Chegg 2014 Annual Report Download - page 92

Table of Contents
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We recognize only the portion of the option award granted to employees that is ultimately expected to vest as
compensation expense. In addition to assumptions used in the Black-Scholes-Merton option pricing model, we must also
estimate a forfeiture rate to calculate the share-based compensation expense related to our awards. Estimated forfeitures are
determined based on historical data and management’s expectation of exercise behaviors. We will continue to evaluate the
appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors.
Quarterly changes in the estimated forfeiture rate can have a significant impact on our share-based compensation expense as
the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture
rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the share-
based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower than the previously
estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense
recognized in the financial statements.
We will continue to use judgment in evaluating the assumptions related to our share-based compensation expense on a
prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates,
which could materially impact our future share-based compensation expense.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the financial statements. We
currently are providing a valuation allowance on domestic deferred tax assets. If or when recognizing deferred tax assets in the
future, we will consider all available positive and negative evidence including future reversals of existing taxable temporary
differences, projected future taxable income, tax-planning strategies, and results of recent operations.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we
determine whether it is more likely than not that the tax positions will be sustained on the basis of technical merits of the
position and (2) for those tax positions that meet the more-likely than-not recognition threshold, we recognize the tax benefit as
the largest amount that is cumulative more than 50 percent likely to be realized upon ultimate settlement with the related tax
authority. We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the
accompanying consolidated statement of operations.
Recent Accounting Pronouncements
Refer to Note 2 - Significant Accounting Policies in the Notes to Consolidated Financial Statements for relevant recent
accounting pronouncements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk, including changes to interest rates, foreign currency exchange rates and inflation.
Foreign Currency Exchange Risk
International revenue as a percentage of net revenues is not significant, and our sales contracts are denominated primarily
in U.S. dollars. A portion of our operating expenses are incurred outside the United States and are denominated in foreign
currencies, which are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the
Chinese Renminbi and Indian Rupee. To date, we have not entered into derivatives or hedging strategies as our exposure to
foreign currency exchange rates has not been material to our historical operating results, but we may do so in the future if our
exposure to foreign currency should become more significant. There were no significant foreign exchange gains or losses in the
years ended December 31, 2014, 2013 and 2012, respectively.
Interest Rate Sensitivity
We had cash and cash equivalents and investments totaling $90.9 million and $138.3 million as of December 31, 2014
and 2013, respectively. Our cash and cash equivalents and investments consist of cash, money market funds, corporate
securities and commercial paper. Our investment policy and strategy are focused on preservation of capital, supporting our
liquidity requirements, and delivering competitive returns subject to prevailing market conditions. Changes in U.S. interest
rates affect the interest earned on our cash and cash equivalents and investments and the market value of those securities. A
hypothetical 100 basis point increase in interest rates would not result in a material impact in the market value of our available-