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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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
 
currentchegglogoa08.jpg
CHEGG, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-3237489
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3990 Freedom Circle
Santa Clara, CA, 95054
(Address of principal executive offices)
(408) 855-5700
(Registrant’s telephone number, including area code)
 



•
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
•
Indicate by check mark whether the registrant has submitted electronically 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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
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 October 31, 2016, the Registrant had 91,347,606 outstanding shares of Common Stock.
 




Table of Contents

TABLE OF CONTENTS

 
 
 
  
Page
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
  
 
  
 
 
 
 
  
  

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

“Chegg,” “Chegg.com,” “Chegg Study,” “Chegg for Good,” “Student Hub,” “internships.com,” “ResearchReady,” “InstaEDU,” “EasyBib” and “#1 In Textbook Rentals,” are some of our trademarks used in this Quarterly Report on Form 10-Q. Solely for convenience, our trademarks, trade names, and service marks referred to in this Quarterly Report on Form 10-Q appear without the ®, ™ and SM symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks and trade names. Other trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.


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NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

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

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

CHEGG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for number of shares and par value)
 
September 30, 2016
 
December 31, 2015
Assets
(unaudited)
 
*
Current assets
 
 
 
Cash and cash equivalents
$
90,213

 
$
67,029

Short-term investments
—

 
17,800

Accounts receivable, net of allowance for doubtful accounts of $390 and $378 at September 30, 2016 and December 31, 2015, respectively
9,481

 
13,157

Prepaid expenses
4,018

 
3,117

Other current assets
35,570

 
31,732

Total current assets
139,282

 
132,835

Long-term investments
—

 
4,229

Textbook library, net
3,956

 
29,728

Property and equipment, net
30,766

 
19,971

Goodwill
114,980

 
91,301

Intangible assets, net
21,659

 
8,865

Other assets
5,565

 
4,427

Total assets
$
316,208

 
$
291,356

Liabilities and stockholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
7,992

 
$
5,860

Deferred revenue
30,004

 
14,971

Accrued liabilities
59,034

 
35,280

Total current liabilities
97,030

 
56,111

Long-term liabilities
 
 
 
Total other long-term liabilities
4,075

 
4,170

Total liabilities
101,105

 
60,281

Commitments and contingencies (Note 8)

 

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; 91,113,230 and 88,099,983 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
91

 
88

Additional paid-in capital
584,999

 
560,242

Accumulated other comprehensive loss
(148
)
 
(172
)
Accumulated deficit
(369,839
)
 
(329,083
)
Total stockholders' equity
215,103

 
231,075

Total liabilities and stockholders' equity
$
316,208

 
$
291,356

* Derived from audited consolidated financial statements as of and for the year ended December 31, 2015.
See Notes to Condensed Consolidated Financial Statements.

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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net revenues:
 
 
 
 
 
 
 
Rental
$
5,511

 
$
22,703

 
$
32,081

 
$
93,199

Services
49,765

 
33,358

 
126,795

 
94,001

Sales
16,067

 
25,225

 
32,157

 
46,019

Total net revenues
71,343

 
81,286

 
191,033

 
233,219

Cost of revenues:
 
 
 
 
 
 
 
Rental
7,646

 
27,080

 
26,505

 
86,873

Services
12,884

 
10,377

 
38,691

 
32,189

Sales
18,169

 
24,263

 
33,833

 
44,407

Total cost of revenues
38,699

 
61,720

 
99,029

 
163,469

Gross profit
32,644

 
19,566

 
92,004

 
69,750

Operating expenses:
 
 
 
 
 
 
 
Technology and development
16,241

 
15,664

 
49,232

 
45,076

Sales and marketing
15,256

 
16,211

 
41,449

 
49,985

General and administrative
13,905

 
12,060

 
41,140

 
35,780

Restructuring (credits) charges
(100
)
 
342

 
(298
)
 
3,320

Loss (gain) on liquidation of textbooks
2,673

 
(909
)
 
(523
)
 
(2,649
)
Total operating expenses
47,975

 
43,368

 
131,000

 
131,512

Loss from operations
(15,331
)
 
(23,802
)
 
(38,996
)
 
(61,762
)
Interest expense and other (expense) income, net:
 
 
 
 
 
 
 
Interest expense, net
(30
)
 
(61
)
 
(151
)
 
(182
)
Other (expense) income, net
(148
)
 
85

 
(146
)
 
217

Total interest expense and other (expense) income, net
(178
)
 
24

 
(297
)
 
35

Loss before provision for income taxes
(15,509
)
 
(23,778
)
 
(39,293
)
 
(61,727
)
Provision for income taxes
554

 
389

 
1,463

 
1,113

Net loss
$
(16,063
)
 
$
(24,167
)
 
$
(40,756
)
 
$
(62,840
)
Net loss per share, basic and diluted
$
(0.17
)
 
$
(0.28
)
 
$
(0.45
)
 
$
(0.73
)
Weighted average shares used to compute net loss per share, basic and diluted
91,059

 
87,706

 
90,201

 
86,419

See Notes to Condensed Consolidated Financial Statements.


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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(16,063
)
 
$
(24,167
)
 
$
(40,756
)
 
$
(62,840
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Change in unrealized gain on available for sale investments
—

 
16

 
25

 
21

Change in foreign currency translation adjustments, net of tax
35

 
(119
)
 
(1
)
 
(97
)
Other comprehensive (loss) income
35

 
(103
)
 
24

 
(76
)
Total comprehensive loss
$
(16,028
)
 
$
(24,270
)
 
$
(40,732
)
 
$
(62,916
)
See Notes to Condensed Consolidated Financial Statements.


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CHEGG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net loss
$
(40,756
)
 
$
(62,840
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Textbook library depreciation expense
8,903

 
36,838

Other depreciation and amortization expense
10,001

 
9,180

Share-based compensation expense
32,701

 
31,784

Gain on liquidation of textbooks
(523
)
 
(2,649
)
Loss from write-offs of textbooks
896

 
4,534

Other non-cash items
106

 
790

Change in assets and liabilities, net of acquisition of business:
 
 
 
Accounts receivable
312

 
(399
)
Prepaid expenses and other current assets
(4,712
)
 
(32,503
)
Other assets
284

 
(204
)
Accounts payable
2,713

 
1,977

Deferred revenue
14,896

 
21,490

Accrued liabilities
5,997

 
10,310

Other liabilities
(92
)
 
(194
)
Net cash provided by operating activities
30,726

 
18,114

Cash flows from investing activities
 
 
 
Purchases of textbooks
(795
)
 
(32,226
)
Proceeds from liquidations of textbooks
23,873

 
34,230

Purchases of marketable securities
(7,633
)
 
(19,975
)
Proceeds from sale of marketable securities
22,830

 
350

Maturities of marketable securities
6,844

 
29,989

Purchases of property and equipment
(17,834
)
 
(5,884
)
Acquisition of business, net of cash acquired
(25,864
)
 
—

Purchase of strategic equity investment
(1,020
)
 
(2,019
)
Net cash provided by investing activities
401

 
4,465

Cash flows from financing activities
 
 
 
Common stock issued under stock plans, net
1,114

 
12,588

Payment of taxes related to the net share settlement of RSUs
(9,057
)
 
(8,080
)
Repurchase of common stock
—

 
(2,263
)
Net cash (used in) provided by financing activities
(7,943
)
 
2,245

Net increase in cash and cash equivalents
23,184

 
24,824

Cash and cash equivalents, beginning of period
67,029

 
56,117

Cash and cash equivalents, end of period
$
90,213

 
$
80,941

 
 
 
 
Supplemental cash flow data:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
47

 
$
76

Income taxes
$
831

 
$
686

Non-cash investing and financing activities:
 
 
 
Accrued purchases of long-lived assets
$
1,517

 
$
999

Issuance of common stock related to prior acquisition
$
—

 
$
825

Accrued deferred cash consideration related to acquisition
$
16,650


$
—

See Notes to Condensed Consolidated Financial Statements.

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CHEGG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Background and Basis of Presentation

Company and Background

Chegg, Inc. (Chegg, the Company, we, us, or our), headquartered in Santa Clara, California, was incorporated as a Delaware corporation 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 help students study more effectively for college admissions exams, find the right college to accomplish their goals, get better grades and test scores while in school, and find internships that allow them to gain valuable skills to help them enter the workforce after college. Our connected learning platform offers products and services that help students transition from high school to college to career, with a view toward improving student outcomes and the overall return on investment in education.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of September 30, 2016, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2016 and 2015, the condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015, and the related footnote disclosures are unaudited. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2016, our results of operations for the three and nine months ended September 30, 2016 and 2015, and cash flows for the nine months ended September 30, 2016 and 2015. Our results of operations for the three and nine months ended September 30, 2016 and cash flows for the nine months ended September 30, 2016 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, 2015 as 2015.

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, 2015 (the Annual Report on Form 10-K) filed with the U.S. Securities and Exchange Commission (SEC).

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.

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, 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 tangible and intangible assets. We base our estimates on historical experience, knowledge of current business conditions, and various other factors we believe to be reasonable under the circumstances. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ from these estimates, and such differences could be material to our financial position and results of operations.

Recent Accounting Pronouncements

Except for the 2016 accounting pronouncements, which are described below, 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 for the year ended December 31, 2015.


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In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). ASU 2016-15 provides for specific guidance on eight cash flow issues where the previously U.S. GAAP was either unclear or did not include specific guidance. The guidance requires a retrospective application and is effective for annual periods after December 15, 2017, with earlier application permitted as of the beginning of an interim or annual reporting period. We have elected to early adopt this standard which did not result in any changes to the presentation of our condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015.

In May 2016, the FASB issued ASU No. 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 provides for improvements and practical expedients for specific areas of Topic 606. In April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 provides for clarification of two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. In March 2016, the FASB issued ASU No. 2016-08 Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU No. 2016-08 requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation.

ASUs 2016-12, 2016-10 and 2016-08 allow for companies to choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). Each guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We plan to adopt the guidance starting in the first quarter of 2018. We are currently in the process of evaluating these guidance updates and have not yet determined the impact on our condensed consolidated financial statements.

In March 2016 the FASB issued ASU No. 2016-09 Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 provides for simplification involving several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition to these simplifications, ASU 2016-09 also eliminates the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. Early adoption is permitted and the application of the guidance is different for each update included within ASU 2016-09. The guidance is effective for annual periods after December 15, 2016, and we are currently in the process of evaluating the impact of this new guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on classification as a finance or operating lease. The amendments in this update also require certain quantitative and qualitative disclosures about leasing arrangements. Early adoption is permitted, and the guidance requires a modified retrospective adoption. The guidance is effective for annual periods after December 15, 2018, and we are currently in the process of evaluating the impact of this new guidance.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires all financial assets and liabilities not accounted for under the equity method to be measured at fair value with the changes in fair value recognized in net income. The amendments in this update also require an entity to separately present in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update supersede the requirement to disclose the methods and significant assumptions used in calculating the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. Early adoption is not permitted except for the comprehensive income presentation requirement, and the updated guidance requires a prospective application with a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The guidance is effective for annual periods after December 15, 2017, and we are currently in the process of evaluating the impact of this new guidance.


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Note 2. 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, less the 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):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net loss
$
(16,063
)
 
$
(24,167
)
 
$
(40,756
)
 
$
(62,840
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares used to compute net loss per share, basic and diluted
91,059

 
87,706

 
90,201

 
86,419

 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.17
)
 
$
(0.28
)
 
$
(0.45
)
 
$
(0.73
)

The following potential weighted-average shares of common stock outstanding were excluded from the computation of diluted net loss per share because including them would have been anti-dilutive (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Options to purchase common stock
10,420

 
8,156

 
10,917

 
11,744

RSUs and PSUs
624

 
317

 
1,797

 
159

Employee stock purchase plan
—

 
6

 
—

 
14

Warrants to purchase common stock
200

 
200

 
200

 
335

Total common stock equivalents
11,244

 
8,679

 
12,914

 
12,252



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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 as of September 30, 2016 and December 31, 2015 (in thousands):
 
 
September 30, 2016
 
December 31, 2015
 
Cost
 
Net Unrealized Gain/(Loss)
 
Fair Value
 
Cost
 
Net Unrealized Gain/(Loss)
 
Fair Value
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
Cash
$
88,935

 
$
—

 
$
88,935

 
$
52,905

 
$
—

 
$
52,905

Money market funds
1,278

 
—

 
1,278

 
6,672

 
—

 
6,672

Commercial paper
—

 
—

 
—

 
5,453

 
—

 
5,453

Corporate securities
—

 
—

 
—

 
600

 
(1
)
 
599

Agency bond
—

 
—

 
—

 
1,400

 
—

 
1,400

Total cash and cash equivalents
$
90,213

 
$
—

 
$
90,213

 
$
67,030

 
$
(1
)
 
$
67,029

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
—

 
$
—

 
$
—

 
$
3,746

 
$
—

 
$
3,746

Corporate securities
—

 
—

 
—

 
10,572

 
(12
)
 
10,560

Agency bonds
—

 
—

 
—

 
3,494

 
—

 
3,494

Total short-term investments
$
—

 
$
—

 
$
—

 
$
17,812

 
$
(12
)
 
$
17,800

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
—

 
$
—

 
$
—

 
$
3,241

 
$
(10
)
 
$
3,231

Agency bond
—

 
—

 
—

 
1,001

 
(3
)
 
998

Long-term corporate securities
$
—

 
$
—

 
$
—

 
$
4,242

 
$
(13
)
 
$
4,229

 
 
 
 
 
 
 
 
 
 
 
 
Short-term restricted cash
$
—

 
$
—

 
$
—

 
$
300

 
$
—

 
$
300

Long-term restricted cash
84

 
—

 
84

 
478

 
—

 
478

Total restricted cash
$
84

 
$
—

 
$
84

 
$
778

 
$
—

 
$
778

 
The amortized cost and fair value of available-for-sale investments as of September 30, 2016 was $1.3 million, respectively, and consist of money market fund deposits which are not due at a single maturity date.

As of September 30, 2016, we did not carry a balance of short-term or long-term investments. 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, and the investment before recovery of the investment’s cost basis. During the nine months ended September 30, 2016, we did not recognize any impairment charges.

Strategic Investment

During the three months ended September 30, 2016 and 2015, we invested $1.0 million and $2.0 million, respectively, in a third party to expand our customer reach. Our total investment of $3.0 million is included in other assets on our condensed consolidated balance sheet. We did not record other-than-temporary impairment charges on this investment during the three and nine months ended September 30, 2016 and 2015, respectively, as there were no significant identified events or changes in circumstances that would be considered an indicator for impairment.


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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 September 30, 2016 and December 31, 2015 are classified based on the valuation technique level in the tables below (in thousands):

 
September 30, 2016
 
Total
 
Quoted Prices
in Active
Markets for Identical
Assets
(Level 1)
 
Significant
Other Observable
Inputs (Level 2)
Assets:
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market funds
$
1,278

 
$
1,278

 
$
—

Total assets measured and recorded at fair value
$
1,278

 
$
1,278

 
$
—


 
December 31, 2015
 
Total
 
Quoted Prices
in Active
Markets for Identical
Assets
(Level 1)
 
Significant 
Other Observable 
Inputs (Level 2)
Assets:
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
Money market funds
$
6,672

 
$
6,672

 
$
—

Commercial paper
5,453

 
—

 
5,453

Corporate securities
599

 
—

 
599

Agency bond
1,400

 
—

 
1,400

Short-term investments:
 
 
 
 
 
Commercial paper
3,746

 
—

 
3,746

Corporate securities
10,560

 
—

 
10,560

Agency bonds
3,494

 
—

 
3,494

Long-term investments:
 
 
 
 
 
Corporate securities
3,231

 
—

 
3,231

Agency bond
998

 
—

 
998

Total assets measured and recorded at fair value
$
36,153

 
$
6,672

 
$
29,481

 

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

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
 
Note 5. Acquisition

In May 2016, we acquired all of the outstanding interests of Imagine Easy Solutions, LLC (Imagine Easy), a privately held online learning company based in New York that provides a portfolio of online writing tools. We anticipate this acquisition to enhance our ability to acquire new students, increase the value of our platform to our existing students, and have a meaningful and positive impact on their outcomes. The total fair value of the purchase consideration was $42.3 million. The purchase consideration included deferred cash consideration of $17.0 million, of which the present value of $16.7 million was recorded as accrued liabilities on our condensed consolidated balance sheet as of September 30, 2016. We will accrete into the deferred cash consideration of $17.0 million until it is paid to the sellers in April 2017. During the three and nine months ended September 30, 2016, we recorded accretion expense of $0.2 million and $0.3 million, respectively, through other expense on the condensed consolidated statement of operations. Further, the consideration included an escrow and a hold-back amount of $4.2 million and $0.5 million, respectively, for general representations and warranties and potential post-closing adjustments. The escrow amount will be released in July 2017, and the hold-back amount was released during the third quarter of 2016.

The acquisition date fair value of the purchase consideration for the above transaction consisted of the following (in thousands):
Initial cash consideration
$
21,023

Net working capital adjustment
200

Fair value of deferred cash consideration
16,374

Escrow
4,200

Hold-back
500

Fair value of purchase consideration
$
42,297


Included in the purchase agreement are additional contingent payments of up to $18.0 million, of which $3.0 million relates to the achievement of performance conditions for the fiscal year ended 2016. These payments will be made over the next three years, subject to continued employment of the sellers, and will be expensed ratably as technology and development and general and administrative expense on our condensed consolidated statements of operations. These contingent payments may be settled by us, at our sole discretion, either in cash or shares of our common stock. We have accrued $2.5 million as of September 30, 2016 for these contingent payments which is included within accrued liabilities on our condensed consolidated balance sheet.

The fair value of the intangible assets acquired was determined under the acquisition method of accounting for business combinations. The excess of purchase consideration paid over the fair value of identifiable assets acquired was recorded as goodwill. Goodwill is primarily attributable to the potential for future product offerings as well as our expanded student reach. The amounts recorded for goodwill are expected to be deductible for tax purposes.


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The following table presents the total purchase price allocation recorded in our condensed consolidated balance sheets as of the acquisition date (in thousands):
Cash
$
59

Accounts receivable
2,610

Favorable lease acquired
300

Other acquired assets
212

Acquired intangible assets:
 
Trade names
1,800

Domain names
1,100

Advertiser relationships
6,600

User base
410

Non-compete agreements
500

Developed technology
5,600

Total acquired intangible assets
16,010

Total identifiable assets acquired
19,191

Liabilities assumed
(573
)
Net identifiable assets acquired
18,618

Goodwill
23,679

Total purchase consideration
$
42,297


During the nine months ended September 30, 2016, we incurred $1.0 million of acquisition-related expenses associated with the acquisition of Imagine Easy which have been included in general and administrative expenses in our condensed consolidated statements of operations.

The pro forma results of operations of the above acquisition have not been presented as the financial impact to our condensed consolidated statements of operations is not material.

Note 6. Goodwill and Intangible Assets

Goodwill consists of the following (in thousands):
 
September 30, 2016
 
December 31, 2015
Beginning balance
$
91,301

 
$
91,301

Addition due to acquisition
23,679

 
—

Ending balance
$
114,980

 
$
91,301


Intangible assets as of September 30, 2016 and December 31, 2015 consist of the following (in thousands, except weighted-average amortization period):
 
September 30, 2016
 
Weighted-Average Amortization
Period
(in months)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technologies
60

 
$
15,017

 
$
(7,779
)
 
$
7,238

Customer lists
47

 
9,830

 
(3,192
)
 
6,638

Trade names
48

 
5,243

 
(1,661
)
 
3,582

Non-compete agreements
30

 
1,720

 
(1,177
)
 
543

Master service agreements
21

 
1,030

 
(972
)
 
58

Indefinite-lived trade name
—

 
3,600

 
—

 
3,600

Total intangible assets
 
 
$
36,440

 
$
(14,781
)
 
$
21,659


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December 31, 2015
 
Weighted-Average Amortization
Period
(in months)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technologies
52

 
$
9,417

 
$
(6,702
)
 
$
2,715

Customer lists
20

 
2,820

 
(2,239
)
 
581

Trade names
48

 
2,343

 
(920
)
 
1,423

Non-compete agreements
28

 
1,220

 
(832
)
 
388

Master service agreements
21

 
1,030

 
(872
)
 
158

Indefinite-lived trade name
—

 
3,600

 
—

 
3,600

Total intangible assets
 
 
$
20,430

 
$
(11,565
)
 
$
8,865


During the three and nine months ended September 30, 2016, amortization expense related to our acquired intangible assets totaled approximately $1.4 million and $3.2 million, respectively. During the three and nine months ended September 30, 2015, amortization expense related to our acquired intangible assets totaled approximately $1.1 million and $4.1 million, respectively.

As of September 30, 2016, the estimated future amortization expense related to our finite-lived intangible assets is as follows (in thousands):
Remaining three months of 2016
$
1,376

2017
5,153

2018
4,255

2019
3,433

2020
2,153

Thereafter
1,689

Total
$
18,059


Note 7. Debt Obligations

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

As of December 31, 2015, we had a revolving credit facility with an aggregate principal amount of $30.0 million (the Revolving Credit Facility) with an accordion feature that, subject to certain financial criteria, allowed us to borrow up to a total of $65.0 million beginning the quarter ended December 31, 2015. The Revolving Credit Facility carried, at our election, a base

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interest rate of the greater of the Federal Funds Rate plus 0.5% or one-month LIBOR plus 1% or a LIBOR based interest rate plus additional interest of up to 4.5% depending on our leverage ratio. The Revolving Credit Facility expired in August 2016.

As of September 30, 2016, we were in compliance with the financial covenants of the Line of Credit. Further, we had no amounts outstanding and were able to borrow up to $30.0 million under the Line of Credit.

Note 8. 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 September 30, 2016 related to our headquarters in Santa Clara, California, our office in San Francisco, California, and our warehouse facility 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. As a result of our strategic partnership with Ingram and the exit of our Kentucky warehouse during 2015, we have subleased substantially all of our warehouse in Kentucky and we expect this sublease agreement to generate $0.2 million of sublease income per month through the end of the lease term in November 2016. Rental expense, net of sublease income, was approximately $0.5 million and $1.4 million in the three and nine months ended September 30, 2016, respectively, and $0.6 million and $2.0 million in the three and nine months ended September 30, 2015, respectively.

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

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. On March 4, 2016, the Kentucky Court of Appeals ruled unanimously in our favor, affirming our position that no property tax was owed on the textbooks. The Kentucky Department of Revenue petitioned the Kentucky Supreme Court for a discretionary review, which was denied in September 2016. The case was determined in our favor with no property tax due related to our textbook library.

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.


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Note 9. Guarantees and Indemnifications

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

We believe the fair value of these indemnification agreements is minimal. We have not recorded any liabilities for these agreements as of September 30, 2016.

Note 10. Stockholders' Equity

Share-based Compensation

Total share-based compensation expense recorded for employees and non-employees, is as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Cost of revenues
$
46

 
$
103

 
$
115

 
$
318

Technology and development
3,449

 
3,464

 
11,207

 
9,444

Sales and marketing
1,605

 
126

 
5,456

 
6,214

General and administrative
5,110

 
5,240

 
15,923

 
15,808

Total share-based compensation expense
$
10,210

 
$
8,933

 
$
32,701

 
$
31,784


There was no capitalized share-based compensation expense as of September 30, 2016 or 2015.

Fair Value of Restricted Stock Units (RSUs) and of Performance-Based Restricted Stock Units (PSUs)

RSUs and PSUs are converted into shares of our common stock upon vesting on a one-for-one basis. Vesting of RSUs is subject to the employee’s continuing service to us, while vesting of PSUs is subject to our achievement of specified corporate financial performance objectives in addition to the employee's continuing service to us. 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 2013 Employee Stock Purchase Plan (2013 ESPP)
 
Under the 2013 ESPP, rights to purchase shares are generally granted during the second and fourth quarter of each year. We estimate the fair value of rights granted under the 2013 ESPP at the date of grant using the Black-Scholes-Merton option-pricing model.

Stock Option Activity

During the nine months ended September 30, 2016 and 2015, we granted 232,700 and 165,456 stock option awards, respectively, at a weighted average grant date fair value of $2.58 and $3.63, respectively, solely to members of our board of directors. We did not grant stock option awards during the three months ended September 30, 2016 and 2015.

As of September 30, 2016, our total unrecognized compensation expense for stock option awards granted to employees, officers, directors, and consultants was approximately $2.9 million, which will be recognized over a weighted-average vesting period of approximately 0.8 years.


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RSU and PSU Activity
 
 
RSUs and PSUs Outstanding
 
Number of RSUs and PSUs
Outstanding
 
Weighted 
Average Grant Date 
Fair Value
Balance at December 31, 2015
13,270,650

 
$
6.38

Granted
9,620,354

 
4.44

Released
(4,558,359
)
 
6.48

Canceled
(3,931,959
)
 
6.09

Balance at September 30, 2016
14,400,686

 
$
5.13


2015 PSU Grant

In February 2015, we granted PSUs under the 2013 Equity Incentive Plan (2013 Plan) to certain of our key employees (the February 2015 grants). The PSUs entitle the employees to receive a certain number of shares of our common stock based on our satisfaction of certain financial and strategic performance targets during 2015 (the 2015 Performance Period) and 2016 (the 2016 Performance Period). Based on the achievement of the performance conditions during the 2015 Performance Period for the February 2015 grants, the final settlement met the minimum threshold for the 2015 Performance Period based on a specified objective formula approved by the Compensation Committee of the Board of Directors (the Compensation Committee). The PSUs related to the 2015 Performance Period vest annually over a one or three year period depending on the employee, with the initial vesting occurring in February 2016. In March 2016, the financial and strategic performance targets were set by the Compensation Committee for the 2016 Performance Period for the February 2015 grants. The PSUs related to the 2016 Performance Period vest over a one year period with vesting occurring in March 2017.

During the nine months ended September 30, 2016, the Compensation Committee approved a modification of the performance targets related to the 2015 Performance Period of the February 2015 grants for 26 employees. As a result of the modification, we recorded an expense of $1.5 million during the nine months ended September 30, 2016.

The number of shares underlying the PSUs granted during the nine months ended September 30, 2015 totaled 2,300,824 shares and had a weighted average grant date fair value of $6.59 per share. During the nine months ended September 30, 2016, 688,464 shares were released relating to the 2015 Performance Period. As of September 30, 2016, we expect a significant portion of the remaining PSUs related to the 2016 Performance Period to vest.

2016 PSU Grants

In March 2016, we granted PSUs under the 2013 Plan to certain of our key executives. The PSUs entitle the executives to receive a certain number of shares of our common stock based on our satisfaction of certain financial and strategic performance targets during 2016. Based on the achievement of the performance conditions during 2016 for the March 2016 grants, the final settlement will range between zero and 100% of the maximum shares underlying the PSU awards based on a specified objective formula approved by the Compensation Committee. If earned, these PSUs will vest over a three year period depending on the employee, with the initial vesting occurring in March 2018.

The number of shares underlying the PSUs granted during the nine months ended September 30, 2016 totaled 2,377,842 shares and had a weighted average grant date fair value of $4.32 per share. As of September 30, 2016, we expect a significant portion of these PSUs to vest.
 
As of September 30, 2016, we had a total of approximately $40.0 million of unrecognized compensation costs related to RSUs and PSUs that are expected to be recognized over the remaining weighted average period of 2.0 years.


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Note 11. Income Taxes

We recorded an income tax provision of approximately $0.6 million and $1.5 million for the three and nine months ended September 30, 2016, respectively, and an income tax provision of approximately $0.4 million and $1.1 million for the three and nine months ended September 30, 2015, respectively. The income tax provision for the three and nine months ended September 30, 2016 was primarily due to state and foreign income tax expense and federal tax expense related to tax amortization of acquired indefinite lived intangible assets. The income tax provision for the three and nine months ended September 30, 2015 was primarily due to state and foreign income tax expense and federal tax expense related to the tax amortization of acquired goodwill.

Note 12. Restructuring (Credits) Charges

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

 
$
—

 
$
—

Restructuring charges
1,885

 
2,983

 
4,868

Cash payments
(1,830
)
 
(675
)
 
(2,505
)
Write-offs
—

 
(317
)
 
(317
)
Other
—

 
472

 
472

Balance at December 31, 2015
55

 
2,463

 
2,518

Restructuring credits
—

 
(298
)
 
(298
)
Cash payments
(55
)
 
(1,564
)
 
(1,619
)
Balance at September 30, 2016
$
—

 
$
601

 
$
601


2015 Restructuring Plan

Restructuring charges recorded in 2015 were related to our exits from our print coupon business and our Kentucky warehouse. As a result of our strategic partnership with Ingram, we successfully exited our warehouse facilities during 2015. Restructuring credits of $0.3 million recorded during the three and nine months ended September 30, 2016 were primarily related to a partial reversal of previously accrued lease termination costs due to our subtenant leasing additional space. Costs incurred to date related to the lease termination and other costs are expected to be fully paid by 2021.

As of September 30, 2016, the $0.6 million liability was comprised of a short-term accrual of $0.5 million included within accrued liabilities and a long-term accrual of $0.1 million included within other liabilities on the condensed consolidated balance sheets.

Note 13. Related-Party Transactions

Our Chief Executive Officer is a member of the Board of Directors of Adobe Systems Incorporated (Adobe). During the three and nine months ended September 30, 2016, we had purchases of $0.7 million and $2.5 million, respectively, and during the three and nine months ended September 30, 2015, we had purchases of $1.1 million and $2.0 million, respectively, of products from Adobe. We had no revenues in the three and nine months ended September 30, 2016 and $0.1 million in the nine months ended September 30, 2015 from Adobe. We had $0.7 million and $0.4 million in payables as of September 30, 2016 and December 31, 2015, respectively, to Adobe. We had no outstanding accounts receivables as of September 30, 2016 and December 31, 2015 from Adobe.

One of our board members is also a member of the Board of Directors of Cengage Learning, Inc. (Cengage). During the three and nine months ended September 30, 2016, we had purchases of $2.8 million and $7.2 million, respectively, and during the three and nine months ended September 30, 2015, we had purchases of $2.9 million and $9.1 million, respectively, of products from Cengage. We had $0.6 million in revenues in both the three and nine months ended September 30, 2016 and $0.1 million in revenues in both the three and nine months ended September 30, 2015 from Cengage. We had an immaterial amount in payables as of September 30, 2016 and December 31, 2015 to Cengage. We had $0.1 million in outstanding accounts receivables as of September 30, 2016 and no outstanding accounts receivables as of December 31, 2015 from Cengage.


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One of our board members is also a member of the Board of Directors of Groupon, Inc. (Groupon). During the three and nine months ended September 30, 2016, we had purchases of $0.2 million and $0.5 million, respectively, and an immaterial amount during the three and nine months ended September 30, 2015 of services from Groupon. We had no revenues in the three and nine months ended September 30, 2016 and September 30, 2015 from Groupon. We had an immaterial amount in payables as of September 30, 2016 and December 31, 2015, respectively, to Groupon. We had no outstanding accounts receivables as of September 30, 2016 and December 31, 2015 from Groupon.

Transactions with the above related parties have been conducted on an arms-length basis, and the terms of our contracts 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 Statements (unaudited)” of this Quarterly Report on Form 10-Q. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See the “Note about Forward-Looking Statements” for additional information. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A, “Risk Factors.”

Overview

Chegg is the leading student-first connected learning platform. Our goal is to help students transition from high school to college to career, with a view to improving student outcomes. We help students study more effectively for college admission exams, find the right college to accomplish their goals, get better grades and test scores while in school, and find internships that allow them to gain valuable skills to help them enter the workforce after college. We strive to improve 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 also offer eTextbooks for rent and sale. Students can subscribe to our digital services, such as Chegg Study, which provides step-by-step Textbook Solutions and Expert Answers, helping students with their course work. We also have live tutors available to students online, anytime, anywhere through our Chegg Tutors service. We provide access to internships to help students gain skills that are critical to securing their first job. We provide students with an online adaptive test preparation service currently covering the ACT and SAT exams. Finally, we provide a portfolio of online writing tools to help students improve their writing skills.

To deliver services to students, we partner with a variety of third parties. We work with colleges 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 network of students and professionals who leverage our platform to tutor in their spare time and employers who leverage our platform to post their internships and jobs. In addition, because we have a large student user base, local and national brands partner with us to reach the college and high school demographics.

During the three and nine months ended September 30, 2016, we generated net revenues of $71.3 million and $191.0 million, respectively, and in the same periods had net losses of $16.1 million and $40.8 million, respectively. During the three and nine months ended September 30, 2015, we generated net revenues of $81.3 million and $233.2 million, respectively, and in the same periods had net losses of $24.2 million and $62.8 million, respectively. We plan to continue to invest in our long-term growth, particularly further investment in the technology that powers our connected learning 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 utilize Chegg Services to increase student engagement with our connected learning platform. We plan to continue to invest in the expansion of Chegg Services to provide a more compelling and personalized solution and deepen engagement with students. In May 2016, we acquired Imagine Easy Solutions, LLC, a privately held online learning company based in New York that provides a portfolio of online writing tools. We anticipate this acquisition to enhance our ability to acquire new students, increase the value to our

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existing students, and have a meaningful and positive impact on their outcomes. Further, 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 these investments we have made to achieve our current scale will allow us to drive increased operating margins over time that, together with increased contributions of Chegg Services products, will enable us to accomplish profitability and become cash-flow positive 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 Chegg Services and other factors described in greater detail in Part II, Item 1A, “Risk Factors.”

We have presented revenues for our two product lines, Required Materials and Chegg Services, based on how students view us and the utilization of our products by them. Required Materials includes all products that are essential for students to meet the requirements of their coursework and Chegg Services includes all other products we provide to supplement the requirements and help students with their coursework. Chegg Services also includes our marketing services which help to complete our offering of services to students. More detail on our two product lines is discussed in the next two sections titled "Required Materials" and "Chegg Services."

Required Materials

Our Required Materials product line includes the rental and sale of print textbooks and eTextbooks as well as the commission we receive from Ingram. Our web-based, multiplatform eTextbook Reader, eTextbooks and supplemental course materials are available 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. This product line has been highly capital intensive due to the resources required to maintain a print textbook rental library. As a result of our strategic partnership with Ingram, we have exited our warehouse facilities in Kentucky and have transitioned our textbook library to Ingram’s facilities, which has helped to free up resources historically required by this product line. We will continue to liquidate our print textbook library through the normal course of our operations and expect it to be substantially liquidated at the end of 2016. Until that point, we will continue to rent textbooks and recognize revenues on the textbooks that we own as rental revenues on our consolidated statement of operations through the liquidation period. Once our entire print textbook library has been liquidated, all revenues from print textbook rentals will be commission-based.

We have historically capitalized the investment in our print textbook library and recorded depreciation expense in cost of revenues over its useful life using an estimated liquidation value. During the nine months ended September 30, 2016 and 2015, our purchases of print textbooks, net of proceeds from textbook liquidation, was an inflow of $23.1 million and $2.0 million, respectively. We received a net inflow of cash as we continued to liquidate our existing textbook library. This is expected to continue through 2016 as we are no longer purchasing textbooks for rental as a result of our strategic partnership with Ingram.

We use our website to liquidate print textbooks from our print textbook library, which allows us to generate greater recovery on our print 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 print textbooks allows for a reduction in the investments necessary to maintain the rental catalog while at the same time attracting students to our website by offering more for their textbooks than they could generally get by selling them back to their campus bookstore.

In the aggregate, Required Materials revenues were 58% and 55% of net revenues during the three and nine months ended September 30, 2016, respectively, and 75% and 72% of net revenues during the three and nine months ended September 30, 2015, respectively.

Chegg Services

Our Chegg Services are experiencing rapid growth and we expect our partnership with Ingram to accelerate the growth of these offerings by freeing up capital while allowing us to maintain our leadership and brand recognition. Our Chegg Services for students include our connected learning platform, or the Student Hub, our online writing tools service, our test preparation service currently covering the ACT and SAT exams, online tutoring, our Chegg Study service, College Admissions, Scholarship Services, and Internship Services. 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 Dell, MasterCard, Microsoft, PayPal, Proctor & Gamble, Red Bull, Shutterfly, and Starbucks, 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

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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 Chegg 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, Chegg Services revenues were 42% and 45% of net revenues during the three and nine months ended September 30, 2016, respectively, and 25% and 28% of net revenues during the three and nine months ended September 30, 2015, respectively.

Strategic Partnership with Ingram

We expect our partnership with Ingram to accelerate the growth of Chegg Services products by allowing us to utilize capital otherwise spent on the purchase of print textbooks, and at the same time allowing us to maintain our leading position and high brand recognition through our iconic orange boxes. We entered into a definitive inventory purchase and consignment agreement with Ingram that will allow us to focus exclusively on eTextbooks and Chegg Services. Under the agreement, since May 2015, Ingram has been responsible for all new investments in the print textbook library, fulfillment logistics, and has title and risk of loss related to print textbook rentals. As a result of our strategic partnership with Ingram, our revenues include a commission on the total revenues that we earn from Ingram upon their fulfillment of a rental transaction using print textbooks for which Ingram has title and risk of loss. Additionally, we have ceased making additional investments in our print textbook library during 2015 and expect to rent and liquidate our existing inventory of print textbooks throughout 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 fully digital company, 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 continue to provide Ingram with extended payment terms throughout 2016 as we procure print textbooks on behalf of Ingram, before moving to normal payment terms in 2017.

Seasonality of Our Business
A substantial majority of our revenues are recognized ratably over the term the student rents our print textbooks and eTextbooks or has access to our Chegg Services. Historically, this has generally resulted in our highest revenues in the fourth quarter as it reflects more days of the academic year and our lowest revenues in the second quarter as colleges conclude their academic year for summer and there are fewer days of rentals. The recognition of revenues from our eTextbooks and Chegg Services will continue to follow this trend. As a result of our strategic partnership with Ingram, revenues from Ingram owned print textbook rental transactions will now be higher in the first and third quarters as we recognize a commission on the transaction rather than recognizing the revenues ratably over the term the student rents the textbooks. 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 during 2016 as we have completely transitioned the shipping and fulfillment activities related to textbooks to Ingram. As a result of these factors, the most concentrated periods for our revenues 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 strategic partnership with Ingram to shift peak revenues in the periods that a student rents a textbook as a result of our revenue sharing agreement such that our revenues will more closely track the academic calendar as our expenses associated with the textbook rental business decrease.


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Results of Operations
The following table summarizes our historical condensed consolidated statements of operations (in thousands, except percentage of revenues):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental
$
5,511

 
7
 %
 
$
22,703

 
28
 %
 
$
32,081

 
17
 %
 
$
93,199

 
40
 %
Services
49,765

 
70

 
33,358

 
41

 
126,795

 
66

 
94,001

 
40

Sales
16,067

 
23

 
25,225

 
31

 
32,157

 
17

 
46,019

 
20

Total net revenues
71,343

 
100

 
81,286

 
100

 
191,033

 
100

 
233,219

 
100

Cost of revenues(1):
 
 
 
 
 
 
 
 


 
 
 


 
 
Rental
7,646

 
11

 
27,080

 
33

 
26,505

 
14

 
86,873

 
37

Services
12,884

 
18

 
10,377

 
13

 
38,691

 
20

 
32,189

 
14

Sales
18,169

 
25

 
24,263

 
30

 
33,833

 
18

 
44,407

 
19

Total cost of revenues
38,699

 
54

 
61,720

 
76

 
99,029

 
52

 
163,469

 
70

Gross profit
32,644

 
46

 
19,566

 
24

 
92,004

 
48

 
69,750

 
30

Operating expenses(1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology and development
16,241

 
23

 
15,664

 
19

 
49,232

 
26

 
45,076

 
19

Sales and marketing
15,256

 
21

 
16,211

 
20

 
41,449

 
22

 
49,985

 
21

General and administrative
13,905

 
19

 
12,060

 
15

 
41,140

 
22

 
35,780

 
15

Restructuring (credits) charges
(100
)
 
—

 
342

 
—

 
(298
)
 
—

 
3,320

 
1

Loss (gain) on liquidation of textbooks
2,673

 
4

 
(909
)
 
(1
)
 
(523
)
 
—

 
(2,649
)
 
(1
)
Total operating expenses
47,975

 
67

 
43,368

 
53

 
131,000

 
70

 
131,512

 
55

Loss from operations
(15,331
)
 
(21
)
 
(23,802
)
 
(29
)
 
(38,996
)
 
(22
)
 
(61,762
)
 
(25
)
Total interest expense and other (expense) income, net
(178
)
 
—

 
24

 
—

 
(297
)
 
—

 
35

 
—

Loss before provision for income taxes
(15,509
)
 
(21
)
 
(23,778
)
 
(29
)
 
(39,293
)
 
(22
)
 
(61,727
)
 
(25
)
Provision for income taxes
554

 
(1
)
 
389

 
—

 
1,463

 
(1
)
 
1,113

 
(1
)
Net loss
$
(16,063
)
 
(22
)%
 
$
(24,167
)
 
(29
)%
 
$
(40,756
)
 
(23
)%
 
$
(62,840
)
 
(26
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
$
46

 
 
 
$
103

 
 
 
$
115

 
 
 
$
318

 
 
Technology and development
3,449

 
 
 
3,464

 
 
 
11,207

 
 
 
9,444

 
 
Sales and marketing
1,605

 
 
 
126

 
 
 
5,456

 
 
 
6,214

 
 
General and administrative
5,110

 
 
 
5,240

 
 
 
15,923

 
 
 
15,808

 
 
Total share-based compensation expense
$
10,210

 
 
 
$
8,933

 
 
 
$
32,701

 
 
 
$
31,784

 
 


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Three and Nine Months Ended September 30, 2016 and 2015
    
Net Revenues    

Net revenues in the three months ended September 30, 2016 decreased $9.9 million, or 12%, compared to the same period in 2015. In the three months ended September 30, 2016 compared to the same period in 2015, rental revenues decreased $17.2 million or 76%, while services revenues increased $16.4 million, or 49%, and sales revenues decreased $9.2 million, or 36%.

Net revenues in the nine months ended September 30, 2016 decreased $42.2 million, or 18%, compared to the same period in 2015. In the nine months ended September 30, 2016 compared to the same period in 2015, rental revenues decreased $61.1 million or 66%, while services revenues increased $32.8 million, or 35%, and sales revenues decreased $13.9 million, or 30%.

The decrease in rental revenues during the three and nine months ended September 30, 2016 as compared to the same period in 2015 was due to our strategic partnership with Ingram, which commenced in July 2014. As a result of our strategic partnership, our rental revenues are increasingly classified as services revenues to represent the commission on the total revenues that we earn from Ingram upon their fulfillment of a rental transaction using books for which Ingram has title and risk of loss rather than recognizing rental revenues from transactions using our print textbooks. The increase in services revenues during the three and nine months ended September 30, 2016 as compared to the same periods in 2015 was driven primarily from growth across our other offerings for students, which included increased revenues from our Chegg Study service and our recent acquisition of Imagine Easy, as well as an increase in the commissions earned from Ingram. The decrease in sales revenues during the three and nine months ended September 30, 2016 as compared to the same periods in 2015 was driven primarily from a decrease in textbooks sold on a just in time basis.

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

 
Three Months Ended 
 September 30,
 
Change
 
2016
 
2015
 
$
 
%
Required Materials
$
41,667

 
$
60,664

 
$
(18,997
)
 
(31
)%
Chegg Services
29,676

 
20,622

 
9,054

 
44

Total net revenues
$
71,343

 
$
81,286

 
$
(9,943
)
 
(12
)%

 
Nine Months Ended 
 September 30,
 
Change
 
2016
 
2015
 
$
 
%
Required Materials
$
105,924

 
$
167,591

 
$
(61,667
)
 
(37
)%
Chegg Services
85,109

 
65,628

 
19,481

 
30

Total net revenues
$
191,033

 
$
233,219

 
$
(42,186
)
 
(18
)%

Required Materials revenues decreased $19.0 million, or 31%, and $61.7 million, or 37%, in the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015, primarily due to our strategic partnership with Ingram. We expect this to continue to decrease throughout 2016 as our Required Materials revenues are increasingly comprised of a commission earned from Ingram rather than the full revenues from a print textbook rental transaction. Required Materials revenues represented 58% and 55% of net revenues during the three and nine months ended September 30, 2016, respectively, and 75% and 72% of net revenues during the three and nine months ended September 30, 2015, respectively. Chegg Services revenues increased $9.1 million, or 44%, and $19.5 million, or 30%, in the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015 due to growth in new memberships for our Chegg Study service, partially offset by revenues recognized from our print coupon business that we exited during the three months ended March 31, 2015. Chegg Services revenues represented 42% and 45% of net revenues during the three and nine months ended September 30, 2016, respectively, and 25% and 28% of net revenues during the three and nine months ended September 30, 2015, respectively.
    

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Cost of Revenues

The following table sets forth our cost of revenues for the periods shown (in thousands, except percentages):

 
Three Months Ended 
 September 30,
 
Change
 
2016
 
2015
 
$
 
%
Cost of revenues(1)
$
38,699

 
$
61,720

 
$
(23,021
)
 
(37
)%
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense of:
$
46

 
$
103

 
$
(57
)
 
(55
)%

 
Nine Months Ended 
 September 30,
 
Change
 
2016
 
2015
 
$
 
%
Cost of revenues(1)
$
99,029

 
$
163,469

 
$
(64,440
)
 
(39
)%
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense of:
$
115

 
$
318

 
$
(203
)
 
(64
)%
    
Cost of revenues in the three months ended September 30, 2016 decreased by $23.0 million, or 37%, compared to the same period in 2015. The decrease in absolute dollars and as a percentage of revenues for the three months ended September 30, 2016 was primarily due to a decrease in textbook depreciation of $7.7 million, lower order fulfillment costs of $7.8 million, lower cost of revenues as a result of lower sales revenue of $9.5 million, a decrease in write-offs related to our print textbook library of $0.5 million, and lower warehouse personnel costs of $0.6 million. These decreases were partially offset by higher content depreciation of $2.5 million. As a result, gross margins increased to 46% in the three months ended September 30, 2016, from 24% in the three months ended September 30, 2015.

Cost of revenues in the nine months ended September 30, 2016 decreased by $64.4 million, or 39%, compared to the same period in 2015. The decrease in absolute dollars and as a percentage of revenues for the nine months ended September 30, 2016 was primarily due to a decrease in textbook depreciation of $27.9 million, lower order fulfillment costs of $17.6 million, lower cost of revenues as a result of lower sales revenue of $14.4 million, a decrease in write-offs related to our print textbook library of $3.6 million, and lower warehouse personnel costs of $3.4 million. These decreases were partially offset by higher content depreciation of $3.1 million. As a result, gross margins increased to 48% in the nine months ended September 30, 2016, from 30% in the nine months ended September 30, 2015.

The decreases in cost of revenues for the three and nine months ended September 30, 2016 compared to the same periods in 2015 resulted from Ingram's fulfillment of more print textbook rental orders and the closure of our warehouse in Kentucky. Further, as Ingram increasingly takes the title and risk of loss for the print textbook inventory needed to fulfill all print textbook rentals and sales, we anticipate our total cost of revenues will continue to decrease and our total gross margins will continue to increase.


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

 
Three Months Ended 
 September 30,
 
Change
 
2016
 
2015
 
$
 
%
Technology and development(1)
$
16,241

 
$
15,664

 
$
577

 
4
 %
Sales and marketing(1)
15,256

 
16,211

 
(955
)
 
(6
)
General and administrative(1)
13,905

 
12,060

 
1,845

 
15

Restructuring (credits) charges
(100
)
 
342

 
(442
)
 
n/m

Loss (gain) on liquidation of textbooks
2,673

 
(909
)
 
3,582

 
n/m

 
$
47,975

 
$
43,368

 
$
4,607

 
11
 %
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense of:
 
 
 
 
 
 
 
Technology and development
$
3,449

 
$
3,464

 
$
(15
)
 
—
 %
Sales and marketing
1,605

 
126

 
1,479

 
n/m
General and administrative
5,110

 
5,240

 
(130
)
 
(2
)
Share-based compensation expense
$
10,164

 
$
8,830

 
$
1,334

 
15
 %

 
Nine Months Ended 
 September 30,
 
Change
 
2016
 
2015
 
$
 
%
Technology and development(1)
$
49,232

 
$
45,076

 
$
4,156

 
9
 %
Sales and marketing(1)
41,449

 
49,985

 
(8,536
)
 
(17
)
General and administrative(1)
41,140

 
35,780

 
5,360

 
15

Restructuring (credits) charges
(298
)
 
3,320

 
(3,618
)
 
n/m

Loss (gain) on liquidation of textbooks
(523
)
 
(2,649
)
 
2,126

 
(80
)
 
$
131,000

 
$
131,512

 
$
(512
)
 
—
 %
 
 
 
 
 
 
 
 
(1) Includes share-based compensation expense of:
 
 
 
 
 
 
 
Technology and development
$
11,207

 
$
9,444

 
$
1,763

 
19
 %
Sales and marketing
5,456

 
6,214

 
(758
)
 
(12
)
General and administrative
15,923

 
15,808

 
115

 
1

Share-based compensation expense
$
32,586

 
$
31,466

 
$
1,120

 
4
 %
_______________________________________
n/m - not meaningful
    
Technology and Development

Technology and development expenses during the three months ended September 30, 2016 increased $0.6 million, or 4%, compared to the same period in 2015. During the three months ended September 30, 2016, our employee-related expenses increased $0.4 million and our web hosting and software licensing fees increased $0.6 million compared to the three months ended September 30, 2015. Technology and development as a percentage of net revenues were 23% during the three months ended September 30, 2016 compared to 19% during the same period in 2015.

Technology and development expenses during the nine months ended September 30, 2016 increased $4.2 million, or 9%, compared to the same period in 2015. During the nine months ended September 30, 2016, our employee-related expenses increased $1.6 million, our web hosting and software licensing fees increased $1.3 million, our outside services expenses increased $0.5 million and our share-based compensation expense increased $1.8 million compared to the nine months ended

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September 30, 2015. Technology and development as a percentage of net revenues were 26% during the nine months ended September 30, 2016 compared to 19% during the same period in 2015.
    
Sales and Marketing

Sales and marketing expenses during the three months ended September 30, 2016 decreased by $1.0 million, or 6%, compared to the same period in 2015. The decrease was primarily attributable to lower advertising and marketing expenses of $2.9 million, partially offset by an increase in share-based compensation expenses of $1.5 million, compared to the three months ended September 30, 2015.  Sales and marketing expenses as a percentage of net revenues were 21% during the three months ended September 30, 2016 compared to 20% during the same period in 2015.

Sales and marketing expenses during the nine months ended September 30, 2016 decreased by $8.5 million, or 17%, compared to the same period in 2015. The decrease was primarily attributable to decreases in employee-related expenses, advertising and marketing expenses, and share-based compensation expenses of $1.8 million, $5.9 million, and $0.8 million, respectively, compared to the nine months ended September 30, 2015. Sales and marketing expenses as a percentage of net revenues remained flat during the nine months ended September 30, 2016 compared to the same period in 2015.

General and Administrative

General and administrative expenses in the three months ended September 30, 2016 increased $1.8 million, or 15%, compared to the same period in 2015. The increase was due to higher employee-related expenses of $1.6 million compared to the three months ended September 30, 2015. General and administrative expenses as a percentage of net revenues were 19% during the three months ended September 30, 2016 compared to 15% during the same period in 2015.

General and administrative expenses in the nine months ended September 30, 2016 increased $5.4 million, or 15%, compared to the same period in 2015. The increase was due to higher employee-related expenses, outside services, and professional fees primarily related to our acquisition of Imagine Easy of $3.3 million, $0.4 million, and $0.5 million, respectively, compared to the nine months ended September 30, 2015. General and administrative expenses as a percentage of net revenues were 22% during the nine months ended September 30, 2016 compared to 15% during the same period in 2015.

Restructuring (Credits) Charges

Restructuring credits of $0.3 million recorded during the three and nine months ended September 30, 2016 were related to a partial reversal of previously accrued lease termination costs due to our subtenant leasing additional space. Costs incurred to date related to the lease termination and other costs are expected to be fully paid by 2021.

Loss (gain) on Liquidation of Textbooks

During the three months ended September 30, 2016 and 2015, we had a loss on liquidation of print textbooks of $2.7 million and gain on liquidation of print textbooks of $0.9 million, respectively, resulting from proceeds received from liquidation of previously rented print textbooks on our website and through various other liquidation channels.

During the nine months ended September 30, 2016 and 2015, we had a gain on liquidation of print textbooks of $0.5 million and $2.6 million, respectively, resulting from proceeds received from liquidation of previously rented print textbooks on our website and through various other liquidation channels.

    

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Interest Expense and Other (Expense) Income, Net

The following table sets forth our interest expense and other (expense) income, net, for the periods shown (in thousands, except percentages):

 
Three Months Ended 
 September 30,
 
Change
 
2016
 
2015
 
$
 
%
Interest expense, net
$
(30