Chegg 2014 Annual Report Download - page 56

Table of Contents
18
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. Additional financing may not 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.
Difficulties that could arise from our print textbook fulfillment partnership with Ingram may have an adverse effect on our
business and results of operations.
We rely on Ingram to fulfill a portion of our print textbook rentals and sales orders, which we expect to increase in the
future. As we continue to focus on reducing the expense and investment necessary to support our print textbook business, we
have become increasingly committed to our strategic partnership. We are in the process of negotiating the binding terms of a
planned expansion of our strategic partnership and there can be no assurance that such terms will remain acceptable to us or to
Ingram. If our continuing relationship with Ingram is interrupted or if Ingram experiences disruptions in its business or is not
able perform as anticipated, or we experience problems with the transition of our print logistical and
fulfillment activities to Ingram, we may experience operational difficulties, an inability to fulfill print textbook orders,
increased costs and a loss of business, as well a greater than expected deployment of capital for textbook acquisition, that may
have a material adverse effect on our business and results of operations and financial condition.