QuinStreet, Inc.
QUINSTREET, INC (Form: 10-Q, Received: 05/10/2017 14:07:29)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2017

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       No  

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       No  

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

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

Number of shares of common stock outstanding as of April 30, 2017: 45,462,094

 


 

QUINSTREET, INC.

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2017 and June 30, 2016

 

3

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2017 and 2016

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2017 and 2016

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016

 

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

 

27

 

 

 

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

 

48

 

 

 

Item 3. Defaults Upon Senior Securities

 

48

 

 

 

Item 4. Mine Safety Disclosures

 

48

 

 

 

Item 5. Other Information

 

48

 

 

 

Item 6. Exhibits

 

49

 

 

 

SIGNATURES

 

50

 

 

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,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,744

 

 

$

53,710

 

Accounts receivable, net

 

 

43,107

 

 

 

47,218

 

Prepaid expenses and other assets

 

 

7,130

 

 

 

7,055

 

Total current assets

 

 

91,981

 

 

 

107,983

 

Property and equipment, net

 

 

6,277

 

 

 

7,678

 

Goodwill

 

 

56,118

 

 

 

56,118

 

Other intangible assets, net

 

 

5,300

 

 

 

10,081

 

Other assets, noncurrent

 

 

10,474

 

 

 

11,242

 

Total assets

 

$

170,150

 

 

$

193,102

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,874

 

 

$

19,814

 

Accrued liabilities

 

 

26,185

 

 

 

27,705

 

Deferred revenue

 

 

1,040

 

 

 

1,200

 

Debt

 

 

 

 

 

15,000

 

Total current liabilities

 

 

48,099

 

 

 

63,719

 

Other liabilities, noncurrent

 

 

3,733

 

 

 

4,631

 

Total liabilities

 

 

51,832

 

 

 

68,350

 

Commitments and contingencies (See Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock:  $0.001 par value; 100,000,000 shares authorized; 45,525,436 and 45,557,295 shares issued and outstanding at March 31, 2017 and June 30, 2016

 

 

45

 

 

 

45

 

Additional paid-in capital

 

 

262,391

 

 

 

257,950

 

Accumulated other comprehensive loss

 

 

(453

)

 

 

(418

)

Accumulated deficit

 

 

(143,665

)

 

 

(132,825

)

Total stockholders' equity

 

 

118,318

 

 

 

124,752

 

Total liabilities and stockholders' equity

 

$

170,150

 

 

$

193,102

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net revenue

 

$

79,205

 

 

$

81,243

 

 

$

218,253

 

 

$

218,593

 

Cost of revenue (1)

 

 

69,338

 

 

 

72,956

 

 

 

198,803

 

 

 

199,220

 

Gross profit

 

 

9,867

 

 

 

8,287

 

 

 

19,450

 

 

 

19,373

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development

 

 

3,147

 

 

 

4,214

 

 

 

10,415

 

 

 

12,501

 

Sales and marketing

 

 

2,243

 

 

 

2,898

 

 

 

7,001

 

 

 

9,502

 

General and administrative

 

 

4,023

 

 

 

4,348

 

 

 

11,848

 

 

 

12,706

 

Restructuring charges

 

 

38

 

 

 

 

 

 

2,441

 

 

 

 

Operating income (loss)

 

 

416

 

 

 

(3,173

)

 

 

(12,255

)

 

 

(15,336

)

Interest income

 

 

42

 

 

 

23

 

 

 

99

 

 

 

39

 

Interest expense

 

 

(31

)

 

 

(155

)

 

 

(322

)

 

 

(433

)

Other income, net

 

 

142

 

 

 

112

 

 

 

252

 

 

 

120

 

Income (loss) before income taxes

 

 

569

 

 

 

(3,193

)

 

 

(12,226

)

 

 

(15,610

)

Benefit from (provision for) taxes

 

 

10

 

 

 

(72

)

 

 

1,386

 

 

 

(477

)

Net income (loss)

 

$

579

 

 

$

(3,265

)

 

$

(10,840

)

 

$

(16,087

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

(0.07

)

 

$

(0.24

)

 

$

(0.36

)

Diluted

 

$

0.01

 

 

$

(0.07

)

 

$

(0.24

)

 

$

(0.36

)

Weighted-average shares used in computing net income (loss)

   per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,507

 

 

 

45,333

 

 

 

45,636

 

 

 

45,098

 

Diluted

 

 

45,722

 

 

 

45,333

 

 

 

45,636

 

 

 

45,098

 

 

(1)

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

 

Cost of revenue

 

$

691

 

 

$

969

 

 

$

2,390

 

 

$

2,826

 

Product development

 

 

424

 

 

 

576

 

 

 

1,431

 

 

 

1,761

 

Sales and marketing

 

 

291

 

 

 

501

 

 

 

868

 

 

 

1,482

 

General and administrative

 

 

671

 

 

 

770

 

 

 

2,095

 

 

 

2,270

 

Restructuring charges

 

 

 

 

 

 

 

 

42

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

4


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income (loss)

 

$

579

 

 

$

(3,265

)

 

$

(10,840

)

 

$

(16,087

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(41

)

 

 

(6

)

 

 

(35

)

 

 

(13

)

Total other comprehensive loss

 

 

(41

)

 

 

(6

)

 

 

(35

)

 

 

(13

)

Comprehensive income (loss)

 

$

538

 

 

$

(3,271

)

 

$

(10,875

)

 

$

(16,100

)

 

See notes to condensed consolidated financial statements

 

 

5


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(10,840

)

 

$

(16,087

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,983

 

 

 

11,437

 

Provision for sales returns and doubtful accounts receivable

 

 

109

 

 

 

843

 

Stock-based compensation

 

 

6,826

 

 

 

8,339

 

Gain on sales of domain names

 

 

(154

)

 

 

(160

)

Other adjustments, net

 

 

(7

)

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,002

 

 

 

(4,103

)

Prepaid expenses and other assets

 

 

583

 

 

 

(3,968

)

Deferred taxes

 

 

(510

)

 

 

(8

)

Accounts payable

 

 

1,109

 

 

 

2,121

 

Accrued liabilities

 

 

(1,277

)

 

 

3,007

 

Deferred revenue

 

 

(160

)

 

 

(305

)

Other liabilities, noncurrent

 

 

(388

)

 

 

(327

)

Net cash provided by operating activities

 

 

8,276

 

 

 

789

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(978

)

 

 

(1,689

)

Internal software development costs

 

 

(1,734

)

 

 

(2,689

)

Proceeds from sales of domain names

 

 

154

 

 

 

135

 

Other investing activities

 

 

(133

)

 

 

(2

)

Net cash used in investing activities

 

 

(2,691

)

 

 

(4,245

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

 

 

 

26

 

Withholding taxes related to restricted stock, net of share settlement

 

 

(765

)

 

 

(2,139

)

Repurchases of common stock

 

 

(1,766

)

 

 

 

Repayment of revolving loan facility

 

 

(15,000

)

 

 

 

Net cash used in financing activities

 

 

(17,531

)

 

 

(2,113

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(20

)

 

 

(97

)

Net decrease in cash and cash equivalents

 

 

(11,966

)

 

 

(5,666

)

Cash and cash equivalents at beginning of period

 

 

53,710

 

 

 

60,468

 

Cash and cash equivalents at end of period

 

$

41,744

 

 

$

54,802

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

295

 

 

 

492

 

Cash paid for income taxes

 

 

368

 

 

 

729

 

 

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 specializes in customer acquisition for clients in high value, information-intensive markets or “verticals,” including financial services, education, home services and business-to-business technology. The corporate headquarters are located in Foster City, California, with additional offices throughout the United States, Brazil and India. While the majority of the Company’s operations and revenue are in North America, the Company has emerging businesses in 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.

Revision of Previously Issued Financial Statements

During the quarter ended June 30, 2016, the Company identified errors related to its stock-based compensation expense included in the unaudited condensed consolidated financial statements for the quarterly periods ended September 30, 2015, December 31, 2015 and March 31, 2016. The stock-based compensation expense related to market-based restricted stock units was understated by $1.1 million through the nine months ended March 31, 2016. The Company assessed the materiality of the above errors individually and in the aggregate on prior periods’ financial statements in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 99 and 108 and, based on an analysis of quantitative and qualitative factors, concluded that such amounts were not material to the September 30, 2015, December 31, 2015 and March 31, 2016 quarterly condensed consolidated financial statements. Therefore, these previously issued financial statements can continue to be relied upon and amendments of the previously filed Quarterly Reports on Form 10-Q were not required. In the Quarterly Report on Form 10-Q for the quarterly periods ended September 30, 2016 and December 31, 2016, the Company has revised the previously issued quarterly condensed consolidated financial statements to correct the error for the quarterly periods ended September 30, 2015 and December 31, 2015 of $0.3 million and $0.4 million. The Company has reflected the correction of the error of $0.4 million and $1.1 million in the condensed consolidated statement of operations and condensed consolidated statement of comprehensive loss for the three and nine months ended March 31, 2016 and $1.1 million in the condensed consolidated statement of cash flows for the nine months ended March 31, 2016 included herein.

Unaudited Interim Financial Information

The accompanying condensed consolidated financial statements and the notes to the condensed consolidated financial statements as of March 31, 2017 and for the three and nine months ended March 31, 2017 and 2016 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, 2016, as filed with the SEC on August 19, 2016. The condensed consolidated balance sheet at June 30, 2016 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, 2017, its condensed consolidated statements of operations for the three and nine months ended March 31, 2017 and 2016, its condensed

7


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

consolidated statements of comprehensive income (loss) for the th ree and nine months ended March 31, 2017 and 2016, and its condensed consolidated statements of cash flows for the nine months ended March 31, 2017 and 2016. The results of operations for the three and nine months ended March 31, 2017 are not necessarily i ndicative of the results to be expected for the fiscal year ending June 30, 2017, 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, 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.

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, 2016. There have been no significant changes in the accounting policies subsequent to June 30, 2016.

Concentrations of Credit Risk

The Company had one client that accounted for 20% and 14% of net revenue for the three and nine months ended March 31, 2017 and 16% and 11% of net revenue for the three and nine months ended March 31, 2016. No other client accounted for 10% or more of net revenue for the three and nine months ended March 31, 2017 and 2016.

The Company had one client that accounted for 13% of net accounts receivable as of March 31, 2017. No other client accounted for 10% or more of net accounts receivable as of March 31, 2017 and no client accounted for 10% or more of net accounts receivable as of June 30, 2016.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash equivalents, accounts receivable and accounts payable. 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.

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. In May 2016, the FASB amended this standard to address improvements to the guidance on collectability, noncash consideration, and completed contracts at transition as well as provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The new standards become effective for fiscal years beginning after December 15, 2017, and interim periods within those years with early adoption permitted. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the new standards. The Company is currently assessing the impact of this new guidance and has not selected the method of transition.

In June 2014, the FASB issued a new accou nting 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

8


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

- Stock Compensation.” The amendment provide s 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 became effective in the current fiscal year and did not have an impact on the Company’s condensed 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 became effective in the current fiscal year and did not have an impact on the Company’s condensed 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.

In January 2017, the FASB issued a new accounting standard update to simplify the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.  The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.  The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.  The adoption of this standard is not expected to have an impact on the Company’s condensed consolidated financial statements.

 

3. Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (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.

9


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In   thousands, except per share data)

 

 

(In thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

579

 

 

$

(3,265

)

 

$

(10,840

)

 

$

(16,087

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock used in computing basic net income (loss) per share

 

 

45,507

 

 

 

45,333

 

 

 

45,636

 

 

 

45,098

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock used in computing basic net income (loss) per share

 

 

45,507

 

 

 

45,333

 

 

 

45,636

 

 

 

45,098

 

Weighted-average effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

11

 

 

 

 

 

 

 

 

 

 

Restricted stock units

 

 

204

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock used in computing diluted net income (loss) per share

 

 

45,722

 

 

 

45,333

 

 

 

45,636

 

 

 

45,098

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

(0.07

)

 

$

(0.24

)

 

$

(0.36

)

Diluted (1)

 

$

0.01

 

 

$

(0.07

)

 

$

(0.24

)

 

$

(0.36

)

Securities excluded from weighted-average shares used in

   computing diluted net income (loss) per share because the

   effect would have been anti-dilutive: (2)

 

 

5,237

 

 

 

6,929

 

 

 

6,472

 

 

 

5,287

 

 

(1)

Diluted net loss per share does not reflect any potential common stock relating to stock options or restricted stock units due to net losses incurred for the nine months ended March 31, 2017 and three and nine months ended March 31, 2016. 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, Cash Equivalents 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 March 31, 2017, 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

10


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

term of the assets or liabilities. As of March 31, 2017, the Company did not have any Lev el 2 financial assets or liabilities.

 

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, 2017, the Company did not have any Level 3 financial assets or liabilities.

The Company’s financial instruments as of March 31, 2017 and June 30, 2016 were categorized as follows in the fair value hierarchy (in thousands):

 

 

Fair   Value Measurements as of March 31, 2017 Using

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

 

 

 

 

 

Active Markets

 

 

Observable

 

 

 

 

 

 

 

for   Identical Assets

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,425

 

 

$

 

 

$

10,425

 

 

 

Fair Value Measurements as of June 30, 2016 Using

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

 

 

 

 

 

Active Markets

 

 

Observable

 

 

 

 

 

 

 

for Identical Assets

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,203

 

 

$

 

 

$

20,203

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Revolving loan facility (1)

 

$

 

 

$

15,000

 

 

$

15,000

 

 

(1)

Carried at historical cost on the Company's condensed consolidated balance sheet.

Cash Equivalents

All liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents on the Company’s condensed consolidated balance sheets. The Company holds money market funds of $10.4 million as of March 31, 2017 and $20.2 million as of June 30, 2016 which are classified as cash equivalents.

 

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, 2017 and June 30, 2016 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, 2017 and June 30, 2016 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, 2017, 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, 2017 , the Company has recorded $1.0 million within prepaid expenses and other assets and $7.5 million within other assets, noncurrent on the condensed consolidated balance sheet.

11


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of June 30, 2016, the Company had recorded $1.0 million within prepaid expenses and other assets and $8.3 million within other assets, noncurrent on the condensed c onsolidated balance sheet. Amortization expense was $0.2 million and $0.8 million for the three and nine months ended March 31, 2017 and $0.3 million and $0.5 million for the three and nine months ended March 31, 2016 .

 

6. Intangible Assets

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

 

  

 

March 31, 2017

 

 

June 30, 2016

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer/publisher/advertiser relationships

 

$

36,909

 

 

$

(36,577

)

 

$

332

 

 

$

36,669

 

 

$

(35,648

)

 

$

1,021

 

Content

 

 

61,521

 

 

 

(59,908

)

 

 

1,613

 

 

 

61,717

 

 

 

(57,778

)

 

 

3,939

 

Website/trade/domain names

 

 

31,287

 

 

 

(28,479

)

 

 

2,808

 

 

 

31,470

 

 

 

(27,288

)

 

 

4,182

 

Acquired technology and others

 

 

36,733

 

 

 

(36,186

)

 

 

547

 

 

 

36,733

 

 

 

(35,794

)

 

 

939

 

Total

 

$

166,450

 

 

$

(161,150

)

 

$

5,300

 

 

$

166,589

 

 

$

(156,508

)

 

$

10,081

 

 

Amortization of intangible assets was $1.4 million and $5.0 million for the three and nine months ended March 31, 2017 and $2.1 million and $6.8 million for the three and nine months ended March 31, 2016.

Future amortization expense for the Company’s intangible assets as of March 31, 2017 was as follows (in thousands):

 

Fiscal Year Ending June 30,

 

Amortization

 

2017 (remaining three months)

 

$

1,174

 

2018

 

 

2,332

 

2019

 

 

863

 

2020

 

 

761

 

2021

 

 

170

 

Thereafter

 

 

 

Total

 

$

5,300

 

 

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, 2017 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 benefit from income taxes for the three months ended March 31, 2017. The Company recorded a benefit from income taxes of $1.4 million for the nine months ended March 31, 2017 as a result of a tax refund from an amended state tax return filing. 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.

 

8. Debt

Loan Facility

The Company’s credit agreement with Comerica Bank (the “Bank”) on November 4, 2011 (as amended on February 15, 2013, July 17, 2014 and June 11, 2015, the “Credit Agreement”) consists of a $25.0 million revolving loan facility with a maturity date of June 11, 2017. Borrowings under the revolving loan facility bear interest at a Eurodollar rate plus 3.00% and is secured by substantially all of the Company’s assets. 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 commitment. The Company has the right to prepay the revolving loan facility or permanently reduce the revolving loan facility commitment without premium or penalty, in whole or in part at any time. Borrowings under the revolving loan facility are subject to a borrowing base consisting of eligible receivables and certain other customary conditions.

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, the Company is

12


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

required to maintain financial covenants as follows when ther e 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 ended 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.

EBITDA under the Credit Agreement is defined as net income (loss) less benefit from (provision for) 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 was in compliance with the covenants of the Credit Agreement, as amended, as of March 31, 2017 and June 30, 2016.

As of March 31, 2017, there were no amounts outstanding under the revolving loan facility. As of June 30, 2016, $15.0 million was outstanding under the revolving loan facility. 

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, 2017 and $0.8 million and $2.5 million for the three and nine months ended March 31, 2016. 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, 2017 were as follows (in thousands):

 

  

 

Operating

 

Fiscal Year Ending June 30,

 

Leases

 

2017 (remaining three months)

 

$

926

 

2018

 

 

3,641

 

2019

 

 

1,668

 

2020

 

 

379

 

2021

 

 

46

 

Thereafter

 

 

 

Total

 

$

6,660

 

13


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 March 31, 2017 and June 30, 2016.

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, 2017 and June 30, 2016.

 

10. Stockholders’ Equity

Stock Repurchases

In November 2016, the Board of Directors authorized a stock repurchase program allowing the Company to repurchase up to 750,000 outstanding shares of its common stock with an expiration date of November 2017. During the three months ended March 31, 2017, the Company repurchased and retired 187,500 shares of its common stock at a weighted average price of $3.82 per share, excluding a broker c ommission of $0.03 per share, at a total cost of $0.7 million . During the nine months ended March 31, 2017, the Company repurchased and retired 531,523 shares of its common stock at a weighted average price of $3.29 per share, excluding a broker commission of $0.03 per share, at a total cost of $1.8 million. Repurchases under this program took place in the open market and were made under a Rule 10b5-1 plan. The Company’s accounting policy upon the retirement of treasury stock is to deduct its par value from common stock and reduce additional paid-in capital by the amount recorded in additional paid-in capital when the stock was originally issued.

 

11. 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, 2017, 15,920,578 shares were reserved and 13,610,855 shares were available for issuance under the 2010 Incentive Plan; 3,359,964 shares were reserved and 1,575,411 shares were available for issuance under the Directors’ Plan.

14


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 closing price of the Company’s common stock on the date of grant.

The weighted-average Black-Scholes model assumptions for the three and nine months ended March 31, 2017 and 2016 were as follows:

 

  

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Expected term (in years)

 

 

4.5

 

 

 

3.5

 

 

 

4.6

 

 

 

3.9

 

Expected volatility

 

 

46

%

 

 

43

%

 

 

45

%

 

 

43

%

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

1.9

%

 

 

1.1

%

 

 

1.3

%

 

 

1.0

%

Grant date fair value

 

$

1.44

 

 

$

0.98

 

 

$

1.40

 

 

$

1.89

 

 

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, 2017 and 2016 were as follows:

 

  

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Expected term (in years)

 

 

4.0

 

 

 

4.0

 

 

 

4.0

 

 

 

4.0

 

Expected volatility

 

 

46

%

 

 

45

%

 

 

45

%

 

 

47

%

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

2.0

%

 

 

1.5

%

 

 

1.1

%

 

 

1.3

%

Grant date fair value

 

$

3.02

 

 

$

3.22

 

 

$

2.99

 

 

$

5.08

 

 

The fair value of restricted stock units is determined based on the closing price of the Company’s common stock on the grant date. Compensation expense is amortized net of estimated forfeitures on a straight-line basis over the requisite service period of the stock-based compensation awards.

 

12. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker, its chief executive officer, reviews financial information presented on a consolidated basis and no expense or operating income is evaluated at a segment level. Given the consolidated level of review by the Company’s chief executive officer, the Company operates as one reportable segment.

 

15


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables set forth net revenue and lon g-lived assets by geographic area (in thousands):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

76,863

 

 

$

79,351

 

 

$

213,220

 

 

$

214,017

 

International

 

 

2,342

 

 

 

1,892

 

 

 

5,033