Chegg 2013 Annual Report Download - page 67

library. These factors are highly unpredictable and can fluctuate substantially, especially if pricing competition
becomes more intense, as we have seen in recent rush cycles, or demand is reduced due to seasonality or other
factors, including increased use of eTextbooks. We rely on a proprietary model to analyze and optimize our
purchasing decisions and rely on inputs from third parties including publishers, distributors, wholesalers and
colleges to make our decisions. We also rely on students to return print textbooks to us in a timely manner and in
good condition so that we can re-rent or sell those textbooks. If the information we receive from third parties is
not accurate or reliable, if students fail to return books to us or return damaged books to us, or if we for any other
reason anticipate inaccurately and acquire insufficient copies of specific textbooks, we may be unable to satisfy
student demand or we may have to incur significantly increased cost in order to do so, in which event our student
satisfaction and results of operations could be affected adversely. Conversely, if we attempt to mitigate this risk
and acquire more copies than needed to satisfy student demand, then our textbook utilization rates would decline
and our gross margins would be affected adversely.
When deciding whether to offer a textbook for rent and the price we charge for that rental, we also must
weigh a variety of factors and assumptions and if our judgments or assumptions are incorrect our gross margins
may be adversely affected. Certain textbooks cost us more to acquire depending on the source from which they
are acquired and the terms on which they are acquired. We must factor in some projection of the number of
rentals we will be able to achieve with such textbooks and at what rental price, among other factors, to determine
whether we believe it will be profitable to acquire such textbooks and offer them for rent. If the textbooks we
acquire are lost or damaged prematurely we may not be able to recover our costs or generate revenue on those
textbooks. If we are unable to effectively make decisions about whether to acquire textbooks and the price we
charge to rent those textbooks, including if the assumptions upon which our decisions are made prove to be
inaccurate, our gross margins may decline significantly.
We may need additional capital, and we cannot be sure that additional financing will be available.
Our print textbook business is highly capital intensive. Historically, our use of cash to invest in our textbook
library has substantially exceeded the cash we have generated from our operations. We have funded our
operating losses and capital expenditures through proceeds from equity and debt financings, equipment leases
and cash flow from operations. Although we currently anticipate that our available funds and cash flow from
operations will be sufficient to meet our cash needs for the foreseeable future, we may require additional
financing, particularly if the investment required to fund our print textbook business is greater than we
anticipated or we choose to invest in new technologies or complementary businesses or change our business
model. Our ability to obtain financing will depend, among other things, on our development efforts, business
plans, operating performance and condition of the capital markets at the time we seek financing. We cannot
assure you that additional financing will be available to us on favorable terms when required, or at all. If we raise
additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights,
preferences or privileges senior to the rights of our common stock, and our stockholders may experience
substantial dilution.
If our relationships with the shipping providers, publishers, wholesalers or distributors that deliver textbooks
directly to our students are terminated or impaired, if shipping costs increase or if these vendors are unable to
timely deliver textbooks to our students, our business and results of operations could be substantially harmed.
We predominantly rely on United Parcel Service, or UPS, to deliver textbooks from our textbook warehouse
and to return textbooks to us from our students. To a lesser extent we rely on FedEx for delivery of print textbook
rentals and on publishers, distributors and wholesalers to fulfill textbook sales orders and liquidations. We are
subject to carrier disruptions and increased costs due to factors that are beyond our control, including labor
difficulties, inclement weather, increased fuel costs and other rising costs of transportation and terrorist activity.
If the delivery failures or delays or damage rates for our textbooks increase as a result of any such factors, this
would increase our cost to deliver textbooks. In addition, if our shipping vendors increased shipping costs for our
textbooks, our gross profit could be affected adversely if we elect not to raise our rental rates to offset the
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