QuinStreet, Inc.
QUINSTREET, INC (Form: 10-Q, Received: 02/09/2017 15:25:54)

 

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 December 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       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, 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

 

 

 

 

 

 

 

 

 

 

 

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       No  

Number of shares of common stock outstanding as of January 31, 2017: 45,419,451

 

 

 

 


QUINSTREET, INC.

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

Condensed Consolidated Balance Sheets at December 31, 2016 and June 30, 2016

 

3

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2016 and 2015

 

4

 

 

 

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

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 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

 

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)

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,496

 

 

$

53,710

 

Accounts receivable, net

 

 

41,118

 

 

 

47,218

 

Prepaid expenses and other assets

 

 

6,823

 

 

 

7,055

 

Total current assets

 

 

85,437

 

 

 

107,983

 

Property and equipment, net

 

 

6,930

 

 

 

7,678

 

Goodwill

 

 

56,118

 

 

 

56,118

 

Other intangible assets, net

 

 

6,674

 

 

 

10,081

 

Other assets, noncurrent

 

 

10,813

 

 

 

11,242

 

Total assets

 

$

165,972

 

 

$

193,102

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

20,422

 

 

$

19,814

 

Accrued liabilities

 

 

23,306

 

 

 

27,705

 

Deferred revenue

 

 

1,249

 

 

 

1,200

 

Debt

 

 

 

 

 

15,000

 

Total current liabilities

 

 

44,977

 

 

 

63,719

 

Other liabilities, noncurrent

 

 

4,381

 

 

 

4,631

 

Total liabilities

 

 

49,358

 

 

 

68,350

 

Commitments and contingencies (See Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock:  $0.001 par value; 100,000,000 shares authorized; 45,606,272 and 45,557,295 shares issued and outstanding at December 31, 2016 and June 30, 2016

 

 

46

 

 

 

45

 

Additional paid-in capital

 

 

261,224

 

 

 

257,950

 

Accumulated other comprehensive loss

 

 

(412

)

 

 

(418

)

Accumulated deficit

 

 

(144,244

)

 

 

(132,825

)

Total stockholders' equity

 

 

116,614

 

 

 

124,752

 

Total liabilities and stockholders' equity

 

$

165,972

 

 

$

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

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net revenue

 

$

65,610

 

 

$

64,961

 

 

$

139,048

 

 

$

137,350

 

Cost of revenue (1)

 

 

61,657

 

 

 

60,346

 

 

 

129,465

 

 

 

126,264

 

Gross profit

 

 

3,953

 

 

 

4,615

 

 

 

9,583

 

 

 

11,086

 

Operating expenses: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development

 

 

3,314

 

 

 

3,843

 

 

 

7,268

 

 

 

8,287

 

Sales and marketing

 

 

2,168

 

 

 

2,982

 

 

 

4,758

 

 

 

6,604

 

General and administrative

 

 

3,794

 

 

 

4,138

 

 

 

7,825

 

 

 

8,358

 

Restructuring charges

 

 

2,403

 

 

 

 

 

 

2,403

 

 

 

 

Operating loss

 

 

(7,726

)

 

 

(6,348

)

 

 

(12,671

)

 

 

(12,163

)

Interest income

 

 

36

 

 

 

10

 

 

 

57

 

 

 

16

 

Interest expense

 

 

(135

)

 

 

(145

)

 

 

(291

)

 

 

(278

)

Other (expense) income, net

 

 

(25

)

 

 

65

 

 

 

110

 

 

 

8

 

Loss before income taxes

 

 

(7,850

)

 

 

(6,418

)

 

 

(12,795

)

 

 

(12,417

)

(Provision for) benefit from taxes

 

 

 

 

 

(40

)

 

 

1,376

 

 

 

(405

)

Net loss

 

$

(7,850

)

 

$

(6,458

)

 

$

(11,419

)

 

$

(12,822

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.17

)

 

$

(0.14

)

 

$

(0.25

)

 

$

(0.29

)

Diluted

 

$

(0.17

)

 

$

(0.14

)

 

$

(0.25

)

 

$

(0.29

)

Weighted-average shares used in computing net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,731

 

 

 

45,127

 

 

 

45,700

 

 

 

44,982

 

Diluted

 

 

45,731

 

 

 

45,127

 

 

 

45,700

 

 

 

44,982

 

 

(1)

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

 

Cost of revenue

 

$

728

 

 

$

930

 

 

$

1,699

 

 

$

1,857

 

Product development

 

 

471

 

 

 

527

 

 

 

1,007

 

 

 

1,185

 

Sales and marketing

 

 

220

 

 

 

509

 

 

 

577

 

 

 

981

 

General and administrative

 

 

681

 

 

 

768

 

 

 

1,424

 

 

 

1,500

 

Restructuring charges

 

 

42

 

 

 

 

 

 

42

 

 

 

 

 

See notes to condensed consolidated financial statements

 

 

4


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(7,850

)

 

$

(6,458

)

 

$

(11,419

)

 

$

(12,822

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

12

 

 

 

 

 

 

6

 

 

 

(7

)

Total other comprehensive income (loss)

 

 

12

 

 

 

 

 

 

6

 

 

 

(7

)

Comprehensive loss

 

$

(7,838

)

 

$

(6,458

)

 

$

(11,413

)

 

$

(12,829

)

 

See notes to condensed consolidated financial statements

 

 

5


QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2016

 

 

2015

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(11,419

)

 

$

(12,822

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,323

 

 

 

7,716

 

Provision for sales returns and doubtful accounts receivable

 

 

211

 

 

 

634

 

Stock-based compensation

 

 

4,749

 

 

 

5,523

 

Gain on sales of domain names

 

 

(143

)

 

 

(116

)

Other adjustments, net

 

 

(4

)

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5,889

 

 

 

5,062

 

Prepaid expenses and other assets

 

 

560

 

 

 

(3,945

)

Deferred taxes

 

 

 

 

 

(8

)

Accounts payable

 

 

627

 

 

 

(2,945

)

Accrued liabilities

 

 

(4,502

)

 

 

(3,883

)

Deferred revenue

 

 

49

 

 

 

31

 

Other liabilities, noncurrent

 

 

(250

)

 

 

(210

)

Net cash provided by (used in) operating activities

 

 

2,090

 

 

 

(4,963

)

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(604

)

 

 

(1,143

)

Internal software development costs

 

 

(1,182

)

 

 

(1,931

)

Proceeds from sales of domain names

 

 

143

 

 

 

91

 

Other investing activities

 

 

(97

)

 

 

 

Net cash used in investing activities

 

 

(1,740

)

 

 

(2,983

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of common stock options

 

 

 

 

 

26

 

Withholding taxes related to restricted stock, net of share settlement

 

 

(536

)

 

 

(1,748

)

Repurchases of common stock

 

 

(1,043

)

 

 

 

Repayment of revolving loan facility

 

 

(15,000

)

 

 

 

Net cash used in financing activities

 

 

(16,579

)

 

 

(1,722

)

Effect of exchange rate changes on cash and cash equivalents

 

 

15

 

 

 

(50

)

Net decrease in cash and cash equivalents

 

 

(16,214

)

 

 

(9,718

)

Cash and cash equivalents at beginning of period

 

 

53,710

 

 

 

60,468

 

Cash and cash equivalents at end of period

 

$

37,496

 

 

$

50,750

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

272

 

 

 

365

 

Cash paid for income taxes

 

 

68

 

 

 

283

 

 

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 period ended September 30, 2016, the Company has revised the previously issued quarterly condensed consolidated financial statements to correct the error for the quarterly period ended September 30, 2015 of $0.3 million. The Company has reflected the correction of the error of $0.4 million and $0.7 million in the condensed consolidated statement of operations and condensed consolidated statement of comprehensive loss for the three and six months ended December 31, 2015 and $0.7 million in the condensed consolidated statement of cash flows for the six months ended December 31, 2015 included herein. The Company will revise the previously issued quarterly condensed consolidated financial statements to correct the error of $0.4 million for the quarterly period ended March 31, 2016 in the future Quarterly Report on Form 10-Q when the quarterly condensed consolidated financial statements for such period is included.

Unaudited Interim Financial Information

The accompanying condensed consolidated financial statements and the notes to the condensed consolidated financial statements as of December 31, 2016 and for the three and six months ended December 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, 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 December 31, 2016, its

7


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

condensed consolidated statements of operations for the three and six months ended December 31, 2016 and 2015, its condensed consolidated statements of comprehensive loss for the three and six months ended December 31, 2016 and 2015, and its condensed consolidated statements of cash flows for the six months ended December 31, 2016 and 2015. The results of operations for the three and six months ended December 31, 2016 are not necessarily indicative 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 10% and 11% of net revenue for the three and six months ended December 31, 2016. No other client accounted for 10% or more of net revenue for the three and six months ended December 31, 2016 and no client accounted for 10% or more of net revenue for the three and six months ended December 31, 2015. No client accounted for 10% or more of net accounts receivable as of December 31, 2016 or 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.

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

8


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 Company is currently assessing the impact of this new guidance.

 

3. 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.

9


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(In   thousands, except per share data)

 

 

(In thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,850

)

 

$

(6,458

)

 

$

(11,419

)

 

$

(12,822

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock used in

   computing basic and diluted net loss per share

 

 

45,731

 

 

 

45,127

 

 

 

45,700

 

 

 

44,982

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted (1)

 

$

(0.17

)

 

$

(0.14

)

 

$

(0.25

)

 

$

(0.29

)

Securities excluded from weighted-average shares used in

   computing diluted net loss per share because the effect

   would have been anti-dilutive: (2)

 

 

7,040

 

 

 

5,207

 

 

 

7,075

 

 

 

5,328

 

 

(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 three and six months ended December 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, 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 December 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 December 31, 2016, the Company did not have any Level 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 December 31, 2016, the Company did not have any Level 3 financial assets or liabilities.

10


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

Fair   Value Measurements as of December 31, 2016 Using

 

 

 

Quoted Prices in

 

 

Significant Other

 

 

 

 

 

 

 

Active Markets

 

 

Observable

 

 

 

 

 

 

 

for   Identical Assets

 

 

Inputs

 

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

20,709

 

 

$

 

 

$

20,709

 

 

 

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 $20.7 million as of December 31, 2016 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 December 31, 2016 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 December 31, 2016 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 December 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 December 31, 2016, the Company has recorded $1.0 million within prepaid expenses and other assets and $7.7 million within other assets, noncurrent on the condensed consolidated balance sheet. 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 consolidated balance sheet. Amortization expense was $0.3 million and $0.6 million for the three and six months ended December 31, 2016 and $0.2 million in both the three and six months ended December 31, 2015.

 

11


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6. Intangible Assets

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

 

  

 

December 31, 2016

 

 

June 30, 2016

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Customer/publisher/advertiser relationships

 

$

36,901

 

 

$

(36,384

)

 

$

517

 

 

$

36,669

 

 

$

(35,648

)

 

$

1,021

 

Content

 

 

61,486

 

 

 

(59,122

)

 

 

2,364

 

 

 

61,717

 

 

 

(57,778

)

 

 

3,939

 

Website/trade/domain names

 

 

31,274

 

 

 

(28,149

)

 

 

3,125

 

 

 

31,470

 

 

 

(27,288

)

 

 

4,182

 

Acquired technology and others

 

 

36,733

 

 

 

(36,065

)

 

 

668

 

 

 

36,733

 

 

 

(35,794

)

 

 

939

 

Total

 

$

166,394

 

 

$

(159,720

)

 

$

6,674

 

 

$

166,589

 

 

$

(156,508

)

 

$

10,081

 

 

Amortization of intangible assets was $1.7 million and $3.6 million for the three and six months ended December 31, 2016 and $2.3 million and $4.7 million for the three and six months ended December 31, 2015.

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

 

Fiscal Year Ending June 30,

 

Amortization

 

2017 (remaining six months)

 

$

2,551

 

2018

 

 

2,330

 

2019

 

 

862

 

2020

 

 

761

 

2021

 

 

170

 

Thereafter

 

 

 

Total

 

$

6,674

 

 

 

7. Income Taxes

The Company recorded a valuation allowance against the majority of the Company’s deferred tax assets at the end of fiscal year 2014 and continues to maintain that full valuation allowance as of December 31, 2016 as the Company believes it is not more likely than not that the net deferred tax assets will be fully realizable.

The Company did not record a benefit from or provision for income taxes for the three months ended December 31, 2016. The Company recorded a benefit from income taxes of $1.4 million for the six months ended December 31, 2016 as a result of a tax refund from an amended state tax return filing.

The Company recorded an immaterial provision for income taxes for the three months ended December 31, 2015. The Company recorded a provision for income taxes of $0.4 million for the six months ended December 31, 2015, primarily due to 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 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 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 loss less (provision for) benefit from taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other expense, net, acquisition costs for business combinations, extraordinary or non-recurring non-cash expenses or losses including, without limitation, goodwill impairments, and any extraordinary or non-recurring cash expenses in an aggregate amount not to exceed $5.0 million for the life of the Credit Agreement, as amended from time to time.

The Company was in compliance with the covenants of the Credit Agreement, as amended, as of December 31, 2016 and June 30, 2016.

As of December 31, 2016, 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 $1.7 million for the three and six months ended December 31, 2016 and $0.9 million and $1.7 million for the three and six months ended December 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 December 31, 2016 were as follows (in thousands):

 

  

 

Operating

 

Fiscal Year Ending June 30,

 

Leases

 

2017 (remaining six months)

 

$

1,871

 

2018

 

 

3,638

 

2019

 

 

1,666

 

2020

 

 

376

 

2021

 

 

46

 

Thereafter

 

 

 

Total

 

$

7,597

 

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 December 31, 2016 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 December 31, 2016 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 December 31, 2016, the Company repurchased and retired 344,023 shares of its common stock at a weighted average price of $3.00 per share, excluding a broker c ommission of $0.03 per share, at a total cost of $1.0 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 December 31, 2016, 15,920,578 shares were reserved and 13,680,746 shares were available for issuance under the 2010 Incentive Plan; 3,359,964 shares were reserved and 1,654,550 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 six months ended December 31, 2016 and 2015 were as follows:

 

  

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected term (in years)

 

 

3.5

 

 

 

3.8

 

 

 

4.6

 

 

 

3.9

 

Expected volatility

 

 

47

%

 

 

42

%

 

 

45

%

 

 

43

%

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

1.0

%

 

 

0.9

%

 

 

1.0

%

 

 

1.0

%

Grant date fair value

 

$

0.95

 

 

$

1.91

 

 

$

1.39

 

 

$

1.94

 

 

The Company estimates the fair value of restricted stock units with a market condition at the date of the grant using the Monte Carlo simulation model. The weighted-average Monte Carlo simulation model assumptions for the three and six months ended December 31, 2016 and 2015 were as follows:

 

  

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Expected term (in years)

 

 

4.0

 

 

 

4.0

 

 

 

4.0

 

 

 

4.0

 

Expected volatility

 

 

45

%

 

 

47

%

 

 

45

%

 

 

47

%

Expected dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

 

1.3

%

 

 

1.4

%

 

 

1.0

%

 

 

1.3

%

Grant date fair value

 

$

2.46

 

 

$

5.80

 

 

$

2.99

 

 

$

6.17

 

 

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.

 

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

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

63,989

 

 

$

63,440

 

 

$

136,357

 

 

$

134,666

 

International

 

 

1,621

 

 

 

1,521

 

 

 

2,691

 

 

 

2,684

 

Total net revenue

 

$

65,610

 

 

$

64,961

 

 

$

139,048

 

 

$

137,350

 

 

  

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2016

 

Property and equipment, net:

 

 

 

 

 

 

 

 

United States

 

$

6,330

 

 

$

6,973

 

International

 

 

600

 

 

 

705

 

Total property and equipment, net

 

$

6,930

 

 

$

7,678

 

 

15


QUINSTREET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

13. Restructuring Costs

In November 2016, the Company announced a corporate restructuring in order to accelerate margin expansion and grow cash flow. As a result, the Company recognized restructuring costs of $ 2.4 million related to employee severance and benefits in the three months ended December 31, 2016, which represents substantially all costs expected to be incurred associated with the corporate restructuring.

The following table summarizes the cash-related restructuring activities for the three months ended December 31, 2016:

 

Amount

 

Balance at October 1, 2016

 

$

 

Charges

 

 

2,361

 

Payments

 

 

(1,106

)

Balance at December 31, 2016

 

$

1,255

 

The balance at December 31, 2016 is recorded within accrued liabilities in the condensed consolidated balance sheet and was paid in January 2017.   In the three months ended December 31, 2016, the Company also incurred non-cash restructuring costs of an immaterial amount related to stock-based compensation.  

 

14. Subsequent Events

In January 2017, the Company repurchased 187,500 shares of its common stock at a weighted average price of $3.82, excluding a  broker commission of $0.03 per share, at a total cost of $0.7 million.

 

 

16


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed with the Securities and Exchange Commission (“SEC”).

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they do not materialize or if they prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements reflect the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in “Part II —Item 1A. Risk Factors” below, and those discussed in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Management Overview

QuinStreet, Inc. is a leader in performance marketing products and technologies. We specialize in customer acquisition for clients in high value, information-intensive markets or “verticals,” including financial services, education, home services, and business-to-business technology. Our clients include some of the world’s largest companies and brands in those markets. While the majority of our operations and revenue are in North America, we have emerging businesses in Brazil and India.

We deliver measurable and cost-effective marketing results to our clients most typically in the form of a qualified lead, inquiry, click, call, application, or customer. Leads, inquiries, clicks, calls, and applications can then convert into a customer or sale for clients at a rate that results in an acceptable marketing cost to them. We are typically paid by clients when we deliver qualified leads, inquiries, clicks, calls, applications, or customers as d