QUINSTREET INC

1. The Company

QuinStreet, Inc. (the “Company”) is a leader in performance marketplaces and technologies for the financial services and home services industries. 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 and home services. The corporate headquarters are located in Foster City, California, with additional offices throughout the United States, India and Mexico. The majority of the Company’s operations and revenue are in North America.

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. Intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying condensed consolidated financial statements and the notes to the condensed consolidated financial statements as of March 31, 2024 and for the three and nine months ended March 31, 2024 and 2023 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, 2023, as filed with the SEC on August 21, 2023. The condensed consolidated balance sheet at June 30, 2023 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 presentation of the Company’s condensed consolidated balance sheet at March 31, 2024, its condensed consolidated statements of stockholders’ equity, operations and comprehensive loss for the three and nine months ended March 31, 2024 and 2023 and condensed consolidated statements of cash flows for the nine months ended March 31, 2024 and 2023. The results of operations for the three and nine months ended March 31, 2024 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2024, 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, credit losses of accounts receivable, 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. In addition, the Company may engage third-party valuation specialists to assist with the preparation of certain of its valuations. 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 Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023. There have been no material changes to our significant accounting policies as of and for the nine months ended March 31, 2024.

Accounts Receivable and Allowances

The Company’s accounts receivable are derived from clients located principally in the United States. The Company performs ongoing credit evaluation of its customers and generally does not require collateral. The Company makes estimates of expected credit losses for the allowance for doubtful accounts and allowance for unbilled receivables based upon its assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of its customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect its ability to collect from customers.

The allowance for credit losses on accounts receivable was $1.5 million and $2.1 million as of March 31, 2024 and June 30, 2023. The revenue reserve was $1.8 million and $1.6 million as of March 31, 2024 and June 30, 2023. The total allowance for credit losses and revenue reserve was $3.3 million and $3.7 million as of March 31, 2024 and June 30, 2023.

Concentrations of Credit Risk

The Company hadone client that accounted for 15% of net revenue for the three months ended March 31, 2024 and no clients that accounted for more than 10% of net revenue for the nine months ended March 31, 2024. The same client accounted for 25% and 23% of net revenue for the three and nine months ended March 31, 2023. One additional client accounted for 12% of net accounts receivable as of March 31, 2024. No other client accounted for 10% or more of net revenue for the three and nine months ended March 31, 2024 or 2023 and net accounts receivable as of March 31, 2024 or June 30, 2023.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash equivalents, accounts receivable, accounts payable, post-closing payments and contingent consideration related to acquisitions. 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.

Cash and Cash Equivalents

All highly 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.

Recent Accounting Pronouncements

In October 2021, the Financial Standards Accounting Board (FASB) issued Accounting Standards Update (ASU) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. The Company adopted the new standard in thefirst quarter of fiscal year 2024 on a prospective basis. The adoption of this standarddid not have a material impact on the Company's condensed consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning July 1, 2024, and for interim periods beginning July 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topics 740): Improvements to Income Tax Disclosures to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning July 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

3. Revenue

Disaggregation of Revenue

The following table presents the Company’s net revenue disaggregated by vertical (in thousands):

Contract Balances

The following table provides information about contract liabilities from the Company’s contracts with its clients (in thousands):

The Company’s contract liabilities result from payments received in advance of revenue recognition and advance consideration received from clients, which precede the Company’s satisfaction of the associated performance obligation. The changes in the liability balances during the nine months ended March 31, 2024 related to advance consideration received from clients of $11.1 million, offset by revenue recognized of $11.3 million.

4. 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, unvested restricted stock units, and shares issuable related to the employee stock purchase plan (“ESPP”) using the treasury stock method.

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

(1)

Diluted netloss per share does not reflect any potential common stock relating to stock options, restricted stock units, or shares issuable related to the ESPP due to net losses incurred during the three and nine months ended March 31, 2024 and 2023. The assumed issuance of any additional shares would be anti-dilutive.

(2)

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

5. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company estimates and categorizes the fair value of its financial instruments by applying the following hierarchy:

Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to directly access.

Level 2 — Valuations based on quoted prices for similar assets or liabilities; valuations for interest-bearing securities based on non-daily quoted prices in active markets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3 — Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The following table presents the fair value of the Company’s financial instruments (in thousands):

There wereno transfers between Level 1, Level 2, and Level 3 during the periods presented.

Cash Equivalents

The valuation technique used to measure the fair value of money market funds included using quoted prices in active markets for identical assets and are classified as Level 1 within the fair value hierarchy.

Post-Closing Payments Related to Acquisitions

The post-closing payments are future payments related to the acquisition of Modernize, Inc. (“Modernize”) in fiscal year 2021, two immaterial acquisitions completed in fiscal year 2022, and the acquisitions of BestCompany.com, LLC (“BestCompany”) and Aqua Vida, LLC (“AquaVida”) in fiscal year 2024. As the fair value of the Company’s post-closing payments was determined based on installments stipulated in the terms of the acquisition agreements and discount rates observable in the market, the post-closing payments are classified as Level 2 within the fair value hierarchy. See Note 6, Acquisitions, for further details related to the acquisitions.

Contingent Consideration Related to Acquisitions

The contingent consideration consists of the estimated fair value of future payments related to the Company’s acquisition of CloudControlMedia, LLC (“CCM”) and AquaVida. The CCM contingent consideration is based upon revenue targets, and the AquaVida contingent consideration is based upon margin targets. The fair value of the contingent consideration is determined using the real options technique which incorporates various estimates, including projected net revenue, projected gross margin, volatility and discount rates. As certain of these inputs are not observable in the market, the contingent consideration is classified as a Level 3 instrument. Significant changes in the projected net revenue, projected gross margin, or discount rates would have a material impact on the fair value of the contingent consideration. Changes in the fair value of the contingent consideration are recorded in earnings on the Company’s condensed consolidated statements of operations.

The following table represents the changes in the contingent consideration during the three and nine months ended March 31, 2024 (in thousands):

6. Acquisitions

BestCompany

On January 4, 2024, the Company acquired certain assets of BestCompany, a leading performance-based marketing company specializing in purchasing media traffic data from third party platforms and generating qualified inquiries from such data, to broaden the Company's customer and media relationships in the home services vertical. In exchange for certain assets of BestCompany, the Company paid $2.5 million in cash upon closing and will make $4.0 million inpost-closing payments, payable in equal annual installments overtwo years, with the first installment payable twelve months following the date of closing. The purchase consideration also includes an incremental $1.0 million to BestCompany in the form of a two-year convertible promissory note.

The following table summarizes the consideration as of the acquisition date (in thousands):

The Company evaluated the set of activities and assets acquired and concluded that it did not meet the definition of a business because the acquired set did not include a substantive process. Therefore, the acquisition was accounted for as an asset acquisition and the total purchase price was allocated to the acquired assets. The results of the acquired assets have been included in the Company's results of operations since the acquisition date. The Company measured assets acquired using a cost accumulation and allocation model under which cost of the acquisition is allocated to the assets acquired. The fair value of the intangible assets acquired was determined by the Company based on management’s best estimates, and in doing so management engaged a third-party valuation specialist to assist with the measurement. The fair value of the shared assets license was determined using the multi-period excess earnings income approach. The fair value of the customer relationships was determined using the distributor method. The fair value of the non-competition agreements was determined using the with and without method. The excess of the purchase price over the aggregate fair value of the identifiable intangible assets acquired was allocated to the individual assets acquired based on their relative fair values. No goodwill is recognized.

The following table summarizes the allocation of the purchase price and estimated useful lives of the identifiable assets acquired as of the date of the acquisition (in thousands):

AquaVida

On March 1, 2024, the Company acquired certain assets of AquaVida, a performance-based marketing company specializing in media generation, to broaden the Company's access to large and meaningful media channels in all verticals. In exchange for the assets of AquaVida, the Company paid $2.0 million in cash upon closing and will make $4.0 million inpost-closing payments, payable in equal annual installments over afour-year period, with the first installment payable twelve months following the date of closing. The purchase consideration also includes a contingent consideration based on future media margin results, payable for four years following the date of closing.

The following table summarizes the consideration of the acquisition date (in thousands):

The acquisition was accounted for as a business combination. The results of the acquired assets have been included in the Company's results of operations since the acquisition date. The Company allocated the purchase price to identifiable intangible assets acquired based on their estimated fair values. The fair value of the intangible assets acquired was determined by the Company based on management’s best estimates, and in doing so management engaged a third-party valuation specialist to assist with the measurement. The fair value of the existing technology was determined using the multi-period excess earnings income approach. The fair value of the customer relationships was determined using the distributor approach. The fair value of content was determined using the replacement cost method. The fair value of the non-competition agreement was determined using with and without method. The excess of the purchase price over the aggregate fair value of the identifiable intangible assets acquired was recorded as goodwill and is primarily attributable to synergies the Company expects to achieve related to the acquisition. The goodwill is deductible for tax purposes.

The following table summarizes the allocation of the purchase price and estimated useful lives of the identifiable assets acquired as of the date of the acquisition (in thousands):

The Company is still finalizing the allocation of the purchase price to the individual assets acquired. Accordingly, these preliminary estimates are subject to change during the measurement period, which is the period subsequent to the acquisition date during which the acquirer may adjust the provisional amounts recognized for a business combination, not to exceed one year from the acquisition date. The final purchase price allocation, which may include changes in the allocations within intangible assets and between intangible assets and goodwill, as well as changes in the estimated useful lives of the intangible assets, will be determined when the Company has completed the detailed review of underlying inputs and assumptions used in its preliminary purchase price allocation.

Other

In thefirst quarter of fiscal year 2021, the Company completed the acquisition of Modernize, a leading home improvement performance marketing company in the home services client vertical, to broaden its customer and media relationships. In exchange for all the outstanding shares of Modernize, the Company paid $43.9 million in cash upon closing (including $3.9 million cash for net assets acquired subject to post-closing adjustments) and will make $27.5 million inpost-closing payments, payable in equal annual installments over afive-year period, with the first annual installment paid in the first quarter of fiscal year 2022.

In thesecond quarter of fiscal year 2022, the Company completed an immaterial acquisition within the home services client vertical. The Company paid $1.0 million in cash upon closing and will make $2.0 million inpost-closing payments, payable in equal annual installments over atwo-year period, with the first annual installment paid in the second quarter of fiscal year 2023.

In thefourth quarter of fiscal year 2022, the Company completed another immaterial acquisition within the home services client vertical. The Company paid $1.0 million in cash upon closing and will make $1.0 million inpost-closing payments, payable in equal annual installments over atwo-year period, with the first installment paid in the fourth quarter of fiscal year 2023.

7. Goodwill and Intangible Assets, Net

Goodwill

The changes in the carrying amount of goodwill for the nine months ended March 31, 2024 were as follows (in thousands):

(1)

Represents goodwill acquired associated with the acquisition of AquaVida completed in the third quarter of fiscal year 2024. See Note 6, Acquisitions, for more information.

There wereno impairments to goodwill during the nine months ended March 31, 2024.

Intangible Assets, Net

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

Amortization of intangible assets was $2.7 million and $7.8 million for the three and nine months ended March 31, 2024, and $2.8 million and $8.5 million for the three and nine months ended March 31, 2023.

Future amortization expense for the Company’s intangible assets as of March 31, 2024 was as follows (in thousands):

8. Income Taxes

The Company’s provision for income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any. Each quarter the Company updates its estimate of the annual effective tax rate and makes a year-to-date adjustment to the provision. The Company recorded a benefit from income taxes of $0.6 million and provision for income taxes of $0.4 million for the three and nine months ended March 31, 2024, and a benefit from income taxes of $1.1 million and $3.1 million for the three and nine months ended March 31, 2023. The tax benefit for the third quarter of 2024 was primarily related to the foreign operations and the tax amortization of goodwill. The tax benefit in the third quarter of 2023 was related to losses of the Company and the foreign operations.

The Company performed an assessment on the likelihood of realizing the benefits of its deferred tax assets. As of March 31, 2024, the Company has concluded that it is not more likely than not that the Company would be able to utilize the majority of the deferred tax assets based on available evidence primarily related to historic losses and projected income. However, if there are favorable changes to actual operating results or to projections of future income, the Company may determine that it is more likely than not that such deferred tax assets may be realizable and record a material non-cash income tax benefit.

Additionally, in the event that the Company experiences an ownership change within the meaning of Section 382 of the Internal Revenue Code (“IRC”), the Company’s ability to utilize net operating losses, tax credits and other tax attributes may be limited.

9. Leases

The Company has operating leases primarily for its office facilities. The leases expire at various dates through fiscal year 2029, some of which include options to renew, with renewal terms of up to 7 years. The Company does not include any renewal options in the lease terms for calculating lease liability, as the renewal options allow the Company to maintain operational flexibility and the Company is not reasonably certain that it will exercise these renewal options at the time of the lease commencement.

The components of lease expense for the three and nine months ended March 31, 2024 and 2023 were as follows (in thousands):

(1)

Variable lease expense for the three and nine months ended March 31, 2024 and 2023 primarily included common area maintenance charges.

Supplemental information related to operating leases was as follows (in thousands, except lease term and discount rate):

The implicit rate within each lease is not readily determinable and therefore the Company uses its incremental borrowing rate at the lease commencement date to determine the present value of the lease payments. The determination of the incremental borrowing rate requires judgment. The Company determined its incremental borrowing rate for each lease using indicative bank borrowing rates, adjusted for various factors including level of collateralization, term and currency to align with the terms of a lease.

Maturities of operating lease liabilities as of March 31, 2024 were as follows (in thousands):

10. Commitments and Contingencies

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 hadno liabilities recorded for these agreements as of March 31, 2024 and June 30, 2023.

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 but may extend 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 hadno liabilities recorded for these agreements as of March 31, 2024 and June 30, 2023.

Letters of Credit

The Company has 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 letter of credit automatically renews annually without amendment unless canceled by the financial institution within 30 days of the annual expiration date.

11. Stockholders’ Equity

Stock Repurchases

In April 2022, the Board of Directors canceled the prior stock repurchase program that commenced in July 2017 and authorized a new stock repurchase program allowing the repurchase of up to $40.0 million worth of common stock. During the nine months ended March 31, 2024, the Company repurchased and retired 247,618 shares of its common stock at an average price of $8.85 per share, at a total cost of $2.2 million (including a broker commission of $0.03 per share). Repurchases under this program took place in the open market and were made under a Rule 10b5-1 plan. The repurchased shares of common stock were recorded as treasury stock and were accounted for under the cost method. As of March 31, 2024, approximately $16.8 million remained available for stock repurchases pursuant to the board authorization.

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.

12. Stock Benefit Plans

Stock Incentive Plans

The Company may grant nonstatutory stock options (“NQSOs”), restricted stock, restricted stock units (“RSUs”), 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 RSUs to non-employee directors under the 2010 Non-Employee Directors’ Stock Award Plan (the “Directors’ Plan”). Prior to fiscal year 2016, the Company granted RSUs with a service condition (“service-based RSUs”). In fiscal year 2016, the Company also began granting to employees RSUs with a market condition (“market-based RSUs”) that requires the Company’s stock price achieve a specified price above the grant date stock price before it can be eligible for service vesting conditions. In fiscal year 2019, the Company began granting to employees RSUs with a performance condition (“performance-based RSUs”) that vest variably subject to the achievement of certain revenue growth and adjusted EBITDA targets (“performance targets”). The Company evaluates the portion of the awards that are probable to vest quarterly until the performance targets are met. To date, the Company has issued ISOs, NQSOs, service-based RSUs, market-based RSUs and performance-based RSUs under its stock incentive plans.

As of March 31, 2024,23,125,612 shares were reserved and 9,435,257 shares were available for issuance under the 2010 Incentive Plan;4,598,838 shares were reserved and 1,923,706 shares were available for issuance under the Directors’ Plan.

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, 2024 and 2023 were as follows:

The Company estimates the fair value of service-based RSUs and performance-based RSUs based on the closing price of the Company’s common stock on the grant date. As some of the components that comprise the performance targets have not been fully established, a grant date as defined by ASC 718 has not been determined. The Company will re-measure the compensation expense associated with the performance-based RSUs at each reporting date based on the closing price of the Company’s common stock at each reporting date until the grant date has been established. Compensation expense is amortized net of estimated forfeitures on a straight-line basis over the requisite service period of the stock-based compensation awards.

Employee Stock Purchase Plan

In October 2021, the Company adopted the 2021 Employee Stock Purchase Plan (the “2021 ESPP”), with 2,164,999 shares of common stock reserved for future issuance under the plan. The 2021 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation. A participant may purchase up to a maximum of 2,500 shares of the common stock during each purchase period, subject to a maximum of $25,000 worth of shares of the common stock in each calendar year (as determined under applicable tax rules). During the nine months ended March 31, 2024,596,040 shares of common stock were purchased under the 2021 ESPP. As of March 31, 2024,1,568,959 shares were available for issuance under the 2021 ESPP.

ESPP employee payroll contributions accrued as of March 31, 2024 were $0.4 million, and are included within accrued liabilities on the Company’s condensed consolidated balance sheet. Payroll contributions accrued as of March 31, 2024 will be used to purchase shares at the end of the current ESPP purchase period ending on August 24, 2024.

The fair value of the purchase rights for the ESPP are estimated on the date of grant using the Black-Scholes model with the following assumptions:

13. 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 asone reportable segment.

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