Quarterly Report (10-q)

Date : 07/29/2019 @ 9:13PM
Source : Edgar (US Regulatory)
Stock : Chegg Inc (CHGG)
Quote : 34.55  0.07 (0.20%) @ 11:00PM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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
 
CURRENTCHEGGLOGOA23.JPG
CHEGG, INC .
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-3237489
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3990 Freedom Circle
Santa Clara , CA , 95054
(Address of principal executive offices)
( 408 ) 855-5700
(Registrant’s telephone number, including area code)
 

Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, $0.001 par value per share
CHGG
The New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   x No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
Non-accelerated filer
 (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No   x
As of July 26, 2019, the Registrant had 119,651,393 outstanding shares of Common Stock.
 






TABLE OF CONTENTS

 
 
 
  
Page
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
  
 
 
 
 
 
 
  

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

Chegg, Chegg.com, Chegg Study, internships.com, Research Ready, EasyBib, #1 In Textbook Rentals, and the Chegg “C” logo, 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.


2



NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “would,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “project,” “endeavor,” “expect,” “plans to,” “if,” “future,” “likely,” “potentially,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q . Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form  10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.

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

3


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CHEGG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)
(unaudited)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
555,792

 
$
374,664

Short-term investments
259,399

 
93,345

Accounts receivable, net of allowance for doubtful accounts of $23 and $229 at June 30, 2019 and December 31, 2018, respectively
5,948

 
12,733

Prepaid expenses
12,152

 
4,673

Other current assets
14,608

 
9,510

Total current assets
847,899

 
494,925

Long-term investments
288,682

 
16,052

Property and equipment, net
76,962

 
59,904

Goodwill
149,466

 
149,524

Intangible assets, net
22,374

 
25,915

Right of use assets
14,756

 

Other assets
15,544

 
14,618

Total assets
$
1,415,683

 
$
760,938

Liabilities and stockholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
3,131

 
$
8,177

Deferred revenue
18,821

 
17,418

Current operating lease liabilities
4,774

 

Accrued liabilities
37,425

 
34,077

Total current liabilities
64,151

 
59,672

Long-term liabilities
 
 
 
Convertible senior notes, net
874,126

 
283,668

Long-term operating lease liabilities
14,243

 

Other long-term liabilities
3,592

 
6,964

Total long-term liabilities
891,961

 
290,632

Total liabilities
956,112

 
350,304

Commitments and contingencies (Note 9)

 

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

 

Common stock, $0.001 par value 400,000,000 shares authorized; 119,335,960 and 115,500,418 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
119

 
116

Additional paid-in capital
873,104

 
818,113

Accumulated other comprehensive loss
(618
)
 
(1,019
)
Accumulated deficit
(413,034
)
 
(406,576
)
Total stockholders' equity
459,571

 
410,634

Total liabilities and stockholders' equity
$
1,415,683

 
$
760,938


See Notes to Condensed Consolidated Financial Statements.

4


CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net revenues
$
93,862

 
$
74,222

 
$
191,271

 
$
151,171

Cost of revenues
20,518

 
17,784

 
43,853

 
38,008

Gross profit
73,344

 
56,438

 
147,418

 
113,163

Operating expenses:
 
 
 
 
 
 
 
Research and development
32,065

 
26,218

 
64,757

 
51,751

Sales and marketing
11,795

 
11,437

 
30,512

 
26,773

General and administrative
22,622

 
19,479

 
46,292

 
37,735

Restructuring charges
47

 
15

 
69

 
235

Total operating expenses
66,529

 
57,149

 
141,630

 
116,494

Income (loss) from operations
6,815

 
(711
)
 
5,788

 
(3,331
)
Interest expense and other income, net:
 
 
 
 
 
 
 
Interest expense, net
(13,514
)
 
(3,664
)
 
(17,746
)
 
(3,684
)
Other income, net
5,253

 
894

 
6,820

 
1,458

Total interest expense and other income, net
(8,261
)
 
(2,770
)
 
(10,926
)
 
(2,226
)
Loss before provision for income taxes
(1,446
)
 
(3,481
)
 
(5,138
)
 
(5,557
)
Provision for income taxes
583

 
428

 
1,209

 
969

Net loss
$
(2,029
)
 
$
(3,909
)
 
$
(6,347
)
 
$
(6,526
)
Net loss per share, basic and diluted
$
(0.02
)
 
$
(0.03
)
 
$
(0.05
)
 
$
(0.06
)
Weighted average shares used to compute net loss per share, basic and diluted
118,790

 
112,738

 
117,766

 
111,826

See Notes to Condensed Consolidated Financial Statements.


5


CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(2,029
)
 
$
(3,909
)
 
$
(6,347
)
 
$
(6,526
)
Other comprehensive income:
 
 
 
 
 
 
 
Change in net unrealized gain (loss) on available for sale investments, net of tax
333

 
114

 
452

 
23

Change in foreign currency translation adjustments, net of tax
(51
)
 
(913
)
 
(51
)
 
(402
)
Other comprehensive income (loss)
282

 
(799
)
 
401

 
(379
)
Total comprehensive loss
$
(1,747
)
 
$
(4,708
)
 
$
(5,946
)
 
$
(6,905
)
See Notes to Condensed Consolidated Financial Statements.


6


CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
 
Three Months Ended June 30, 2019

Common Stock
 
 
 
 
 
 
 
 

Shares
 
Par 
Value
 
Additional Paid-In
Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Accumulated
Deficit
 
Total Stockholders’ Equity
Balances at March 31, 2019
118,197

 
$
118

 
$
839,924

 
$
(900
)
 
$
(411,005
)
 
$
428,137

Equity component of convertible senior notes, net of issuance costs

 

 
25,860

 

 

 
25,860

Purchase of convertible senior notes capped call

 

 
(12,150
)
 

 

 
(12,150
)
Issuance of common stock upon exercise of stock options and ESPP
845

 
1

 
10,225

 

 

 
10,226

Net issuance of common stock for settlement of RSUs
294

 

 
(6,207
)
 

 

 
(6,207
)
Share-based compensation expense

 

 
15,452

 

 

 
15,452

Other comprehensive income

 

 

 
282

 

 
282

Net loss

 

 

 

 
(2,029
)
 
(2,029
)
Balances at June 30, 2019
119,336

 
$
119

 
$
873,104

 
$
(618
)
 
$
(413,034
)
 
$
459,571



 
Three Months Ended June 30, 2018
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Par 
Value
 
Additional Paid-In
Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Accumulated
Deficit
 
Total Stockholders’ Equity
Balances at March 31, 2018
112,749

 
$
113

 
$
764,065

 
$
138

 
$
(394,305
)
 
$
370,011

Equity component of convertible senior notes, net of issuance costs

 

 
62,444

 

 

 
62,444

Purchase of convertible senior notes capped call

 

 
(39,227
)
 

 

 
(39,227
)
Repurchase of common stock
(983
)
 
(1
)
 
(19,999
)
 

 

 
(20,000
)
Issuance of common stock upon exercise of stock options and ESPP
1,406

 
2

 
12,828

 

 

 
12,830

Net issuance of common stock for settlement of RSUs
379

 

 
(4,674
)
 

 

 
(4,674
)
Share-based compensation expense

 

 
12,043

 

 

 
12,043

Other comprehensive loss

 

 

 
(799
)
 

 
(799
)
Net loss

 

 

 

 
(3,909
)
 
(3,909
)
Balances at June 30, 2018
113,551

 
$
114

 
$
787,480

 
$
(661
)
 
$
(398,214
)
 
$
388,719


7


 
Six Months Ended June 30, 2019
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Par 
Value
 
Additional Paid-In
Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Accumulated
Deficit
 
Total Stockholders’ Equity
Balances at December 31, 2018
115,500

 
$
116

 
$
818,113

 
$
(1,019
)
 
$
(406,576
)
 
$
410,634

Cumulative-effect adjustment to accumulated deficit related to adoption of ASU 2016-02

 

 

 

 
(111
)
 
(111
)
Equity component of convertible senior notes, net of issuance costs

 

 
206,747

 

 

 
206,747

Purchase of convertible senior notes capped call

 

 
(97,200
)
 

 

 
(97,200
)
Repurchase of common stock
(504
)
 
(1
)
 
(19,999
)
 

 

 
(20,000
)
Issuance of common stock upon exercise of stock options and ESPP
1,554

 
2

 
16,044

 

 

 
16,046

Net issuance of common stock for settlement of RSUs
2,745

 
2

 
(82,251
)
 

 

 
(82,249
)
Issuance of common stock in connection with acquisition
41

 

 
1,160

 

 

 
1,160

Share-based compensation expense

 

 
30,490

 

 

 
30,490

Other comprehensive income

 

 

 
401

 

 
401

Net loss

 

 

 

 
(6,347
)
 
(6,347
)
Balances at June 30, 2019
119,336

 
$
119

 
$
873,104

 
$
(618
)
 
$
(413,034
)
 
$
459,571

 
Six Months Ended June 30, 2018
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Par 
Value
 
Additional Paid-In
Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Accumulated
Deficit
 
Total Stockholders’ Equity
Balances at December 31, 2017
109,668

 
$
110

 
$
782,845

 
$
(282
)
 
$
(391,611
)
 
$
391,062

Cumulative-effect adjustment to accumulated deficit related to adoption of ASUs

 

 

 

 
(77
)
 
(77
)
Equity component of convertible senior notes, net of issuance costs

 

 
62,444

 

 

 
62,444

Purchase of convertible senior notes capped call

 

 
(39,227
)
 

 

 
(39,227
)
Repurchase of common stock
(983
)
 
(1
)
 
(19,999
)
 

 

 
(20,000
)
Issuance of common stock upon exercise of stock options and ESPP
2,034

 
2

 
18,046

 

 

 
18,048

Net issuance of common stock for settlement of RSUs
2,798

 
3

 
(40,314
)
 

 

 
(40,311
)
Warrant exercises
34

 

 

 

 

 

Share-based compensation expense

 

 
23,685

 

 

 
23,685

Other comprehensive loss

 

 

 
(379
)
 

 
(379
)
Net loss

 

 

 

 
(6,526
)
 
(6,526
)
Balances at June 30, 2018
113,551

 
$
114

 
$
787,480

 
$
(661
)
 
$
(398,214
)
 
$
388,719

See Notes to Condensed Consolidated Financial Statements.


8


CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(6,347
)
 
$
(6,526
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
13,934

 
10,665

Share-based compensation expense
30,490

 
23,685

Amortization of debt discount and issuance costs
17,025

 
3,421

Deferred income taxes
39

 
(315
)
Operating lease expense, net of accretion
2,168

 

Other non-cash items
(115
)
 
115

Change in assets and liabilities:
 
 
 
Accounts receivable
6,944

 
2,609

Prepaid expenses and other current assets
(12,942
)
 
(6,773
)
Other assets
2,334

 
(500
)
Accounts payable
(5,417
)
 
(1,712
)
Deferred revenue
1,403

 
270

Accrued liabilities
2,397

 
(2,678
)
Other liabilities
(4,067
)
 
1,254

Net cash provided by operating activities
47,846

 
23,515

Cash flows from investing activities
 
 
 
Purchases of investments
(527,363
)
 
(66,634
)
Maturities of investments
86,105

 
71,980

Purchases of property and equipment
(23,491
)
 
(10,087
)
Acquisition of business, net of cash acquired

 
(14,438
)
Net cash used in investing activities
(464,749
)
 
(19,179
)
Cash flows from financing activities
 
 
 
Common stock issued under stock plans, net
17,208

 
18,050

Payment of taxes related to the net share settlement of equity awards
(82,251
)
 
(40,314
)
Proceeds from issuance of convertible senior notes, net of issuance costs
780,180

 
335,601

Purchase of convertible senior notes capped call
(97,200
)
 
(39,227
)
Repurchase of common stock
(20,000
)
 
(20,000
)
Net cash provided by financing activities
597,937

 
254,110

Net increase in cash, cash equivalents and restricted cash
181,034

 
258,446

Cash, cash equivalents and restricted cash, beginning of period
375,945

 
126,963

Cash, cash equivalents and restricted cash, end of period
$
556,979

 
$
385,409

 
 
 
 
Supplemental cash flow data:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
431

 
$
37

Income taxes
$
912

 
$
994

Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
(2,325
)
 
$

Non-cash investing activities:
 
 
 
Accrued purchases of long-lived assets
$
5,170

 
$
5,337




 
June 30,
 
2019
 
2018
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
555,792

 
$
384,926

Restricted cash included in other current assets
121

 

Restricted cash included in other assets
1,066

 
483

Total cash, cash equivalents and restricted cash
$
556,979

 
$
385,409

See Notes to Condensed Consolidated Financial Statements.

9


CHEGG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Background and Basis of Presentation

Company and Background

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

Basis of Presentation

The accompanying condensed consolidated balance sheet as of  June 30, 2019 , the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive loss, and the condensed consolidated statements of stockholder's equity for the three and six months ended June 30, 2019 and 2018 , the condensed consolidated statements of cash flows for the six months ended   June 30, 2019  and 2018 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, 2019 , our results of operations, results of comprehensive loss, and stockholder's equity for the three and six months ended June 30, 2019 and 2018 and cash flows for the six months ended June 30, 2019 and 2018 . Our results of operations, stockholder's equity, and cash flows for the  six months ended   June 30, 2019  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, 2018  as  2018 .

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, 2018  (the Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC).

We have changed the captions on our condensed consolidated statements of cash flows from “purchases of marketable securities” to “purchases of investments” and from “maturities of marketable securities” to “maturities of investments.” This change does not impact any current or previously reported results.

Except for our policies on leases and convertible senior notes, there have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K.

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right of use (ROU) assets, operating lease liabilities within current liabilities, and operating lease liabilities within long-term liabilities on our condensed consolidated balance sheet. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Our leases do not provide an implicit rate and therefore we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future minimum lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. We do not record leases on our condensed consolidated balance sheet with a term of one year or less. We do not separate lease and non-lease components but rather account for each separate component as a single lease component for all underlying classes of assets. Some of our leases include payments that are dependent on an index, such as the Consumer Price Index (CPI), and our minimum lease payments include payments based on the index at inception with any future changes in such indices recognized as an expense in the period of change. 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 operating lease cost over the lease term.


10


Convertible Senior Notes, net

In March 2019 , we issued $700 million in aggregate principal amount of  0.125%  convertible senior notes due in 2025 (2025 notes) and in April 2019 , the initial purchasers fully exercised their option to purchase $100 million of additional 2025 notes for aggregate total gross proceeds of $800 million . In April 2018 , we issued  $345 million in aggregate principal amount of  0.25%  convertible senior notes due in 2023 (2023 notes). Collectively, the 2025 notes and 2023 notes are referred to as the “notes.” In accounting for their issuance, we separated the notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the carrying amount of the liability component from the par value of the notes. The difference represents the debt discount, recorded as a reduction of the convertible senior notes on our condensed consolidated balance sheets, and is amortized to interest expense over the term of the notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the notes, we allocated the total amount of issuance costs incurred to liability and equity components based on their relative values. Issuance costs attributable to the liability component are being amortized on a straight-line basis, which approximates the effective interest rate method, to interest expense over the term of the notes. The issuance costs attributable to the equity component are recorded as a reduction of the equity component within additional paid-in capital.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (U.S. GAAP) requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities; the disclosure of contingent liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting periods. Significant estimates, assumptions, and judgments are used for, but not limited to: revenue recognition, 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, the valuation of acquired intangible assets, the valuation of our convertible senior notes, and operating lease ROU assets and operating lease liabilities. We base our estimates on historical experience, knowledge of current business conditions, and various other factors we believe to be reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ from these estimates, and such differences could be material to our financial position and results of operations.

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. ASU 2019-05 provides entities with an option to irrevocably elect the fair value option for eligible instruments. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. ASU 2019-04 provides codification updates to ASU 2016-01 and ASU 2016-13. In June 2016, the FASB issued ASU 2016-13,  Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. Early adoption is permitted and these guidance updates require a modified retrospective method of adoption. These guidance updates are effective for annual periods beginning after December 15, 2019, and we are currently in the process of evaluating the impact of these guidance updates.

In August 2018, the FASB issued ASU 2018-15,  Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with existing guidance contained within subtopic 350-40 to develop or obtain internal-use software. Early adoption is permitted and the guidance allows for a retrospective or prospective application. The guidance is effective for annual periods beginning after December 15, 2019, and we are currently in the process of evaluating the impact of this guidance.

In July 2018, the FASB issued ASU 2018-09,  Codification Improvements . ASU 2018-09 provides updates for technical corrections, clarifications, and other minor improvements to a wide variety of topics in the ASC. The transition method of adoption is dependent on the ASC topic impacted by this guidance. Additionally, some of the ASC topic updates are effective

11


upon issuance of ASU 2018-09 and some of the ASC topic updates are effective at a future date. The ASC topic updates effective upon issuance of ASU 2018-09 do not impact our accounting for the respective ASC topics. For those ASC topic updates effective at a future date, we are currently in the process of evaluating the impact of this guidance update.

Recently Adopted Accounting Pronouncements

The FASB has issued four ASUs related to Accounting Standards Codification (ASC) 842. In March 2019, the FASB issued ASU 2019-01,  Leases (Topic 842): Codification Improvements. In July 2018, the FASB issued ASU 2018-11,  Leases (Topic 842): Targeted Improvements and ASU 2018-10,  Codification Improvements to Topic 842, Leases . In February 2016, the FASB issued ASU 2016-02,  Leases (Topic 842) . ASC 842 requires an entity to recognize a ROU 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.

We have adopted ASC 842 on January 1, 2019 and have elected the transition method of adoption that allows for a modified retrospective adoption with a cumulative-effect adjustment to the opening balance of accumulated deficit and recorded an immaterial decrease to our opening balance of accumulated deficit. As a result, we have not changed previously disclosed amounts or provided additional disclosures for comparative periods. We initially recorded ROU assets of $17.2 million and lease liabilities of $21.1 million on our condensed consolidated balance sheet. ASC 842 does not have a material impact to our condensed consolidated statement of operations. We have elected a package of transition practical expedients which include not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. We have also elected a practical expedient to not separate lease and non-lease components. We did not elect the practical expedient to use hindsight in determining our lease terms or assessing impairment of our ROU assets. See Note 8. Leases for more information.

Note 2. Revenues

Revenue Recognition

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

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

 
Three Months Ended June 30,
 
Change
 
2019
 
2018
 
$
 
%
Chegg Services
$
80,307

 
$
61,849

 
$
18,458

 
30
%
Required Materials
13,555

 
12,373

 
1,182

 
10

Total net revenues
$
93,862

 
$
74,222

 
$
19,640

 
26



 
Six Months Ended June 30,
Change
 
2019
 
2018
 
$
 
%
Chegg Services
$
155,599

 
$
118,126

 
$
37,473

 
32
%
Required Materials
35,672

 
33,045

 
2,627

 
8

Total net revenues
$
191,271

 
$
151,171

 
$
40,100

 
27



During the three months ended June 30, 2019 , we recognized $19.9 million of revenues that were included in our deferred revenue balance as of March 31, 2019 . During the six months ended June 30, 2019 , we recognized $13.6 million of revenues that were included in our deferred revenue balance as of December 31, 2018 . During the three and six months ended June 30, 2019 , we recognized $0.7 million of previously deferred revenues recognized from performance obligations satisfied in previous periods related to variable consideration recognized from our agreement with our Required Materials print textbook

12


partner. The aggregate amount of unsatisfied performance obligations is approximately $21.3 million as of June 30, 2019 , of which substantially all is expected to be recognized into revenues over the next year and the remainder within two years.

Contract Balances

The following table presents our accounts receivable, net and deferred revenue balances (in thousands, except percentages):
 
 
 
Change
 
June 30, 2019
 
December 31, 2018
 
$
 
%
Accounts receivable, net
$
5,948

 
$
12,733

 
$
(6,785
)
 
(53
)%
Deferred revenue
$
18,821

 
$
17,418

 
$
1,403

 
8
 %


During the six months ended June 30, 2019 , our accounts receivable, net balance decreased by $6.8 million , or 53% , primarily due to an improvement in cash collections. During the six months ended June 30, 2019 , our deferred revenue balance increased by $1.4 million , or 8% , primarily due to increased bookings for our Chegg Study service and eTextbook rentals driven by the seasonality of our business. Our contract assets balance was immaterial as of June 30, 2019 and December 31, 2018 .

Note 3. 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), performance-based restricted stock units (PSUs), and shares related to convertible senior notes, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential common shares outstanding would have been anti-dilutive.

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net loss
$
(2,029
)
 
$
(3,909
)
 
$
(6,347
)
 
$
(6,526
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares used to compute net loss per share, basic and diluted
118,790

 
112,738

 
117,766

 
111,826

 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.02
)
 
$
(0.03
)
 
$
(0.05
)
 
$
(0.06
)


The following potential weighted-average shares of common stock outstanding were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Options to purchase common stock
2,753

 
4,369

 
3,006

 
4,321

RSUs and PSUs
3,787

 
7,079

 
5,394

 
8,128

Shares related to convertible senior notes
3,646

 

 
3,494

 

Total common stock equivalents
10,186

 
11,448

 
11,894

 
12,449



Shares related to convertible senior notes represents the anti-dilutive impact of our issuance of $345 million in aggregate principal amount of our 2023 notes as the average price of our common stock during the three and six months ended June 30, 2019 was higher than the conversion price of $26.95 . While these shares are anti-dilutive during the three and six months ended June 30, 2019 , they may be dilutive in periods we report net income. However, as a result of the capped call transactions, there will be no economic dilution from the 2023 notes up to $40.68 , as exercise of the capped call instruments

13


will reduce dilution from the 2023 notes that would have otherwise occurred when the average price of our common stock exceeds the conversion price. None of the shares related to our issuance of $800 million in aggregate principal amount of our 2025 notes were anti-dilutive during the three and six months ended June 30, 2019 . The average price of our common stock during the three and six months ended June 30, 2019 was lower than the conversion price of our 2025 notes of $51.56 . See Note 7 for more information about our convertible senior notes.

Note 4. Cash and Cash Equivalents, and Investments
 
The following tables shows our cash and cash equivalents, and investments’ adjusted cost, unrealized gain, unrealized loss and fair value as of June 30, 2019 and December 31, 2018 (in thousands):
 
June 30, 2019
 
Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
234,738

 
$

 
$

 
$
234,738

Money market funds
268,689

 

 

 
268,689

Commercial paper
52,375

 

 
(10
)
 
52,365

Total cash and cash equivalents
$
555,802

 
$

 
$
(10
)
 
$
555,792

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
$
58,717

 
$
3

 
$
(12
)
 
$
58,708

Corporate securities
146,074

 
195

 
(11
)
 
146,258

U.S. treasury securities
44,398

 
31

 

 
44,429

Agency bonds
10,001

 
3

 

 
10,004

Total short-term investments
$
259,190

 
$
232

 
$
(23
)
 
$
259,399

Long-term investments:
 
 
 
 
 
 
 
Corporate securities
$
228,389

 
$
459

 
$
(172
)
 
$
228,676

Agency bonds
60,000

 
6

 

 
60,006

Total long-term investments
$
288,389

 
$
465

 
$
(172
)
 
$
288,682



 
December 31, 2018
 
Cost
 
Unrealized Gain
 
Unrealized Loss
 
Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash
$
351,345

 
$

 
$

 
$
351,345

Money market funds
5,052

 

 

 
5,052

Commercial paper
18,267

 

 

 
18,267

Total cash and cash equivalents
$
374,664

 
$

 
$

 
$
374,664

Short-term investments:
 
 
 
 
 
 
 
Commercial paper
$
40,500

 
$

 
$
(12
)
 
$
40,488

Corporate securities
38,616

 

 
(87
)
 
38,529

U.S. treasury securities
14,333

 

 
(5
)
 
14,328

Total short-term investments
$
93,449

 
$

 
$
(104
)
 
$
93,345

Long-term investments:
 
 
 
 
 
 
 
Corporate securities
$
14,429

 
$
9

 
$
(14
)
 
$
14,424

U.S. treasury securities
1,630

 

 
(2
)
 
1,628

Total long-term investments
$
16,059

 
$
9

 
$
(16
)
 
$
16,052






14


The adjusted cost and fair value of available-for-sale investments as of  June 30, 2019  by contractual maturity were as follows (in thousands):
 
Cost
 
Fair Value
Due in 1 year or less
$
311,565

 
$
311,764

Due in 1-2 years
288,389

 
288,682

Investments not due at a single maturity date
268,689

 
268,689

Total
$
868,643

 
$
869,135



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

As of  June 30, 2019 , 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 eight  months, and our investment policy generally limits the amount of credit exposure to any one issuer or industry sector. The policy requires investments generally to be investment grade, with the primary objective of preserving capital and maintaining liquidity. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and our intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s cost basis. During the  three and six months ended June 30, 2019 and 2018 , we did not recognize any other-than-impairment charges.

Restricted Cash

As of  June 30, 2019 and December 31, 2018 , we had approximately  $1.2 million and $1.3 million , respectively, of restricted cash that primarily consists of security deposits for our corporate offices. These amounts are classified in either other current assets or other assets on our condensed consolidated balance sheets based upon the term of the remaining restrictions.

Strategic Investments

In October 2018, we completed an investment of $10.0 million in WayUp, Inc., a U.S.-based job site and mobile application for college students and recent graduates. Additionally, we previously invested  $3.0 million  in a foreign entity to explore expanding our reach internationally. We did not record other-than-temporary impairment charges on our investments during the three and six months ended June 30, 2019 and 2018 , as there were no significant identified events or changes in circumstances that would be considered an indicator for impairment. There were no observable price changes in orderly transactions for the identical or similar investments of the same issuer during the three and six months ended June 30, 2019 and 2018 .

Note 5. Fair Value Measurement

We have established a fair value hierarchy used to determine the fair value of our financial instruments as follows:

Level 1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration, for substantially the full term of the financial instruments.

Level 3—Inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value; the inputs require significant management judgment or estimation.

A financial instrument’s classification within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

15



Financial instruments measured and recorded at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 are classified based on the valuation technique level in the tables below (in thousands):
 
June 30, 2019
 
Total
 
Quoted Prices
in Active
Markets for Identical
Assets
(Level 1)
 
Significant
Other Observable
Inputs (Level 2)
Assets:
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market funds
$
268,689

 
$
268,689

 
$

Commercial paper
52,365

 

 
52,365

Short-term investments:
 
 
 
 
 
Commercial paper
58,708

 

 
58,708

Corporate securities
146,258

 

 
146,258

U.S. treasury securities
44,429

 
44,429

 

Agency bonds
10,004

 

 
10,004

Long-term investments:
 
 
 
 
 
Corporate securities
228,676

 

 
228,676

Agency bonds
60,006

 

 
60,006

Total assets measured and recorded at fair value
$
869,135

 
$
313,118

 
$
556,017


 
December 31, 2018
 
Total
 
Quoted Prices
in Active
Markets for Identical
Assets
(Level 1)
 
Significant 
Other Observable 
Inputs (Level 2)
Assets:
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market funds
$
5,052

 
$
5,052

 
$

Commercial paper
18,267

 

 
18,267

Short-term investments:
 
 
 
 
 
Commercial paper
40,488

 

 
40,488

Corporate securities
38,529

 

 
38,529

U.S. treasury securities
14,328

 
14,328

 

Long-term investments:
 
 
 
 
 
Corporate securities
14,424

 

 
14,424

U.S. treasury securities
1,628

 
1,628

 

Total assets measured and recorded at fair value
$
132,716

 
$
21,008

 
$
111,708


 
We value our investments based on quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. Other than our money market funds and U.S. treasury securities, we classify our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. We do not hold any investments valued with a Level 3 input.


16


The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
 
Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We report our financial instruments at fair value with the exception of the notes. The estimated fair value of the notes was determined based on the trading price of the notes as of the last day of trading for the period. We consider the fair value of the notes to be a Level 2 measurement due to the limited trading activity. For further information on the notes see Note 7.

The carrying amounts and estimated fair values of the notes as of June 30, 2019 and December 31, 2018 are as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
2025 notes
$
583,505

 
$
803,864

 
$

 
$

2023 notes
290,621

 
526,988

 
283,668

 
416,156

Convertible senior notes, net
$
874,126

 
$
1,330,852

 
$
283,668

 
$
416,156



The carrying amount of the 2025 notes and 2023 notes as of June 30, 2019 was net of unamortized debt discount of  $202.6 million  and $48.6 million , respectively, and unamortized issuance costs of  $13.9 million and $5.8 million , respectively. The carrying amount of the 2023 notes as of December 31, 2018 was net of unamortized debt discount of  $54.8 million  and unamortized issuance costs of  $6.5 million .

Note 6. Goodwill and Intangible Assets

Goodwill consists of the following (in thousands):
 
Six Months Ended June 30, 2019
 
Year Ended December 31, 2018
Beginning balance
$
149,524

 
$
125,272

Additions due to acquisitions

 
24,673

Foreign currency translation adjustment
(58
)
 
(421
)
Ending balance
$
149,466

 
$
149,524



Intangible assets as of June 30, 2019 and December 31, 2018 consist of the following (in thousands, except weighted-average amortization period):
 
June 30, 2019
 
Weighted-Average Amortization
Period
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technologies and content library
71

 
$
31,667

 
$
(15,853
)
 
$
15,814

Customer lists
47

 
9,970

 
(7,530
)
 
2,440

Trade names
44

 
6,113

 
(5,462
)
 
651

Non-compete agreements
31

 
2,018

 
(1,840
)
 
178

Indefinite-lived trade name

 
3,600

 

 
3,600

Foreign currency translation adjustment

 
(309
)
 

 
(309
)
Total intangible assets
61

 
$
53,059

 
$
(30,685
)
 
$
22,374


17


 
 
December 31, 2018
 
Weighted-Average Amortization
Period
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technologies and content library
71

 
$
31,667

 
$
(13,737
)
 
$
17,930

Customer lists
47

 
9,970

 
(6,847
)
 
3,123

Trade names
44

 
6,113

 
(4,863
)
 
1,250

Non-compete agreements
31

 
2,018

 
(1,735
)
 
283

Indefinite-lived trade name

 
3,600

 

 
3,600

Foreign currency translation adjustment

 
(271
)
 

 
(271
)
Total intangible assets
61

 
$
53,097

 
$
(27,182
)
 
$
25,915



During the three and six months ended June 30, 2019 , amortization expense related to our acquired intangible assets totaled approximately $1.7 million and $3.5 million , respectively. During the three and six months ended June 30, 2018 , amortization expense related to our acquired intangible assets totaled approximately $1.4 million and $2.9 million , respectively.

As of June 30, 2019 , the estimated future amortization expense related to our finite-lived intangible assets is as follows (in thousands):
Remaining six months of 2019
$
2,945

2020
4,816

2021
3,423

2022
2,943

2023
2,276

Thereafter
2,371

Total
$
18,774



Note 7. Convertible Senior Notes

In March 2019 , we issued $700 million in aggregate principal amount of 0.125%  convertible senior notes due in 2025 (2025 notes) and in April 2019 , the initial purchasers fully exercised their option to purchase $100 million of additional notes for aggregate total principal amount of $800 million . In April 2018 , we issued  $345 million in aggregate principal amount of  0.25%  convertible senior notes due in 2023 (2023 notes). The aggregate principal amount of the 2023 notes includes $45 million  from the initial purchasers fully exercising their option to purchase additional notes. Collectively, the 2025 notes and 2023 notes are referred to as the “notes.” The notes were issued in private placements to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended.

The total net proceeds from the notes are as follows (in thousands):
 
2025 Notes
 
2023 Notes
Principal amount
$
800,000

 
$
345,000

Less initial purchasers’ discount
(18,998
)
 
(8,625
)
Less other issuance costs
(822
)
 
(757
)
Net proceeds
$
780,180

 
$
335,618



The notes are our senior, unsecured obligations and are governed by indenture agreements by and between us and Wells Fargo Bank, National Association, as Trustee (the indentures). The 2025 notes bear interest of 0.125% per year which is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2019 . The 2025 notes will mature on March 15, 2025 (the 2025 notes maturity date), unless repurchased, redeemed or converted in accordance with their terms prior to such date. The 2023 notes bear interest of 0.25% per year which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2018 . The 2023 notes will mature on May 15, 2023 (the 2023 notes maturity date), unless repurchased, redeemed or converted in accordance with their terms prior to such date.

18



Each $1,000 principal amount of the 2025 notes will initially be convertible into 19.3956 shares of our common stock. This is equivalent to an initial conversion price of approximately $51.56 per share, which is subject to adjustment in certain circumstances. Each $1,000 principal amount of the 2023 notes will initially be convertible into 37.1051 shares of our common stock. This is equivalent to an initial conversion price of approximately $26.95 per share, which is subject to adjustment in certain circumstances.

Prior to the close of business on the business day immediately preceding December 15, 2024 for the 2025 notes and February 15, 2023 for the 2023 notes, the notes are convertible at the option of holders only upon satisfaction of the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on June 30, 2019 for the 2025 notes and June 30, 2018 for the 2023 notes, if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the respective conversion price for the notes on each applicable trading day;
during the five-business day period after any ten consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day;
if we call any or all of the notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or
upon the occurrence of certain specified corporate events described in the indentures.

On or after December 15, 2024 for the 2025 notes and February 15, 2023 for the 2023 notes until the close of business on the second scheduled trading day immediately preceding the respective maturity dates, holders may convert their notes at any time, regardless of the foregoing circumstances. Upon conversion, the notes may be settled in shares of our common stock, cash or a combination of cash and shares of our common stock, at our election.

If we undergo a fundamental change, as defined in the indentures, prior to the respective maturity dates, subject to certain conditions, holders of the notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events, described in the indentures, occur prior to the respective maturity dates, we will also increase the conversion rate for a holder who elects to convert their notes in connection with such specified corporate events.

During the three and six months ended June 30, 2019 , the conditions allowing holders of the 2025 notes to convert had not been met and were therefore not convertible. During the three and six months ended June 30, 2019 , the conditions allowing holders of the 2023 notes to convert had been met and are therefore convertible. None of the holders of the 2023 notes elected to convert their notes into shares of our common stock during the three and six months ended June 30, 2019 . During the three months ended June 30, 2018, the conditions allowing holders of the notes to convert had not been met and were therefore not convertible. 

In accounting for the issuance of the notes, we separated the notes into liability and equity components. The carrying amount of the liability components for the 2025 notes and 2023 notes of approximately $588.0 million and $280.8 million , respectively, was calculated by measuring the fair value of similar debt instruments that do not have an associated convertible feature. The carrying amount of the equity components for the 2025 notes and 2023 notes of approximately $212.0 million and $64.2 million , respectively, representing the conversion option, was determined by deducting the carrying amount of the liability components from the principal amount of the notes. This difference between the principal amount of the notes and the liability components represents the debt discount, presented as a reduction to the notes on our condensed consolidated balance sheets, and is amortized to interest expense using the effective interest method over the remaining term of the notes. The equity components of the notes are included in additional paid-in capital on our condensed consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.

We incurred issuance costs related to the 2025 notes of approximately $19.8 million , consisting of the initial purchasers' discount of $19.0 million and other issuance costs of approximately $0.8 million . We incurred issuance costs related to the 2023 notes of approximately $9.4 million , consisting of the initial purchasers' discount of $8.6 million and other issuance costs of approximately $0.8 million . In accounting for the issuance costs, we allocated the total amount incurred to the liability and equity components using the same proportions determined above for the notes. Transaction costs attributable to the liability components for the 2025 notes and 2023 notes of approximately $14.6 million and $7.6 million , respectively, were recorded as

19


debt issuance cost, presented as a reduction to the notes on our condensed consolidated balance sheets, and are amortized to interest expense using the effective interest method over the term of the notes. The issuance costs attributable to the equity components for the 2025 notes and 2023 notes were approximately $5.3 million and $1.7 million , respectively, and were recorded as a reduction to the equity component included in additional paid-in capital.

The net carrying amount of the liability component of the notes is as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
 
2025 Notes
 
2023 Notes
 
2023 Notes
Principal
$
800,000

 
$
345,000

 
$
345,000

Unamortized debt discount
(202,576
)
 
(48,600
)
 
(54,817
)
Unamortized issuance costs
(13,919
)
 
(5,779
)
 
(6,515
)
Net carrying amount (liability)
$
583,505

 
$
290,621

 
$
283,668

    
The net carrying amount of the equity component of the notes is as follows (in thousands):
 
June 30, 2019
 
December 31, 2018

2025 Notes
 
2023 Notes
 
2023 Notes
Debt discount for conversion option
$
212,000

 
$
64,193

 
$
64,193

Issuance costs
(5,253
)
 
(1,749
)
 
(1,749
)
Net carrying amount (equity)
$
206,747

 
$
62,444

 
$
62,444


    
As of June 30, 2019 , the remaining lives of the 2025 notes and 2023 notes are approximately 5.7 and 3.9 years, respectively, and are classified as long-term debt.

Based on the closing price of our common stock of $38.59 on June 30, 2019 , the if-converted value of the 2025 notes was approximately $598.8 million which is less than the principal amount of $800 million by approximately $201.2 million and the if-converted value of the 2023 notes was approximately $494.0 million which exceeds the principal amount of $345 million by approximately $149.0 million .

The effective interest rate of the liability components for the 2025 notes and 2023 notes are 5.4% and 4.34% , respectively, and is based on the interest rate of similar debt instruments, at the time of our offering, that do not have associated convertible features. The following tables set forth the total interest expense recognized related to the notes (in thousands):

 
Three Months Ended June 30,
 
2019
 
2018
 
2025 Notes
 
2023 Notes
 
2023 Notes
Contractual interest expense
$
251

 
$
215

 
$
210

Amortization of debt discount
8,914

 
3,125

 
3,057

Amortization of issuance costs
613

 
368

 
364

Total interest expense
$
9,778

 
$
3,708

 
$
3,631


 
Six Months Ended June 30,
 
2019
 
2018
 
2025 Notes
 
2023 Notes
 
2023 Notes
Contractual interest expense
$
265

 
$
428