CHEGG 2015-6-30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| |
x
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
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)
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| | |
Delaware | | 20-3237489 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification no.) |
3990 Freedom Circle
Santa Clara, CA, 95054
(Address of principal executive offices)
(408) 855-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| | |
Title of each class | | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | | The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
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Large accelerated filer ¨ | Accelerated filer x |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 31, 2015, the Registrant had 87,655,772 outstanding shares of Common Stock.
TABLE OF CONTENTS
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 for Good,” “CourseRank,” “Cramster,” “InstaEDU,” "internships.com" “Zinch” and “#1 in Textbook Rentals” are some of our trademarks used in this Quarterly Report on Form 10-Q. Solely for convenience, our trademarks, trade names and service marks referred to in this Quarterly Report on Form 10-Q appear without the ®, ™ and SM symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names. Other trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.
NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plans to,” “if,” “future,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHEGG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)
|
| | | | | | | |
| June 30, 2015 | | December 31, 2014 |
Assets | (unaudited) | | * |
Current assets | | | |
Cash and cash equivalents | $ | 35,087 |
| | $ | 56,117 |
|
Short-term investments | 27,409 |
| | 33,346 |
|
Accounts receivable, net of allowance for doubtful accounts of $261 and $559 at June 30, 2015 and December 31, 2014, respectively | 12,131 |
| | 14,396 |
|
Prepaid expenses | 7,657 |
| | 3,091 |
|
Other current assets | 16,872 |
| | 3,864 |
|
Total current assets | 99,156 |
| | 110,814 |
|
Long-term investments | 4,727 |
| | 1,451 |
|
Textbook library, net | 61,260 |
| | 80,762 |
|
Property and equipment, net | 18,569 |
| | 18,369 |
|
Goodwill | 91,301 |
| | 91,301 |
|
Intangible assets, net | 10,629 |
| | 13,626 |
|
Other assets | 1,922 |
| | 1,804 |
|
Total assets | $ | 287,564 |
| | $ | 318,127 |
|
Liabilities and stockholders' equity | | | |
Current liabilities | | | |
Accounts payable | $ | 3,832 |
| | $ | 10,945 |
|
Deferred revenue | 19,752 |
| | 24,591 |
|
Accrued liabilities | 23,903 |
| | 31,183 |
|
Total current liabilities | 47,487 |
| | 66,719 |
|
Long-term liabilities | | | |
Total other long-term liabilities | 4,732 |
| | 4,365 |
|
Total liabilities | 52,219 |
| | 71,084 |
|
Commitments and contingencies (Note 7) |
| |
|
Stockholders' equity: | | | |
Preferred stock, $0.001 par value – 10,000,000 shares authorized, no shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively | — |
| | — |
|
Common stock, $0.001 par value 400,000,000 shares authorized at June 30, 2015 and December 31, 2014, respectively; 87,560,103 and 84,008,043 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively | 88 |
| | 84 |
|
Additional paid-in capital | 543,789 |
| | 516,845 |
|
Accumulated other comprehensive gain (loss) | 14 |
| | (13 | ) |
Accumulated deficit | (308,546 | ) | | (269,873 | ) |
Total stockholders' equity | 235,345 |
| | 247,043 |
|
Total liabilities and stockholders' equity | $ | 287,564 |
| | $ | 318,127 |
|
* Derived from audited consolidated financial statements as of and for the year ended December 31, 2014.
See Notes to Condensed Consolidated Financial Statements
CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net revenues: | | | | |
|
| |
|
|
Rental | $ | 32,782 |
| | $ | 42,257 |
| | $ | 70,496 |
| | $ | 89,113 |
|
Services | 29,276 |
| | 18,599 |
| | 60,643 |
| | 35,845 |
|
Sales | 5,003 |
| | 3,636 |
| | 20,794 |
| | 13,927 |
|
Total net revenues | 67,061 |
| | 64,492 |
| | 151,933 |
| | 138,885 |
|
Cost of revenues: | | | | |
|
| |
|
|
Rental | 21,238 |
| | 29,889 |
| | 59,793 |
| | 77,586 |
|
Services | 9,975 |
| | 4,912 |
| | 21,812 |
| | 12,568 |
|
Sales | 5,043 |
| | 3,795 |
| | 20,144 |
| | 13,927 |
|
Total cost of revenues | 36,256 |
| | 38,596 |
| | 101,749 |
| | 104,081 |
|
Gross profit | 30,805 |
| | 25,896 |
| | 50,184 |
| | 34,804 |
|
Operating expenses: | | | | | | | |
Technology and development | 13,268 |
| | 12,189 |
| | 29,412 |
| | 23,509 |
|
Sales and marketing | 12,382 |
| | 14,817 |
| | 33,774 |
| | 29,844 |
|
General and administrative | 11,943 |
| | 10,654 |
| | 23,720 |
| | 20,494 |
|
Restructuring charges | 464 |
| | — |
| | 2,978 |
| | — |
|
Loss (gain) on liquidation of textbooks | 2,445 |
| | (2,122 | ) | | (1,740 | ) | | (3,800 | ) |
Total operating expenses | 40,502 |
| | 35,538 |
| | 88,144 |
| | 70,047 |
|
Loss from operations | (9,697 | ) | | (9,642 | ) | | (37,960 | ) | | (35,243 | ) |
Interest expense and other income, net: | | | | | | | |
Interest expense, net | (60 | ) | | (127 | ) | | (121 | ) | | (188 | ) |
Other income, net | 56 |
| | 156 |
| | 132 |
| | 276 |
|
Total interest expense and other income, net | (4 | ) | | 29 |
| | 11 |
| | 88 |
|
Loss before provision for (benefit from) income taxes | (9,701 | ) | | (9,613 | ) | | (37,949 | ) | | (35,155 | ) |
Provision for (benefit from) income taxes | 430 |
| | (1,367 | ) | | 724 |
| | (1,150 | ) |
Net loss | $ | (10,131 | ) | | $ | (8,246 | ) | | $ | (38,673 | ) | | $ | (34,005 | ) |
Net loss per share, basic and diluted | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | (0.45 | ) | | $ | (0.41 | ) |
Weighted average shares used to compute net loss per share, basic and diluted | 86,741 |
| | 83,209 |
| | 85,771 |
| | 82,686 |
|
See Notes to Condensed Consolidated Financial Statements
CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net loss | $ | (10,131 | ) | | $ | (8,246 | ) | | $ | (38,673 | ) | | $ | (34,005 | ) |
Other comprehensive (loss) income: | | | | | | | |
Net change in unrealized loss (gain) on available for sale investments | (17 | ) | | 54 |
| | 5 |
| | 38 |
|
Change in foreign currency translation adjustments | — |
| | (27 | ) | | 22 |
| | (4 | ) |
Other comprehensive (loss) income: | (17 | ) | | 27 |
| | 27 |
| | 34 |
|
Total comprehensive loss | $ | (10,148 | ) | | $ | (8,219 | ) | | $ | (38,646 | ) | | $ | (33,971 | ) |
See Notes to Condensed Consolidated Financial Statements.
CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited) |
| | | | | | | |
| Six Months Ended June 30, |
| 2015 | | 2014 |
Cash flows from operating activities | | | |
Net loss | $ | (38,673 | ) | | $ | (34,005 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Textbook library depreciation expense | 27,476 |
| | 38,130 |
|
Amortization of warrants and deferred loan costs | 70 |
| | 117 |
|
Other depreciation and amortization expense | 6,413 |
| | 4,544 |
|
Share-based compensation expense | 22,851 |
| | 15,411 |
|
Provision for bad debts | (269 | ) | | 197 |
|
Gain on liquidation of textbooks | (1,740 | ) | | (3,800 | ) |
Loss from write-offs of textbooks | 3,611 |
| | 6,805 |
|
Deferred income taxes | — |
| | (1,626 | ) |
Realized gain on sale of securities | — |
| | (18 | ) |
Loss from disposal of property and equipment | 918 |
| | — |
|
Change in assets and liabilities net of effect of acquisition of businesses: | | | |
Accounts receivable | 116 |
| | (2,211 | ) |
Prepaid expenses and other current assets | (17,405 | ) | | (1,774 | ) |
Other assets | (253 | ) | | (470 | ) |
Accounts payable | (6,150 | ) | | 2,988 |
|
Deferred revenue | (4,839 | ) | | 1,241 |
|
Accrued liabilities | (5,574 | ) | | (2,803 | ) |
Other liabilities | 389 |
| | (128 | ) |
Net cash (used in) provided by operating activities | (13,059 | ) | | 22,598 |
|
Cash flows from investing activities | | | |
Purchases of textbooks | (31,275 | ) | | (52,781 | ) |
Proceeds from liquidations of textbooks | 22,693 |
| | 18,737 |
|
Purchases of marketable securities | (17,127 | ) | | (54,882 | ) |
Proceeds from sale of marketable securities | — |
| | 38,860 |
|
Maturities of marketable securities | 19,690 |
| | 29,600 |
|
Purchases of property and equipment | (4,146 | ) | | (2,496 | ) |
Acquisition of businesses, net of cash acquired | — |
| | (43,872 | ) |
Net cash used in investing activities | (10,165 | ) | | (66,834 | ) |
Cash flows from financing activities | | | |
Proceeds from issuance of common stock under employee stock plans | 1,399 |
| | 1,743 |
|
Proceeds from exercise of common stock under employee stock plans | 10,530 |
| | — |
|
Payment of taxes related to the net share settlement of RSUs | (7,472 | ) | | (3,588 | ) |
Repurchase of common stock | (2,263 | ) | | — |
|
Net cash provided by (used in) financing activities | 2,194 |
| | (1,845 | ) |
Net decrease in cash and cash equivalents | (21,030 | ) | | (46,081 | ) |
Cash and cash equivalents, beginning of period | 56,117 |
| | 76,864 |
|
Cash and cash equivalents, end of period | $ | 35,087 |
| | $ | 30,783 |
|
Cash paid during the period for: | | | |
Interest | $ | 50 |
| | $ | 31 |
|
Income taxes | $ | 571 |
| | $ | 445 |
|
Non-cash investing and financing activities: | | | |
Accrued purchases of long-lived assets | $ | 3,805 |
| | $ | 5,528 |
|
Issuance of common stock related to prior acquisition | $ | 825 |
| | $ | 1,585 |
|
See Notes to Condensed Consolidated Financial Statements.
CHEGG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Background and Basis of Presentation
Company and Background
Chegg, Inc. (Chegg, the Company, we, us, or our), headquartered in Santa Clara, California, was incorporated as a Delaware corporation on July 29, 2005. Chegg is the leading student-first connected learning platform, empowering students to take control of their education to save time, save money, and get smarter. We are driven by our passion to help students become active consumers in the educational process. Our integrated platform offers products and services that students need throughout the college lifecycle, from choosing a college through graduation and beyond. By helping students learn more in less time and at a lower cost, we help them improve the overall return on investment in education. In 2014, nearly 7.5 million students used our platform.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of June 30, 2015, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2015 and 2014, the condensed consolidated statements of cash flows for the six months ended June 30, 2015 and 2014, and the related footnote disclosures are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2015, our results of operations for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014. The results of operations for the three and six months ended June 30, 2015 and cash flows for the six months ended June 30, 2015 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, 2014 as 2014.
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, included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC).
Except for restructuring charges, which are discussed below, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K.
We have presented revenue and cost of revenues separately for rental, service and sale beginning with our Annual Report on Form 10-K. Rental revenue includes the rental of print textbooks for which we take title and bear the risk of loss; service revenue includes Chegg Study, brand advertising, eTextbooks, tutoring, enrollment marketing, and commissions we earn from Ingram and other e-commerce partners; sale revenue includes just-in-time sale of print textbooks and the sale of other required materials. We have reclassified amounts in the prior periods to conform to the current period presentation. None of the changes impact previously reported condensed consolidated revenue, cost of revenue, operating income, or earnings per share.
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 revenue and expenses during the reporting periods. Significant estimates, assumptions and judgments are used for, but not limited to: revenue recognition, recoverability of accounts receivable, determination of the useful lives and salvage value assigned to our textbook library, 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.
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.
Recent Accounting Pronouncements
There have been no material changes to recent accounting pronouncements as compared to recent accounting pronouncements described in our Annual Report on Form 10-K.
Note 2. Net Loss Per Share
Basic net loss per share is computed by dividing net loss by weighted-average number of shares of common stock outstanding during the period, less weighted-average unvested common stock subject to repurchase or forfeiture. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including stock options, warrants, 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):
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Numerator: | | | | | | | |
Net loss | $ | (10,131 | ) | | $ | (8,246 | ) | | $ | (38,673 | ) | | $ | (34,005 | ) |
Denominator: | | | | | | | |
Weighted-average common shares outstanding | 86,741 |
| | 83,255 |
| | 85,771 |
| | 82,760 |
|
Less: Weighted-average unvested common shares subject to repurchase or forfeiture | — |
| | (46 | ) | | — |
| | (74 | ) |
Weighted-average common shares used in computing basic and diluted net loss per share | 86,741 |
| | 83,209 |
| | 85,771 |
| | 82,686 |
|
| | | | | | | |
Net loss per share, basic and diluted. | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | (0.45 | ) | | $ | (0.41 | ) |
The following potential 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):
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Options to purchase common stock | 8,849 |
| | 15,579 |
| | 12,011 |
| | 14,925 |
|
RSUs and PSUs | 107 |
| | 714 |
| | 98 |
| | 260 |
|
Employee stock purchase plan | 8 |
| | — |
| | 8 |
| | — |
|
Common stock subject to repurchase or forfeiture | — |
| | 40 |
| | — |
| | 40 |
|
Warrants to purchase common stock | 324 |
| | 996 |
| | 399 |
| | 996 |
|
Total common stock equivalents | 9,288 |
| | 17,329 |
| | 12,516 |
| | 16,221 |
|
Note 3. Cash and Cash Equivalents, Investments and Restricted Cash
The following table shows our cash and cash equivalents, restricted cash and investments’ adjusted cost, unrealized gain (loss) and fair value (in thousands) as of June 30, 2015 and December 31, 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2015 | | December 31, 2014 |
| Cost | | Net Unrealized Gain/(Loss) | | Fair Value | | Cost | | Net Unrealized Gain/(Loss) | | Fair Value |
Cash and cash equivalents: | | | | | | | | | | | |
Cash | $ | 26,093 |
| | $ | — |
| | $ | 26,093 |
| | $ | 49,836 |
| | $ | — |
| | $ | 49,836 |
|
Money market funds | 5,995 |
| | — |
| | 5,995 |
| | 5,828 |
| | — |
| | 5,828 |
|
Commercial paper | 2,999 |
| | — |
| | 2,999 |
| | 453 |
| | — |
| | 453 |
|
Total cash and cash equivalents | $ | 35,087 |
| | $ | — |
| | $ | 35,087 |
| | $ | 56,117 |
| | $ | — |
| | $ | 56,117 |
|
Short-term investments: | | | | | | | | | | | |
Commercial paper | $ | 11,044 |
| | $ | — |
| | $ | 11,044 |
| | $ | 13,435 |
| | $ | — |
| | $ | 13,435 |
|
Corporate securities | 16,366 |
| | (1 | ) | | 16,365 |
| | 18,426 |
| | (15 | ) | | 18,411 |
|
Certificate of deposit | — |
| | — |
| | — |
| | 1,499 |
| | 1 |
| | 1,500 |
|
Total short-term investments | $ | 27,410 |
| | $ | (1 | ) | | $ | 27,409 |
| | $ | 33,360 |
| | $ | (14 | ) | | $ | 33,346 |
|
Long-term investments: | | | | | | | | | | | |
Corporate securities | $ | 3,736 |
| | $ | (10 | ) | | $ | 3,726 |
| | $ | 1,453 |
| | $ | (2 | ) | | $ | 1,451 |
|
Agency bond | 1,001 |
| | — |
| | 1,001 |
| | — |
| | — |
| | — |
|
Long-term corporate securities | $ | 4,737 |
| | $ | (10 | ) | | $ | 4,727 |
| | $ | 1,453 |
| | $ | (2 | ) | | $ | 1,451 |
|
| | | | | | | | | | | |
Short-term restricted cash | $ | 300 |
| | $ | — |
| | $ | 300 |
| | $ | 300 |
| | $ | — |
| | $ | 300 |
|
Long-term restricted cash | 1,480 |
| | — |
| | 1,480 |
| | 1,480 |
| | — |
| | 1,480 |
|
Total restricted cash | $ | 1,780 |
| | $ | — |
| | $ | 1,780 |
| | $ | 1,780 |
| | $ | — |
| | $ | 1,780 |
|
The amortized cost and fair value of available-for-sale investments as of June 30, 2015 by contractual maturity were as follows (in thousands):
|
| | | | | | | |
| Cost | | Fair Value |
Due in 1 year or less | $ | 30,410 |
| | $ | 30,409 |
|
Due in 1-2 years | 4,736 |
| | 4,726 |
|
Investments not due at a single maturity date | 5,995 |
| | 5,995 |
|
Total | $ | 41,141 |
| | $ | 41,130 |
|
Investments not due at a single maturity date in the preceding table consist of money market fund deposits and commercial paper.
As of June 30, 2015, 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 four months, and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires investments generally to be investment grade, with the primary objective of preserving capital and maintaining liquidity. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and our intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost basis. During the six months ended June 30, 2015, we did not recognize any impairment charges.
Note 4. Fair Value Measurement
We have established a fair value hierarchy used to determine the fair value of our financial instruments as follows:
Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.
Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value; the inputs require significant management judgment or estimation.
A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Financial instruments measured and recorded at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 are classified based on the valuation technique level in the tables below (in thousands):
|
| | | | | | | | | | | |
| June 30, 2015 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) |
Assets: | | | | | |
Cash equivalents: | | | | | |
Money market funds | $ | 5,995 |
| | $ | 5,995 |
| | $ | — |
|
Commercial paper | 2,999 |
| | — |
| | 2,999 |
|
Short-term investments: | | | | | |
Commercial paper | 11,044 |
| | — |
| | 11,044 |
|
Corporate securities | 16,365 |
| | — |
| | 16,365 |
|
Long-term investments: | | | | | |
Corporate securities | 3,726 |
| | — |
| | 3,726 |
|
Agency bond | 1,001 |
| | — |
| | 1,001 |
|
Total assets measured and recorded at fair value | $ | 41,130 |
| | $ | 5,995 |
| | $ | 35,135 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2014 |
| Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents: | | | | | | | |
Money market funds | $ | 5,828 |
| | $ | 5,828 |
| | $ | — |
| | $ | — |
|
Commercial paper | 453 |
| | — |
| | 453 |
| | — |
|
Short-term investments: | | | | | | | |
Commercial paper | 13,435 |
| | — |
| | 13,435 |
| | — |
|
Corporate securities | 18,411 |
| | — |
| | 18,411 |
| | — |
|
Certificate of deposit | 1,500 |
| | — |
| | 1,500 |
| | — |
|
Long-term investments, corporate securities | 1,451 |
| | — |
| | 1,451 |
| | |
|
Total assets measured and recorded at fair value | $ | 41,078 |
| | $ | 5,828 |
| | $ | 35,250 |
| | $ | — |
|
Liabilities: | | | | | | | |
Put option liability | $ | 1,079 |
| | $ | — |
| | $ | — |
| | $ | 1,079 |
|
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.
As of June 30, 2015, the put option liability (Level 3) related to a previous acquisition that provided certain employees of the acquired company with the right to require us to acquire vested common shares at a stated contractual price had been fully exercised and the shares were repurchased from employees in the first quarter of 2015. We no longer hold any Level 3 assets or liabilities as of June 30, 2015.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Note 5. Intangible Assets
Intangible assets as of June 30, 2015 and December 31, 2014 consist of the following (in thousands, except weighted-average amortization period):
|
| | | | | | | | | | | | | | |
| June 30, 2015 |
| Weighted-Average Amortization Period (in months) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Developed technologies | 52 |
| | $ | 9,417 |
| | $ | (5,918 | ) | | $ | 3,499 |
|
Customer lists | 20 |
| | 2,820 |
| | (2,051 | ) | | 769 |
|
Trade names | 48 |
| | 2,343 |
| | (627 | ) | | 1,716 |
|
Non-compete agreements | 28 |
| | 1,220 |
| | (557 | ) | | 663 |
|
Master service agreements | 21 |
| | 1,030 |
| | (648 | ) | | 382 |
|
Indefinite-lived trade name | — |
| | 3,600 |
| | — |
| | 3,600 |
|
Total intangible assets | | | $ | 20,430 |
| | $ | (9,801 | ) | | $ | 10,629 |
|
|
| | | | | | | | | | | | | | | | | | |
| December 31, 2014 |
| Weighted-Average Amortization Period (in months) | | Gross Carrying Amount | | Accumulated Amortization | | Impairment | | Net Carrying Amount |
Developed technologies | 50 |
| | $ | 9,792 |
| | $ | (5,000 | ) | | $ | (194 | ) | | $ | 4,598 |
|
Customer lists | 15 |
| | 4,363 |
| | (1,816 | ) | | (829 | ) | | 1,718 |
|
Trade names | 44 |
| | 3,132 |
| | (1,085 | ) | | (39 | ) | | 2,008 |
|
Non-compete agreements | 21 |
| | 1,637 |
| | (421 | ) | | (278 | ) | | 938 |
|
Master service agreements | 21 |
| | 1,030 |
| | (266 | ) | | — |
| | 764 |
|
Corporate partnerships | 0 |
| | 243 |
| | (31 | ) | | (212 | ) | | — |
|
Indefinite-lived trade name | — |
| | 3,600 |
| | — |
| | — |
| | 3,600 |
|
Total intangible assets | | | $ | 23,797 |
| | $ | (8,619 | ) | | $ | (1,552 | ) | | $ | 13,626 |
|
During the three and six months ended June 30, 2015, amortization expense related to our acquired intangible assets totaled approximately $1.4 million and $3.0 million, respectively. During the three and six months ended June 30, 2014, amortization expense related to our acquired intangible assets totaled approximately $1.0 million and $1.6 million, respectively.
As of June 30, 2015, the estimated future amortization expense related to our finite-lived intangible assets is as follows (in thousands):
|
| | | |
Remaining six months of 2015 | $ | 1,765 |
|
2016 | 2,238 |
|
2017 | 1,701 |
|
2018 | 1,018 |
|
2019 | 307 |
|
Total | $ | 7,029 |
|
Note 6. Debt Obligations
In August 2013, we entered into a revolving credit facility with an aggregate principal amount of $50.0 million (the Revolving Credit Facility). In June 2014 we amended the Revolving Credit Facility to reduce the aggregate principal amount to $40.0 million with an accordion feature subject to certain financial criteria that would allow us to borrow up to $75.0 million in total. In August 2015, we amended the Revolving Credit Facility to reduce the financial covenant consolidated EBITDA requirements beginning the quarter ended June 30, 2015 and to reduce the aggregate principal amount to $30.0 million beginning the quarter ended December 31, 2015. The Revolving Credit Facility carries, 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 will expire in August 2016. The Revolving Credit Facility requires us to repay the outstanding balance at expiration, or to prepay the outstanding balance, if certain reporting and financial covenants are not maintained. These financial covenants are as follows: (1) maintain specified quarterly levels of consolidated EBITDA, which is defined as net income (loss) before tax plus interest expense, provision for (benefit from) income taxes, depreciation and amortization expense, non-cash share-based compensation expense and costs and expenses not to exceed $2.0 million in closing fees related to the revolving credit facility; and (2) maintain a leverage ratio greater than 1.5 to 1.0 as of the end of each quarter, based on the ratio of the consolidated outstanding debt balance to consolidated EBITDA for the period of the four fiscal quarters most recently ended. As of June 30, 2015, we were in compliance with these financial covenants.
Note 7. Commitments and Contingencies
We lease our office and warehouse facilities under operating leases, which expire at various dates through 2021. Our primary operating lease commitments at June 30, 2015, related to our headquarters in Santa Clara, California, our office in San Francisco, California, and our warehouse in Shepherdsville, Kentucky. 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. On April
10, 2015, we signed an agreement to sublease effectively one half of our warehouse in Kentucky. We expect this sublease agreement to generate $0.1 million of sublease income per month through the end of November 2016. Rental expense, net of sublease income, was approximately $0.5 million and $1.4 million in the three and six months ended June 30, 2015, respectively, and $0.8 million and $1.6 million in the three and six months ended June 30, 2014, 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, from time to time, we may 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, from time to time, also 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.
In July 2010, the Kentucky Tax Authority issued a property tax assessment of approximately $1.0 million related to our textbook library located in our Kentucky warehouse for the 2009 and 2010 tax years under audit. In March 2011, we filed a protest with the Kentucky Board of Tax Appeals that was rejected in March 2012. In September 2012, we filed a complaint seeking declaratory rights against the Commonwealth of Kentucky in the Bullitt Circuit Court of Kentucky, and that case was subsequently dismissed in favor of administration remedies with the Kentucky Tax Authority. We received a final Notice of Tax due in October 2012 from the Kentucky Tax Authority and we appealed this notice in November 2012 with the Kentucky Board of Tax Appeals. In May 2013, we presented an Offer in Judgment to the Kentucky Tax Authority of approximately $150,000, excluding tax and penalties, an amount that we have accrued for the two years under audit. We accrued this amount as of December 31, 2012. We appealed to the Kentucky Board of Tax Appeals in July 2013 and the Board issued a ruling in favor of the Kentucky Department of Revenue in January 2014 maintaining the property tax assessment. In February 2014, we filed an appeal to the Franklin Circuit Court in Kentucky and in June 2014 the Circuit Court held in abeyance our motion to appeal. In October 2014 the Franklin Circuit Court in Kentucky issued its opinion and order reversing the Board of Tax Appeal's decision, setting aside the Kentucky Department of Revenue's tax assessments against us and further vacating all penalties and interest. The Kentucky Department of Revenue has appealed the Circuit Court ruling. Due to the preliminary status of the appeal by the Kentucky Department of Revenue and the uncertainties related to the appeal, we are unable to evaluate the likelihood of either a favorable or unfavorable outcome. We believe that it is reasonably possible that we will incur a loss; however, we cannot currently estimate a range of any possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this matter on our financial condition, results of operations, or cash flows.
We are not aware of any other pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on our consolidated financial position, results of operations, or cash flows. However, our determination of whether a claim will proceed to litigation cannot be made with certainty, nor can the results of litigation be predicted with certainty. Nevertheless, defending any of these actions, regardless of the outcome, may be costly, time consuming, distract management personnel, and have a negative effect on our business. An adverse outcome in any of these actions, including a judgment or settlement, may cause a material adverse effect on our future business, operating results, and/or financial condition.
Note 8. 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 June 30, 2015.
Note 9. Stockholders' Equity
Share-Based Compensation
Total share-based compensation expense recorded for employees and non-employees, is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Cost of revenues | $ | 81 |
| | $ | 134 |
| | $ | 215 |
| | $ | 312 |
|
Technology and development | 1,273 |
| | 2,635 |
| | 5,980 |
| | 5,017 |
|
Sales and marketing | 1,034 |
| | 2,263 |
| | 6,088 |
| | 3,595 |
|
General and administrative | 5,443 |
| | 3,449 |
| | 10,568 |
| | 6,487 |
|
Total share-based compensation expense | $ | 7,831 |
| | $ | 8,481 |
| | $ | 22,851 |
| | $ | 15,411 |
|
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 estimated fair value of our common stock 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 is based on the average volatility of public companies within our peer group as our common stock has not been publicly trading for a long enough period to rely on our own expected volatility.
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:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Expected term (years) | 5.50 |
| | 6.07 |
| | 5.50 |
| | 6.07 |
|
Expected volatility | 50.68 | % | | 55.91 | % | | 50.68 | % | | 56.15 | % |
Dividend yield | — | % | | — | % | | — | % | | — | % |
Risk-free interest rate | 1.75 | % | | 1.88 | % | | 1.75 | % | | 1.91 | % |
Weighted-average grant-date fair value per share | $ | 3.63 |
| | $ | 3.66 |
| | $ | 3.63 |
| | $ | 3.82 |
|
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 and also the employee's continuing service to us. The compensation expense related to RSUs and PSUs is determined using the fair value of our common stock on the date of grant and the expense is recognized on a straight-line basis over the vesting period. 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 Employee Stock Purchase Plan
Under the 2013 Employee Stock Purchase Plan (the 2013 ESPP), rights to purchase shares are generally granted during the second and fourth quarter of each year. The fair value of rights granted under the 2013 ESPP was estimated at the date of grant using the Black-Scholes-Merton option-pricing model.
Stock Option Activity
Option activity under our equity incentive plans was as follows:
|
| | | | | | | | | | | | |
| Options Outstanding |
| Number of Options Outstanding | | Weighted- Average Exercise Price per Share | | Weighted-Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value |
Balance at December 31, 2014 | 14,962,099 |
| | $ | 8.53 |
| | 7.11 | | $ | 6,646,629 |
|
Granted | 165,456 |
| | 7.65 |
| | | | |
Exercised | (1,646,852 | ) | | 6.41 |
| | | | |
Canceled | (661,730 | ) | | 9.67 |
| | | | |
Balance at June 30, 2015 | 12,818,973 |
| | $ | 8.74 |
| | 6.88 | | $ | 8,122,971 |
|
As of June 30, 2015, our total unrecognized compensation expense for stock options granted to employees, officers, directors, and consultants was approximately $16.6 million, which will be recognized over a weighted-average vesting period of approximately 1.5 years.
We recognize only the portion of the option award 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.
No option awards were granted to consultants during the three and six months ended June 30, 2015 and 2014. Total share-based compensation expense for consultants was not significant for the three and six months ended June 30, 2015 and 2014.
There was no capitalized share-based compensation expense as of June 30, 2015 or 2014.
RSU and PSU Activity
|
| | | | | | |
| RSUs and PSUs Outstanding |
| Number of RSUs and PSUs Outstanding | | Weighted Average Grant Date Fair Value |
Balance at December 31, 2014 | 9,125,190 |
| | $ | 6.25 |
|
Granted | 7,085,445 |
| | 6.79 |
|
Released | (2,320,865 | ) | | 7.78 |
|
Canceled | (596,939 | ) | | 6.48 |
|
Balance at June 30, 2015 | 13,292,831 |
| | $ | 6.26 |
|
During the three and six months ended June 30, 2014, 29,502 and 1,285,261 RSUs granted prior to our initial public offering (IPO) vested and were settled for shares of our common stock, respectively. Of those shares, we withheld 10,859 and 527,778 shares valued at approximately $0.1 million and $3.6 million, respectively, in satisfaction of tax withholding obligations for employees who elected to net settle, i.e., surrender shares of common stock to satisfy their tax obligations. Payment of taxes related to this net share settlement of RSUs is reflected as a financing activity in our condensed consolidated statements of cash flows. The shares withheld by us as a result of the net settlement are no longer considered issued and outstanding, thereby reducing our shares outstanding used to calculate earnings per share. These shares are returned to the reserves and are available for future issuance under the 2013 Equity Incentive Plan (the 2013 Plan).
In February 2015, we granted PSUs under the 2013 Plan to certain of our key employees. 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 Performance Period). Based on the achievement of the performance conditions during the Performance Period for the February grants, the final settlement will range between zero and 100% of the target shares underlying the PSU awards based on a specified objective formula approved by the Compensation Committee. If earned, these PSUs will vest annually over a two or three year period depending on the employee, with the initial vesting in February 2016.
The target number of shares underlying the PSUs that were granted to certain key employees during the six months ended June 30, 2015 totaled 2,300,824 shares and had a weighted average grant date fair value of $6.59 per share. No PSUs were granted in the three months ended June 30, 2015. As of June 30, 2015, 100% of the PSUs are expected to vest.
As of June 30, 2015, we had a total of approximately $53.9 million of unrecognized compensation costs related to RSUs and PSUs that is expected to be recognized over the remaining weighted average period of 1.8 years.
Note 10. Income Taxes
We recorded an income tax provision of approximately $0.4 million and $0.7 million for the three and six months ended June 30, 2015, respectively, and an income tax benefit of approximately $1.4 million and $1.2 million for the three and six months ended June 30, 2014, respectively. The income tax provision for the three and six months ended June 30, 2015 was primarily due to state and foreign income tax expense and federal tax expense related to the tax amortization of acquired goodwill. The income tax benefit for the three and six months ended June 30, 2014 was the result of the release of valuation allowance resulting from our acquisition of InstaEDU, offset by foreign and state income tax expense.
Note 11. Restructuring Charges
2015 Restructuring Plan
For the three and six months ended June 30, 2015, we recorded restructuring charges of $0.5 million and $3.0 million, respectively, related to the closure of our print coupon business and our Kentucky warehouse. The charges include one-time employee termination benefits for approximately 71 employees of $0.3 million and $1.1 million during the three and six months ended June 30, 2015, respectively, and lease termination and other costs of $0.2 million and $1.8 million for the three and six months ended June 30, 2015, respectively. As a result of the expanded partnership with Ingram, we expect to exit our warehouse facilities by the end of 2015. We expect to incur additional charges in 2015 under the restructuring plan related to these exit activities and related severance costs of approximately $5.3 million. Costs incurred to date related to employee
termination benefits are expected to be paid within the next six months. 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 (in thousands):
|
| | | | | | | | | | | |
| Workforce Reduction Costs | | Lease Termination and Other Costs | | Total |
Balances at January 1, 2015 | $ | — |
| | $ | — |
| | $ | — |
|
Restructuring charges | 1,135 |
| | 1,843 |
| | 2,978 |
|
Cash payments | (612 | ) | | (367 | ) | | (979 | ) |
Write-offs | — |
| | (338 | ) | | (338 | ) |
Balances at June 30, 2015 | $ | 523 |
| | $ | 1,138 |
| | $ | 1,661 |
|
As of June 30, 2015, the $1.7 million liability was comprised of a short-term accrual of $1.0 million included within accrued liabilities and a long-term accrual of $0.7 million included within other liabilities on the condensed consolidated balance sheet.
Note 12. Related-Party Transactions
Our Chief Executive Officer is a member of the Board of Directors of Adobe Systems (Adobe). During the three and six months ended June 30, 2015, we had purchases of $0.8 million and $0.9 million, respectively, and during the three and six months ended June 30, 2014, we had purchases of $0.3 million and $0.7 million, respectively, of products from Adobe. We had $0.1 million in revenues in the three and six months ended June 30, 2015 and $0.2 million and $1.0 million in revenues in the three and six months ended June 30, 2014, respectively, from Adobe. We had $0.1 million in payables as of December 31, 2014 to Adobe. We had $0.1 million in outstanding accounts receivables to Adobe as of June 30, 2015.
One of our board members is also a member of the Board of Directors of Cengage Learning (Cengage). During the three and six months ended June 30, 2015, we had purchases of $1.9 million and $6.2 million, respectively, and during the three and six months ended June 30, 2014 we had purchases of $0.5 million and $6.4 million, respectively, of products from Cengage. We had $0.1 million in payables as of December 31, 2014 to Cengage. We had $0.1 million in outstanding accounts receivables to Cengage as of December 31, 2014.
One of our board members is the Chief Executive Officer of Shutterfly Inc. (Shutterfly). During the six months ended June 30, 2015, we had purchases of $1.1 million of products from Shutterfly. We had $0.1 million and an immaterial amount in revenues in the three and six months ended June 30, 2015, respectively, and $0.1 million in revenues in the three and six months ended June 30, 2014 from Shutterfly. We had an immaterial amount in outstanding accounts receivables to Shutterfly as of June 30, 2015.
The terms of our contracts with the above related parties are consistent with our contracts with other independent parties.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the related notes included in Part I, Item 1, “Financial Information” of this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See the “Note about Forward-Looking Statements” for additional information. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”
Overview
Chegg is the 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 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. By helping students learn more in less time and at a lower cost, we are improving the overall return on investment in education.
We match domestic and international students with colleges, universities and other academic institutions (collectively referred to as colleges) in the United States. Students get help finding the best fit school for them and colleges are able to reach the best candidates at a fraction of the cost of traditional marketing. Once in college, we provide a range of products and services to help students save time, save money and get smarter. We offer an extensive print textbook library for rent and sale both on our own and through our strategic partnership with Ingram, which we discuss in more detail below. We rent and sell eTextbooks. Students can subscribe to our digital services, such as Chegg Study, which provides Textbook Solutions and Q&A, helping students with their course work. When students are really stuck, they can reach a live tutor online, anytime, anywhere through our Chegg Tutors service. Finally, we provide access to internships to help students gain skills which are critical to securing their first job.
To deliver services to students, we partner with a variety of third parties. We work with colleges who rely on us to help shape their incoming classes. 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 and growing 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. In addition, because we have a large and growing student user base, local and national brands partner with us to reach the college and high school demographic.
During the three and six months ended June 30, 2015, we generated net revenues of $67.1 million and $151.9 million, respectively, and in the same periods had net losses of $10.1 million and $38.7 million, respectively. During the three and six months ended June 30, 2014, we generated net revenues of $64.5 million and $138.9 million, respectively, and in the same periods had net losses of $8.2 million and $34.0 million, respectively. We plan to continue to invest in our long-term growth, particularly further investment in the technology that powers our platform, the development of additional products and services that serve students, and expanding our strategic partnership with Ingram.
Our strategy for achieving and maintaining profitability is centered upon our ability to use our digital offerings to increase student engagement with our connected learning platform. We plan to continue to invest in the expansion of our digital offerings to provide a more compelling and personalized solution and deepen engagement with students. We believe this expanded and deeper penetration of the student demographic will allow us to drive further growth in our enrollment and brand marketing 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 higher margin digital offerings, will enable us to accomplish profitability and become cash-flow positive for the long-term. Our ability to accomplish 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 our digital offerings and other factors described in greater detail in “Risk Factors.”
Strategic Partnership with Ingram
We expect our partnership with Ingram to accelerate the growth of our higher margin digital offerings while allowing us to maintain our leadership and brand recognition in print textbook rental. We entered into a definitive inventory purchase and consignment agreement with Ingram in April 2015 that we expect will allow us to exit the capital intensive aspects of our print textbook rental business and to focus exclusively on our digital offerings by 2017. Under the agreement, since May 1, 2015, Ingram has been responsible for all new investments in the textbook library, fulfillment logistics, and has title and risk of loss related to textbook rentals. As a result of our partnership with Ingram, our revenue includes a commission on the total revenue that we earn from Ingram upon their fulfillment of a rental transaction using books for which Ingram has title and risk of loss. Additionally, we have ceased making additional investments in our textbook library during 2015 and expect to rent and liquidate our existing inventory of books during the remainder of 2015 and 2016. This new model will allow us to reduce and eventually eliminate the operating expenses we incur to acquire and maintain a print textbook library. As we transition to a pure digital offerings model, we will continue to buy used books on Ingram’s behalf including books through our buyback program and invoice Ingram at cost. We will also provide Ingram with extended payment terms in 2015 and 2016 as we procure textbooks on behalf of Ingram, before moving to normal payment terms in 2017.
Our Print Textbook Business
Our print textbook rental business has been highly capital intensive. As a result of our expanded partnership with Ingram, we expect to exit our warehouse facilities in Kentucky by the end of 2015 and transition our textbook library to Ingram’s facilities which will help to free up resources historically required by this business. We will continue to liquidate our textbook library through the normal course of our rental operations and expect to be fully liquidated at the end of 2016. Until that point, we will continue to rent textbooks and to recognize revenue on the textbooks that we own as print revenue through the liquidation period. Once our entire textbook library has been liquidated all revenue from textbook rentals will be commission-based and we will no longer report on revenue from our print offerings as all of the revenue will be classified as services revenue.
We capitalize the investment in our textbook library and record depreciation expense in cost of revenues over its useful life using an estimated liquidation value. During the six months ended June 30, 2015 and June 30, 2014, our investment in print textbooks, net of proceeds from textbook liquidation, was $8.6 million and $34.0 million, respectively. Investment in our print textbooks, net of proceeds from textbook liquidations, in the six months ended June 30, 2015 decreased and is expected to continue to decrease through 2016 as a result of our partnership with Ingram.
We use our website to liquidate textbooks from our textbook library, which allows us to generate greater recovery on our textbooks compared to bulk liquidations, while at the same time providing students substantial savings over the retail price of a new book. We are able to adjust what we liquidate based on expected rental demand. We also use our website to source, on behalf of Ingram, both new and used print textbooks for rental or resale from wholesalers, publishers and students. Purchasing used textbooks allows us to reduce the investments necessary to maintain the rental catalog while at the same time attracting students to our website by offering them more for their textbooks than they could generally get by selling them back to their campus bookstore.
Our Digital Offerings Business
Our digital learning and advertising offerings, which we refer to as “digital offerings” are experiencing rapid growth and we expect our partnership with Ingram to accelerate the growth of these offerings while allowing us to maintain our leadership and brand recognition in print textbook rental. Our digital offerings for students include our connected learning platform, or the Student Hub, our web-based, multiplatform eTextbook Reader, eTextbooks and supplemental materials from approximately 120 publishers, which we offer as a rental-equivalent solution and for free to students awaiting the arrival of their print textbook rental, online tutoring, our Chegg Study service, College Admissions, Scholarship Services and Internship Services. Commissions earned through our Ingram partnership are also included within the digital offerings business. In addition, we offer enrollment marketing services to colleges, allowing them to reach interested college-bound high school students that use our College Admissions, and Scholarship Services. We also work with leading brands, such as Adobe, Dell, Microsoft, PayPal, Proctor & Gamble, Red Bull and Shutterfly, to provide students with discounts, promotions and other products that, based on student feedback, delight them. For example, for Red Bull, we inserted a free can of Red Bull in select textbook rental shipments to students and Microsoft sponsored a “Free Study Week,” which included free access to our Chegg Study service as well as additional free study materials. All of our brand advertising services and the discounts, promotions and other products provided to students are paid for by the brands.
Students typically pay to access eTextbooks for the academic term or subscribe for other services such as Chegg Study on a monthly or annual basis, while colleges subscribe to our enrollment marketing services and brands pay us depending on the nature of the campaign. In the aggregate digital offerings were 45% and 42% of net revenues during the three and six months ended June 30, 2015, respectively, and 29% and 26% of net revenues during the three and six months ended June 30, 2014.
Seasonality of Our Business
A substantial majority of our revenue is recognized ratably over the term the student rents our textbooks or has access to our digital offerings. This generally results in our highest revenue in the fourth quarter as it reflects more days of the academic year and our lowest revenue in the second quarter as colleges conclude their academic year for summer and there are fewer days of rentals. The variable expenses associated with our shipments of textbooks and marketing activities are 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. We expect these variable expenses to decrease through the remainder of 2015 and 2016 as we transition shipping and fulfillment activities related to textbooks to Ingram. As a result of these factors, the most concentrated periods for our revenue and expenses do not necessarily coincide and comparisons of our quarterly operating results on a sequential basis may not provide meaningful insight into our overall financial performance. We expect our expanded strategic partnership with Ingram to shift peak revenue in the periods that a student rents a textbook as a result of our revenue sharing agreement such that out revenue will more closely track the academic calendar as our expenses associated with the textbook rental business decrease.
Results of Operations
The following table summarizes our historical consolidated statements of operations (in thousands, except percentage of revenue):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net revenues: | | | | | | | | | | | | | | | |
Rental | $ | 32,782 |
| | 49 | % | | $ | 42,257 |
| | 66 | % | | $ | 70,496 |
| | 46 | % | | $ | 89,113 |
| | 64 | % |
Services | 29,276 |
| | 44 | % | | 18,599 |
| | 29 | % | | 60,643 |
| | 40 | % | | 35,845 |
| | 26 | % |
Sales | 5,003 |
| | 7 | % | | 3,636 |
| | 6 | % | | 20,794 |
| | 14 | % | | 13,927 |
| | 10 | % |
Total net revenues | 67,061 |
| | 100 | % | | 64,492 |
| | 100 | % | | 151,933 |
| | 100 | % | | 138,885 |
| | 100 | % |
Cost of revenues(1): | | | | | | | | | | | | | | | |
Rental | 21,238 |
| | 32 | % | | 29,889 |
| | 46 | % | | 59,793 |
| | 39 | % | | 77,586 |
| | 56 | % |
Services | 9,975 |
| | 15 | % | | 4,912 |
| | 8 | % | | 21,812 |
| | 14 | % | | 12,568 |
| | 9 | % |
Sales | 5,043 |
| | 8 | % | | 3,795 |
| | 6 | % | | 20,144 |
| | 13 | % | | 13,927 |
| | 10 | % |
Total cost of revenues | 36,256 |
| | 54 | % | | 38,596 |
| | 60 | % | | 101,749 |
| | 67 | % | | 104,081 |
| | 75 | % |
Gross profit | 30,805 |
| | 46 | % | | 25,896 |
| | 40 | % | | 50,184 |
| | 33 | % | | 34,804 |
| | 25 | % |
Operating expenses(1): | | | | | | | | | | | | | | | |
Technology and development | 13,268 |
| | 20 | % | | 12,189 |
| | 19 | % | | 29,412 |
| | 19 | % | | 23,509 |
| | 17 | % |
Sales and marketing | 12,382 |
| | 18 | % | | 14,817 |
| | 23 | % | | 33,774 |
| | 22 | % | | 29,844 |
| | 21 | % |
General and administrative | 11,943 |
| | 18 | % | | 10,654 |
| | 17 | % | | 23,720 |
| | 16 | % | | 20,494 |
| | 15 | % |
Restructuring charges | 464 |
| | 1 | % | | — |
| | — | % | | 2,978 |
| | 2 | % | | — |
| | — | % |
Loss (gain) on liquidation of textbooks | 2,445 |
| | 4 | % | | (2,122 | ) | | (3 | )% | | (1,740 | ) | | (1 | )% | | (3,800 | ) | | (3 | )% |
Total operating expenses | 40,502 |
| | 60 | % | | 35,538 |
| | 55 | % | | 88,144 |
| | 58 | % | | 70,047 |
| | 50 | % |
Loss from operations | (9,697 | ) | | (14 | )% | | (9,642 | ) | | (15 | )% | | (37,960 | ) | | (25 | )% | | (35,243 | ) | | (25 | )% |
Total interest expense and other income, net | (4 | ) | | — | % | | 29 |
| | — | % | | 11 |
| | — | % | | 88 |
| | — | % |
Loss before provision for (benefit from) income taxes | (9,701 | ) | | (14 | )% | | (9,613 | ) | | (15 | )% | | (37,949 | ) | | (25 | )% | | (35,155 | ) | | (25 | )% |
Provision for (benefit from) income taxes | 430 |
| | (1 | )% | | (1,367 | ) | | 2 | % | | 724 |
| | — | % | | (1,150 | ) | | 1 | % |
Net loss | $ | (10,131 | ) | | (15 | )% | | $ | (8,246 | ) | | (13 | )% | | $ | (38,673 | ) | | (25 | )% | | $ | (34,005 | ) | | (24 | )% |
| | | | | | | | | | | | | | | |
(1) Includes share-based compensation expense as follows: | | | | | | | | | | | | | | | |
Cost of revenues | $ | 81 |
| | | | $ | 134 |
| | | | $ | 215 |
| | | | $ | 312 |
| | |
Technology and development | 1,273 |
| | | | 2,635 |
| | | | 5,980 |
| | | | 5,017 |
| | |
Sales and marketing | 1,034 |
| | | | 2,263 |
| | | | 6,088 |
| | | | 3,595 |
| | |
General and administrative | 5,443 |
| | | | 3,449 |
| | | | 10,568 |
| | | | 6,487 |
| | |
Total share-based compensation expense | $ | 7,831 |
| | | | $ | 8,481 |
| | | | $ | 22,851 |
| | | | $ | 15,411 |
| | |
Three and Six Months Ended June 30, 2015 and 2014
Net Revenues
Net revenues in the three months ended June 30, 2015 increased $2.6 million, or 4%, compared to the same period in 2014. Rental revenue decreased $9.5 million or 22%, while service revenue increased $10.7 million, or 57%, and sale revenue increased $1.4 million, or 38%.
Net revenues in the six months ended June 30, 2015 increased $13.0 million, or 9%, compared to the same period in 2014. Rental revenue decreased $18.6 million or 21%, while service revenue increased $24.8 million, or 69%, and sale revenue increased $6.9 million, or 49%.
The decrease in rental revenue in the three and six months ended June 30, 2015 as compared to the same period in 2014 was due to our partnership with Ingram, which commenced in July 2014. As a result of the Ingram partnership, our service revenue and digital offerings revenue is comprised of a commission on the total revenue that we earn from Ingram upon their fulfillment of a rental transaction using books for which Ingram has title and risk of loss. The increase in services and sales revenue in the three and six months ended June 30, 2015 as compared to the same period in 2014 was driven primarily from growth across our digital offerings for students which included increased revenue from Chegg Study, commissions earned from Ingram, and our various acquisitions in 2014.
The following table sets forth our net revenues for the periods shown, in addition to revenue details for our print textbook business and digital offerings business (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Print textbooks | $ | 36,849 |
| | $ | 45,796 |
| | (8,947 | ) | | (20 | )% |
Digital offerings | 30,212 |
| | 18,696 |
| | 11,516 |
| | 62 |
|
Net revenues | $ | 67,061 |
| | $ | 64,492 |
| | $ | 2,569 |
| | 4 | % |
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Print textbooks | $ | 88,198 |
| | $ | 102,421 |
| | (14,223 | ) | | (14 | )% |
Digital offerings | 63,735 |
| | 36,464 |
| | 27,271 |
| | 75 |
|
Net revenues | $ | 151,933 |
| | $ | 138,885 |
| | $ | 13,048 |
| | 9 | % |
The increase in net revenues in the three and six months ended June 30, 2015 compared to the same periods in 2014 was the result of a 62% and 75% increase, respectively, in digital offerings due to growth in new memberships for our Chegg Study service, revenue from acquisitions that we completed toward the end of the first half of 2014, an increase in eTextbook volumes as well as our commission earned from Ingram related to textbook rentals. Digital offerings represented 45% and 42% of net revenues during the three and six months ended June 30, 2015, respectively and 29% and 26% of net revenues during the three and six months ended June 30, 2014, respectively. This increase was partially offset by a decrease during the three and six months ended June 30, 2015 compared to the same period in 2014 in print textbook revenue of 20% and 14%, respectively, primarily due to our partnership with Ingram. Because we record the commission we earn from Ingram as digital offerings revenue and service revenue, we expect our print textbook revenue and rental revenue to continue to decrease throughout 2015 as we transition investments in the textbook library and logistics and fulfillment for print textbook rental orders to Ingram. We expect by the end of 2016 we will have substantially liquidated our textbook library through the normal course of our rental operations.
Cost of Revenues
The following table sets forth our cost of revenues for the periods shown (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Cost of revenues(1) | $ | 36,256 |
| | $ | 38,596 |
| | $ | (2,340 | ) | | (6 | )% |
| | | | | | | |
(1) Includes share-based compensation expense of: | $ | 81 |
| | $ | 134 |
| | $ | (53 | ) | | (40 | )% |
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Cost of revenues(1) | $ | 101,749 |
| | $ | 104,081 |
| | $ | (2,332 | ) | | (2 | )% |
| | | | | | | |
(1) Includes share-based compensation expense of: | $ | 215 |
| | $ | 312 |
| | $ | (97 | ) | | (31 | )% |
Cost of revenues in each of the three and six months ended June 30, 2015 decreased by $2.3 million compared to the same periods in 2014. As a result, gross margins increased to 46% and 33% in the three and six months ended June 30, 2015, respectively from 40% and 25% in the three and six months ended June 30, 2014, respectively, as digital offerings continue to become a larger percentage of our business. Further, as we move towards Ingram taking title and risk of loss for the textbook inventory needed to fulfill all print textbooks rentals and sales, we anticipate our print related cost of revenues will continue to decrease and our total gross margins will continually increase to be more in-line with gross margins we experience for digital offerings today.
Operating Expenses
The following table sets forth our operating expenses for the periods shown (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Technology and development(1) | $ | 13,268 |
| | $ | 12,189 |
| | $ | 1,079 |
| | 9 | % |
Sales and marketing(1) | 12,382 |
| | 14,817 |
| | (2,435 | ) | | (16 | ) |
General and administrative(1) | 11,943 |
| | 10,654 |
| | 1,289 |
| | 12 |
|
Restructuring charges | 464 |
| | — |
| | 464 |
| | n/m |
|
Loss (gain) on liquidation of textbooks | 2,445 |
| | (2,122 | ) | | 4,567 |
| | (215 | ) |
| $ | 40,502 |
| | $ | 35,538 |
| | $ | 4,964 |
| | 14 | % |
| | | | | | | |
(1) Includes share-based compensation expense of: | | | | | | | |
Technology and development | $ | 1,273 |
| | $ | 2,635 |
| | $ | (1,362 | ) | | (52 | )% |
Sales and marketing | 1,034 |
| | 2,263 |
| | (1,229 | ) | | (54 | ) |
General and administrative | 5,443 |
| | 3,449 |
| | 1,994 |
| | 58 |
|
Share-based compensation expense | $ | 7,750 |
| | $ | 8,347 |
| | $ | (597 | ) | | (7 | )% |
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| 2015 | | 2014 | | $ | | % |
Technology and development(1) | $ | 29,412 |
| | $ | 23,509 |
| | $ | 5,903 |
| | 25 | % |
Sales and marketing(1) | 33,774 |
| | 29,844 |
| | 3,930 |
| | 13 |
|
General and administrative(1) | 23,720 |
| | 20,494 |
| | 3,226 |
| | 16 |
|
Restructuring charges | 2,978 |
| | — |
| | 2,978 |
| | n/m |
|
Gain on liquidation of textbooks | (1,740 | ) | | (3,800 | ) | | 2,060 |
| | (54 | ) |
| $ | 88,144 |
| | $ | 70,047 |
| | $ | 18,097 |
| | 26 | % |
| | | | | | | |
(1) Includes share-based compensation expense of: | | | | | | | |
Technology and development | $ | 5,980 |
| | $ | 5,017 |
| | $ | 963 |
| | 19 | % |
Sales and marketing | 6,088 |
| | 3,595 |
| | 2,493 |
| | 69 |
|
General and administrative | 10,568 |
| | 6,487 |
| | 4,081 |
| | 63 |
|
Share-based compensation expense | $ | 22,636 |
| | $ | 15,099 |
| | $ | 7,537 |
| | 50 | % |
_____________________________________________________
n/m - not meaningful
Technology and Development
Technology and development expenses during the three months ended June 30, 2015 increased $1.1 million, or 9%, compared to the same period in 2014. During the three months ended June 30, 2015 our employee-related expenses and expenses for outside services increased $1.4 million and $0.4 million, respectively, compared to the same period in 2014 which was partially offset by a decrease in share-based compensation expense of $1.4 million. Technology and development as a percentage of net revenues was 20% during the three months ended June 30, 2015 compared to 19% during the three months ended June 30, 2014.
Technology and development expenses during the six months ended June 30, 2015 increased $5.9 million, or 25%, compared to the same period in 2014. During the six months ended June 30, 2015 our employee-related expenses and share-based compensation expenses increased $3.0 million and $1.0 million, respectively, compared to the same period in 2014. In addition, expenses for outside services increased $1.1 million and web hosting and software licensing fees increased $0.4 million compared to the six months ended June 30, 2014. Technology and development as a percentage of net revenues was 19% during the six months ended June 30, 2015 compared to 17% during the six months ended June 30, 2014.
Sales and Marketing
Sales and marketing expenses during the three months ended June 30, 2015 decreased by $2.4 million, or 16%, compared to the same period in 2014. The decrease is primarily attributable to a decrease in our employee-related expenses, share-based compensation, and office expenses of $1.1 million, $1.2 million, and $0.5 million, respectively, compared to the three months ended June 30, 2014. The decrease was partially offset by the amortization of our intangibles which increased $0.4 million related to acquisitions completed in 2014. Sales and marketing expenses as a percentage of net revenues decreased to 18% during the three months ended June 30, 2015 compared to 23% during the three months ended June 30, 2014.
Sales and marketing expenses during the six months ended June 30, 2015 increased by $3.9 million, or 13%, compared to the same period in 2014. The increase is primarily attributable to an increase in share-based compensation which increased $2.5 million compared to the six months ended June 30, 2014. In addition, amortization of our intangibles increased $1.4 million related to acquisitions completed in 2014. Sales and marketing expenses as a percentage of net revenues increased to 22% during the six months ended June 30, 2015 compared to 21% during the six months ended June 30, 2014.
General and Administrative
General and administrative expenses in the three months ended June 30, 2015 increased $1.3 million, or 12%, compared to the same period in 2014. The increase was due to higher employee-related expenses and share-based compensation expenses which increased $0.3 million and $2.0 million, respectively, compared to the three months ended June 30, 2014, which was partially offset by a decrease in professional fees, office expenses, and insurance of $0.3 million, $0.3 million, and $0.1 million, respectively. General and administrative expenses as a percentage of net revenues increased to 18% during the three months ended June 30, 2015 compared to 17% during the three months ended June 30, 2014.
General and administrative expenses in the six months ended June 30, 2015 increased $3.2 million, or 16%, compared to the same period in 2014. The increase was due to higher employee-related expenses and share-based compensation expenses which increased $0.9 million and $4.1 million, respectively, compared to the six months ended June 30, 2014, which was partially offset by a decrease in professional fees, office expenses, and insurance of $0.9 million, $0.2 million, and $0.3 million, respectively. General and administrative expenses as a percentage of net revenues increased to 16% during the six months ended June 30, 2015 compared to 15% during the six months ended June 30, 2014.
Restructuring Charges
During the three and six months ended June 30, 2015, we incurred restructuring charges of $0.5 million and $3.0 million, respectively, resulting from the closure of our print coupon business and the expected closure of our warehouse in Kentucky. The restructuring charges were comprised of