Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. CHEGG, INC (1364954) 10-Q published on Apr 29, 2019 at 4:30 pm
Reporting Period: Mar 30, 2019
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. Operating lease cost for minimum lease payments is recognized on a straight-line basis over the lease term.
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.
Shares related to convertible senior notes represents the anti-dilutive impact of our issuance of $345 million in aggregate principal amount of our 0.25% convertible senior notes due in 2023 (2023 notes) as the average price of our common stock during the three months ended March 31, 2019 was higher than the conversion price of $26.95. While these shares are anti-dilutive during the three months ended March 31, 2019, they may be dilutive in periods we report net income. However, as a result of the capped call transactions described in Note 7, there will be no economic dilution from the 2023 notes up to $40.68, as exercise of the capped call instruments will reduce any dilution from the 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 $700 million in aggregate principal amount of our 0.125% convertible senior notes due in 2025 (2025 notes) were anti-dilutive during the three months ended March 31, 2019.
During the three months ended March 31, 2019, the conditions allowing holders of the 2025 notes to convert have not been met and are therefore not convertible during the three months ended March 31, 2019. During the three months ended March 31, 2019, the conditions allowing holders of the 2023 notes to convert have been met and are therefore convertible during the three months ended March 31, 2019. None of the holders of the 2023 notes elected to convert their notes into shares of our common stock during the three months ended March 31, 2019.
Our business may also be subject to laws specific to students, such as the Family Educational Rights and Privacy Act, the Delaware Higher Education Privacy Act and a California statute which restricts the access by postsecondary educational institutions of prospective students’ social media account information. Compliance levels include disclosures, consents, transfer restrictions, notice and access provisions for which we may in the future need to build further infrastructure to further support. We cannot guarantee that we have been or will be fully compliant in every jurisdiction, as it is not entirely clear how existing laws and regulations governing educational institutions affect our business. Moreover, as the education industry continues to evolve, increasing regulation by federal, state and foreign agencies becomes more likely. Recently, California adopted the Student Online Personal Information Protection Act which prohibits operators of online services used for K-12 school purposes from using or sharing student personal information and Colorado adopted House Bill 16-1423 designed to protect the use of student personal data in elementary and secondary school. These acts do not apply to general audience Internet websites but it is not clear how these acts will be interpreted and the breadth of services that will be restricted by them. Other states may adopt similar statutes. Certain states have also adopted statutes, such as California Education Code § 66400, which prohibit the preparation or sale of material which should reasonably be known will be submitted for academic credit. These statutes are directed at enterprises selling term papers, theses, dissertations and the like, which we do not offer, and were not designed for services like ours which are designed to help students understand the relevant subject matter. Although we will continue to work with academic institutions to enforce our honor code and otherwise discourage students from misusing our services, other states may adopt similar or broader versions of these types of statutes, or the interpretation of the existing or future statutes may impact whether they are cited against us or where we can offer our services.
The adoption of any laws or regulations that adversely affect the popularity or growth in the use of the Internet particularly for educational services, including laws limiting the content that we can offer, and the audiences that we can offer that content to, may decrease demand for our service offerings and increase our cost of doing business. Future regulations, or changes in laws and regulations or their existing interpretations or applications, could also hinder our operational flexibility, raise compliance costs and result in additional historical or future liabilities for us, resulting in adverse impacts on our business and our operating results.