š„Prompt Disruptionš„
Updates: Chegg Inc. ($CHGG), Diamond Comics + Hooters
Weāre suckers for disruption and we may be witnessing an intense form of it in real time, right before our very own eyes.
Youāll recall that back in March, we initiated coverage on Chegg Inc. ($CHGG)(āCheggā), a besieged edtech company that had just reported ā¦
ā¦ 4Q24 earnings:
To recap, Cheggās primary product is a subscription service that provides college students with homework and exam help ā a.k.a. gives them all answers ā for $14.95/month. Unfortunately for Chegg, thereās this low key thing out there that all of the kids are addicted to called āArtificial Intelligenceā or āAIā and it comes in the form of Open AIās ChatGPT or Googleās Gemini and many others. These AI tools have been siphoning off Cheggās subscribers and would-be customers at an alarming rate, and Cheggās revenue and EBITDA declines have been marked. Said another way, the algorithms are f*cking Chegg big time.
Which brings us to ā25. Has the company found an answer? Short answer:
1Q25 only brought more suffering for Chegg and its stockholders (its bondholders on the other hand ā¦ stay tuned!). 1Q25 Revenue was down 30% YOY to $121mm, compared to $174mm in 1Q24. The drop in revenue was due to a 31% YOY decline in subscribers to 3.2mm from 4.7mm in 1Q24. This is the lowest level of both revenue and quarterly subscribers Chegg has seen since before the pandemic, when Cheggās growth took off amidst the COVID-19-driven shift to online schooling.
Adj. EBITDA declined 59% to $19.3mm, with margins contracting from 27% in 1Q24 to 16% in 1Q25 ā a level the company has not hit since ā17.
The ongoing EBITDA and margin deterioration are in spite of the austere cost-cutting measures the company began in June ā24. Last year, Chegg laid off 40% of its workforce (760 people) in two waves in June and November ā24 and closed two offices for an estimated savings of $100-120mm.
Cheggās business has some seasonality to it, as more students tend to subscribe around exam seasons in 2Q and 4Q and lapse during the summer months of 3Q. However, on a rolling LTM basis, the declining EBITDA and margin trend is clear:
On the 1Q25 earnings call, CEO Nathan Schultz expressed the view that things will get worse before they get better, and offered 2Q25 guidance of $100-$102mm of Revenue and $16-17mm of Adj. EBITDA, suggesting roughly 19% Adj. EBITDA margin at the mid-point. Given the seasonality of Cheggās business around exam seasons, OpenAIās decision ā announced on X with little fanfare ā to give away its premium ChatGPT Plus product for free for most of 2Q may be particularly devastating to Chegg.
Against the unending onslaught of AI, Chegg announced that it would lay off a further 22% of its staff (248 people) and close more offices, as part of a third operational restructuring effort expected to save $45-50mm in ā25 and $100-110mm on an annualized run rate basis. This is in addition to the $100-120mm annualized savings from the ā24 restructurings.
Beyond this third round of cuts, Chegg is continuing the strategic review process it first announced in February ā25. Chegg seems necessarily open to literally anything and everything. Will it explore a sale of the whole company? š¤·āāļø, sure. Or just parts? Also, š¤·āāļø, sure. This includes its (i) core product, Chegg Study, (ii) growing but still unprofitable language learning service, Busuu, and (iii) expanding B2B offering, Chegg Skills. Chegg has also agreed to license some of its Chegg Study Q&A content to two big tech companies on a non-exclusive basis. These licensing deals generated a whopping ā¦ wait for it ā¦ $4mm of Revenue in 1Q25 and are expected to generate $7mm in 2Q25, š.
There was the tiniest shred of positive news in 1Q25, for Cheggās bondholders at least. Chegg managed to meet the March 15 maturity of its ā25 converts, paying off all $359mm outstanding. It also repurchased $65mm face of its 0% convertible bonds due June ā26 (the āā26 convertsā) at 88 cents on the dollar. This leaves Chegg with $62mm of the ā26 converts outstanding, now pricing at 77, and no other debt.
The company finished the quarter with $126mm of cash on hand.
Chegg has produced positive cash flow from operations throughout the tumult and may be able to keep it up with its additional cost-cutting measures; it has also slashed capital expenditures. The company claims this new lower capex level is the result of its largely completed AI investments made in ā23 and early ā24. The new lower level of capex may be sustainable if this is true. Or the company may be just deferring needed capex to preserve cash.
The stock is up off of its $0.44 low since the May 12, 2025 1Q25 earnings call, although it is still facing de-listing from the NYSE.
With its interest-free debt, net cash position, and still positive FCF generation, Chegg could feasibly coast for some time. That said, weāre doubtful that Chegg can find a real way out of this AI-generated mess as anything resembling its current form.
ā”Update 2: Diamond Comics Distributors, Inc.ā”
Oh man, weāre sorry weāre a bit late to this one.
Back in January something nerdier than bankruptcy professionals descended upon a bankruptcy court: Diamond Comic Distributors Inc. and three affiliates (collectively, the ādebtorsā) filed chapter 11 cases in the District of Maryland (Judge Rice). We initially covered the filing here:
And then followed that up with an update on the sale process here:
That process involved two competing bids: one from the original proposed stalking horse, Universal Distribution Inc. (āUDIā), and another from a company called Alliance Entertainment LLC (āAllianceā). More shocking than the fact that there was an auction in the first place was the outcome: the challenger emerged victorious, taking the cake with a $72.2mm bid. Time to celebrate!
Not quite.
It turns out there were, uh, issues prior to the debtorsā sale hearing ā some sorta mixup about certain payments of prepaid inventory, or something. Instead of having āgood faithā (š) discussions with Alliance to resolve the issue, the debtors promptly pivoted to the $69.1mm back-up bid submitted jointly by UDI and Ad Populum LLC. Alliance, obviously, simply stepped away peacefully from the process and UDI and Ad Populum rode off into the sunset, the happy owners of sh*t nerds love, right?
Lol, no. Cue the nerd drama because instead of some Disney-sh*t we got some Sin City.
Alliance was, obviously, not happy with the debtors leaving it at the altar; it filed an adversary proceeding alleging all kinds of stuff ā we wonāt get into the details but suffice it to say that ultimately Alliance got what it wanted albeit at a much richer price. On April 11, 2025, the court approved an asset purchase agreement that reflected a total purchase price of $85.4mm and Alliance voluntarily dismissed its own proceeding with prejudice.
Couldāve been worse, right?
On April 29, 2025, Alliance filed a complaint against the debtors alleging fraudulent misrepresentation of the debtors business relationship with a large vendor, Wizards of the Coast LLC (āWOTCā), which accounts for ~25% of the debtorsā gaming business revenue.*
How exactly did the debtors misrepresent the WOTC relationship? By saying there was a relationship at all, LOL! Just a small thing, LOLOL.
Apparently WOTC decided not to renew the distribution agreement with the debtors back in December ā24. This was BEFORE the filing of these cases. And according to the Alliance complaint, the debtors hid this fact throughout the entire sale process:
āDefendants kept this closely guarded secret from Plaintiff, all other bidders in the Auction (defined below), and the Court. For example, Defendants redacted the termination dates from the WOTC agreements that were disclosed to Plaintiff (and, presumably, other bidders).ā
And itās not like Alliance didnāt try poking around. Alliance recounts a March 6 video conference that went like this:
ā[Alliance] inquired as to the status of the Debtorsā relationships with their key vendors. Each of Defendants Tyson, Hirsch, and Gorin falsely represented that Debtorsā relationships with their key vendors were strong and stable and the Debtors remained in good standing with them. When [Alliance] asked Debtors about specific vendors, including WOTC, Defendants Raymond James and Gorin prevented Debtors from answering those questions.ā
The named defendants include the debtors, Raymond James & Associates, Inc. (the debtorsā investment banker), Getzler Henrich & Associates LLC (the debtorsā financial advisor), Robert Gorin (MD at Getzler Henrich), Charlie Tyson (co-CEO of the debtors), and Dan Hirsch (co-CEO of the debtors).** Basically everyone, lol.
Alliance claims they only learned of the troubles with WOTC on April 12, two days after executing the APA, when the debtors ā¦ OOPS ā¦ uploaded an unredacted version of the WOTC agreements. And, hilariously, this was how the debtors responded:
āFar from confessing to their deception, on April 17, 2025, Defendants feigned outrage, calling the termination āshocking,ā ācoming out of nowhere,ā and a āslap in the face,ā given the Debtorsā twenty-five-year relationship with WOTC.ā
But no amount of Oscar-worthy acting could get the defendants through an actual video conference with WOTC:
āDefendantsā falsehoods were finally laid bare on April 21, 2025, in a video conference involving WOTC, [Alliance], and the Debtors. WOTC revealed that its decision to terminate the Distribution Agreement was madeā and the Debtors were aware of the decisionāin December 2024, because the Debtorsā business with WOTC had declined by more than 8% over the last four years, during which period each of WOTCās other four distributors had significantly increased their sales. Importantly, Debtors did not refute WOTCās characterization on the video conference.ā
What we would give to be a fly on the wall during that awkward as-all-f*ck-balls call.
Despite all that, and maybe due to a little bit of Stockholm Syndrome, Alliance still tried to move forward with an adjusted APA to reflect the loss of the WOTC contract. That endeavor ended up falling apart once again and Alliance issued a notice of material adverse change on April 23 and terminated the APA on April 24. Now Alliance seeks to recoup its $8.5mm deposit as well as damages related to the alleged fraud allegations. What? You didnāt expect the debtors to just willy-nilly give the deposit back, did you?
Immediately following these claims from Alliance, the debtors pivoted back to a joint back-up bid from UDI and Ad Populum because, like, of course they did, lol. Youāll recall that UDI and Ad Populum originally submitted a successful joint back-up bid that amounted to $69.1mm (UDI at $49.6mm and Ad Populum for $19.5mm). Under the newly approved sale order ā yes, this thing actually went forward ā UDI is paying $42mm and Ad Populum is contributing $7.5mm for a grand total of $49.5mm.
Itās safe to say that the back-up bidders were also in the dark when it came to the WOTC issue.***
Itās even safer to say that pre-petition-cum-DIP-lender, JPMorgan Chase & Co. ($JPM), was sh*tting bricks as this thing teetered on the brink of collapse.
*For all our readers out there unfamiliar with nerd-culture, WOTC is a very big hitter when it comes to table top games. WOTC publishes big names like Magic: The Gathering and Dungeons & Dragons.
**Mr. Gorin was singled out as āthe architect of the Debtorsā fraud.ā
***In the middle of all of this, the U.S. Trustee (āUSTā) decided to file a motion to convert. No, not because everything was seemingly going off the rails ā¦ but because the debtors had failed to file a single monthly operating report since the cases commenced. LOL, the UST ā¦ always on point! The debtors remedied the problem earlier this month and the UST subsequently withdrew its motion.
ā”ļøUpdate 1: Hooters of America, LLCā”ļø
Regular readers of PETITION will recall that Hooters of America, LLC and 29 affiliated debtors (collectively, the ādebtorsā) filed bankruptcy back on March 31, 2025 in the Northern District of Texas (Judge Everett):
In that coverage āļø, we observed that āthe debtors pay ~$4.2mm per year on account of āpurportedā legacy royalty obligationsā owed to Lags Equipment, LLC (āLAGSā).* The āpurportedā part of that? News to LAGS, which āfirst learned ofā the debtorsā intentions to challenge their rights āby the first-day filings and presentations,ā and we can only imagine how they felt:
And weāre not talking anything new here; LAGS purchased those rights ā a monthly, perpetual 3% royalty in the gross sales of company-owned stores in Indiana, Ohio, Texas, and certain Florida counties ā thirty-six years ago and, to boot, the debtors have confirmed them some nine-plus times over the years.
But wanting to avoid a public brawl, LAGS offered a simple DIP solution: escrow the funds and donāt prime LAGSā security interest, which the debtors proposed to give no adequate protection, āpending resolution of the substantive issues[.]ā
Straightforward, uncomplicated and ā¦ ignored. Itās bankruptcy in 2025, yāall ā you get prepacks, aggressive posturing, and nothing in between. So on April 23, 2025, LAGS was forced to throw in its DIP objection, which detailed their history and arrangements with the debtors, including the debtorsā provision of a first-lien security interest in cash and servicing accounts to secure LAGSā rights if, for whatever reason, its ownership wasnāt respected. LOL, you just have to wonder whether it thought that challenge would come from its 30+ year partner.
In any event, after a couple more weeks and kicking the DIP hearing, presumably to work out a deal that never materialized, the debtors filed their reply on May 12, 2025. The arguments? Naturally, there was an uninspired, boring well-trodden best-and-only-available-DIP argument. You just canāt ignore that compelling (š„±) justification. Beyond that, they accused LAGS of failing to comply with Florida trust law and busting their back-up financing statements.**
You think Judge Everett wanted to entertain trust law lit if he had a dead easy way out?
Pretty much straight out of the gate, he told everyone he wasnāt going to. The issues were too complex, thereās damn-near four decades of backstory and docs to get through, and the DIP wasnāt the appropriate mechanism for it to play out regardless.
So the parties agreed to LAGSā proposal and the hearing lasted all of fifteen minutes.
ā¦
LOL, you wish! No, the debtors and the DIP lenders doubled down and refused to escrow sh*t, so we were treated to 2.5 hours of argument and testimony about the f*ckinā royalty rights and backstabbery.
Then the court wanted a break. Maybe bio, maybe for a snack, maybe to get away from nonsense he already said he wasnāt game to listen to. But hey, the break served a purpose because, coming back from it, Ropes & Gray LLPās Chris Dickerson got up and spoke on behalf of the debtors:
ā[T]he debtors agree that they will escrow any postpetition royalty, proceeds that they receive, and hold them separate from any commingling or any other account such that those amounts will be there for LAGS to the extent that at the end of the day, it's ruled that they are entitled to them[.]ā
Or put another way ā¦
In the end, LAGS got what it asked for all along, the court entered the final DIP order on May 16, 2025, and the debtors and the DIP lenders moved their litigation to another day. Or perhaps theyāll settle it out. In fact, thereās some indication that may be happening right now because, on May 6, 2025, the debtors filed their proposed chapter 11 plan and corresponding disclosure statement (āDSā), which inherently contemplates treating LAGS as a GUC and zeroing it (and all other GUCs) out for no consideration.*** And while the debtors had scheduled a hearing for conditional approval of the DS on May 23, 2025, a couple days prior, on May 21, 2025, they kicked it indefinitely.****
*LAGS is represented by Bradley Arant Boult Cummings LLP (Jarrod Martin, Michael Riordan, George Barber, Bryan Bates).
**The reply also addressed (i) the US trusteeās DIP objection, which beefed with customary surcharge, āequities of the case,ā and marshaling waivers and the court had no problem overruling, and (ii) the objection of the official committee of unsecured creditors, represented by Pachulski Stang Ziehl & Jones LLP (Brad Sandler, Robert Feinstein, Shirley Cho, Maxim Litvak, Judith Elkin, Theodore Heckel) as legal counsel and Province, LLC (Paul Navid) as financial advisor, which took aim at old-money cross-collateralization, case milestones, the $25k investigation budget, and those same waivers and settled consensually for, among other typical goodies, a juiced, $100k investigation budget.
***If that doesnāt work out for the debtors and the DIP lenders, the plan isnāt confirmable.
****Then again, maybe not. The next day, May 22, 2025, LAGS filed āemergencyā motions for rule 2004 discovery from the debtors and the DIP lenders.
šResourcesš
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. š„You can find it hereš„.
š¾Congratulations toā¦š¾
Lowenstein Sandler LLP (Gianfranco Finizio, Kelly Moynihan) and Potter Anderson & Corroon LLP (Christopher Samis, Aaron Stulman, Maria Kotsiras) for securing the legal mandate on behalf of the official committee of unsecured creditors in the CHG US Holdings LLC chapter 11 bankruptcy cases.
Province LLC (Paul Navid) for securing the financial advisor mandate on behalf of the official committee of unsecured creditors in the Hooters of America LLC chapter 11 bankruptcy cases and the Royal Interco LLC chapter 11 bankruptcy cases.
Raines Feldman Littrell LLP (Thomas Francella Jr.) and Law Offices of Manganelli, Leider & Savio PA (Christian Savio) for securing the legal mandate on behalf of the official committee of unsecured creditors in the Leisure Investments Holdings LLC chapter 11 bankruptcy cases.
Willkie Farr & Gallagher LLP (Brett Miller, Todd Goren, James Burbage, Jessica Graber) and Sills Cummis & Gross PC (Andrew Sherman, Boris Mankovetskiy, Gregory Kopacz) for securing the legal mandate on behalf of the official committee of unsecured creditors in the New Rite Aid LLC chapter 11 bankruptcy cases.