QuinStreet, Inc.
QUINSTREET, INC (Form: 10-Q, Received: 05/10/2016 17:04:27)

 

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 March 31, 2016

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 April 30, 2016: 45,417,582

 

 

 

 


QUINSTREET, INC.

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2016 and June 30, 2015

 

3

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2016 and 2015

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended March 31, 2016 and 2015

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2016 and 2015

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

18

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

28

 

 

 

Item 4. Controls and Procedures

 

29

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

30

 

 

 

Item 1A. Risk Factors

 

31

 

 

 

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

 

47

 

 

 

Item 3. Defaults Upon Senior Securities

 

47

 

 

 

Item 4. Mine Safety Disclosures

 

47

 

 

 

Item 5. Other Information

 

47

 

 

 

Item 6. Exhibits

 

48

 

 

 

SIGNATURES

 

49

 

 

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)

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,802

 

 

$

60,468

 

Accounts receivable, net

 

 

49,500

 

 

 

46,240

 

Deferred tax assets

 

 

173

 

 

 

166

 

Prepaid expenses and other assets

 

 

6,979

 

 

 

11,503

 

Total current assets

 

 

111,454

 

 

 

118,377

 

Property and equipment, net

 

 

8,282

 

 

 

8,565

 

Goodwill

 

 

56,118

 

 

 

56,118

 

Other intangible assets, net

 

 

12,172

 

 

 

19,030

 

Other assets, noncurrent

 

 

11,557

 

 

 

3,063

 

Total assets

 

$

199,583

 

 

$

205,153

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

22,489

 

 

$

20,425

 

Accrued liabilities

 

 

29,957

 

 

 

27,146

 

Deferred revenue

 

 

903

 

 

 

1,208

 

Debt

 

 

50

 

 

 

49

 

Total current liabilities

 

 

53,399

 

 

 

48,828

 

Debt, noncurrent

 

 

15,000

 

 

 

15,000

 

Other liabilities, noncurrent

 

 

5,409

 

 

 

5,740

 

Total liabilities

 

 

73,808

 

 

 

69,568

 

Commitments and contingencies (See Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock:  $0.001 par value; 100,000,000 shares authorized; 45,416,200 and

   44,617,850 shares issued and outstanding at March 31, 2016 and

   June 30, 2015, respectively

 

 

45

 

 

 

45

 

Additional paid-in capital

 

 

254,574

 

 

 

249,358

 

Accumulated other comprehensive loss

 

 

(426

)

 

 

(413

)

Accumulated deficit

 

 

(128,418

)

 

 

(113,405

)

Total stockholders' equity

 

 

125,775

 

 

 

135,585

 

Total liabilities and stockholders' equity

 

$

199,583

 

 

$

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

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net revenue

 

$

81,243

 

 

$

75,345

 

 

$

218,593

 

 

$

211,228

 

Cost of revenue (1)

 

 

72,771

 

 

 

65,192

 

 

 

198,735

 

 

 

188,996

 

Gross profit

 

 

8,472

 

 

 

10,153

 

 

 

19,858

 

 

 

22,232

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development

 

 

4,136

 

 

 

4,653

 

 

 

12,283

 

 

 

13,853

 

Sales and marketing

 

 

2,861

 

 

 

3,881

 

 

 

9,353

 

 

 

10,905

 

General and administrative

 

 

4,264

 

 

 

4,300

 

 

 

12,484

 

 

 

12,994

 

Operating loss

 

 

(2,789

)

 

 

(2,681

)

 

 

(14,262

)

 

 

(15,520

)

Interest income

 

 

23

 

 

 

7

 

 

 

39

 

 

 

61

 

Interest expense

 

 

(155

)

 

 

(760

)

 

 

(433

)

 

 

(2,726

)

Other income, net

 

 

112

 

 

 

40

 

 

 

120

 

 

 

3,001

 

Loss before income taxes

 

 

(2,809

)

 

 

(3,394

)

 

 

(14,536

)

 

 

(15,184

)

(Provision for) benefit from taxes

 

 

(72

)

 

 

178

 

 

 

(477

)

 

 

204

 

Net loss

 

$

(2,881

)

 

$

(3,216

)

 

$

(15,013

)

 

$

(14,980

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

 

$

(0.07

)

 

$

(0.33

)

 

$

(0.34

)

Diluted

 

$

(0.06

)

 

$

(0.07

)

 

$

(0.33

)

 

$

(0.34

)

Weighted average shares used in computing net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,333

 

 

 

44,522

 

 

 

45,098

 

 

 

44,409

 

Diluted

 

 

45,333

 

 

 

44,522

 

 

 

45,098

 

 

 

44,409

 

 

(1)

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

 

Cost of revenue

 

$

787

 

 

$

863

 

 

$

2,344

 

 

$

2,292

 

Product development

 

 

497

 

 

 

542

 

 

 

1,542

 

 

 

1,731

 

Sales and marketing

 

 

464

 

 

 

600

 

 

 

1,333

 

 

 

1,626

 

General and administrative

 

 

684

 

 

 

576

 

 

 

2,046

 

 

 

1,733

 

 

See notes to condensed consolidated financial statements

 

 

4


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(2,881

)

 

$

(3,216

)

 

$

(15,013

)

 

$

(14,980

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

13

 

Less: reclassification adjustment related to realized loss on  investments, net of tax of $0

 

 

 

 

 

16

 

 

 

 

 

 

16

 

Net change

 

 

 

 

 

16

 

 

 

 

 

 

29

 

Foreign currency translation adjustment

 

 

(6

)

 

 

10

 

 

 

(13

)

 

 

(15

)

Change in unrealized (loss) gain on interest rate swap

 

 

 

 

 

(29

)

 

 

 

 

 

225

 

Other comprehensive (loss) income

 

 

(6

)

 

 

(3

)

 

 

(13

)

 

 

239

 

Comprehensive loss

 

$

(2,887

)

 

$

(3,219

)

 

$

(15,026

)

 

$

(14,741

)

 

See notes to condensed consolidated financial statements

 

 

5


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(15,013

)

 

$

(14,980

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,437

 

 

 

14,778

 

Provision for sales returns and doubtful accounts receivable

 

 

843

 

 

 

58

 

Write-off of bank loan upfront fees

 

 

 

 

 

328

 

Stock-based compensation

 

 

7,265

 

 

 

7,382

 

Gain on sales of domain names

 

 

(160

)

 

 

(3,331

)

Other adjustments, net

 

 

 

 

 

160

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,103

)

 

 

(3,040

)

Prepaid expenses and other assets

 

 

(3,968

)

 

 

(734

)

Deferred taxes

 

 

(8

)

 

 

2

 

Accounts payable

 

 

2,121

 

 

 

2,128

 

Accrued liabilities

 

 

3,007

 

 

 

2,146

 

Deferred revenue

 

 

(305

)

 

 

181

 

Other liabilities, noncurrent

 

 

(327

)

 

 

(316

)

Net cash provided by operating activities

 

 

789

 

 

 

4,762

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,689

)

 

 

(2,629

)

Internal software development costs

 

 

(2,689

)

 

 

(1,428

)

Purchases of marketable securities

 

 

 

 

 

(16,600

)

Proceeds from maturities of marketable securities

 

 

 

 

 

26,849

 

Proceeds from sales of marketable securities

 

 

 

 

 

28,427

 

Proceeds from sales of domain names

 

 

135

 

 

 

3,346

 

Other investing activities

 

 

(2

)

 

 

11

 

Net cash (used in) provided by investing activities

 

 

(4,245

)

 

 

37,976

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

26

 

 

 

1,300

 

Principal payments on term loan facility

 

 

 

 

 

(12,500

)

Payment of bank loan upfront fees

 

 

 

 

 

(272

)

Principal payments on acquisition-related notes payable

 

 

 

 

 

(444

)

Withholding taxes related to restricted stock net share settlement

 

 

(2,139

)

 

 

(910

)

Net cash used in financing activities

 

 

(2,113

)

 

 

(12,826

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(97

)

 

 

11

 

Net (decrease) increase in cash and cash equivalents

 

 

(5,666

)

 

 

29,923

 

Cash and cash equivalents at beginning of period

 

 

60,468

 

 

 

84,177

 

Cash and cash equivalents at end of period

 

$

54,802

 

 

$

114,100

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

492

 

 

 

2,415

 

Cash paid for income taxes

 

 

729

 

 

 

772

 

 

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 products and technologies. 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 March 31, 2016 and for the three and nine months ended March 31, 2016 and 2015 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 March 31, 2016, its condensed consolidated statements of operations for the three and nine months ended March 31, 2016 and 2015, its condensed consolidated statements of comprehensive loss for the three and nine months ended March 31, 2016 and 2015, and its condensed consolidated statements of cash flows for the nine months ended March 31, 2016 and 2015. The results of operations for the three and nine months ended March 31, 2016 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

The Company had one client that accounted for 16% and 11% of net revenue for the three and nine months ended March 31, 2016. No other client accounted for more than 10% of net revenue for the three and nine months ended March 31, 2016 and no client accounted for more than 10% of net revenue for the three and nine months ended March 31, 2015. No client accounted for more than 10% of net accounts receivable as of March 31, 2016 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 March 31, 2016 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 March 31, 2016 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. In March and April 2016, the FASB amended this standard to clarify implementation guidance on principal versus agent considerations and the identification of performance obligations and licensing. The new standards become 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 share-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 balance 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.

8


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 2016, the FASB issued a new accounting standard update which replaces ASC 840, “Leases.” The new guidance requires a lessee to recognize on its balance sheet a right-of-use asset representing its right to use the underlying asset for the lease term and a lease liability representing its lease payment obligations. The guidance also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The guidance becomes effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company is currently assessing the impact of this new guidance.

In March 2016, the FASB issued a new accounting standard update on the accounting for share-based payments. The new guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance becomes effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The Company is currently assessing the impact of this new guidance.

 

 

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

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In   thousands, except per share data)

 

 

(In thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,881

)

 

$

(3,216

)

 

$

(15,013

)

 

$

(14,980

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock

   computing basic and diluted net loss per share

 

 

45,333

 

 

 

44,522

 

 

 

45,098

 

 

 

44,409

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted (1)

 

$

(0.06

)

 

$

(0.07

)

 

$

(0.33

)

 

$

(0.34

)

Securities excluded from weighted average shares used in

   computing diluted net loss per share because the effect

   would have been anti-dilutive: (2)

 

 

6,929

 

 

 

6,524

 

 

 

5,287

 

 

 

8,879

 

 

(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 nine months ended March 31, 2016 and 2015. 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

9


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 priorit y 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 March 31, 2016, 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 March 31, 2016, the Company used Level 2 assumptions for its acquisition-related promissory note and revolving loan facility.

 

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 require 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 flow models, and similar techniques. As of March 31, 2016, the Company did not have any Level 3 financial assets or liabilities.

The Company’s financial instruments as of March 31, 2016 and June 30, 2015 were categorized as follows in the fair value hierarchy (in thousands):

 

 

 

Fair   Value Measurements as of March 31, 2016 Using

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

 

 

 

 

 

Active Markets

 

 

Observable

 

 

 

 

 

 

 

for   Identical Assets

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,182

 

 

$

 

 

$

20,182

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related promissory note (1)

 

$

 

 

$

50

 

 

$

50

 

Revolving loan facility (1)

 

 

 

 

 

15,000

 

 

 

15,000

 

 

 

$

 

 

$

15,050

 

 

$

15,050

 

 

 

 

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.

10


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 March 31, 2016 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 March 31, 2016 and June 30, 2015.

The Company did not realize any material gains or losses from sales of its securities for the three and nine months ended March 31, 2016 and 2015. As of March 31, 2016 and June 30, 2015, the Company did not hold securities that had maturity dates greater than one year.

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 the Company’s 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 March 31, 2016 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 March 31, 2016 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 March 31, 2016, 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 their insurance categories. The agreement included a one-time upfront cash payment of $10.0 million. The payment is being amortized on a straight-line basis over the life of the contract. As of March 31, 2016 , the Company has recorded $1.0 million within prepaid expenses and other assets and $8.5 million in other assets, noncurrent on the condensed consolidated balance sheet. Amortization expense was $0.3 million and $0.5 million for the three and nine months ended March 31, 2016.

 

 

6. Intangible Assets and Goodwill

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

 

 

 

March 31, 2016

 

 

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

 

 

$

(35,173

)

 

$

1,482

 

 

$

37,056

 

 

$

(33,916

)

 

$

3,140

 

Content

 

 

61,732

 

 

 

(56,939

)

 

 

4,793

 

 

 

62,162

 

 

 

(54,629

)

 

 

7,533

 

Website/trade/domain names

 

 

31,475

 

 

 

(26,662

)

 

 

4,813

 

 

 

31,533

 

 

 

(24,697

)

 

 

6,836

 

Acquired technology and others

 

 

36,733

 

 

 

(35,649

)

 

 

1,084

 

 

 

36,742

 

 

 

(35,221

)

 

 

1,521

 

 

 

$

166,595

 

 

$

(154,423

)

 

$

12,172

 

 

$

167,493

 

 

$

(148,463

)

 

$

19,030

 

 

Amortization of intangible assets was $2.1 million and $6.8 million for the three and nine months ended March 31, 2016 and $2.9 million and $10.0 million for the three and nine months ended March 31, 2015.

11


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Future amortization expense for the Company’s intangible assets as of March 31, 2016 was as follows (in thousands):

 

Year Ending June 30,

 

Amortization

 

2016 (remaining three months)

 

$

2,422

 

2017

 

 

6,124

 

2018

 

 

1,945

 

2019

 

 

798

 

2020

 

 

773

 

Thereafter

 

 

110

 

 

 

$

12,172

 

 

As of March 31, 2016 and June 30, 2015, goodwill was $56.1 million.

The Company conducts a test for the impairment of goodwill at the reporting unit level on at least an annual basis and whenever there are events or changes in circumstances that would more likely than not reduce the estimated fair value of a reporting unit below its carrying value. In the third quarter of fiscal year 2016, the Company’s public market capitalization experienced a decline to a value below the net book carrying value of the Company’s equity which triggered the necessity to conduct an interim goodwill impairment test as of March 31, 2016. As of March 31, 2016, the Company had one reporting unit. Given that the Company’s shares are publicly traded in an active market, the Company believes that the quoted market price is the best evidence of fair value. As of March 31, 2016, the Company’s market capitalization exceeded the Company’s net book carrying value. Additionally, the Company estimated fair value utilizing a weighting of the fair values derived from the market and income approach which exceeded the Company’s net book carrying value. Based on the results of the step one interim impairment test, the Company determined there was no goodwill impairment as of March 31, 2016.

 

 

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 March 31, 2016 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 a provision for income taxes of $0.1 million and $0.5 million for the three and nine months ended March 31, 2016, primarily due to the outcome of a state tax examination.

The Company recorded a benefit from income taxes of $0.2 million for the three and nine months ended March 31, 2015, primarily due to the carryback of prior year tax losses.

 

 

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.

12


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 r evolving 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 l enders (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 income, 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.

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 ended March 31, 2016; and

(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 March 31, 2016 and June 30, 2015.

As of March 31, 2016 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

13


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 recognize d 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 March 31, 2016 were as follows (in thousands):

 

 

 

Promissory

 

 

Revolving   Loan

 

Year Ending June 30,

 

Note

 

 

Facility

 

2016 (remaining three months)

 

$

50

 

 

$

 

2017

 

 

 

 

 

15,000

 

 

 

 

50

 

 

 

15,000

 

Less: imputed interest and unamortized discounts

 

 

 

 

 

 

Less: current portion

 

 

(50

)

 

 

 

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 the Company’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 $0.8 million and $2.5 million for the three and nine months ended March 31, 2016 and $0.9 million and $2.7 million for the three and nine months ended March 31, 2015. 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 March 31, 2016 were as follows (in thousands):

 

 

 

Operating

 

Year Ending June 30,

 

Leases

 

2016 (remaining three months)

 

$

949

 

2017

 

 

3,502

 

2018

 

 

3,379

 

2019

 

 

1,406

 

2020

 

 

159

 

Thereafter

 

 

26

 

 

 

$

9,421

 

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

14


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

agreements is not material. Accordingly, the Company had no liabilities recorded for these agreements as of March 31, 2016 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 March 31, 2016 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 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 March 31, 2016, 13,642,714 shares were reserved and 12,522,916 shares were available for issuance under the 2010 Incentive Plan; 2,789,628 shares were reserved and 1,249,574 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 nine months ended March 31, 2016 and 2015 were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected term (in years)

 

 

3.5

 

 

 

4.6

 

 

 

3.9

 

 

 

4.6

 

Expected volatility

 

 

43

%

 

 

47

%

 

 

43

%

 

 

46

%

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

1.1

%

 

 

1.4

%

 

 

1.0

%

 

 

1.6

%

Grant date fair value

 

$

0.98

 

 

$

2.32

 

 

$

1.89

 

 

$

1.79

 

 

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 nine months ended March 31, 2016 and 2015 were as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected term (in years)

 

 

4.0

 

 

 

 

 

 

4.0

 

 

 

 

Expected volatility

 

 

45

%

 

 

 

 

 

47

%

 

 

 

Expected dividend yield