QuinStreet, Inc.
QUINSTREET, INC (Form: 10-Q, Received: 02/09/2016 16:53:47)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

R

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2015

or

£

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                

Commission File No. 001-34628

 

QuinStreet, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

77-0512121

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

950 Tower Lane, 6th Floor

 

Foster City, California

94404

(Address of principal executive offices)

(Zip Code)

650-578-7700

Registrant’s telephone number, including area code

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   R     No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   R     No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

 

 

 

Accelerated filer

 

R

 

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

¨

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   R

Number of shares of common stock outstanding as of January 31, 2016: 45,233,509

 

 

 

 


QUINSTREET, INC.

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

Condensed Consolidated Balance Sheets at December 31, 2015 and June 30, 2015

 

3

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2015 and 2014

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended December 31, 2015 and 2014

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2015 and 2014

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

Item 4. Controls and Procedures

 

28

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

29

 

 

 

Item 1A. Risk Factors

 

30

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

Item 3. Defaults Upon Senior Securities

 

45

 

 

 

Item 4. Mine Safety Disclosures

 

45

 

 

 

Item 5. Other Information

 

45

 

 

 

Item 6. Exhibits

 

46

 

 

 

SIGNATURES

 

47

 

 

2


PART I. FINANCI AL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

QUINSTREET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

December 31,

 

 

June 30,

 

 

 

2015

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

50,750

 

 

$

60,468

 

Accounts receivable, net

 

 

40,544

 

 

 

46,240

 

Deferred tax assets

 

 

173

 

 

 

166

 

Prepaid expenses and other assets

 

 

6,671

 

 

 

11,503

 

Total current assets

 

 

98,138

 

 

 

118,377

 

Property and equipment, net

 

 

8,678

 

 

 

8,565

 

Goodwill

 

 

56,118

 

 

 

56,118

 

Other intangible assets, net

 

 

14,357

 

 

 

19,030

 

Other assets, noncurrent

 

 

11,840

 

 

 

3,063

 

Total assets

 

$

189,131

 

 

$

205,153

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

17,460

 

 

$

20,425

 

Accrued liabilities

 

 

23,249

 

 

 

27,146

 

Deferred revenue

 

 

1,239

 

 

 

1,208

 

Debt

 

 

49

 

 

 

49

 

Total current liabilities

 

 

41,997

 

 

 

48,828

 

Debt, noncurrent

 

 

15,000

 

 

 

15,000

 

Other liabilities, noncurrent

 

 

5,529

 

 

 

5,740

 

Total liabilities

 

 

62,526

 

 

 

69,568

 

Commitments and contingencies (See Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock: $0.001 par value; 100,000,000 shares authorized; 45,232,041 and

   44,617,850 shares issued and outstanding at December 31, 2015 and

   June 30, 2015, respectively

 

 

45

 

 

 

45

 

     Additional paid-in capital

 

 

252,517

 

 

 

249,358

 

     Accumulated other comprehensive loss

 

 

(420

)

 

 

(413

)

     Accumulated deficit

 

 

(125,537

)

 

 

(113,405

)

Total stockholders' equity

 

 

126,605

 

 

 

135,585

 

Total liabilities and stockholders' equity

 

$

189,131

 

 

$

205,153

 

 

See notes to condensed consolidated financial statements

 

 

3


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net revenue

 

$

64,961

 

 

$

66,694

 

 

$

137,350

 

 

$

135,883

 

Cost of revenue (1)

 

 

60,169

 

 

 

60,395

 

 

 

125,964

 

 

 

123,804

 

Gross profit

 

 

4,792

 

 

 

6,299

 

 

 

11,386

 

 

 

12,079

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development

 

 

3,761

 

 

 

4,244

 

 

 

8,147

 

 

 

9,200

 

Sales and marketing

 

 

2,917

 

 

 

3,357

 

 

 

6,492

 

 

 

7,024

 

General and administrative

 

 

4,057

 

 

 

4,079

 

 

 

8,220

 

 

 

8,694

 

Operating loss

 

 

(5,943

)

 

 

(5,381

)

 

 

(11,473

)

 

 

(12,839

)

Interest income

 

 

10

 

 

 

28

 

 

 

16

 

 

 

54

 

Interest expense

 

 

(145

)

 

 

(786

)

 

 

(278

)

 

 

(1,966

)

Other income, net

 

 

65

 

 

 

636

 

 

 

8

 

 

 

2,961

 

Loss before income taxes

 

 

(6,013

)

 

 

(5,503

)

 

 

(11,727

)

 

 

(11,790

)

(Provision for) benefit from taxes

 

 

(40

)

 

 

26

 

 

 

(405

)

 

 

26

 

Net loss

 

$

(6,053

)

 

$

(5,477

)

 

$

(12,132

)

 

$

(11,764

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.13

)

 

$

(0.12

)

 

$

(0.27

)

 

$

(0.27

)

Diluted

 

$

(0.13

)

 

$

(0.12

)

 

$

(0.27

)

 

$

(0.27

)

Weighted average shares used in computing net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,127

 

 

 

44,440

 

 

 

44,982

 

 

 

44,353

 

Diluted

 

 

45,127

 

 

 

44,440

 

 

 

44,982

 

 

 

44,353

 

 

(1)

Cost of revenue and operating expenses include stock-based compensation expense as follows:

 

Cost of revenue

 

$

753

 

 

$

785

 

 

$

1,557

 

 

$

1,429

 

Product development

 

 

445

 

 

 

594

 

 

 

1,045

 

 

 

1,189

 

Sales and marketing

 

 

444

 

 

 

562

 

 

 

869

 

 

 

1,026

 

General and administrative

 

 

687

 

 

 

585

 

 

 

1,362

 

 

 

1,157

 

 

See notes to condensed consolidated financial statements

 

 

4


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

 

$

(6,053

)

 

$

(5,477

)

 

$

(12,132

)

 

$

(11,764

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain on investments

 

 

 

 

 

5

 

 

 

 

 

 

13

 

Foreign currency translation adjustment

 

 

 

 

 

(18

)

 

 

(7

)

 

 

(25

)

Change in unrealized gain on interest rate swap

 

 

 

 

 

28

 

 

 

 

 

 

254

 

Other comprehensive income (loss)

 

 

 

 

 

15

 

 

 

(7

)

 

 

242

 

Comprehensive loss

 

$

(6,053

)

 

$

(5,462

)

 

$

(12,139

)

 

$

(11,522

)

 

See notes to condensed consolidated financial statements

 

 

5


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(12,132

)

 

$

(11,764

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,716

 

 

 

10,408

 

Provision for sales returns and doubtful accounts receivable

 

 

634

 

 

 

470

 

Write-off of bank loan upfront fees

 

 

 

 

 

328

 

Stock-based compensation

 

 

4,833

 

 

 

4,801

 

Excess tax benefits from stock-based compensation

 

 

 

 

 

(51

)

Gain on sales of domain names

 

 

(116

)

 

 

(3,158

)

Other adjustments, net

 

 

 

 

 

99

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,062

 

 

 

394

 

Prepaid expenses and other assets

 

 

(3,945

)

 

 

(369

)

Deferred taxes

 

 

(8

)

 

 

2

 

Accounts payable

 

 

(2,945

)

 

 

2,964

 

Accrued liabilities

 

 

(3,883

)

 

 

(3,449

)

Deferred revenue

 

 

31

 

 

 

178

 

Other liabilities, noncurrent

 

 

(210

)

 

 

(253

)

Net cash (used in) provided by operating activities

 

 

(4,963

)

 

 

600

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,143

)

 

 

(2,285

)

Internal software development costs

 

 

(1,931

)

 

 

(933

)

Purchases of marketable securities

 

 

 

 

 

(16,600

)

Proceeds from sales and maturities of marketable securities

 

 

 

 

 

27,287

 

Proceeds from sales of domain names

 

 

91

 

 

 

3,158

 

Proceeds from sale of property and equipment

 

 

 

 

 

10

 

Net cash (used in) provided by investing activities

 

 

(2,983

)

 

 

10,637

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

26

 

 

 

1,300

 

Principal payments on term loan facility

 

 

 

 

 

(7,500

)

Payment of bank loan upfront fees

 

 

 

 

 

(272

)

Principal payments on acquisition-related notes payable

 

 

 

 

 

(444

)

Excess tax benefits from stock-based compensation

 

 

 

 

 

51

 

Withholding taxes related to restricted stock net share settlement

 

 

(1,748

)

 

 

(626

)

Net cash used in financing activities

 

 

(1,722

)

 

 

(7,491

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(50

)

 

 

17

 

Net (decrease) increase in cash and cash equivalents

 

 

(9,718

)

 

 

3,763

 

Cash and cash equivalents at beginning of period

 

 

60,468

 

 

 

84,177

 

Cash and cash equivalents at end of period

 

$

50,750

 

 

$

87,940

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

365

 

 

 

1,602

 

Cash paid for income taxes

 

 

283

 

 

 

660

 

 

See notes to condensed consolidated financial statements

 

 

 

6


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. The Company

QuinStreet, Inc. (the “Company”) is a leader in performance marketing online. The Company was incorporated in California in April 1999 and reincorporated in Delaware in December 2009. The Company provides customer acquisition programs for clients in various industry verticals such as financial services and education. The corporate headquarters are located in Foster City, California, with additional offices throughout the United States, Brazil and India.

 

 

2. Summary of Significant Accounting Policies

Basis of Presentation

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. The Company also evaluates its ownership in entities to determine if they are variable interest entities (“VIEs”), if the Company has a variable interest in those entities, and if the nature and extent of those interests result in consolidation. Refer to Note 4 for more information on VIEs. The Company applies the cost method of accounting for investments in entities if the Company does not have the ability to exercise significant influence over the entities. The interests held at cost are periodically evaluated for other-than-temporary declines in value. Intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying condensed consolidated financial statements and the notes to the condensed consolidated financial statements as of December 31, 2015 and for the three and six months ended December 31, 2015 and 2014 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, as filed with the SEC on August 19, 2015. The condensed consolidated balance sheet at June 30, 2015 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes, required by GAAP.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the Company’s condensed consolidated balance sheet at December 31, 2015, its condensed consolidated statements of operations for the three and six months ended December 31, 2015 and 2014, its condensed consolidated statements of comprehensive loss for the three and six months ended December 31, 2015 and 2014, and its condensed consolidated statements of cash flows for the six months ended December 31, 2015 and 2014. The results of operations for the three and six months ended December 31, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2016, or any other future period.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the period. On an ongoing basis, management evaluates these estimates, judgments and assumptions, including those related to revenue recognition, stock-based compensation, goodwill, intangible assets, long-lived assets, contingencies, and income taxes. The Company bases these estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

7


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Accounting Policies

The significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2015. There have been no significant changes in the accounting policies subsequent to June 30, 2015.

Concentrations of Credit Risk

No client accounted for 10% or more of net revenue for the three and six months ended December 31, 2015 or for the same period in fiscal year 2015. No client accounted for 10% or more of net accounts receivable as of December 31, 2015 or June 30, 2015.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash equivalents, accounts receivable, accounts payable, an acquisition-related promissory note and a revolving loan facility. The fair value of the Company’s cash equivalents is determined based on quoted prices in active markets for identical assets for its money market funds. The recorded values of the Company’s accounts receivable and accounts payable approximate their current fair values due to the relatively short-term nature of these accounts. The fair value of the acquisition-related promissory note approximates its recorded amount as the interest rates on similar financing arrangements available to the Company at December 31, 2015 approximate the interest rates implied when this acquisition-related promissory note was originally issued and recorded. The Company believes that the fair value of the revolving loan facility approximates its recorded amount at December 31, 2015 as the interest rate on the revolving loan facility is variable and is based on market interest rates and after consideration of default and credit risk.

Recent Accounting Pronouncements

In May 2014, the FASB issued a new accounting standard update on revenue from contracts with clients. The new guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance becomes effective for fiscal years beginning after December 15, 2017, and interim periods within those years with early adoption permitted. The Company is currently assessing the impact of this new guidance.

In June 2014, the FASB issued a new accounting standard update on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period, which amends ASC 718, “Compensation - Stock Compensation.” The amendment provides guidance on the treatment of shared-based payment awards with a specific performance target, requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The new guidance becomes effective for fiscal years beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new guidance becomes effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued a new accounting standard update on consolidating legal entities in which a reporting entity holds a variable interest . The amended guidance modifies the evaluation of whether limited partnerships and similar legal entities are VIEs and affects the consolidation analysis of reporting entities that are involved with VIEs that have fee arrangements and related party relationships . The new guidance becomes effective for fiscal years beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. The Company is currently assessing the impact of this new guidance.

In November 2015, the FASB issued a new accounting standard update on the balances sheet classification of deferred taxes. The new standard requires entities to classify deferred tax liabilities and assets as noncurrent in a classified statement of financial position. The new guidance becomes effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

8


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3. Net Loss Attributable to Common Stockholders and Net Loss per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by using the weighted-average number of shares of common stock outstanding, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options and restricted stock units using the treasury stock method.

The following table presents the calculation of basic and diluted net loss per share:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(In   thousands, except per share data)

 

 

(In thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,053

)

 

$

(5,477

)

 

$

(12,132

)

 

$

(11,764

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

   computing basic and diluted net loss per share

 

 

45,127

 

 

 

44,440

 

 

 

44,982

 

 

 

44,353

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted (1)

 

$

(0.13

)

 

$

(0.12

)

 

$

(0.27

)

 

$

(0.27

)

Securities excluded from weighted average shares used in

   computing diluted net loss per share because the effect

   would have been anti-dilutive: (2)

 

 

5,207

 

 

 

10,341

 

 

 

5,328

 

 

 

10,057

 

 

(1)

Diluted EPS does not reflect any potential common stock relating to stock options or restricted stock units due to net losses incurred for the three and six months ended December 31, 2015 and 2014. The assumed issuance of any additional shares would be anti-dilutive.

(2)

These weighted shares relate to anti-dilutive stock options and restricted stock units as calculated using the treasury stock method and could be dilutive in the future.

 

 

4. Fair Value Measurements, Marketable Securities and Variable Interest Entities

Fair value is defined as the price that would be received on sale of an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The FASB has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels of the fair value hierarchy under the guidance for fair value measurement are described below:

Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Pricing inputs are based upon quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required. As of December 31, 2015, the Company used Level 1 assumptions for its money market funds.

Level 2 — Pricing inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of December 31, 2015, the Company used Level 2 assumptions for its acquisition-related promissory note and revolving loan facility.

9


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Level 3 — Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value r equire management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flo w models, and similar techniques. As of December 31, 2015, the Company did not have any Level 3 financial assets or liabilities.

The Company’s financial instruments as of December 31, 2015 and June 30, 2015 were categorized as follows in the fair value hierarchy (in thousands):

 

 

 

Fair   Value Measurements as of December 31, 2015 Using

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

 

 

 

 

 

Active Markets

 

 

Observable

 

 

 

 

 

 

 

for   Identical Assets

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,167

 

 

$

 

 

$

20,167

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related promissory note (1)

 

$

 

 

$

49

 

 

$

49

 

Revolving loan facility (1)

 

 

 

 

 

15,000

 

 

 

15,000

 

 

 

$

 

 

$

15,049

 

 

$

15,049

 

 

 

 

Fair Value Measurements as of June 30, 2015 Using

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

 

 

 

 

 

Active Markets

 

 

Observable

 

 

 

 

 

 

 

for Identical Assets

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,156

 

 

$

 

 

$

20,156

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related promissory note (1)

 

$

 

 

$

49

 

 

$

49

 

Revolving loan facility (1)

 

 

 

 

 

15,000

 

 

 

15,000

 

 

 

$

 

 

$

15,049

 

 

$

15,049

 

 

(1)

These liabilities are carried at historical cost on the Company's condensed consolidated balance sheets.

Marketable Securities

All liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with maturities greater than three months at the date of purchase are classified as marketable securities. Historically, the Company’s marketable securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss within stockholders’ equity.

The Company holds money market funds of $20.2 million as of December 31, 2015 and June 30, 2015. Gross unrealized gains and losses were not material as the carrying value approximated estimated fair value due to its short maturities. The Company did not hold any marketable securities as of December 31, 2015 and June 30, 2015.

The Company did not realize any material gains or losses from sales of its securities in the three and six months ended December 31, 2015 and 2014. As of December 31, 2015 and June 30, 2015, the Company did not hold securities that had maturity dates greater than one year.

10


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Variable Interest Entities

A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The assessment of whether the Company is the primary beneficiary of the VIE requires significant assumptions and judgments, including the identification of significant activities and an assessment of our ability to direct those activities. The Company has an equity interest in a privately held entity that is a VIE, of which the Company is not the primary beneficiary. Accordingly, the interest of $2.5 million as of December 31, 2015 and June 30, 2015 is recognized at cost within other assets, noncurrent on the Company’s condensed consolidated balance sheets. The Company’s interest was evaluated for impairment as of December 31, 2015 and June 30, 2015 which did not result in any indications of impairment. The Company’s maximum exposure to loss as a result of the unconsolidated VIE is $2.5 million at December 31, 2015, which represents the carrying value of the Company’s investment in the VIE.

 

 

5. Prepaid Expenses and Other Assets

During the three months ended December 31, 2015, the Company entered into a 10-year partnership agreement with a large online customer acquisition marketing company focused on the U.S. insurance industry to be their exclusive click monetization partner for the majority of its insurance categories. The agreement included a one-time upfront cash payment of $10.0 million. The payment will be amortized on a straight-line basis over the life of the co ntract. As of December 31, 2015, the Company has recorded $1.0 million within prepaid expenses and other assets and $8.8 million in other assets, noncurrent on the condensed consolidated balance sheet. Amortization expense was $0.2 million in both the three and six months ended December 31, 2015.

 

 

6. Intangible Assets and Goodwill

Intangible assets, net balances, excluding goodwill, consisted of the following (in thousands):

 

 

 

December 31, 2015

 

 

June 30, 2015

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer/publisher/advertiser relationships

 

$

36,655

 

 

$

(34,671

)

 

$

1,984

 

 

$

37,056

 

 

$

(33,916

)

 

$

3,140

 

Content

 

 

61,732

 

 

 

(56,062

)

 

 

5,670

 

 

 

62,162

 

 

 

(54,629

)

 

 

7,533

 

Website/trade/domain names

 

 

31,475

 

 

 

(26,001

)

 

 

5,474

 

 

 

31,533

 

 

 

(24,697

)

 

 

6,836

 

Acquired technology and others

 

 

36,733

 

 

 

(35,504

)

 

 

1,229

 

 

 

36,742

 

 

 

(35,221

)

 

 

1,521

 

 

 

$

166,595

 

 

$

(152,238

)

 

$

14,357

 

 

$

167,493

 

 

$

(148,463

)

 

$

19,030

 

 

Amortization of intangible assets was $2.3 million and $4.7 million in the three and six months ended December 31, 2015 and $3.3 million and $7.1 million in the three and six months ended December 31, 2014.

Future amortization expense for the Company’s intangible assets as of December 31, 2015 was as follows (in thousands):

 

Year Ending June 30,

 

Amortization

 

2016 (remaining six months)

 

$

4,607

 

2017

 

 

6,124

 

2018

 

 

1,945

 

2019

 

 

798

 

2020

 

 

773

 

Thereafter

 

 

110

 

 

 

$

14,357

 

 

As of December 31, 2015 and June 30, 2015, goodwill was $56.1 million.

 

 

11


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7 . Income Taxes

The Company recorded a valuation allowance against the majority of the Company’s deferred tax assets at the end of fiscal year 2014 and continues to maintain that full valuation allowance as of December 31, 2015 and June 30, 2015 as the Company believes it is not more likely than not that the net deferred tax assets will be fully realizable.

The Company recorded an immaterial provision for income taxes for the three months ended December 31, 2015. The Company recorded a provision for income taxes of $0.4 million for the six months ended December 31, 2015 primarily due to a state tax examination which concluded as of December 31, 2015.

Due to the full valuation allowance against its deferred tax assets for the three and six months ended December 31, 2014, the Company recorded an immaterial benefit from income taxes.

 

 

8. Debt

Loan Facility

In November 2011, the Company entered into a credit agreement (“Credit Agreement”) with Comerica Bank (the “Bank”), the administrative agent and lead arranger. The Credit Agreement consisted of a $100.0 million five-year term loan facility, with annual principal amortization of 5%, 10%, 15%, 20% and 50%, and a $200.0 million five-year revolving loan facility maturing on November 4, 2016.

On February 15, 2013, the Company entered into the First Amendment to Credit Agreement and Amendment to Guaranty (“First Amendment”) with the Bank to, among other things: (1) amend the definition of EBITDA; and (2) reduce the $200.0 million five-year revolving loan facility to $100.0 million.

On July 17, 2014, the Company entered into the Second Amendment to Credit Agreement (“Second Amendment”) with the Bank to, among other things, amend the financial covenants and reduce the revolving loan facility from $100.0 million to $50.0 million, each effective as of June 30, 2014. Upfront arrangement fees incurred in connection with the Second Amendment totaled $0.3 million and were deferred and amortized over the remaining term of the arrangement. In connection with the reduction of the revolving loan facility, the Company accelerated amortization of approximately $0.3 million of unamortized deferred upfront costs.

On June 11, 2015, the Company entered into the Third Amendment to Credit Agreement (“Third Amendment”) with the Bank to, among other things, pay off in full and terminate the term loan facility, reduce the revolving loan facility from $50.0 million to $25.0 million, amend the financial covenants, and extend the expiration date of the Credit Agreement from November 4, 2016 to June 11, 2017. Pursuant to the Third Amendment, each of the revolving loan facility lenders (other than the Bank) assigned its revolving loan facility commitments to the Bank, resulting in the Bank remaining as sole lender under the Credit Agreement. Upfront arrangement fees incurred in connection with the Third Amendment were not material. In connection with the termination of the term loan facility, the Company accelerated amortization of approximately $0.5 million of unamortized deferred upfront costs.

The Credit Agreement, as amended from time to time, is secured by substantially all of the Company’s assets. Borrowings under the revolving loan facility are subject to a borrowing base consisting of eligible receivables and certain other customary conditions.

Pursuant to the Second Amendment, (1) the applicable margin for base rate borrowings was set at (a) 1.375% for the revolving loan facility or (b) 1.75% for the term loan facility, and (2) the applicable margin for Eurodollar rate borrowings was set at (a) 2.375% for the revolving loan facility or (b) 2.75% for the term loan facility.

Pursuant to the Third Amendment, borrowings under the revolving loan facility bear interest at a Eurodollar rate plus 3.00%.

EBITDA under the Credit Agreement is defined as net loss less (provision for) benefit from taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other expense, net, acquisition costs for business combinations, extraordinary or non-recurring non-cash expenses or losses including, without limitation, goodwill impairments, and any extraordinary or non-recurring cash expenses in an aggregate amount not to exceed $5.0 million for the life of the Credit Agreement, as amended from time to time. The Company must pay an annual facility fee of $62,500 and an annual unused fee of 0.25% of the undrawn revolving loan facility commitments. The Company has the right to prepay the revolving loan facility or permanently reduce the revolving loan facility commitments without premium or penalty, in whole or in part at any time.

12


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Credit Agreement, as amended, contains limitations on the Company’s ability to sell assets, make acquisitions, pay dividends, incur capital expenditures, and also requires the Company to comply with certain additional covenants. In addition, pursuant to the Third Amendment, the Company is required to maintain financial covenants as follows when there are amounts outstanding under the revolving loan facility and at the time the Company draws down amounts under the revolving loan facility:

1. Minimum EBITDA as of the end of each fiscal quarter for the trailing twelve month period of not less than:

(a) $1 for the quarter ended June 30, 2015;

(b) $2,000,000 for the quarter ended September 30, 2015;

(c) $3,000,000 for the quarter ended December 31, 2015;

(d) $4,000,000 for the quarter ending March 31, 2016;

(e) $5,000,000 for the quarter ending June 30, 2016.

Thereafter, minimum EBITDA increases each quarter in $1,000,000 increments; provided that there shall be no loss in EBITDA greater than $2,000,000 in any fiscal quarter during such trailing four quarter period.

2. Minimum adjusted quick ratio as of the end of each month of not less than 1.25 to 1.00.

The Company was in compliance with the covenants of the Credit Agreement, as amended, as of December 31, 2015 and June 30, 2015.

As of December 31, 2015 and June 30, 2015, $15.0 million was outstanding under the revolving loan facility.

Interest Rate Swap

During fiscal year 2015, the Company held an interest rate swap to reduce its exposure to the financial impact of changing interest rates under its term loan facility. The swap encompassed the principal balances outstanding as of January 1, 2014 and scheduled to be outstanding thereafter, such principal and notional amount totaling $85.0 million in January 2014 and amortizing to $35.0 million in November 2016. The swap agreement exchanged a variable interest rate base (Eurodollar rate) for a fixed interest rate of 0.97% over the term of the agreement. This interest rate swap was designated as a cash flow hedge of the interest rate risk attributable to forecasted variable interest payments. The effective portion of the fair value gains or losses on this swap was included as a component of accumulated other comprehensive loss with any hedge ineffectiveness immediately recognized in earnings in the current period.

In June 2015, in connection with the repayment in full and termination of the term loan facility, the Company also terminated the interest rate swap agreement. Upon settlement, the Company recognized an expense of $0.3 million within other income, net, in the condensed consolidated statement of operations.

Debt Maturities

The maturities of the Company’s debt as of December 31, 2015 were as follows (in thousands):

 

 

 

Promissory

 

 

Revolving   Loan

 

Year Ending June 30,

 

Note

 

 

Facility

 

2016 (remaining six months)

 

$

50

 

 

$

 

2017

 

 

 

 

 

15,000

 

 

 

 

50

 

 

 

15,000

 

Less: imputed interest and unamortized discounts

 

 

(1

)

 

 

 

Less: current portion

 

 

(49

)

 

 

 

Noncurrent portion of debt

 

$

 

 

$

15,000

 

 

Letters of Credit

The Company has a $0.4 million letter of credit agreement with a financial institution that is used as collateral for fidelity bonds placed with an insurance company and a $0.5 million letter of credit agreement with a financial institution that is used as collateral for

13


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

the Co mpany’s corporate headquarters’ operating lease. The letters of credit automatically renew annually without amendment unless cancelled by the financial institutions within 30 days of the annual expiration date.

 

 

9. Commitments and Contingencies

Leases

The Company leases office space under non-cancelable operating leases with various expiration dates through fiscal year 2021. Rent expense was $0.9 million and $1.7 million for the three and six months ended December 31, 2015 and $0.9 million and $1.8 million for the three and six months ended December 31, 2014. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not paid.

Future annual minimum lease payments under noncancelable operating leases as of December 31, 2015 were as follows (in thousands):

 

 

 

Operating

 

Year Ending June 30,

 

Leases

 

2016 (remaining six months)

 

$

1,867

 

2017

 

 

3,490

 

2018

 

 

3,367

 

2019

 

 

1,393

 

2020

 

 

147

 

Thereafter

 

 

23

 

 

 

$

10,287

 

Guarantor Arrangements

The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts under certain circumstances and subject to deductibles and exclusions. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is not material. Accordingly, the Company had no liabilities recorded for these agreements as of December 31, 2015 and June 30, 2015.

In the ordinary course of its business, the Company from time to time enters into standard indemnification provisions in its agreements with its clients. Pursuant to these provisions, the Company may be obligated to indemnify its clients for certain losses suffered or incurred, including losses arising from violations of applicable law by the Company or by its third-party publishers, losses arising from actions or omissions of the Company or its third-party publishers, and for third-party claims that a Company product infringed upon any United States patent, copyright or other intellectual property rights. Where practicable, the Company limits its liabilities under such indemnities. Subject to these limitations, the term of such indemnification provisions is generally coterminous with the corresponding agreements and survives for the duration of the applicable statute of limitations after termination of the agreement. The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions is generally limited and the Company believes the estimated fair value of these indemnity provisions is not material. Accordingly, the Company had no liabilities recorded for these agreements as of December 31, 2015 and June 30, 2015.

 

 

10. Stock Benefit Plans

Stock Incentive Plans

The Company may grant incentive stock options (“ISOs”), nonstatutory stock options (“NQSOs”), restricted stock, restricted stock units, stock appreciation rights, performance-based stock awards, and other forms of equity compensation, as well as performance cash awards, under its 2010 Equity Incentive Plan (the “2010 Incentive Plan”). The Company may grant NQSOs and restricted stock units to non-employee directors under the 2010 Non-Employee Directors’ Stock Award Plan (the “Directors’ Plan”). In fiscal year 2016, the Company began granting to employees restricted stock units with a market condition that requires that the Company’s stock

14


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

price achieve a specified price above the grant date stock price before it can be eligible for service vesting conditions. To date, the Company has issued only ISOs, NQSOs, restricted stock units and performance-based stock awards under its stock incentive plans.

As of December 31, 2015, 13,642,714 shares were reserved and 12,097,530 shares were available for issuance under the 2010 Incentive Plan; 2,789,628 shares were reserved and 1,265,463 shares were available for issuance under the Directors’ Plan.

Stock-Based Compensation

The Company estimates the fair value of stock options at the date of grant using the Black-Scholes option-pricing model. Options are granted with an exercise price equal to the fair value of the common stock at the date of grant. The weighted average Black-Scholes model assumptions for the three and six months ended December 31, 2015 and 2014 were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Expected term (in years)

 

 

3.8

 

 

 

4.6

 

 

 

3.9

 

 

 

4.6

 

Expected volatility

 

 

42

%

 

 

46

%

 

 

43

%

 

 

46

%

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

0.9

%

 

 

1.6

%

 

 

1.0

%

 

 

1.6

%

Grant date fair value

 

$

1.91

 

 

$

1.68

 

 

$

1.94

 

 

$

1.76

 

 

The Company estimates the fair value of restricted stock units with a market condition at the date of the grant using the Monte Carlo simulation model. The weighted average Monte Carlo simulation model assumptions for the three and six months ended December 31, 2015 and 2014 were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Expected term (in years)

 

 

4.0

 

 

 

 

 

 

4.0

 

 

 

 

Expected volatility

 

 

47

%

 

 

 

 

 

47

%

 

 

 

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

1.4

%

 

 

 

 

 

1.3

%