Document and Entity Information

9 Months Ended

Sep. 30, 2017

Oct. 27, 2017

Document And Entity Information [Abstract]

Entity Registrant Name

CHEGG, INC

Entity Central Index Key

0001364954

Current Fiscal Year End Date

--12-31

Entity Filer Category

Accelerated Filer

Document Type

10-Q

Document Period End Date

Sep. 30, 2017

Document Fiscal Year Focus

2017

Document Fiscal Period Focus

Q3

Amendment Flag

false

Entity Common Stock, Shares Outstanding

108,441,709

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)

In Thousands, unless otherwise specified

Sep. 30, 2017

Dec. 31, 2016

Current assets

Cash and cash equivalents

$ 122,227

$ 77,329 ¹

Short-term investments

80,914

0 ¹

Accounts receivable, net of allowance for doubtful accounts of $267 and $436 at September 30, 2017 and December 31, 2016, respectively

9,843

10,451 ¹

Prepaid expenses

3,865

2,579 ¹

Other current assets

23,955

21,014 ¹

Total current assets

240,804

111,373 ¹

Long-term investments

17,013

0 ¹

Textbook library, net

0

2,575 ¹

Property and equipment, net

45,078

35,305 ¹

Goodwill

116,239

116,239 ¹

Intangible assets, net

16,599

20,748 ¹

Other assets

4,419

4,412 ¹

Total assets

440,152

290,652 ¹

Current liabilities

Accounts payable

2,109

5,175 ¹

Deferred revenue

21,906

14,836 ¹

Accrued liabilities

41,940

44,319 ¹

Total current liabilities

65,955

64,330 ¹

Long-term liabilities

Total other long-term liabilities

5,243

4,383 ¹

Total liabilities

71,198

68,713 ¹

Commitments and contingencies (Note 7)

¹

Stockholders' equity:

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

0

0 ¹

Common stock, $0.001 par value – 400,000,000 shares authorized; 108,163,229 and 91,708,839 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

108

92 ¹

Additional paid-in capital

764,097

593,351 ¹

Accumulated other comprehensive income (loss)

19

(176)¹

Accumulated deficit

(395,270)

(371,328)¹

Total stockholders' equity

368,954

221,939 ¹

Total liabilities and stockholders' equity

$ 440,152

$ 290,652 ¹

[1] Derived from audited consolidated financial statements as of and for the year ended December 31, 2016.

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)

In Thousands, except Share data, unless otherwise specified

Sep. 30, 2017

Dec. 31, 2016

Statement of Financial Position [Abstract]

Allowance for doubtful accounts receivable, current

$ 267

$ 436

Preferred stock, par value (in dollars per share)

$ 0.001

Preferred stock, shares authorized

10,000,000

Preferred stock, shares issued

0

Preferred stock, shares outstanding

0

Common stock, par value (in dollars per share)

$ 0.001

Common stock, shares authorized

400,000,000

Common stock, shares issued

108,163,229

91,708,839

Common stock, shares outstanding

108,163,229

91,708,839

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)

In Thousands, except Per Share data, unless otherwise specified

3 Months Ended

9 Months Ended

Sep. 30, 2017

Sep. 30, 2016

Sep. 30, 2017

Sep. 30, 2016

Net revenues:

Rental

$ 0

$ 5,511

$ 0

$ 32,081

Services

62,640

50,265

181,559

127,812

Sales

0

15,567

0

31,140

Net revenues:

62,640

71,343

181,559

191,033

Cost of revenues:

Rental

0

7,646

0

26,505

Services

22,356

13,203

60,794

39,684

Sales

0

17,850

0

32,840

Cost of revenues:

22,356

38,699

60,794

99,029

Gross profit

40,284

32,644

120,765

92,004

Operating expenses:

Technology and development

19,876

16,241

59,077

49,232

Sales and marketing

14,184

15,256

40,246

41,449

General and administrative

17,320

13,905

47,163

41,140

Restructuring charges (credits)

64

(100)

1,023

(298)

Loss (gain) on liquidation of textbooks

0

2,673

(4,766)

(523)

Total operating expenses

51,444

47,975

142,743

131,000

Loss from operations

(11,160)

(15,331)

(21,978)

(38,996)

Interest expense and other income (expense), net:

Interest expense, net

(19)

(30)

(56)

(151)

Other income (expense), net

261

(148)

53

(146)

Total interest expense and other income (expense), net

242

(178)

(3)

(297)

Loss before provision for income taxes

(10,918)

(15,509)

(21,981)

(39,293)

Provision for income taxes

598

554

1,961

1,463

Net loss

$ (11,516)

$ (16,063)

$ (23,942)

$ (40,756)

Net loss per share, basic and diluted (in dollars per share)

$ (0.11)

$ (0.17)

$ (0.25)

$ (0.45)

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

103,041

91,059

97,008

90,201

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (USD $)

In Thousands, unless otherwise specified

3 Months Ended

9 Months Ended

Sep. 30, 2017

Sep. 30, 2016

Sep. 30, 2017

Sep. 30, 2016

Statement of Comprehensive Income [Abstract]

Net loss

$ (11,516)

$ (16,063)

$ (23,942)

$ (40,756)

Other comprehensive (loss) income:

Change in unrealized (loss) gain on available for sale investments

(48)

0

(48)

25

Change in foreign currency translation adjustments, net of tax

(9)

35

243

(1)

Other comprehensive (loss) income

(57)

35

195

24

Total comprehensive loss

$ (11,573)

$ (16,028)

$ (23,747)

$ (40,732)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)

In Thousands, unless otherwise specified

9 Months Ended

Sep. 30, 2017

Sep. 30, 2016

Cash flows from operating activities

Net loss

$ (23,942)

$ (40,756)

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

Textbook library depreciation expense

0

8,903

Other depreciation and amortization expense

14,301

10,001

Share-based compensation expense

27,468

32,701

Gain on liquidation of textbooks

(4,766)

(523)

Loss from write-offs of textbooks

314

896

Loss from write-off of property and equipment

1,368

0

Interest accretion on deferred consideration

(626)

0

Other non-cash items

62

106

Change in assets and liabilities, net of acquisition of business:

Accounts receivable

786

312

Prepaid expenses and other current assets

(4,293)

(4,712)

Other assets

(7)

284

Accounts payable

(2,291)

2,713

Deferred revenue

7,070

14,896

Accrued liabilities

12,880

5,997

Other liabilities

1,123

(92)

Net cash provided by operating activities

29,447

30,726

Cash flows from investing activities

Purchases of textbooks

0

(795)

Proceeds from liquidations of textbooks

6,943

23,873

Purchases of marketable securities

(112,417)

(7,633)

Proceeds from sale of marketable securities

14,499

22,830

Maturities of marketable securities

0

6,844

Purchases of property and equipment

(19,930)

(17,834)

Acquisition of business, net of cash acquired

0

(25,864)

Purchase of strategic equity investment

0

(1,020)

Net cash (used in) provided by investing activities

(110,905)

401

Cash flows from financing activities

Common stock issued under stock plans, net

13,565

1,114

Payment of taxes related to the net share settlement of RSUs

(17,902)

(9,057)

Payment of deferred cash consideration related to acquisitions

(16,939)

0

Proceeds from follow-on offering, net of offering costs

147,632

0

Net cash provided by (used in) financing activities

126,356

(7,943)

Net increase in cash and cash equivalents

44,898

23,184

Cash and cash equivalents, beginning of period

77,329 ¹

67,029

Cash and cash equivalents, end of period

122,227

90,213

Supplemental cash flow data:

Interest

66

47

Income taxes

1,241

831

Non-cash investing and financing activities:

Accrued purchases of long-lived assets

$ 3,712

$ 1,517

[1] Derived from audited consolidated financial statements as of and for the year ended December 31, 2016.

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 leading student-first connected learning platform. Our goal is to help students transition from high school to college to career, with a view to improving student outcomes. We help students study more effectively for college admission exams, find the right college to accomplish their goals, get better grades and test scores while in school, and find internships that allow them to gain valuable skills to help them enter the workforce after college. Our student-first connected learning platform offers products and services that help students transition from high school to college to career.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of September 30, 2017, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2017 and 2016, the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 and the related footnote disclosures are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2017 and our results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016. Our results of operations for the three and nine months ended September 30, 2017 and cash flows for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.

We operate in a single segment. Our fiscal year ends on December 31 and in this report we refer to the year ended December 31, 2016 as 2016.

The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC).

Except for our textbook library, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our 2016 Annual Report on Form 10-K.

We no longer consider our textbook library to be a significant accounting policy as we no longer have a balance as of March 31, 2017.

Reclassification of Prior Period Presentation

In order to conform with current period presentation, $0.5 million and $1.0 million of sales revenues during the three and nine months ended September 30, 2016, respectively, have been reclassified to services revenues and $0.3 million and $1.0 million of sales cost of revenues during the three and nine months ended September 30, 2016, 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 condensed consolidated balance sheet as of December 31, 2016. These changes in presentation do not affect previously reported results.

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, 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.

Recent Accounting Pronouncements

Except for the following accounting pronouncements, there have been no material changes to recent accounting pronouncements as compared to recent accounting pronouncements described in our 2016 Annual Report on Form 10-K.

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 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 have 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 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. Early adoption is permitted and the guidance requires a prospective application. The guidance is effective for annual periods after December 15, 2017, and we are currently in the process of evaluating the impact of this guidance.

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 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 condensed 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 after December 15, 2018 and we plan to adopt the guidance starting in the first quarter of 2019. We are currently in the process of evaluating the impact of this guidance.

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). We plan to adopt ASU 2014-09 under the 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 plan to adopt ASU 2014-09 starting on January 1, 2018.

We are currently in the process of evaluating the impact ASU 2014-09 may have on our consolidated financial statements, accounting policies, and related disclosures. We believe that we will continue to operate as an agent in our strategic partnership with Ingram and agreements with other textbook publishers under the new guidance and therefore continue to recognize a commission on print textbook rental transactions. We have initially determined three potential areas of impact which are subject to further evaluation. First, the timing of revenue recognition relating to our Enrollment Marketing and Brand Partnership product offerings is anticipated to 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. Finally, revenues previously recognized from shipping and handling activities will be recognized as a reduction of cost of revenues under ASU 2014-09 as these activities do not represent a separately identifiable performance obligation. These are the significant areas that we have identified will be different under ASU 2014-09 and we will continue to evaluate ASU 2014-09 as we near our adoption date.

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):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Numerator:
Net loss	$	(11,516	)	$	(16,063	)	$	(23,942	)	$	(40,756	)
Denominator:
Weighted average shares used to compute net loss per share, basic and diluted	103,041			91,059			97,008			90,201

Net loss per share, basic and diluted	$	(0.11	)	$	(0.17	)	$	(0.25	)	$	(0.45	)

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



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Options to purchase common stock	2	10,420	3,167	10,917
RSUs and PSUs	49	624	137	1,797
Warrants to purchase common stock	—	200	200	200
Total common stock equivalents	51	11,244	3,504	12,914

Cash and Cash Equivalents, and Investments

The following table shows our cash and cash equivalents, restricted cash and investments’ adjusted cost, unrealized gain (loss) and fair value as of September 30, 2017 (in thousands):



	September 30, 2017
	Cost		Net Unrealized Gain/(Loss)			Fair Value
Cash and cash equivalents:
Cash	$	90,256	$	—		$	90,256
Money market funds	11,036		—			11,036
Commercial paper	20,933		2			20,935
Total cash and cash equivalents	$	122,225	$	2		$	122,227
Short-term investments:
Commercial paper	$	41,975	$	(4	)	$	41,971
Corporate securities	18,998		(11		)	18,987
U.S. treasury securities	19,963		(7		)	19,956
Total short-term investments	$	80,936	$	(22	)	$	80,914

Long-term corporate securities	$	17,041	$	(28	)	$	17,013

The adjusted cost and fair value of available-for-sale investments as of September 30, 2017 by contractual maturity were as follows (in thousands):



	Cost		Fair Value
Due in 1 year or less	$	101,869	$	101,849
Due in 1-2 years	17,041		17,013
Investments not due at a single maturity date	11,036		11,036
Total	$	129,946	$	129,898

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

As of September 30, 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 seven months, and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of preserving capital and maintaining liquidity. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and our intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost basis. During the nine months ended September 30, 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 September 30, 2017 and December 31, 2016, we had approximately $0.4 million and $0.1 million, respectively, of restricted cash that consists of security deposits for our offices. These amounts are classified in other assets in our condensed consolidated balance sheets as these amounts are restricted for periods that exceed one year from the balance sheet dates.

Strategic Investment

We previously invested $3.0 million in a foreign entity to explore expanding our reach internationally. Our investment is included in other assets on our condensed consolidated balance sheets. We did not record other-than-temporary impairment charges on this investment during the three and nine months ended September 30, 2017 and 2016 as there were no significant identified events or changes in circumstances that would be considered an indicator for impairment.

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 September 30, 2017 are classified based on the valuation technique level in the tables below (in thousands):



	September 30, 2017
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents:
Money market funds	$	11,036	$	11,036	$	—
Commercial paper	20,935		—		20,935
Short-term investments:
Commercial paper	41,971		—		41,971
Corporate securities	18,987		—		18,987
U.S. treasury securities	19,956		—		19,956
Long-term corporate securities	17,013		—		17,013
Total assets measured and recorded at fair value	$	129,898	$	11,036	$	118,862

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

The 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.

Intangible Assets

Intangible assets as of September 30, 2017 and December 31, 2016 consist of the following (in thousands, except the weighted-average amortization period):



	September 30, 2017
	Weighted-Average Amortization Period (in months)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technologies	60	$	15,077	$	(9,616	)	$	5,461
Customer lists	47	9,970		(5,138		)	4,832
Trade names	47	5,513		(3,077		)	2,436
Non-compete agreements	30	1,728		(1,458		)	270
Master service agreements	21	1,030		(1,030		)	—
Indefinite-lived trade name	—	3,600		—			3,600
Total intangible assets		$	36,918	$	(20,319	)	$	16,599



	December 31, 2016
	Weighted-Average Amortization Period (in months)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technologies	60	$	15,077	$	(8,245	)	$	6,832
Customer lists	47	9,970		(3,673		)	6,297
Trade names	47	5,513		(1,998		)	3,515
Non-compete agreements	30	1,728		(1,249		)	479
Master service agreements	21	1,030		(1,005		)	25
Indefinite-lived trade name	—	3,600		—			3,600
Total intangible assets		$	36,918	$	(16,170	)	$	20,748

During the three and nine months ended September 30, 2017, amortization expense related to our acquired intangible assets totaled approximately $1.4 million and $4.1 million, respectively. During the three and nine months ended September 30, 2016, amortization expense related to our acquired intangible assets totaled approximately $1.4 million and $3.2 million, respectively.

As of September 30, 2017, the estimated future amortization expense related to our finite-lived intangible assets is as follows (in thousands):



Remaining three months of 2017	$	1,201
2018	4,446
2019	3,510
2020	2,153
2021	815
Thereafter	874
Total	$	12,999

Debt Obligations

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), plus depreciation expense, plus amortization expense and other non-cash expenses (assuming there are no future cash costs), plus expenses incurred in connection with permitted acquisitions (including without limitation accrued acquisition-related contingent expenses) in an amount not to exceed $6.0 million per calendar year, plus non-recurring expenses in an amount not to exceed $2.0 million per calendar year. We must maintain financial covenants under the Line of Credit as follows: (1) maintain a balance of unrestricted cash at the lender of not less than $30.0 million at all times, other than the three months ending March 31, 2017 and June 30, 2017, and not less than $25.0 million during the three months ending March 31, 2017 and June 30, 2017; and (2) achieve EBITDA, on a trailing 12 month basis, of not less than (i) $25.0 million for the period of time from September 30, 2016 through June 30, 2017, (ii) $30.0 million for the period of time from September 30, 2017 through June 30, 2018, and (iii) $35.0 million for the period of time from September 30, 2018 through the maturity of the Line of Credit. As of September 30, 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.

Commitments and Contingencies

We lease our offices under operating leases, which expire at various dates through 2022. Our primary operating lease commitments at September 30, 2017 are related to our headquarters in Santa Clara, California, our office in San Francisco, California, and our office in India. We recognize rent expense on a straight-line basis over the lease period. Where leases contain escalation clauses, rent abatements, or concessions, such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line rent expense over the lease term. Rental expense, net of sublease income, was approximately $0.6 million and $2.0 million during the three and nine months ended September 30, 2017, respectively, and $0.5 million and $1.4 million during the three and nine months ended September 30, 2016, respectively.

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.

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 September 30, 2017.

Stockholders' Equity

Follow-on Offering

On August 8, 2017, we closed an underwritten public offering pursuant to a registration statement on Form S-3 of 11,500,000 shares of our common stock sold by us, including 1,500,000 shares sold upon full exercise of the underwriters’ option to purchase additional shares of common stock, at a price to the public of $13.50 per share, generating aggregate net proceeds of $147.6 million, after deducting underwriting discounts and commissions of $7.0 million and offering costs of $0.6 million.

Share-based Compensation Expense

Total share-based compensation expense recorded for employees and non-employees is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Cost of revenues	$	73	$	46	$	228	$	115
Technology and development	3,706		3,449		10,334		11,207
Sales and marketing	1,261		1,605		3,588		5,456
General and administrative	5,051		5,110		13,318		15,923
Total share-based compensation expense	$	10,091	$	10,210	$	27,468	$	32,701

There was no capitalized share-based compensation expense as of September 30, 2017 or 2016.

Stock Option Activity

There were no stock option awards granted to employees, consultants, officers or directors during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, we granted 232,700 stock option awards at a weighted-average grant date fair value of $2.58 solely to members of our board of directors.

As of September 30, 2017, our total unrecognized share-based compensation expense related to stock option awards was approximately $0.2 million, which will be recognized over the remaining weighted-average vesting period of approximately 0.8 years.

RSU and PSU Activity

Activity for RSUs and PSUs is as follows:



	RSUs and PSUs Outstanding
	Number of RSUs and PSUs Outstanding		Weighted-Average Grant Date Fair Value
Balance at December 31, 2016	14,142,109		$	5.20
Granted	6,425,919		8.75
Released	(4,968,509	)	5.67
Canceled	(1,153,704	)	6.01
Balance at September 30, 2017	14,445,815		$	6.57

As of September 30, 2017, our total unrecognized share-based compensation expense related to RSUs and PSUs was approximately $55.7 million, which will be recognized over the remaining weighted-average vesting period of approximately 1.9 years.

Income Taxes

We recorded an income tax provision of approximately $0.6 million and $2.0 million during the three and nine months ended September 30, 2017, respectively, and an income tax provision of approximately $0.6 million and $1.5 million for the three and nine months ended September 30, 2016, respectively, primarily due to state and foreign income tax expense and federal tax expense related to tax amortization of acquired indefinite lived intangible assets.

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 nine months ended September 30, 2017. We expect costs incurred to date related to this workforce reduction to be fully paid within six months.

2015 Restructuring Plan

Restructuring credits recorded in 2016 of $0.4 million primarily related to a partial reversal of previously accrued lease termination costs due to our subtenant leasing additional space in our Kentucky warehouse. 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			Total
Balance at January 1, 2016	$	—		$	—		$	55		$	2,463		$	2,518
Restructuring credits	—			—			—			(423		)	(423		)
Cash payments	—			—			(55		)	(1,734		)	(1,789		)
Balance at December 31, 2016	—			—			—			306			306
Restructuring charges (credits)	927			138			—			(42		)	1,023
Cash payments	(897		)	(118		)	—			(14		)	(1,029		)
Write-offs	—			(20		)	—			—			(20		)
Balance at September 30, 2017	$	30		$	—		$	—		$	250		$	280

As of September 30, 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 our condensed consolidated balance sheets.

Related-Party Transactions

Our Chief Executive Officer is a member of the Board of Directors of Adobe Systems Incorporated (Adobe). During the three and nine months ended September 30, 2017, we had purchases of $0.8 million and $2.6 million, respectively, and during the three and nine months ended September 30, 2016, we had purchases of $0.7 million and $2.5 million, respectively, from Adobe. We had no revenues in the three and nine months ended September 30, 2017 and September 30, 2016, respectively, from Adobe. We had an immaterial amount and $0.3 million in payables as of September 30, 2017 and December 31, 2016, respectively, to Adobe. We had no outstanding accounts receivables as of September 30, 2017 and 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 three and nine months ended September 30, 2017, we had purchases of $4.7 million and $9.5 million, respectively, and during the three and nine months ended September 30, 2016, we had purchases of $2.8 million and $7.2 million, respectively, from Cengage. We had $1.2 million and $1.8 million of revenues in the three and nine months ended September 30, 2017, respectively, and $0.6 million in revenues in both the three and nine months ended September 30, 2016 from Cengage. We had an immaterial amount in payables as of September 30, 2017 and December 31, 2016 to Cengage. We had $0.3 million and $0.1 million in outstanding accounts receivables as of September 30, 2017 and December 31, 2016, respectively, from Cengage.

One of our board members is also a member of the Board of Directors of Groupon, Inc. (Groupon). During the three and nine months ended September 30, 2017, we had purchases of $0.2 million and $0.5 million, respectively, and during the three and nine months ended September 30, 2016, we had purchases of $0.2 million and $0.5 million, respectively, from Groupon. We had no revenues in the three and nine months ended September 30, 2017 and September 30, 2016, respectively, from Groupon. We had no payables as of September 30, 2017 and an immaterial amount in payables as of December 31, 2016 to Groupon. We had no outstanding accounts receivables as of September 30, 2017 and December 31, 2016 from Groupon.

The immediate family of one of our board members is also a member of the Board of Directors of PayPal Holdings, Inc. (PayPal). During the three and nine months ended September 30, 2017, we incurred payment processing fees of $0.3 million and $0.8 million, respectively, to PayPal.

Subsequent Event Subsequent Event

Subsequent Event

Subsequent Events

Acquisition of Cogeon GmbH

On October 16, 2017, we acquired all of the outstanding interest of Cogeon GmbH (Cogeon), a privately held online learning company based in Berlin, Germany that provides adaptive math technology. Pursuant to the terms of the share purchase agreement, we paid €12.5 million (approximately $15.0 million) in cash to the sellers at the closing of the acquisition. There are potential payments of up to €7.5 million (approximately $9.0 million) over the next three years subject to certain contingencies. These contingent payments may be settled by us, in our sole discretion, either in cash or shares of our common stock. Additionally, there are potential issuances of up to €3.2 million (approximately $3.8 million) in RSUs over the next three years subject to certain contingencies. The potential contingent payments and RSU issuances equivalent value in USD may fluctuate based on the exchange rate at the time the payment or issuance is made.

Background and Basis of Presentation (Policies)

Basis of Presentation

The accompanying condensed consolidated balance sheet as of September 30, 2017, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2017 and 2016, the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 and the related footnote disclosures are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2017 and our results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016. Our results of operations for the three and nine months ended September 30, 2017 and cash flows for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year.

We operate in a single segment. Our fiscal year ends on December 31 and in this report we refer to the year ended December 31, 2016 as 2016.

The condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto that are included in our Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC).

Except for our textbook library, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our 2016 Annual Report on Form 10-K.

Reclassification of Prior Period Presentation

In order to conform with current period presentation, $0.5 million and $1.0 million of sales revenues during the three and nine months ended September 30, 2016, respectively, have been reclassified to services revenues and $0.3 million and $1.0 million of sales cost of revenues during the three and nine months ended September 30, 2016, respectively, have been reclassified to services cost of revenues on our condensed consolidated statements of operations.