amount pursuant to Section 401(k) of the IRC. During the year ended December 31, 2017, 2016 and 2015, our
88
matching contributions totaled approximately $1.1 million, $0.9 million, and $0.8 million, respectively.
Note 18. Segment Information
Our chief operating decision-maker is our Chief Executive Officer who makes resource allocation decisions and reviews
financial information presented on a consolidated basis. Accordingly, we have determined that we have a single operating and
reporting segment and operating unit structure.
Product Information
We derive our revenues from our Chegg Services and Required Materials product lines. Chegg Services includes our
products and services we provide to supplement the requirements and help students with their coursework as well as our
marketing services which help to complete our offering of services to students. Required Materials includes all products that
are essential for students to meet the requirements of their coursework. Chegg Services includes Chegg Study, Chegg Writing,
Chegg Tutors, Brand Partnership, Test Prep and Internships. Required Materials includes commissions from Ingram and other
partners, on the rental and sale of print textbooks, as well as revenues from eTextbooks.
The following table sets forth our total net revenues for the periods shown for our Chegg Services and Required
Materials product lines (in thousands):
Chegg Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Required Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Geographic Information
December 31,
2017
185,683
69,383
255,066
$
$
2016
129,335
124,755
254,090
$
$
2015
94,285
207,088
301,373
Our headquarters and most of our operations are located in the United States. We conduct our sales, marketing and
customer service activities primarily in the United States. Geographic revenues information is based on the location of the
customer. In 2017, 2016 and 2015, substantially all of our revenues and long-lived assets are located in the United States.
89
Note 19. Selected Quarterly Financial Data (unaudited)
Three Months Ended
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net (loss) income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares used to compute net (loss) income per
share:
March 31, 2017
62,602
June 30, 2017
56,317
$
September 30,
2017
December 31,
2017
$
62,640
$
$
41,206
(6,401) $
$
39,275
(6,025) $
$
40,284
(11,516) $
73,507
54,126
3,659
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92,830
92,830
95,047
95,047
103,041
103,041
108,968
121,557
Net (loss) income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.07) $
(0.07) $
(0.06) $
(0.06) $
(0.11) $
(0.11) $
0.03
0.03
Three Months Ended
March 31, 2016
66,654
June 30, 2016
53,036
$
September 30,
2016
December 31,
2016
$
71,343
$
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares used to compute net loss per share,
basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . $
$
27,731
(15,685) $
$
31,629
(9,008) $
$
32,644
(16,063) $
89,118
90,416
91,059
(0.18) $
(0.10) $
(0.17) $
63,057
42,485
(1,489)
91,526
(0.02)
We recorded restructuring charges of $24 thousand, $64 thousand, $59 thousand and $0.9 million in the three months
ended December 31, 2017, September 30, 2017, June 30, 2017 and March 31, 2017, respectively. We recorded restructuring
credits of $0.1 million, $0.1 million, $0.2 million and $44 thousand in the three months ended December 31, 2016, September
30, 2016, June 30, 2016 and March 31, 2016, respectively.
90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period
covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures
relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the
information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures.
(b) Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of
our internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—
Integrated Framework (2013 framework). The Company has excluded from its evaluation the internal control over financial
reporting of Cogeon GmbH, which is included in the December 31, 2017 consolidated financial statements and constituted less
than 1% of total assets as of December 31, 2017, and less than 1% of total net revenues and net loss, respectively, for the year
ended December 31, 2017. All control systems are subject to inherent limitations. Our management has concluded that, as of
December 31, 2017, our internal control over financial reporting is effective based on these criteria. Additionally, our
independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company's internal
control over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K.
(c) Changes in Internal Control over Financial Reporting
During the fourth quarter of fiscal 2017, there were no changes in our internal control over financial reporting identified
in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our most
recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
91
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning our directors, compliance with Section 16(a) of the Exchange Act, our Audit Committee and
any changes to the process by which stockholders may recommend nominees to the Board required by this Item are
incorporated herein by reference to information contained in the Proxy Statement, including “Proposal No. 1 Election of
Directors”, “Committees of our Board of Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance” and
“Stockholder Proposals to Be Presented at Next Annual Meeting.”
The information concerning our executive officers required by this Item is incorporated herein by reference to
information contained in the Proxy Statement, including “Our Management.”
We have adopted a code of ethics, our Code of Business Conduct and Ethics, which applies to all employees, including
our principal executive officer, our principal financial officer, and all other executive officers, and our board of directors. The
Code of Business Conduct and Ethics is available on our web-site at investor.chegg.com under “Corporate Governance.” We
intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision
of our Code of Business Conduct and Ethics by posting such information on our website at the address and location specified
above.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to information contained in the Proxy
Statement, including “Compensation Committee Interlocks and Insider Participation” and “Executive Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference to information contained in the Proxy
Statement, including “Transactions with Related Parties, Founders and Control Persons” and “Independence of Directors.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to information contained in the Proxy
Statement, including “Corporate Governance Standards and Director Independence” “Transactions with Related Parties,
Founders and Control Persons” and “Termination and Change of Control Arrangements.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to information contained in the Proxy
Statement, including “Proposal No. 2 Ratification of Independent Registered Public Accounting Firm”.
92
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
56
59
60
61
62
63
64
2. Financial Statement Schedules
Schedule II-Valuation and Qualifying Accounts (in thousands):
Years Ended December 31, 2017, 2016, and 2015
Balance at
Beginning of
Year
Provision
(Release) for
Bad Debts
Net Write-offs
Balance at
End of Year
Allowance for doubtful accounts
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
436
378
559
$
$
$
47
$
58
$
(77) $
(224) $
— $
(104) $
259
436
378
Years Ended December 31, 2017, 2016, and 2015
Balance at
Beginning of
Year
Provision for
Refunds
Refunds Issued
Balance at
End of Year
Refund Reserve
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
487
4,538
6,174
$
$
$
22,446
26,373
39,919
$
$
$
(22,651) $
(30,424) $
(41,555) $
282
487
4,538
All other financial statement schedules are omitted because they are not applicable or the information is included in the
Registrant’s consolidated financial statements or related notes.
3. Exhibits
Exhibit
No.
3.01
3.02
4.01
Incorporated by Reference
Exhibit
Restated Certificate of Incorporation of the
Registrant effective November 18, 2013
Restated Bylaws of the Registrant effective
November 13, 2013
Form of Registrant’s Common Stock Certificate
Form
10-K
10-K
S-1/A
File No
001-3618
0
001-3618
0
333-1906
16
Filing Date Exhibit No.
Filed
Herewith
3/4/16
3/4/16
3.01
3.02
10/01/13
4.01
93
4.02
10.01*
10.02*
10.03*
Amended and Restated Investors’ Rights
Agreement, dated as of March 7, 2012, by and
among the Registrant and certain investors of the
Registrant
Form of Indemnification Agreement entered into
between the Registrant and each of its directors and
executive officers
2005 Stock Incentive Plan, as amended, and forms
of agreement thereunder
2013 Equity Incentive Plan, and forms of agreement
thereunder
10.04*
2013 Employee Stock Purchase Plan
10.05*
10.06*
10.07*
10.08*
10.09*
10.10*
10.11*
10.13
10.14
10.15
10.16
10.17†
10.18
10.19
10.20††
Offer Letter between Dan Rosensweig and the
Registrant, dated December 3, 2009
Amendment to Offer Letter between Dan
Rosensweig and the Registrant, dated November 29,
2012
Offer Letter between Andy Brown and the
Registrant, dated September 2, 2011
Amendment to Offer Letter between Andy Brown
and the Registrant, dated November 29, 2012
Offer Letter between Nathan Schultz and the
Registrant, dated February 19, 2008
Offer Letter between Chuck Geiger and the
Registrant, dated June 30, 2009
Offer Letter between Esther Lem and the
Registrant, dated December 9, 2010
Lease between Silicon Valley CA-I, LLC and the
Registrant, dated as of May 14, 2012
Commencement Date Memorandum between
Silicon Valley CA-I, LLC and the Registrant, dated
as of October 12, 2012
Standard Industrial Lease Agreement between
Pattillo Industrial Partners, LLC and the Registrant,
dated as of October 17, 2009
Amendment to Lease, dated as of May 13, 2011,
amended the Standard Industrial Lease Agreement
between Pattillo Industrial Partners, LLC and the
Registrant, dated as of October 17, 2009
2015 Inventory Purchase and Consignment
Agreement dated April 3, 2015, by and among
Ingram Hosting Holdings Inc., the Company and
Ingram Book Group Inc.
Interest Purchase Agreement by and among Chegg
Inc., and Imagine Easy Solutions, LLC and the
Sellers, dated as of April 28, 2016.
Credit Agreement dated September 21, 2016 by and
between Chegg, Inc. and Wells Fargo Bank,
National Association.
First Supplement to the 2015 Inventory Purchase
and Consignment Agreement, entered into as of
May 30, 2017 and effective as of December 29,
2016, by and among Chegg, Inc. and Ingram
Hosting Holdings LLC.
94
S-1
333-1906
16
08/14/13
4.02
S-1/A
S-1
S-1/A
S-1
S-1
S-1
10-K
10-K
S-1
10-K
S-1
S-1
S-1
S-1
8-K
8-K
333-1906
16
333-1906
16
333-1906
16
333-1906
16
333-1906
16
333-1906
16
001-361
80
001-361
80
333-1906
16
001-361
80
333-1906
16
333-1906
16
333-1906
16
333-1906
16
10/01/13
10.01
08/14/13
10.02
10/25/13
10.04
08/14/13
10.05
08/14/13
10.06
08/14/13
10.07
3/6/14
10.07
3/6/14
10.08
8/14/13
10.09
3/6/14
10.09
08/14/13
10.14
08/14/13
10.15
08/14/13
10.16
08/14/13
10.17
001-3618
0
001-3618
0
5/2/16
99.03
9/22/16
99.1
X
X
X
10.21††
Amendment to Textbook Services Agreement, dated
as of January 1, 2018 by and among Chegg, Inc.
and Ingram Hosting Holdings LLC (f/k/a Ingram
Hosting Holdings Inc.) and Ingram Book Group
LLC (f/k/a Ingram Book Group Inc.).
21.01
23.01
24.01
31.01
31.02
List of subsidiaries
Consent of Independent Registered Public
Accounting Firm
Power of Attorney (included on signature page
hereto)
Certification of Dan Rosensweig, Chief Executive
Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Andrew Brown, Chief Financial
Officer, pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32.01**
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
101.INS
XBRL Instance
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation
101.LAB XBRL Taxonomy Extension Labels
101.PRE XBRL Taxonomy Extension Presentation
101.DEF XBRL Taxonomy Extension Definition
X
X
X
X
X
X
X
X
X
X
X
X
X
†
††
*
**
Confidential treatment has been granted for portions of this exhibit by the SEC.
Confidential treatment has been requested for portions of this exhibit pursuant to Rule 24b-2 promulgated under the
Exchange Act. These portions have been omitted and submitted separately to the Securities and Exchange
Commission.
Indicates a management contract or compensatory plan.
This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended
(Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference
into any filing under the Securities Act of 1933, as amended or the Exchange Act.
ITEM 16. FORM 10-K SUMMARY
None.
95
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
February 26, 2018
CHEGG, INC.
By:
/S/ DAN ROSENSWEIG
Dan Rosensweig
President, Chief Executive Officer and Chairman
96
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes
and appoints Dan Rosensweig, Andrew Brown and Dave Borders Jr., and each of them, his or her true and lawful attorneys-in-
fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities,
to sign any amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do
or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Name
Title
Date
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
/S/ DAN ROSENSWEIG
Dan Rosensweig
President, Chief Executive Officer and Chairman
(Principal Executive Officer)
/S/ ANDREW BROWN
Andrew Brown
Chief Financial Officer
(Principal Financial Officer)
/S/ ROBIN TOMASELLO
Robin Tomasello
Vice President, Corporate Controller
(Principal Accounting Officer)
Jeffrey Housenbold
/S/ RENEE BUDIG
Renee Budig
/S/ MARNE LEVINE
Marne Levine
/S/ RICHARD SARNOFF
Richard Sarnoff
/S/ TED SCHLEIN
Ted Schlein
John York
Director
Director
Director
Director
Director
Director
97
[THIS PAGE INTENTIONALLY LEFT BLANK]
B OAR D O F D I R EC TO R S
LEADERSHIP
H E AD Q UARTE RS
Re n e é B u d ig
E xe cutive Vice President
& Chief Financial O ffi ce r,
CBS Inte r ac tive
J e ff r ey H o u s e n b o l d
M an ag in g Par tn e r,
S of tb an k Inve s tm e nt
Adv is e r s
M a r n e L ev i n e
Chief O p e r ating O ffi ce r,
Ins t agr am , LLC
D a n Ros e n s we i g
Ch air m an
R i c h a r d S a r n o ff
S e n i o r Adv i s o r to
Ko h lb e rg K r av is
Ro b e r t s & Co.
Te d S c h le i n
G e n e r a l P a r tn e r
of K le in e r Pe r k in s
C aufi e ld & Bye r s
J o h n Yo r k
Chief E xe cutive
O ffi ce r, S an Fr an cis co
49e r s
Dan Ro senswe ig
President, Chief
Executive Office r,
and Chairman
Andrew Brow n
Chief Financial
Office r
Dave Bo rde r s Jr.
G e n e ra l Cou n s e l
a n d S e c re t a r y
Je nny Brandemuehl
Chief Pe ople Office r
Esther Le m
Chief Marketing
Office r
M i c h a e l O s i e r
Chief Outcomes
Office r
Nathan Schult z
Chief Le arning
Office r
Ch e g g , Inc .
39 9 0 Fre e d o m C i rcle
S ant a Clar a , C A 9505 4
S TO C K LI S TI N G
Ch e g g , Inc . co m m on
s to ck is tr ad e d o n
th e N ew Yo r k Sto ck
E xch an g e un d e r
th e sy m b o l “CH G G”.
TR AN S FE R AG E NT
A m e r ic an Sto ck
Tr an s fe r & Tr u s t
Co m p any, LLC
6201 1 5th Ave nu e
B ro o k ly n , NY 1 1 219
w w w. a s t fi nancial .com
8 0 0 -937-5 4 49
info @a s t fi n an cial .co m
I N D E PE N D E NT
AU D ITO R S
D e loit te & To u ch e LLP
LEGAL CO U N S E L
Fe nwick & We s t LLP
©2018 Ch e g g , In c . All
r i g ht s re s e r ve d .
T h e C h e g g n a m e
a n d l o g o, C h e g g .co m ,
C h e g g Stu d y, C h e g g
fo r G o o d , A S m a r te r
Way to Stu d e nt™,
inte r n ships .co m ,
Re s e arch Re ady,
Ins t aEDU, E a syB ib
a n d #1 i n Tex tb o o k
Re nt al s are
tr ad e m ar k s of Ch e g g ,
In c . O th e r
tr ad e m ar k s are th e
p ro p e r t y of th e ir
re sp e c tive own e r s .
B OAR D O F D I R EC TO R S
LEADERSHIP
H E AD Q UARTE RS
Re n e é B u d ig
E xe cutive Vice President
& Chief Financial O ffi ce r,
CBS Inte r ac tive
J e ff r ey H o u s e n b o l d
M an ag in g Par tn e r,
S of tb an k Inve s tm e nt
Adv is e r s
M a r n e L ev i n e
Chief O p e r ating O ffi ce r,
Ins t agr am , LLC
D a n Ros e n s we i g
Ch air m an
R i c h a r d S a r n o ff
S e n i o r Adv i s o r to
Ko h lb e rg K r av is
Ro b e r t s & Co.
Te d S c h le i n
G e n e r a l P a r tn e r
of K le in e r Pe r k in s
C aufi e ld & Bye r s
J o h n Yo r k
Chief E xe cutive
O ffi ce r, S an Fr an cis co
49e r s
Dan Ro senswe ig
President, Chief
Executive Office r,
and Chairman
Andrew Brow n
Chief Financial
Office r
Dave Bo rde r s Jr.
G e n e ra l Cou n s e l
a n d S e c re t a r y
Je nny Brandemuehl
Chief Pe ople Office r
Esther Le m
Chief Marketing
Office r
M i c h a e l O s i e r
Chief Outcomes
Office r
Nathan Schult z
Chief Le arning
Office r
Ch e g g , Inc .
39 9 0 Fre e d o m C i rcle
S ant a Clar a , C A 9505 4
S TO C K LI S TI N G
Ch e g g , Inc . co m m on
s to ck is tr ad e d o n
th e N ew Yo r k Sto ck
E xch an g e un d e r
th e sy m b o l “CH G G”.
TR AN S FE R AG E NT
A m e r ic an Sto ck
Tr an s fe r & Tr u s t
Co m p any, LLC
6201 1 5th Ave nu e
B ro o k ly n , NY 1 1 219
w w w. a s t fi nancial .com
8 0 0 -937-5 4 49
info @a s t fi n an cial .co m
I N D E PE N D E NT
AU D ITO R S
D e loit te & To u ch e LLP
LEGAL CO U N S E L
Fe nwick & We s t LLP
©2018 Ch e g g , In c . All
r i g ht s re s e r ve d .
T h e C h e g g n a m e
a n d l o g o, C h e g g .co m ,
C h e g g Stu d y, C h e g g
fo r G o o d , A S m a r te r
Way to Stu d e nt™,
inte r n ships .co m ,
Re s e arch Re ady,
Ins t aEDU, E a syB ib
a n d #1 i n Tex tb o o k
Re nt al s are
tr ad e m ar k s of Ch e g g ,
In c . O th e r
tr ad e m ar k s are th e
p ro p e r t y of th e ir
re sp e c tive own e r s .