QuinStreet
Annual Report 2015

Plain-text annual report

QUINSTREET, INC FORM 10-K (Annual Report) Filed 08/19/15 for the Period Ending 06/30/15 Address Telephone CIK 950 TOWER LANE, 6TH FLOOR FOSTER CITY, CA 94404 650-578-7700 0001117297 Symbol QNST SIC Code Industry Sector Fiscal Year 7389 - Business Services, Not Elsewhere Classified Business Services Services 06/30 http://www.edgar-online.com © Copyright 2015, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K For the Fiscal Year Ended June 30, 2015 OR Commission file number: 001-34628 QuinStreet, Inc. (Exact name of registrant as specified in its charter) 950 Tower Lane, 6 Floor Foster City, California 94404 (Address of principal executive offices, including zip code) (650) 587-7700 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1) No  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 (cid:1) 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No (cid:1) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:1) 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. (Check one): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1) No  As of December 31, 2014, the aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sale price of the Company’s common stock as reported by the NASDAQ Global Select Market on such date, was $215,190,902. For purposes of this disclosure, shares held by persons who hold more than 5% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not a conclusive determination for other purposes. Number of shares of common stock outstanding as of August 14, 2015: 45,004,701 Documents Incorporated by Reference: Portions of the registrant’s definitive proxy statement relating to its 2015 annual stockholders’ meeting are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (cid:1) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware 77-0512121 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value $0.001 per share The NASDAQ Stock Market LLC (NASDAQ Global Select Market) Large accelerated filer (cid:1) Accelerated filer  Non-accelerated filer (cid:1) (Do not check if a smaller reporting company) Smaller reporting company (cid:1) th Table of Contents QUINSTREET, INC. FOR THE FISCAL YEAR ENDED JUNE 30, 2015 TABLE OF CONTENTS 2 Page PART I. Item 1. Business 3 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 30 Item 2. Properties 30 Item 3. Legal Proceedings 30 Item 4. Mine Safety Disclosures 30 PART II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31 Item 6. Selected Consolidated Financial Data 33 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 51 Item 8. Financial Statements and Supplementary Data 53 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 84 Item 9A. Controls and Procedures 84 Item 9B. Other Information 85 PART III. Item 10. Directors, Executive Officers and Corporate Governance 86 Item 11. Executive Compensation 86 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 86 Item 13. Certain Relationships and Related Transactions, and Director Independence 86 Item 14. Principal Accounting Fees and Services 86 PART IV. Item 15. Exhibits, Financial Statement Schedules 87 Signatures 88 Table of Contents PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements. All statements other than statements of historical facts, including statements regarding our future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. Terminology such as “believe,” “may,” “might,” “objective,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions is intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part 1, Item 1A. “Risk Factors” of this Annual Report on Form 10-K and elsewhere in this report, such as but not limited to: Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, and we qualify all of our forward-looking statements by these cautionary statements. Item 1. Business Our Company QuinStreet is a leader in performance marketing online. We have built a strong set of capabilities to engage Internet visitors in targeted media and to connect our marketing clients with their potential customers online. We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients. Presently, our primary client verticals are the financial services and education industries. We also have a presence in the business-to-business technology, home services and medical industries. 3 • our still developing industry and relatively new business model; • changes in the economic condition, market dynamics, regulatory enforcement or legislative environment affecting our, our third party publishers’, and our clients’ businesses; • our dependence on the availability and affordability of quality media from third-party publishers; • our dependence on Internet search companies to attract Internet visitors; • our ability to accurately forecast our operating results and appropriately plan our expenses; • our ability to compete in our industry; • our ability to manage cyber security risks and costs associated with maintaining a robust security infrastructure; • our ability to develop our websites to allow Internet visitors to access our websites through mobile devices; • our ability to develop new services and enhancements and features to meet new demands from our clients; and • our ability to successfully challenge regulatory audits, investigations, or allegations of noncompliance with laws. Table of Contents We generate revenue by delivering measurable online marketing results to our clients. These results are typically in the form of qualified leads, inquiries, clicks, calls, applications, or customers that are generated from our marketing activities on our websites or via third-party publishers with whom we have relationships. Clients primarily pay us for leads that they can convert into customers, typically in a call center or through other offline customer acquisition processes, or for clicks from our websites that they can convert into applications or customers on their websites. We are predominantly paid on a negotiated or market-driven “per lead” or “per click” basis. Media costs to generate qualified leads, inquiries, clicks, calls, applications or customers are borne by us as a cost of providing our services. QuinStreet was incorporated in California on April 16, 1999 and reincorporated in Delaware on December 31, 2009. We have been a pioneer in the development and application of measurable marketing on the Internet. Clients pay us for the actual opt-in actions by prospects or customers that result from our marketing activities on their behalf, versus traditional impression-based advertising and marketing models in which an advertiser pays for more general exposure to an advertisement. We have been particularly focused on developing and delivering measurable marketing results in the search engine “ecosystem,” the entry point of the Internet for most of the visitors we convert into qualified leads, inquiries, clicks, calls, applications or customers for our clients. We own or partner with vertical content websites that attract Internet visitors from organic search engine rankings due to the quality and relevancy of their content to search engine users. We also acquire targeted visitors for our websites through the purchase of pay-per-click, or PPC, advertisements on search engines. We complement search engine companies by building websites with content and offerings that are relevant and responsive to their searchers, and by increasing the value of the PPC search advertising they sell by matching visitors with offerings and converting them into customer prospects for our clients. Market Opportunity Change in marketing strategy and approach We believe that marketing approaches are changing as budgets shift from offline, analog advertising media to digital advertising media such as Internet marketing. These changing approaches are fundamental, and require a shift to fundamentally new competencies, including: From qualitative, impression-driven marketing to analytic, data-driven marketing Growth in Internet marketing is enabling a more data-driven approach to advertising. The measurability of online marketing allows marketers to collect a significant amount of detailed data on the performance of their marketing campaigns, including the effectiveness of ad format and placement and user responses. This data can then be analyzed and used to improve marketing campaign performance and cost-effectiveness on substantially shorter cycle times than with traditional offline media. From account management-based client relationships to results-based client relationships Marketers are becoming increasingly focused on strategies that deliver specific, measurable results. For example, marketers are attempting to better understand how their marketing spending produces measurable objectives such as meeting their target marketing cost per new customer. As marketers adopt more results-based approaches, the basis of client relationships with their marketing services providers is shifting from being more account management-based to being more results-oriented. From marketing messages pushed on audiences to marketing messages pulled by self-directed audiences Traditional marketing messages such as television and radio advertisements are broadcast to a broad audience. The Internet is enabling more self-directed and targeted marketing. For example, when Internet visitors click on PPC search advertisements, they are expressing an interest in and proactively engaging with information about a product or service related to that advertisement. The growth of self-directed marketing, primarily through 4 Table of Contents online channels, allows marketers to present more targeted and potentially more relevant marketing messages to potential customers who have taken the first step in the buying process, which can in turn increase the effectiveness of marketers’ spending. From marketing spending focused on large media buys to marketing spending optimized for fragmented media We believe that media is becoming increasingly fragmented and that marketing strategies are changing to adapt to this trend. There are millions of Internet websites, tens of thousands of which have significant numbers of visitors. While this fragmentation can create challenges for marketers, it also allows for improved audience segmentation and the delivery of highly targeted marketing messages, but new technologies and approaches are necessary to effectively manage marketing given the increasing complexity resulting from more media fragmentation. Increasing complexity of online marketing Online marketing is a dynamic and increasingly complex advertising medium. There are numerous online channels for marketers to reach potential customers, including search engines, Internet portals, vertical content websites, affiliate networks, display and contextual ad networks, email, video advertising, and social media. We refer to these and other marketing channels as media. Each of these channels may involve multiple ad formats and different pricing models, amplifying the complexity of online marketing. We believe that this complexity increases the demand for our vertical marketing and media services due to our capabilities and to our experience managing and optimizing online marketing programs across multiple channels. Also, marketers and agencies often lack our ability to aggregate offerings from multiple clients in the same industry vertical, an approach that allows us to cover a wide selection of visitor segments and provide more potential matches to visitor needs. This approach can allow us to convert more Internet visitors into qualified leads, inquiries, clicks, calls, applications, or customers from targeted media sources, giving us an advantage when buying or monetizing that media. Our Business Model We deliver 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 paid typically by clients when we deliver qualified leads, inquiries, clicks, calls, applications, or customers as defined by our agreements with them. References to the delivery of customers means a sale or completed customer transaction (e.g., bound insurance policies or customer appointments with clients). Because we bear the costs of media, our programs must deliver a value to our clients and provide for a media yield, or generation of acceptable margin on our media costs, that provides a sound financial outcome for us. To deliver leads, inquiries, clicks, calls, applications, and customers to our clients, generally we: 5 • own or access targeted media through business arrangements (e.g., revenue sharing agreements) or by purchasing media (e.g., clicks from major search engines); • run advertisements or other forms of marketing messages and programs in that media to create visitor responses in the form most typically of leads or inquiries (contact information and intent or requests), clicks (to further qualification or matching steps, or to online client applications or offerings), calls (to our owned and operated call centers or that of our clients or their agents), applications (e.g., for enrollment or a financial product), or customers (e.g., bound insurance policies); • match these leads, inquiries, clicks, calls, applications, or customers to client offerings or brands that we believe can meet visitor interests or needs and client targets and requirements; and • optimize client matches and media yield such that we achieve desired results for clients and a sound financial outcome for us. Table of Contents Media cost, or the cost to attract targeted Internet visitors, is the largest cost input to producing the measurable marketing results we deliver to clients. Balancing our clients’ customer acquisition cost and conversion objectives — or the rate at which the leads, inquiries, clicks, calls, or applications that we deliver to them convert into customers — with our media costs and yield objectives, represents the primary challenge in our business model. We have been able to effectively balance these competing demands by focusing on our media sources and capabilities, conversion optimization, and our mix of offerings and client coverage. We also seek to mitigate media cost risk by working with third-party publishers predominantly on a revenue-share basis. Media purchased on a revenue-share basis has represented the majority of our media costs and of the Internet visitors we convert into qualified leads, inquiries, clicks, calls, applications, or customers for clients, contributing significantly to our ability to maintain profitability. Media and Internet visitor mix We are a client-driven organization. We seek to be one of the largest providers of measurable marketing results on the Internet in the client industry verticals we serve by meeting the needs of clients for results, reliability and volume. Meeting those client needs requires that we maintain a diversified and flexible mix of Internet visitor sources due to the dynamic nature of online media. Our media mix changes with changes in Internet visitor usage patterns. We adapt to those changes on an ongoing basis, and also proactively adjust our mix of vertical media sources to respond to client or vertical-specific circumstances and to achieve our financial objectives. Generally, our Internet visitor sources include: Conversion optimization Once we acquire targeted Internet visitors from any of our numerous online media sources, we seek to convert that media into qualified leads, inquiries, clicks, calls, applications, or customers at a rate that balances client results with our media costs or yield objectives. We start by providing Internet visitors with information and product offerings on our websites and in our marketing programs that we believe match their interests. Achieving acceptable client results and media yield then requires ongoing testing, measuring, analysis, feedback, and adaptation of the key components of our Internet marketing programs. These components include the marketing or advertising messaging, content mix, visitor navigation path, mix and coverage of client offerings presented, and point-of-sale conversion messaging — the content that is presented to an Internet visitor immediately prior to converting that individual into a qualified lead, inquiry, click, call, application, or customer for our clients. This data complexity is managed by us with technology, data reporting, marketing processes, and personnel. We believe that our scale and more than fifteen-year track record give us an advantage, as managing this complexity often implies a steep experience-based learning curve. Offerings and client coverage The Internet is a self-directed medium. Internet visitors choose the websites they visit and their online navigation paths, and always have the option of clicking away to a different website or web page. Having offerings, content or clients that match the interests or needs of website visitors is key to providing results and 6 • websites owned and operated by us, with content and offerings that are relevant to our clients’ target customers; • visitors acquired from PPC advertisements purchased on major search engines and sent to our websites; • revenue sharing agreements with third-party publishers with whom we have a relationship and whose content or traffic is relevant to our clients’ target customers; • email lists owned by us or by third parties; and • advertisements run through online advertising networks, directly with major websites or portals, social media networks, or mobile networks, on a revenue-share or purchased basis. Table of Contents adequate media yield. Our vertical focus allows us to continuously revise and improve this matching process, to better understand the various segments of visitors and client offerings available to be matched, and to ensure that we enable Internet visitors to find what they seek. Our Competitive Advantages Vertical focus and expertise We focus our efforts on large, attractive client market verticals and on building our depth of media and coverage of clients and client offerings within them. We have been a pioneer in developing vertical marketing and media on the Internet and in providing measurable marketing results to clients. We focus on clients who are moving their marketing spending to measurable online formats and on information-intensive client verticals with large underlying market opportunities and high product or customer lifetime values. This focus allows us to utilize targeted media, in-depth industry and client knowledge, and customer segmentation and breadth of client offerings, or coverage, to deliver results for our clients, and greater media yield and buying power. Measurable marketing experience, expertise and data We have substantial experience at designing and deploying marketing programs that match Internet visitors to information or product offerings, and that can deliver economically attractive, measurable results to our clients, cost-effectively for us. Such results require frequent testing and balancing of numerous variables, including Internet visitor sources, mix of content and of client and product offerings, visitor navigation paths, prospect qualification, and advertising creative design, among others. The complexity of executing these marketing campaigns is challenging. Due to our scale and more than fifteen-year track record, we have successfully executed thousands of Internet marketing programs, and we have gained significant experience managing and optimizing this complexity to meet our clients’ volume, quality and cost objectives, while also achieving media yield and buying power requirements for our business model. Targeted media Targeted media attracts Internet visitors who are relatively narrowly focused demographically or in their interests. Targeted media can deliver better measurable marketing results for our clients, at lower media costs for us due to higher rates of conversion of Internet visitors into qualified leads, inquiries, clicks, calls, applications, or customers for targeted offerings and, often, due to less competition from display advertisers. We have significant experience at creating, identifying, partnering, monetizing, and managing targeted media on the Internet. This array of targeted media can represent a share of targeted traffic in our verticals on the Internet that is meaningful and attractive to clients. Many of the targeted media sources for our marketing programs are proprietary or more defensible because of our direct ownership of websites in our client verticals, our acquisition of targeted Internet visitors directly from search engines to our websites, and our relationships and media buying power advantages with media properties or sources owned by others. Examples of websites that we own and operate include Schools.com, OnlineDegrees.com, and AlliedHealthWorld.com in our education client vertical; CarInsurance.com, Insurance.com, Insure.com, CardRatings.com, and MoneyRates.com in our financial services client vertical; eWeek.com and ITBusinessEdge.com in our business-to-business technology client vertical; reliableremodeler.com and improvementcenter.com in our home services client vertical; and ElderCarelink.com in our medical client vertical. Proprietary technology We have developed a core technology platform and a common set of applications for managing and optimizing measurable marketing programs across multiple client verticals at scale. The primary objectives and effects of our technologies are to achieve higher media yield, deliver better results for our clients, and more efficiently and effectively manage our scale and complexity. We continuously strive to develop technologies that allow us to better match Internet visitors in our client verticals to the information, clients or product offerings 7 Table of Contents visitors seek at scale. In so doing, our technologies can allow us to simultaneously improve visitor satisfaction, increase our media yield, and achieve higher rates of conversions of leads, inquiries, clicks, calls, applications, or customers for our clients — a cycle of increased value for Internet visitors and our clients and competitive advantage for us. Some of the key applications in our technology platform are: Approximately one-third of our employees are engineers, focused on building, maintaining and operating our technology platform. Client relationships We are a reliable source of measurably effective marketing results for our clients. We endeavor to work collaboratively and in a data-driven way with clients to improve our results for them. We believe our successful client relationships are due to: As our high client retention rates, combined with our depth and breadth of online media in our primary client verticals indicate, we are an important marketing channel partner for our clients. Client-driven online marketing approach We focus on providing measurable Internet marketing and media services to our clients in a way that seeks to protect and enhance their brands and their relationships with prospective customers. The Internet marketing programs we execute are designed to adhere to strict client branding and regulatory guidelines, and are intended to match our clients’ brands and offers with expressed customer interest. We have contractual arrangements with third-party publishers to ensure that they follow our clients’ brand guidelines, and we utilize our proprietary technologies and trained personnel to help ensure compliance. In addition, we believe that providing relevant, helpful content and client offers that match an Internet visitor’s self-selected interest in a product or service, such as requesting information about a financial product or education program, makes that visitor more likely to convert into a customer for our clients. We do not engage in online marketing practices such as spyware or deceptive promotions, as we believe that these do not provide value to Internet visitors and can undermine our clients’ brands. 8 • an ad server for tracking the placement and performance of content, creative messaging, and offerings on our websites and on those of publishers with whom we work; • database-driven applications for dynamically matching content, offers or brands to Internet visitors’ expressed needs or interests; • a platform for measuring and managing the performance of tens of thousands of PPC search engine advertising campaigns; • dashboards or reporting tools for displaying operating and financial metrics for thousands of ongoing marketing campaigns; and, • a compliance tool capable of cataloging and filtering content from the thousands of websites on which our marketing programs appear to ensure adherence to client branding guidelines and to regulatory requirements. • our close, often direct, relationships with most of our large clients; • our ability to deliver measurable and attractive return on investment, or ROI, on clients’ marketing spending; • our ownership of, or access to large amounts of, targeted media inventory and associated Internet visitors in the client verticals on which we focus; and • our ability to consistently and reliably deliver large quantities of qualified leads, inquiries, clicks, calls, applications, or customers. Table of Contents Acquisition strategy and success We have successfully acquired vertical online marketing and media companies, including vertical website businesses, marketing services companies, and technologies. Our scale, breadth of capabilities and common technology platform have historically enabled us to integrate and generate value from acquisitions through our: Scale We are one of the largest Internet performance marketing companies in the world. Our scale allows us to better meet the needs of large clients for reliability, volume and quality of service. It allows us to invest more in technologies that improve media yield, client results and our operating efficiency. We are also able to invest more in other forms of research and development, including determining and developing new types of vertical media, new approaches to engaging website visitors, and new segments of Internet visitors and client budgets, all of which can lead to advantages in media costs, and effectiveness in delivering client results. Our Strategy Our goal is to continue to be one of the largest and most successful performance marketing companies on the Internet, and eventually in other digitized media forms. We believe that we are in the early stages of a very large and long-term market opportunity. Our strategy for pursuing this opportunity includes the following key components: Clients In fiscal years 2015, 2014 and 2013, no client comprised more than 10% of net revenue, and our top 20 clients accounted for 45%, 52% and 52% of net revenue. Since our service was first offered in 2001, we have 9 • ability to monetize Internet media, coupled with client demand for our services, providing us with a particular advantage in acquiring targeted online media properties in the client verticals on which we focus; • capabilities in online media allowing us to generate a greater volume of qualified leads, inquiries, clicks, calls, applications, or customers, and therefore create more value, than other owners of marketing services companies that have aggregated client budgets or relationships; and • application of technologies across our business volume to create more value than previous owners of the technology. • focus on generating sustainable revenues by providing measurable value to our clients; • build QuinStreet and our industry sustainably by behaving ethically in all we do and by providing quality content and website experiences to Internet visitors; • remain vertically focused, choosing to grow through depth, expertise and coverage in our current client verticals; enter new client verticals selectively over time, organically and through acquisitions; • build a world class organization, with best-in-class capabilities for delivering measurable marketing results to clients and high yields or returns on media costs; • develop and evolve the best technologies and platform for managing vertical marketing and media on the Internet; focus on technologies that enhance media yield, improve client results and achieve scale efficiencies; • build, buy and partner with vertical content websites that provide the most relevant and highest quality visitor experiences in the client and media verticals we serve; and • be a client-driven organization; develop a broad set of media sources and capabilities to reliably meet client needs. Table of Contents developed a broad client base with many multi-year relationships. We enter into Internet marketing contracts with our clients, most of which are cancelable with little or no prior notice. In addition, these contracts do not contain penalty provisions for cancellation before the end of the contract term. Sales and Marketing We have an internal sales team that consists of employees focused on signing new clients and account managers who maintain and seek to increase our business with existing clients. Our sales people and account managers are each focused on a particular client vertical so that they develop an expertise in the marketing needs of our clients in that particular vertical. Our marketing programs include advertising, attendance at trade shows and conferences. Technology and Infrastructure We have developed a suite of technologies to manage, improve and measure the results of the marketing programs we offer our clients. We use a combination of proprietary and third-party software as well as hardware from established technology vendors. We use specialized software for client management, building and managing websites, acquiring and managing media, managing our third-party publishers, and the matching of Internet visitors to our marketing clients. We have invested significantly in these technologies and plan to continue to do so to meet the demands of our clients and Internet visitors, to increase the scalability of our operations, and enhance management information systems and analytics in our operations. Our development teams work closely with our marketing and operating teams to develop applications and systems that can be used across our business. In fiscal years 2015, 2014 and 2013, we spent $17.9 million, $19.5 million and $19.0 million on product development. Our primary data center is at a third-party co-location center in San Francisco, California. All of the critical components of the system are redundant, and we have a backup data center in Las Vegas, Nevada. We have implemented these backup systems and redundancies to minimize the risk associated with earthquakes, fire, power loss, telecommunications failure, and other events beyond our control. Intellectual Property We rely on a combination of patent, trade secret, trademark and copyright laws in the United States and other jurisdictions together with confidentiality agreements and technical measures to protect the confidentiality of our proprietary rights. To protect our trade secrets, we control access to our proprietary systems and technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties. QuinStreet is a registered trademark in the United States and other jurisdictions. We also have registered and unregistered trademarks for the names of many of our websites, and we own the domain registrations for our many website domains. Our Competitors Our primary competition falls into two categories: advertising and direct marketing services agencies, and online marketing and media companies. We compete for business on the basis of a number of factors including return on marketing expenditures, price, access to targeted media, ability to deliver large volumes or precise types of customer prospects, and reliability. Advertising and direct marketing services agencies Online and offline advertising and direct marketing services agencies control the majority of the large client marketing spending for which we primarily compete. So, while they are sometimes our competitors, agencies are 10 Table of Contents also often our clients. We compete with agencies to attract marketing budget or spending from offline forms to the Internet or, once designated to be spent online, to be spent with us versus the agency or by the agency with others. When spending online, agencies spend with QuinStreet and with portals, other websites and ad networks. Online marketing and media companies We compete with other Internet marketing and media companies, in many forms, for online marketing budgets. Most of these competitors compete with us in one vertical. Examples include BankRate in the financial services client vertical and Education Dynamics in the education client vertical. Some of our competition also comes from agencies or clients spending directly with larger websites or portals, including Google, Yahoo! and Microsoft. Government Regulation We provide services through a number of different online and offline channels. As a result, we are subject to many federal and state laws and regulations, including restrictions on the use of unsolicited commercial email, such as the CAN-SPAM Act and state email marketing laws, and restrictions on the use of marketing activities conducted by telephone, including the Telemarketing Sales Rule (the “TSR”) and the Telephone Consumer Protection Act (the “TCPA”). Our business is also subject to federal and state laws and regulations regarding unsolicited commercial email, telemarketing, user privacy, search engines, Internet tracking technologies, direct marketing, data security, data privacy, pricing, sweepstakes, promotions, intellectual property ownership and infringement, trade secrets, export of encryption technology, acceptable content and quality of goods, and taxation, among others. In addition, we provide services to a number of our clients that operate in highly regulated industries, particularly in our financial services and education verticals. In our financial services vertical, our websites and marketing services are subject to various federal, state and local laws, including state licensing laws, federal and state laws prohibiting unfair acts and practices, and federal and state advertising laws. In addition, we are a licensed insurance agent in all fifty states. The costs of compliance with these and new laws may increase in the future and any failure on our part to comply with such laws may subject us to significant liabilities. To date, we have generated a large portion of our revenue from our education client vertical, and nearly all of that revenue was generated from post-secondary educational institutions. Post-secondary educational institutions are subject to extensive federal and state regulations, including the Higher Education Act, Department of Education regulations and individual state higher education regulations. The regulations govern many aspects of these clients’ operations, including marketing and recruiting activities, as well as the school’s eligibility to participate in Title IV federal student financial aid programs, which is the principal source of funding for many of our education clients. There have been significant changes to these regulations in the recent past, and a high level of regulatory activity and heightened legislative scrutiny is expected to continue in the post-secondary education sector. Employees As of June 30, 2015, we had 638 employees, which consisted of 185 employees in product development, 67 in sales and marketing, 45 in general and administration and 341 in operations. None of our employees are represented by a labor union, except for our employees in Brazil who are represented by a union as required by Brazilian law. Available Information We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings required by the SEC. We make these reports and filings available free of charge on our website via the investor relations page on www.quinstreet.com as soon as reasonably practicable after such material is electronically filed with or furnished 11 Table of Contents to the SEC. We also webcast our earnings calls and certain events we host with members of the investment community on our investor relations page at http://investor.quinstreet.com. The content of our website is not intended to be incorporated by reference into this report or in any other report or document we file, and any reference to this website and others included in this report is intended to be an inactive textual reference only. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Item 1A . Risk Factors Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this periodic report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition or results of operations could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment. Risks Related to Our Business and Industry We operate in an industry that is still developing and have a relatively new business model that is continually evolving, which makes it difficult to evaluate our business and prospects. We derive nearly all of our revenue from the sale of online marketing and media services, which is a still developing industry that has undergone rapid and dramatic changes in its relatively short history and which is characterized by rapidly-changing Internet media and advertising technology, evolving industry standards, regulatory uncertainty, and changing user and client demands. As a result, we face risks and uncertainties such as but not limited to: If we are unable to address these risks, our business, results of operations and prospects could suffer. 12 • our still developing industry and relatively new business model; • changes in the economic condition, market dynamics, regulatory enforcement or legislative environment affecting our, our third-party publishers’, and our clients’ businesses; • our dependence on the availability and affordability of quality media from third-party publishers; • our dependence on Internet search companies to attract Internet visitors; • our ability to accurately forecast our results of operations and appropriately plan our expenses; • our ability to compete in our industry; • our ability to manage cyber security risks and costs associated with maintaining a robust security infrastructure; • our ability to develop our websites to allow Internet visitors to access our websites through mobile devices; • our ability to develop new services, enhancements and features to meet new demands from our clients; and • our ability to successfully challenge regulatory audits, investigations, or allegations of noncompliance with laws. Table of Contents Negative changes in the market conditions or the regulatory environment have had in the past, and may in the future have, a material and adverse impact on our revenue, business, and growth. Adverse macroeconomic conditions could cause decreases or delays in spending by our clients and could harm our ability to generate revenue and our results of operations. Moreover, to date, we have generated a large majority of our revenue from clients in our financial services and education client verticals. We expect that a majority of our revenue, at least in the near term, will continue to be generated from clients in our financial services and education client verticals. Changes in the market conditions or the regulatory environment in these two highly-regulated client verticals in particular have negatively impacted, and may continue to negatively impact, our clients’ businesses, marketing practices and budgets and, therefore, our financial results. Our, our third-party publishers’, and our clients’ businesses operate in highly regulated industries, subject to many laws and regulatory requirements, including federal, state, and local laws and regulations regarding unsolicited commercial email, telemarketing, user privacy, search engines, Internet tracking technologies, direct marketing, data security, data privacy, pricing, sweepstakes, promotions, intellectual property ownership and infringement, trade secrets, export of encryption technology, acceptable content and quality of goods, and taxation, among others. Each of our financial services, education and other client verticals is also subject to various laws and regulations, and our marketing activities on behalf of our clients are regulated. Many of these laws are frequently changing, and keeping our business in compliance with or bringing our business into compliance with new laws may be costly, affect our revenue and harm our financial results. Violations or alleged violations of laws by us, our third-party publishers or clients could result in damages, fines, criminal prosecution, unfavorable publicity, and restrictions on our ability to operate, any of which could have a material adverse effect on our business, financial condition, and results of operations. In addition, new laws or regulations or changes in enforcement of existing laws or regulations applicable to our clients could affect the activities or strategies of our clients and, therefore, lead to reductions in their level of business with us. For example, the Federal Communications Commission amended the Telephone Consumer Protection Act (the “TCPA”) that affects telemarketing calls. Certain provisions of the regulations became effective in July 2012, and additional regulations requiring prior express written consent for certain types of telemarketing calls became effective in October 2013. Our efforts to comply with the TCPA has not had a material impact on traffic conversion rates. However, depending on future traffic and product mix, it could potentially have a material effect on our revenue and profitability, including increasing our and our clients’ exposure to enforcement actions and litigation. Additionally, we generate leads from which users provide a wireless number, and in turn a significant amount of revenue comes from calls made by our internal call centers as well as, in some cases, by third-party call centers. We also purchase a portion of our lead data from third-party publishers and cannot guarantee that these third-parties will comply with the regulations. Any failure by us or the third-party publishers on which we rely for telemarketing, email marketing, and other lead generation activities to adhere to or successfully implement appropriate processes and procedures in response to existing regulations and changing regulatory requirements could result in legal and monetary liability, significant fines and penalties, or damage to our reputation in the marketplace, any of which could have a material adverse effect on our business, financial condition, and results of operations. Furthermore, our clients may make business decisions based on their own experiences with the TCPA regardless of our products and the changes we implemented to comply with the new regulations. These decisions may negatively affect our revenue or profitability. In connection with our and our third-party publishers’ email campaigns to generate traffic for our clients, we are subject to various state and Federal laws regulating commercial email communications, including the federal CAN-SPAM Act. For example, in 2012, several of our clients were named defendants in a California Anti-Spam lawsuit relating to commercial emails which allegedly originated from us and our third party publishers. While the matter was ultimately resolved in our clients’ favor, we were nonetheless obligated to indemnify certain of our clients for the fees incurred in the defense of such matter. If we or any of our third-party publishers fail to comply with any provisions of these laws or regulations, we could be subject to regulatory investigation, enforcement actions, and litigation, as well as indemnification obligations with respect to our clients. Any negative outcomes from such regulatory actions or litigation, including monetary penalties or damages, could 13 Table of Contents have a material adverse effect on our financial condition, results of operation, and reputation. From time to time, we are subject to audits, inquiries, investigations, claims of non-compliance and lawsuits by federal and state governmental agencies, regulatory agencies, attorneys general, and other governmental or regulatory bodies, any of whom may allege violations of legal requirements. For example, in June 2012, we entered into an Assurance of Voluntary Compliance agreement following a civil investigation into certain of our marketing practices related to our education client vertical that was conducted by the attorneys general of a number of states. If the results of any future investigations, audits, inquiries, claims or litigation are unfavorable to us, we may be required to pay monetary fines or penalties or have restrictions placed on our business, which could materially adversely affect our business, financial condition, results of operations, and cash flows. Federal and state regulations governing clients in our education vertical have negatively affected, and may continue to negatively affect, our clients’ businesses, marketing practices, and budgets, any or all of which could reduce our clients’ level of business with us and thereby have a material adverse effect on our financial results. To date, we have generated a large portion of our revenue from our education client vertical, and nearly all of that revenue was generated from post-secondary educational institutions. Post-secondary educational institutions are subject to extensive federal and state regulations, including the Higher Education Act, Department of Education regulations and individual state higher education regulations. The regulations govern many aspects of these clients’ operations, including marketing and recruiting activities, as well as the school’s eligibility to participate in Title IV federal student financial aid programs, which is the principal source of funding for many of our education clients. There have been significant changes to these regulations in the recent past, and a high level of regulatory activity and heightened legislative scrutiny are expected to continue in the post-secondary education sector. For example, in January 2014, the Department of Education initiated an investigation of a publicly traded for-profit education client with respect to its enrollment activities and job placement, among other things, and in July 2014, the Department of Education signed an agreement with the client requiring it to wind down or sell its campuses. In addition, in October 2014, the Department of Education announced final regulations on gainful employment which went into effect on July 1, 2015. The regulation requires career college programs to prepare students for gainful employment in a recognized occupation which requires the programs’ graduates’ annual loan payments to be less than a defined percentage of earnings. Programs that do not pass the test could lose access to federal financial aid, which typically constitutes an important source of funding for these programs. As a result, such programs may be modified, curtailed, or eliminated. Similar regulatory and enforcement activities have affected and are expected to continue to affect our clients’ businesses and marketing practices, which may result in a decrease in these clients’ spending with us, and fluctuations in the volume and mix of our business with these clients. Changes in, or new interpretations of, applicable laws, regulations, standards or policies applicable to these clients could have a material adverse effect on their accreditation, authorization to operate in various states, or receipt of funds under Title IV programs, any of which, in turn, may harm our ability to generate revenue from these clients and our financial results. We depend on third-party publishers for a significant portion of our visitors. Any decline in the supply of media available through these websites or increase in the price of this media could cause our revenue to decline or our cost to reach visitors to increase. A significant portion of our revenue is attributable to visitor traffic originating from third-party publishers. In many instances, third-party publishers can change the media inventory they make available to us at any time and, therefore, impact our results of operations. In addition, third-party publishers may place significant restrictions on our offerings. These restrictions may prohibit advertisements from specific clients or specific industries, or restrict the use of certain creative content or formats. If a third-party publisher decides not to make media inventory available to us, or decides to demand a higher revenue share or places significant restrictions on the use of such inventory, we may not be able to find media inventory from other websites that satisfy our 14 Table of Contents requirements in a timely and cost-effective manner. In addition, the number of competing online marketing service providers and advertisers that acquire inventory from websites continues to increase. Consolidation of Internet advertising networks and third-party publishers could eventually lead to a concentration of desirable inventory on websites or networks owned by a small number of individuals or entities, which could limit the supply or impact the pricing of inventory available to us. In the past, we have experienced declines in our financial services client vertical primarily due to volume declines caused by losses of available media from third-party publishers acquired by competitors, changes in search engine algorithms which reduced or eliminated traffic from some third-party publishers and increased competition for quality media. We cannot assure you that we will be able to acquire media inventory that meets our clients’ performance, price, and quality requirements, in which case our revenue could decline or our operating costs could increase. We depend upon Internet search providers to direct a significant portion of the visitors to our and our third-party publishers’ websites. Changes in search engine algorithms have in the past harmed, and may in the future, harm the websites’ placements in both paid and organic search result listings, which may cause the number of visitors to our and our third-party publishers’ websites and as a result, cause our revenue to decline. Our success depends on our ability to attract online visitors to our and our third-party publishers’ websites and convert them into prospects for our clients in a cost-effective manner. We depend on Internet search providers to direct a substantial share of visitors to our websites. Search providers offer two types of search results: organic and paid listings. Organic listings are displayed based solely on formulas designed by the search companies. Paid listings are displayed based on a combination of the advertiser’s bid price for particular keywords and the search engines’ assessment of the website’s relevance and quality. Our ability to maintain or grow the number of visitors to our websites from search providers is not entirely within our control. Search providers frequently revise their algorithms and changes in their algorithms have in the past caused, and could in the future, cause our websites to receive less favorable placements. We have experienced fluctuations in organic rankings for a number of our websites and some of our paid listing campaigns have also been harmed by search engine algorithmic changes. Search providers could determine that our or our third-party publishers’ websites’ content is either not relevant or is of poor quality. In addition, we may fail to optimally manage our paid listings, or our proprietary bid management technologies may fail. To attract and retain visitors, we use search engine optimization (“SEO”) which involves developing content to optimize ranking in search engine results. Our ability to successfully manage SEO efforts across our owned and operated websites and our and our third-party publishers’ websites depends on our timely and effective modification of SEO practices implemented in response to periodic changes in search engine algorithms and methodologies and changes in search query trends. If we fail to successfully manage our SEO strategy, our websites may receive less favorable placement in organic or paid listings, which would reduce the number of visitors to our sites, decrease conversion rates and repeat business and have a detrimental effect on our ability to generate revenue. If visits to our websites decrease, we may need to use more costly sources to replace lost visitors, and such increased expense could adversely affect our business and profitability. Even if we succeed in driving traffic to our owned and operated websites and to our clients’ websites, we may not be able to effectively monetize this traffic or otherwise retain users. Our failure to do so could result in lower advertising revenue from our owned and operated websites as well as third-party publishers’ websites, which would have an adverse effect on our business, financial condition, and results of operations. Our results of operations have fluctuated in the past and may do so in the future, which makes our results of operations difficult to predict and could cause our results of operations to fall short of analysts’ and investors’ expectations. Historically, quarterly and annual results of operations have fluctuated due to changes in our business, our industry, and the general economic climate. We expect our future results of operations to vary significantly from 15 Table of Contents quarter to quarter due to a variety of factors, many of which are beyond our control. Our fluctuating results of operations could cause our performance and outlook to be below the expectations of securities analysts and investors, causing the price of our common stock to decline. Our business is changing and evolving, and, as a result, our historical results of operations may not be useful to you in predicting our future results of operations. Factors that may increase the volatility of our results of operations include, but are not limited to, the following: As a result of changes in our business model, increased investments, increased expenditures for certain businesses, products, services, and technologies, we anticipate fluctuations in our Adjusted EBITDA margin. We have invested and expect to continue to invest in new businesses, products, markets, services and technologies, including more expensive forms of media. For example, we expended significant resources in developing new products and technologies and made strategic outlays in, among other things, partnerships, which in the short term will have the effect of reducing our Adjusted EBITDA margin. If we are unsuccessful in our monetization efforts with respect to new products and investments, we may fail to engage and retain users and clients. We may have insufficient revenue to fully offset liabilities and expenses in connection with these investments and may experience inadequate, unpredictable return of capital on our investments. As a result of these investments, we expect fluctuations in our Adjusted EBITDA margin. If we fail to compete effectively against other online marketing and media companies and other competitors, we could lose clients and our revenue may decline. The market for online marketing is intensely competitive, and we expect this competition to continue to increase in the future both from existing competitors and, given the relatively low barriers to entry into the market, from new competitors. We compete both for clients and for limited high-quality media. We compete for clients on the basis of a number of factors, including return on investment of client’s marketing spending, price, and client service. We compete with Internet and traditional media companies for a share of clients’ overall marketing budgets, including: 16 • changes in client volume; • loss of or reduced demand by existing clients; • the availability and price of quality media; • consolidation of media sources; • changes in search engine algorithms that affect our and our publishers’ websites; and • regulatory and legislative changes. • online marketing or media services providers such as BankRate in the financial services client vertical and Education Dynamics in the education client vertical; • offline and online advertising agencies; • major Internet portals and search engine companies with advertising networks; • other online marketing service providers, including online affiliate advertising networks and industry-specific portals or lead generation companies; • third-party publishers with their own sales forces that sell their online marketing services directly to clients; • in-house marketing groups and activities at current or potential clients; • offline direct marketing agencies; Table of Contents Competition for web traffic among websites and search engines, as well as competition with traditional media companies, has resulted and may continue to result in significant increases in media pricing, declining margins, reductions in revenue, and loss of market share. In addition, if we expand the scope of our services, we may compete with a greater number of websites, clients, and traditional media companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise, brand recognition, and other areas. Internet search companies with brand recognition, such as Google, Yahoo! and Microsoft, have significant numbers of direct sales personnel and substantial proprietary advertising inventory and web traffic that provide a significant competitive advantage and have a significant impact on pricing for Internet advertising and web traffic. Some of these companies may offer or develop more vertically targeted products that match users with products and services and, thus, compete with us more directly. For example, Google’s search engine provides comparison shopping for insurance and other financial products, which could in the future compete directly with our comparison platforms, divert our users and ultimately our clients, and result in a significant loss of revenue for our financial services vertical. The trend toward consolidation in online marketing may also affect pricing and availability of media inventory and web traffic. Many of our current and potential competitors also enjoy other competitive advantages over us, such as longer operating histories, greater brand recognition, larger client bases, greater access to advertising inventory on high-traffic websites, and significantly greater financial, technical, and marketing resources. As a result, we may not be able to compete successfully. Competition from other marketing service providers’ online and offline offerings has affected and may continue to affect both volume and price, and, thus, revenue, profit margins, and profitability. If we fail to deliver results that are superior to those that other online marketing service providers deliver to clients, we could lose clients and market share, and our revenue may decline. We are exposed to online security risks and security breaches particularly given that we gather, transmit and store personally identifiable information. Unauthorized access to or accidental disclosure of confidential or proprietary data may cause us to incur significant expenses and may negatively affect our reputation and business. We gather, transmit, and store information about our users and marketing and media partners, including personally identifiable information. This information may include social security numbers, credit scores, credit card information, and financial and health information, some of which is held or managed by our third-party vendors. As a result, we are subject to certain contractual terms, including third-party security reviews, as well as federal, state and foreign laws and regulations designed to protect personally identifiable information. Despite our implementation of security measures and controls, our information technology and infrastructure are susceptible to electronic or physical computer break-ins, cyber attacks, malware, viruses, fraud, employee error, and other disruptions and security breaches that could result in third parties gaining unauthorized access to our systems and data. In addition, the increased use of mobile devices increases the risk of unintentional disclosure of data including personally identifiable information. We may be unable to anticipate all our vulnerabilities and implement adequate preventative measures and, in some cases, we may not be able to immediately detect a security incident. In the past, we have experienced security incidents involving access to our databases. Although to our knowledge no sensitive financial or personal information has been compromised, any future security incidents could result in the compromise of such data and subject us to liability or result in cancellation of client contracts. Any security incident may also result in a misappropriation of our proprietary information or that of our users, clients, and third-party publishers, which could result in legal and financial liability, as well as harm to our reputation. Privacy concerns relating to our data collection practices and any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of our network by an unauthorized party, employee theft, misuse, or error could harm our reputation, impair our ability to attract website visitors and to attract and retain our clients, result in a loss of confidence in the security of our products and services, or 17 • mobile and social media; and • television, radio, and print companies. Table of Contents subject us to claims or litigation arising from damages suffered by consumers, and thereby harm our business and results of operations. In addition, we could incur significant costs for which our insurance policies may not adequately cover us and expend significant resources in protecting against security breaches and complying with the multitude of state, federal and foreign laws regarding data privacy and data breach notification obligations. More people are using mobile devices to access the Internet. If we fail to develop our websites to keep pace with this shift in user devices, we may not remain competitive and could lose clients or advertising inventory. The number of people who access the Internet through mobile devices such as smart phones and tablets has increased dramatically in the past few years, and we expect the trend to continue. Our online marketing services and content were originally designed for desktop or laptop computers. The shift from desktop or laptop computers to mobile devices could potentially deteriorate the user experience for visitors to our websites and may make it more difficult for visitors to respond to our offerings. It also requires us to develop new offerings specifically designed for mobile devices, such as social media advertising opportunities. Additionally, the monetization of our online marketing services and content on these mobile devices might not be as lucrative for us compared to those on desktop and laptop computers. If we fail to develop our websites cost effectively and improve the monetization capabilities of our mobile marketing services, we may not remain competitive, which may negatively affect our business and results of operations. A reduction in online marketing spend by our clients, a loss of clients or lower advertising yields may seriously harm our business, financial condition, and results of operations. In addition, a substantial portion of our revenue is generated from a limited number of clients and, if we lose a major client, our revenue will decrease and our business and prospects may be harmed. We rely on clients’ marketing spend on our owned and operated websites and on our network of third-party publisher websites. We have historically derived, and we expect to continue to derive, the majority of our revenue through the delivery of qualified leads, inquiries, clicks, calls, applications, and customers. One component of our platform that we use to generate client interest is our system of monetization tools, which is designed to match content with client offerings in a manner that optimizes revenue yield and end-user experience. Clients will stop spending marketing funds on our owned and operated websites or our third-party publisher websites if their investments do not generate leads and ultimately users or if we do not deliver advertisements in an appropriate and effective manner. The failure of our yield-optimized monetization technology to effectively match advertisements or client offerings with our content in a manner that results in increased revenue for our clients would have an adverse impact on our ability to maintain or increase our revenue from client marketing spend. Even if our content is effectively matched with advertisements or client offerings, our current clients may not fulfill their obligations under their existing contracts with us and they may not continue to place marketing spend or advertisements on our websites beyond the terms of their existing contracts. If any of our clients decided not to continue marketing spend or advertising on our owned and operated websites or on our third-party publisher websites, we could experience a rapid decline in our revenue over a relatively short period of time. Any factors that limit the amount our clients are willing to and do spend on marketing or advertising with us, or to purchase leads from us, could have a material adverse effect on our business. Furthermore, a substantial portion of our revenue is generated from a limited number of clients. None of our clients account for 10% or more of our net revenue. However, we have a few clients that account for a large portion of our net revenue. Our clients can generally terminate their contracts with us at any time and they do not have minimum purchase requirements. Clients may also fail to renew their contracts or reduce their level of business with us, leading to lower revenue. In addition, reductions in business by one or more significant clients may trigger price reductions for our other clients whose prices for certain products are determined in whole or in part by client bidding or 18 Table of Contents competition. Any such price reduction could result in lower revenue. We expect that a limited number of clients will continue to account for a significant percentage of our revenue, and the loss of any one of these clients, or material reduction in their marketing spending with us, could decrease our revenue and harm our business. We rely on our management team and other key employees, and the loss of one or more key employees could harm our business. Our success and future growth depend upon the continued services of our management team, including Douglas Valenti, Chief Executive Officer, and other key employees in all areas of our organization. From time to time, there may be changes in our key employees resulting from the hiring or departure of executives and employees, which could disrupt our business. We have experienced declines in our business and a depressed stock price, making our equity and cash incentive compensation programs less attractive to current and potential key employees. If we lose the services of key employees or if we are unable to attract and retain additional qualified employees, our business and growth could suffer. Third-party publishers or vendors may engage in unauthorized or unlawful acts that could subject us to significant liability or cause us to lose clients. We generate a significant portion of our web visitors from online media that we purchase from third-party publishers. We also rely on third-party call centers and email marketers. Some of these third-parties are authorized to use our clients’ brands, subject to contractual restrictions. Any activity by third-party publishers or vendors that clients view as potentially damaging to their brands, whether or not permitted by our contracts with our clients, could harm our relationship with the client and cause the client to terminate its relationship with us, resulting in a loss of revenue. In addition, we may also face liability for any failure of our third-party publishers or vendors to comply with regulatory requirements, as further described in the risk factor beginning, “ Negative changes in the market conditions or the regulatory environment have had in the past, and may in the future have, a material and adverse impact on our revenue, business, and growth .” The law is unsettled on the extent of liability that an advertiser in our position has for the activities of third-party publishers or vendors. Department of Education regulations impose liability on our education clients for misrepresentations made by their marketing service providers. In addition, certain of our contracts impose liability on us, including indemnification obligations, for the acts of our third-party publishers or vendors. We could be subject to costly litigation and, if we are unsuccessful in defending ourselves, we could incur damages for the unauthorized or unlawful acts of third-party publishers or vendors. If we fail to continually enhance and adapt our products and services to keep pace with rapidly changing technologies and industry standards, we may not remain competitive and could lose clients or advertising inventory. The online media and marketing industry is characterized by rapidly changing standards, changing technologies, frequent new product and service introductions, and changing user and client demands. The introduction of new technologies and services embodying new technologies and the emergence of new industry standards and practices could render our existing technologies and services obsolete and unmarketable or require unanticipated investments in technology. We continually make enhancements and other modifications to our proprietary technologies, and these changes may contain design or performance defects that are not readily apparent. If our proprietary technologies fail to achieve their intended purpose or are less effective than technologies used by our competitors, our business could be harmed. Our future success will depend in part on our ability to successfully adapt to these rapidly changing online media formats and other technologies. If we fail to adapt successfully, we could lose clients or advertising inventory. 19 Table of Contents We rely on certain advertising agencies for the purchase of various advertising and marketing services on behalf of their clients. Such agencies may have or develop high-risk credit profiles, which may result in credit risk to us. A portion of our client business is sourced through advertising agencies and, in many cases, we contract with these agencies and not directly with the underlying client. Contracting with these agencies subjects us to greater credit risk than where we contract with clients directly. In many cases, agencies are not required to pay us unless and until they are paid by the underlying client. In addition, many agencies are thinly capitalized and have or may develop high-risk credit profiles. This credit risk may vary depending on the nature of an agency’s aggregated client base. If an agency became insolvent, or if an underlying client did not pay the agency, we may be required to write off account receivables as bad debt. Any such write-offs could have a materially negative effect on our results of operations for the periods in which the write-offs occur. Damage to our reputation could harm our business, financial condition and results of operations. Our business is dependent on attracting a large number of visitors to our and our third-party publishers’ websites and providing leads, inquiries, clicks, calls, applications, and customers to our clients, which depends in part on our reputation within the industry and with our clients. Certain other companies within our industry regularly engage in activities that others may view as unlawful or inappropriate. These activities by third-parties, such as spyware or deceptive promotions, may be seen as characteristic of participants in our industry and may therefore harm the reputation of all participants in our industry, including us. Our ability to attract potential users and, thereby, clients, also depends in part on users receiving competitive levels of customer service, responsiveness and prices from our clients. If our clients do not provide competitive levels of service to users, our reputation and therefore our ability to attract additional clients and users could be harmed. In addition, from time to time, we may be subject to investigations, inquiries or litigation by various regulators, which may harm our reputation regardless of the outcome of any such action. For example, in 2012 we responded to a civil investigation conducted by the attorneys general of a number of states into certain of our marketing and business practices resulting in us entering into an Assurance of Voluntary Compliance agreement. Negative perceptions of our business may result in additional regulation, enforcement actions by the government and increased litigation, any of which may affect our business and result in lower revenue. We also believe that building brand awareness is important to achieving increased demand for certain of our products and services. Accordingly, we have dedicated, and expect to continue to dedicate, significant operating capital and resources to building brand awareness, which may not be successful. Our failure to build brand awareness may adversely affect our ability to attract and retain clients in a cost-effective manner and as a result, our business, financial condition and results of operations. Any damage to our reputation, including from publicity from legal proceedings against us or companies that work within our industry, governmental proceedings, consumer class action litigation, or the disclosure of information security breaches or private information misuse, could adversely affect our business, financial condition and results of operations. If we do not effectively manage any future growth or if we are not able to scale our products quickly enough to meet our clients’ needs, our operating performance will suffer and we may lose clients. We have historically experienced growth in our operations and operating locations. This growth has placed, and any future growth will continue to place, significant demands on our management and our operational and financial infrastructure. Growth, if any, may make it more difficult for us to accomplish the following: 20 • successfully scaling our technology to accommodate a larger business and integrate acquisitions; • maintaining our standing with key vendors, including Internet search companies and third-party publishers; Table of Contents Our future success depends in part on the efficient performance of our software and technology infrastructure. As the numbers of websites and Internet users increase, our technology infrastructure may not be able to meet the increased demand. Unexpected constraints on our technology infrastructure could lead to slower website response times or system failures and adversely affect the availability of websites and the level of user responses received, which could result in the loss of clients or revenue or harm to our business and results of operations. In addition, our personnel, systems, procedures, and controls may be inadequate to support our future operations. The improvements required to manage growth may require us to make significant expenditures, expand, train and manage our employee base, and reallocate valuable management resources. We may spend substantial amounts to purchase or lease data centers and equipment, upgrade our technology and network infrastructure to handle increased traffic on our owned and operated websites and roll out new products and services. This expansion could be expensive and complex and could result in inefficiencies or operational failures. If we do not implement this expansion successfully, or if we experience inefficiencies and operational failures during its implementation, the quality of our products and services and our users’ experience could decline. This could damage our reputation and cause us to lose current and potential users and clients. The costs associated with these adjustments to our architecture could harm our operating results. Accordingly, if we fail to effectively manage growth, our operating performance will suffer, and we may lose clients, key vendors and key personnel. Interruption or failure of our information technology and communications systems could impair our ability to effectively deliver our services, which could cause us to lose clients and harm our results of operations. Our delivery of marketing and media services depends on the continuing operation of our technology infrastructure and systems. Any damage to or failure of our systems could result in interruptions in our ability to deliver offerings quickly and accurately or process visitors’ responses emanating from our various web presences. Interruptions in our service could reduce our revenue and profits, and our reputation could be damaged if users or clients perceive our systems to be unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, break-ins, hardware or software failures, telecommunications failures, cyber attacks, computer viruses or other attempts to harm our systems, and similar events. If we or third-party data centers that we utilize were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly through a major power outage and their fuel supply could also be inadequate during a major power outage or disruptive event. Furthermore, we do not currently have backup generators at our Foster City, California headquarters. Information systems such as ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from switches to and from back-up generators. This could give rise to obligations to certain of our clients which could have an adverse effect on our results of operations for the period of time in which any disruption of utility services to us occurs. Our primary data center is at a third-party co-location center in San Francisco, California. All of the critical components of the system are redundant and we have a backup data center in Las Vegas, Nevada. We have implemented these backup systems and redundancies to minimize the risk associated with earthquakes, fire, power loss, telecommunications failure, and other events beyond our control; however, these backup systems may fail or may not be adequate to prevent losses. Any unscheduled interruption in our service would result in an immediate loss of revenue. If we experience frequent or persistent system failures, the attractiveness of our technologies and services to clients and third-party 21 • maintaining our client service standards; and • developing and improving our operational, financial and management controls and maintaining adequate reporting systems and procedures. Table of Contents publishers could be permanently harmed. The steps we have taken to increase the reliability and redundancy of our systems are expensive, reduce our operating margin and may not be successful in reducing the frequency or duration of unscheduled interruptions. Acquisitions and investments could complicate operations, or could result in dilution and other harmful consequences that may adversely impact our business and results of operations. Acquisitions have historically been an important element of our overall corporate strategy and use of capital. Any possible future acquisitions or investments could be material to our financial condition and results of operations. We may evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business or technology has created, and will continue to create, unforeseen operating difficulties and expenditures. Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business generally. Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, impairment of goodwill or restructuring charges, any of which could harm our financial condition or results. Also, the anticipated benefit of many of our acquisitions may not materialize. We rely on call centers, Internet and data center providers, and other third-parties for key aspects of the process of providing services to our clients, and any failure or interruption in the services and products provided by these third-parties could harm our business. We rely on internal and third-party call centers as well as third-party vendors, data centers and Internet providers. Notwithstanding disaster recovery and business continuity plans and precautions instituted to protect our clients and us from events that could interrupt delivery of services, there is no guarantee that such interruptions would not result in a prolonged interruption in our ability to provide services to our clients. Any temporary or permanent interruption in the services provided by our call centers or third-party providers could significantly harm our business. In addition, any financial or other difficulties our third-party providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over our third-party vendors, which increases our vulnerability to problems with the services they provide. We license technology and related databases from third-parties to facilitate analysis and storage of data and delivery of offerings. We have experienced interruptions and delays in service and availability for data centers, bandwidth and other technologies in the past. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and services could adversely affect our business and could expose us to liabilities to third-parties. We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not be available or may not be available on favorable terms and our business and financial condition could therefore be adversely affected. While we anticipate that our existing cash and cash equivalents, together with availability under our revolving loan facility and cash from operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital, including debt capital, to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses, and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all. In addition, our revolving loan facility limits the incurrence of additional indebtedness and is secured by substantially all of 22 Table of Contents our assets, leaving us with limited collateral for additional financing. Lack of sufficient capital resources could significantly limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies. Our quarterly revenue and results of operations may fluctuate significantly from quarter to quarter due to fluctuations in advertising spending, including seasonal and cyclical effects. In addition to other factors that cause our results of operations to fluctuate, results are also subject to significant seasonal fluctuation. In particular, our quarters ending December 31 (our second fiscal quarter) are typically characterized by seasonal weakness. During that quarter, there is generally lower availability of lead supply from some forms of media during the holiday period on a cost effective basis and some of our clients have lower budgets. In our quarters ending March 31 (our third fiscal quarter), this trend generally reverses with better lead availability and often new budgets at the beginning of the year for our clients with fiscal years ending December 31. Furthermore, advertising spend on the Internet, similar to traditional media, tends to be cyclical and discretionary as a result of factors beyond our control, including budgetary constraints and buying patterns of clients, as well as economic conditions affecting the Internet and media industry. Poor macroeconomic conditions could decrease our clients’ advertising spending and thereby have a material adverse effect on our business, financial condition, and operating results. If the market for online marketing services fails to continue to develop, our success may be limited, and our revenue may decrease. The online marketing services market is relatively new and rapidly evolving, and it uses different measurements from traditional media to gauge its effectiveness. Some of our current or potential clients have little or no experience using the Internet for advertising and marketing purposes and have allocated only limited portions of their advertising and marketing budgets to the Internet. The adoption of online marketing, particularly by those companies that have historically relied upon traditional media for advertising, requires the acceptance of a new way of conducting business, exchanging information and evaluating new advertising and marketing technologies and services. In particular, we are dependent on our clients’ adoption of new metrics to measure the success of online marketing campaigns. Certain of our metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business. We present key metrics such as cost-per-click, cost-per-lead and cost-per-acquisition, some of which are calculated using internal data. We periodically review and refine some of our methodologies for monitoring, gathering, and calculating these metrics. While our metrics are based on what we believe to be reasonable measurements and methodologies, there are inherent challenges in deriving our metrics. In addition, our user metrics may differ from estimates published by third-parties or from similar metrics of our competitors due to differences in methodology. If clients or publishers do not perceive our metrics to be accurate, or if we discover material inaccuracies in our metrics, it could negatively affect our business model and current or potential clients’ willingness to adopt our metrics. We may also experience resistance from traditional advertising agencies who may be advising our clients. We cannot assure you that the market for online marketing services will continue to grow. If the market for online marketing services fails to continue to develop or develops more slowly than we anticipate, the success of our business may be limited, and our revenue may decrease. 23 Table of Contents If we do not adequately protect our intellectual property rights, our competitive position and business may suffer. Our ability to compete effectively depends upon our proprietary systems and technology. We rely on patent, trade secret, trademark and copyright law, confidentiality agreements, and technical measures to protect our proprietary rights. We enter into confidentiality agreements with our employees, consultants, independent contractors, advisors, client vendors, and publishers. These agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our services or obtaining and using our proprietary information. Further, these agreements may not provide an adequate remedy in the event of unauthorized disclosures or uses, and we cannot assure you that our rights under such agreements will be enforceable. Effective patent, trade secret, copyright, and trademark protection may not be available in all countries where we currently operate or in which we may operate in the future. Some of our systems and technologies are not covered by any copyright, patent or patent application. We cannot guarantee that: (i) our intellectual property rights will provide competitive advantages to us; (ii) our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will be effective; (iii) our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; (iv) any of the patent, trademark, copyright, trade secret or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged, or abandoned; (v) competitors will not design around our protected systems and technology; or (vi) that we will not lose the ability to assert our intellectual property rights against others. We have from time to time become aware of third-parties who we believe may have infringed our intellectual property rights. Such infringement or infringement of which we are not yet aware could reduce our competitive advantages and cause us to lose clients, third-party publishers or could otherwise harm our business. Policing unauthorized use of our proprietary rights can be difficult and costly. Litigation, while it may be necessary to enforce or protect our intellectual property rights, could result in substantial costs and diversion of resources and management attention and could adversely affect our business, even if we are successful on the merits. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Third-parties may sue us for intellectual property infringement, which, even if unsuccessful, could require us to expend significant costs to defend or settle. We cannot be certain that our internally developed or acquired systems and technologies do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property rights from third-parties and may be subject to claims of infringement if such parties do not possess the necessary intellectual property rights to the products they license to us. In addition, we have in the past, and may in the future, be subject to legal proceedings and claims that we have infringed the patents or other intellectual property rights of third-parties. These claims sometimes involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own intellectual property rights, if any, may therefore provide little or no deterrence. For example, in December 2012, Internet Patents Corporation (“IPC”) filed a patent infringement lawsuit against us in the Northern District of California alleging that some of our websites infringe a patent held by IPC. IPC is a non-practicing entity that relies on asserting its patents as its primary source of revenue. In addition, third-parties have asserted and may in the future assert intellectual property infringement claims against our clients, and we have agreed in certain circumstances to indemnify and defend against such claims. Any intellectual property-related infringement claims, whether or not meritorious and regardless of the outcome of the litigation, could result in costly litigation and could divert management resources and attention. Should we be found liable for infringement, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages, or limit or curtail our systems and technologies. Moreover, we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could prevent us from competing effectively and increase our costs. 24 Table of Contents Additionally, the laws relating to use of trademarks on the Internet are unsettled, particularly as they apply to search engine functionality. For example, other Internet marketing and search companies have been sued for trademark infringement and other intellectual property-related claims for displaying ads or search results in response to user queries that include trademarked terms. The outcomes of these lawsuits have differed from jurisdiction to jurisdiction. We may be subject to trademark infringement, unfair competition, misappropriation or other intellectual property-related claims which could be costly to defend and result in substantial damages or otherwise limit or curtail our activities, and therefore adversely affect our business or prospects. Limitations on our ability to collect and use data derived from user activities, as well as new technologies that block our ability to deliver Internet-based advertising, could significantly diminish the value of our services and have an adverse effect on our ability to generate revenue. When a user visits our websites, we use technologies, including “cookies,” to collect information such as the user’s IP address and the user’s past responses to our offerings. We also have relationships with data partners that collect and provide us with user data. We access and analyze this information in order to determine the effectiveness of a marketing campaign and to determine how to modify the campaign. The use of cookies is the subject of litigation, regulatory scrutiny and industry self-regulatory activities, including the discussion of “do-not-track” technologies and guidelines. Additionally, users are able to block or delete cookies from their browser. Periodically, certain of our clients and publishers seek to prohibit or limit our collection or use of data derived from the use of cookies. Technologies, tools, software and applications (including new and enhanced web browsers) have been developed, and are likely to continue to be developed, that can block or allow users to opt out of display, search, and Internet-based advertising and content, delete or block the cookies used to deliver such advertising, or shift the location in which advertising appears on pages so that our advertisements do not show up in the most monetizable places on our pages or are obscured. As a result, the adoption of such technologies, tools, software, and applications could reduce the number of display and search advertisements that we are able to deliver and/or our ability to deliver Internet-based advertising and this, in turn, could reduce our results of operations. Interruptions, failures or defects in our data collection systems, as well as privacy concerns and regulatory changes or enforcement actions affecting our or our data partners’ ability to collect user data, could also limit our ability to analyze data from, and thereby optimize, our clients’ marketing campaigns. If our access to data is limited in the future, we may be unable to provide effective technologies and services to clients and we may lose clients and revenue. If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis or effectively prevent fraud could be impaired, which would adversely affect our ability to operate our business. In order to comply with the Sarbanes-Oxley Act of 2002, our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. We may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal control over financial reporting will not prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. All control systems have inherent limitations, and, accordingly, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate financial statements on a timely basis, which could adversely affect our ability to operate our business and could result in regulatory action. 25 Table of Contents As a creator and a distributor of Internet content, we face potential liability and expenses for legal claims based on the nature and content of the materials that we create or distribute. If we are required to pay damages or expenses in connection with these legal claims, our results of operations and business may be harmed. We display original content and third-party content on our websites and in our marketing messages. As a result, we face potential liability based on a variety of theories, including defamation, negligence, deceptive advertising (including Department of Education regulations regarding misrepresentation in education marketing), copyright or trademark infringement. We are also exposed to risk that content provided by third-parties is inaccurate or misleading, and for material posted to our websites by users and other third-parties. These claims, whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. In addition, if we become subject to these types of claims and are not successful in our defense, we may be forced to pay substantial damages. We face additional risks in conducting business in international markets. We have entered into certain international markets and may enter into additional international markets in the future, including through acquisitions. We have limited experience in marketing, selling and supporting our services outside of the United States, and we may not be successful in introducing or marketing our services abroad. For example, in fiscal year 2015, we acquired a company specializing in online marketing to financial services clients in Brazil. While we already have a foothold in the Brazilian education market, our expansion into the financial services market in Brazil is new and as such, we cannot guarantee that we will achieve the same success as we have with the Brazilian education market. There are risks and challenges inherent in conducting business in international markets, such as: If we are unable to successfully expand and market our services abroad, our business and future growth may be harmed, and we may incur costs that may not lead to future revenue. In the past, we have recognized impairments in the carrying value of goodwill. Additional such charges in the future could negatively affect our financial condition and results of operations. We continue to have a substantial amount of goodwill and purchased intangible assets on our consolidated balance sheet as a result of historical acquisitions. The carrying value of goodwill represents the fair value of an 26 • adapting our technologies and services to foreign clients’ preferences and customs; • successfully navigating foreign laws and regulations, including marketing, privacy regulations, employment and labor regulations; • changes in foreign political and economic conditions; • tariffs and other trade barriers, fluctuations in currency exchange rates and potentially adverse tax consequences; • language barriers or cultural differences; • reduced or limited protection for intellectual property rights in foreign jurisdictions; • difficulties and costs in staffing, managing or overseeing foreign operations; • education of potential clients who may not be familiar with online marketing; • challenges in collecting accounts receivables; and • successfully interpreting and complying with the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, particularly when operating in countries with varying degrees of governmental corruption. Table of Contents acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of intangible assets with identifiable useful lives represents the fair value of relationships, content, domain names, acquired technology, among others, as of the acquisition date, and are amortized based on their economic lives. Goodwill expected to contribute indefinitely to our cash flows is not amortized, but must be evaluated for impairment at least annually. If the carrying value exceeds current fair value as determined based on the discounted future cash flows of the related business, the goodwill or intangible asset is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment include adverse changes in the regulatory environment, a reduced market capitalization or other factors leading to reduction in expected long-term growth or profitability. Goodwill impairment analysis and measurement is a process that requires significant judgment. Our stock price and any estimated control premium are factors affecting the assessment of the fair value of our underlying reporting units for purposes of performing any goodwill impairment assessment. For example, our public market capitalization sustained a decline after December 31, 2012 and June 30, 2014 to a value below the net book carrying value of our equity, triggering the need for a goodwill impairment analysis. As a result of our goodwill impairment analysis, we recorded a goodwill impairment charge in those periods. It is possible that another material change could occur in the future. We will continue to conduct impairment analyses of our goodwill on an annual basis, unless indicators of possible impairment arise that would cause a triggering event, and we would be required to take additional impairment charges in the future if any recoverability assessments reflect estimated fair values that are less than our recorded values. Further impairment charges with respect to our goodwill could have a material adverse effect on our financial condition and results of operations. We could lose clients if we fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our clients. We are exposed to the risk of fraudulent clicks or actions on our websites or our third-party publishers’ websites, which could lead our clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and related revenue. Click-through fraud occurs when an individual clicks on an ad displayed on a website, or an automated system is used to create such clicks, with the intent of generating the revenue share payment to the publisher rather than viewing the underlying content. Action fraud occurs when online lead forms are completed with false or fictitious information in an effort to increase a publisher’s compensable actions. From time to time, we have experienced fraudulent clicks or actions. We do not charge our clients for fraudulent clicks or actions when they are detected, and such fraudulent activities could negatively affect our profitability or harm our reputation. If fraudulent clicks or actions are not detected, the affected clients may experience a reduced return on their investment in our marketing programs, which could lead the clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and related revenue. Additionally, we have, from time to time, had to, and in the future may have to, terminate relationships with publishers who we believed to have engaged in fraud. Termination of such relationships entails a loss of revenue associated with the legitimate actions or clicks generated by such publishers. As a public company, we are subject to compliance initiatives that will require substantial time from our management and result in significantly increased costs that may adversely affect our operating results and financial condition. The Securities Exchange Act of 1934, Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and other rules implemented by the SEC and NASDAQ, impose various requirements on public companies, including requiring changes in corporate governance practices. These and proposed corporate governance laws and regulations under consideration may further increase our compliance costs. If compliance with these various legal and regulatory requirements diverts our management’s attention from other business concerns, it could have a material adverse effect on our business, financial condition and 27 Table of Contents results of operations. We also expect that these laws and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than used to be available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors, on committees of our board of directors, or as executive officers. Risks Related to the Ownership of Our Common Stock Our stock price has been volatile, and you may not be able to resell shares of our common stock at or above the price you paid. The trading price of our common stock has been volatile since our initial public offering and may continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this periodic report and others such as: In recent years, the stock market in general, and the market for technology and Internet-based companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse opinion regarding our stock, our stock price and trading volume could decline. The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business or the industries or businesses of our clients. If any of the analysts issue an adverse opinion regarding our stock or if our actual results do not meet analyst estimates, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. 28 • our ability to grow our revenues and Adjusted EBITDA margin and to manage any such growth effectively; • changes in earnings estimates or recommendations by securities analysts; • announcements about our revenue, earnings or other financial results that are not in line with analyst expectations; • our ability to find, develop or retain high quality targeted media on a cost effective basis; • relatively low trading volume in our stock, which creates inherent volatility regardless of factors related to our business performance or prospects; • the sale of, or indication of the intent to sell, substantial amounts of our common stock by our directors, officers or substantial shareholders; • announcements by us or our competitors of new services, significant contracts, commercial relationships, acquisitions or capital commitments; • our commencement of, involvement in, or a perceived threat of litigation or regulatory enforcement action; and • negative publicity about us, our industry, our clients or our clients’ industries. Table of Contents Our directors and executive officers and their respective affiliates have substantial influence over us and could delay or prevent a change in corporate control. As of June 30, 2015, our directors and executive officers, together with their affiliates, beneficially owned approximately 24% of our outstanding common stock. As a result, these stockholders, acting together, have substantial influence over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have significant influence over the management and affairs of our company. Accordingly, this concentration of ownership may have the effect of: Provisions in our charter documents under Delaware law and in contractual obligations could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management. Our amended and restated certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions include: We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. 29 • delaying, deferring or preventing a change in corporate control; • impeding a merger, consolidation, takeover or other business combination involving us; or • discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. • a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors; • no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; • the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; • the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and • advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us. Table of Contents We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We have not declared or paid dividends on our common stock and we do not intend to do so in the near term. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our revolving loan facility restrict our ability to pay dividends. Therefore, you are not likely to receive any dividends on your common stock in the near term. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our principal executive offices are located in a leased facility in Foster City, California, consisting of approximately 63,998 square feet of office space under a lease that expires in October 2018 with the option to extend the lease term by another two years. This facility accommodates our principal engineering, sales, marketing, operations, finance and administrative activities. We also lease additional facilities to accommodate sales, marketing, and operations throughout the United States. Outside of the United States, we also lease facilities to accommodate engineering, sales, marketing, and operations in Brazil and India. We may add new facilities and expand our existing facilities as we add employees and expand our markets, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations. Item 3. Legal Proceedings In December 2012, Internet Patents Corporation (“IPC”) filed a patent infringement lawsuit against us and several other named defendants in the United States District Court for the Northern District of California, alleging that we had infringed a patent held by IPC. In September 2013, the court dismissed a related case because it found that the patent is invalid, and on the same date, the court issued IPC an Order to Show Cause that the lawsuit against us should not be dismissed. In October 2013, IPC filed a response to the order and the court subsequently dismissed the case against us. In October 2013, IPC filed its appeal in the United States Court of Appeals for the Federal Circuit. On June 23, 2015, the United States Court of Appeals for the Federal Circuit affirmed the decision of the district court dismissing IPC’s claim against us. IPC has determined that it will not appeal the Federal Circuit court’s decision, and we therefore believe that the case has been fully resolved. In addition, from time to time we are a party to various legal matters incidental to the conduct of our business. Certain of our outstanding legal matters include claims for indeterminate amounts of damages. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. Based on our current knowledge, we do not believe that there is a reasonable possibility that the final outcome of the pending or threatened legal proceedings to which we are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However, the outcome of such legal matters is subject to significant uncertainties. Not Applicable. 30 Item 4. Mine Safety Disclosures Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has been traded on the NASDAQ Global Select Market under the symbol “QNST” since our initial public offering on February 11, 2010. Prior to this time, there was no public market for our common stock. The following table shows the high and low sale prices per share of our common stock as reported on the NASDAQ Global Select Market for the periods indicated: On August 14, 2015, the closing price as reported on the NASDAQ Global Select Market of our common stock was $4.99 per share and we had approximately 93 stockholders of record of our common stock. We have never declared or paid, and do not anticipate declaring or paying, any dividends on our common stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Our revolving loan facility also restricts our ability to pay dividends. For equity compensation plan information refer to Item 12 in Part III of this Annual Report on Form 10-K. 31 Fiscal Year Ended June 30, 2014 High Low First quarter ended September 30, 2013 $ 9.71 $ 8.40 Second quarter ended December 31, 2013 $ 9.62 $ 8.00 Third quarter ended March 31, 2014 $ 9.09 $ 6.02 Fourth quarter ended June 30, 2014 $ 6.72 $ 5.10 Fiscal Year Ended June 30, 2015 High Low First quarter ended September 30, 2014 $ 6.09 $ 4.10 Second quarter ended December 31, 2014 $ 6.09 $ 3.78 Third quarter ended March 31, 2015 $ 6.83 $ 5.01 Fourth quarter ended June 30, 2015 $ 6.66 $ 5.06 Table of Contents Performance Graph The following performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of QuinStreet, Inc. under the Securities Act of 1933, as amended, or the Exchange Act. The following performance graph shows a comparison from June 30, 2010 through June 30, 2015 of cumulative total return for our common stock, the NASDAQ Composite Index and the RDG Internet Composite Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the RDG Internet Composite Index assume reinvestment of dividends. Recent Sales of Unregistered Securities There were no unregistered sales of our equity securities during the fiscal year ended June 30, 2015. 32 Table of Contents The following selected consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the consolidated financial statements and accompanying notes appearing elsewhere in this report. The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. The results of acquired businesses have been included in our consolidated financial statements since their respective dates of acquisition. Our historical results are not necessarily indicative of our future results and any interim results are not necessarily indicative of the results for a full fiscal year. We derived the consolidated statements of operations data for the fiscal years ended June 30, 2015, 2014, and 2013 and the consolidated balance sheets data as of June 30, 2015 and 2014 from our audited consolidated financial statements appearing elsewhere in this report. The consolidated statements of operations data for the fiscal year ended June 30, 2012 and 2011 and the consolidated balance sheets data as of June 30, 2013, 2012 and 2011 are derived from our audited consolidated financial statements, which are not included in this report. 33 Item 6. Selected Consolidated Financial Data Fiscal Year Ended June 30, 2015 2014 2013 2012 2011 (In thousands, except per share data) Consolidated Statements of Operations Data: Net revenue $ 282,140 $ 282,549 $ 305,101 $ 370,468 $ 403,021 Cost of revenue 252,002 241,907 251,591 283,466 291,991 Gross profit 30,138 40,642 53,510 87,002 111,030 Operating expenses: Product development 17,948 19,548 19,048 21,051 24,163 Sales and marketing 14,544 16,385 14,705 14,074 17,382 General and administrative 16,823 17,046 16,226 23,375 20,396 Impairment of goodwill — 95,641 92,350 — — Total operating expenses 49,315 148,620 142,329 58,500 61,941 Operating (loss) income (19,177 ) (107,978 ) (88,819 ) 28,502 49,089 Interest income 72 115 115 134 169 Interest expense (3,818 ) (3,825 ) (5,200 ) (4,462 ) (4,213 ) Other income (expense), net 2,671 1,493 (69 ) (42 ) 56 Interest and other expense, net (1,075 ) (2,217 ) (5,154 ) (4,370 ) (3,988 ) (Loss) income before income taxes (20,252 ) (110,195 ) (93,973 ) 24,132 45,101 Benefit from (provision for) taxes 244 (36,209 ) 26,601 (11,131 ) (17,887 ) Net (loss) income $ (20,008 ) $ (146,404 ) $ (67,372 ) $ 13,001 $ 27,214 Net (loss) income attributable to common stockholders — Basic and diluted $ (20,008 ) $ (146,404 ) $ (67,372 ) $ 13,001 $ 27,214 Net (loss) income per share attributable to common stockholders: Basic $ (0.45 ) $ (3.36 ) $ (1.57 ) $ 0.28 $ 0.59 Diluted $ (0.45 ) $ (3.36 ) $ (1.57 ) $ 0.28 $ 0.55 Weighted average shares used in computing net (loss) income per share attributable to common stockholders: Basic 44,454 43,528 42,816 45,846 46,222 Diluted 44,454 43,528 42,816 46,859 49,130 (1) (1) (2) Table of Contents The following table presents a reconciliation of adjusted EBITDA to net (loss) income calculated in accordance with U.S. generally accepted accounting principles (GAAP), the most comparable GAAP measure, for each of the periods indicated: 34 Cost of revenue and operating expenses include stock-based compensation expense as follows: Cost of revenue $ 3,120 $ 2,767 $ 3,930 $ 4,293 $ 4,506 Product development 2,395 2,429 2,765 2,570 2,705 Sales and marketing 2,144 2,937 3,264 3,096 3,747 General and administrative 2,196 2,296 2,057 3,037 2,992 See Note 3, Net Loss per Share, to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net (loss) income per share of common stock. June 30, 2015 2014 2013 2012 2011 (In thousands) Consolidated Balance Sheets Data: Cash and cash equivalents $ 60,468 $ 84,177 $ 90,117 $ 68,531 $ 132,290 Working capital 69,549 110,412 111,040 103,222 162,361 Total assets 205,153 276,843 429,547 507,160 524,924 Total liabilities 69,568 131,692 150,652 168,803 169,535 Total debt 15,049 77,263 92,677 107,596 106,048 Total stockholders’ equity 135,585 145,151 278,895 338,357 355,389 Fiscal Year Ended June 30, 2015 2014 2013 2012 2011 (In thousands) Consolidated Statements of Cash Flows Data: Net cash provided by operating activities $ 6,133 $ 18,377 $ 50,665 $ 46,375 $ 78,171 Depreciation and amortization 18,867 26,097 32,325 31,150 27,272 Capital expenditures 3,346 5,455 1,341 2,268 5,363 Fiscal Year Ended June 30, 2015 2014 2013 2012 2011 (In thousands) Other Financial Data: Adjusted EBITDA $ 9,984 $ 24,189 $ 47,872 $ 72,648 $ 90,311 We define adjusted EBITDA as net (loss) income less benefit from (provision for) taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other expense, net, impairment of goodwill and restructuring. Please see the “adjusted EBITDA” section within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information. Fiscal Year Ended June 30, 2015 2014 2013 2012 2011 (In thousands) Net (loss) income $ (20,008 ) $ (146,404 ) $ (67,372 ) $ 13,001 $ 27,214 Interest and other expense, net 1,075 2,217 5,154 4,370 3,988 (Benefit from) provision for taxes (244 ) 36,209 (26,601 ) 11,131 17,887 Depreciation and amortization 18,867 26,097 32,325 31,150 27,272 Stock-based compensation expense 9,855 10,429 12,016 12,996 13,950 Impairment of goodwill — 95,641 92,350 — — Restructuring 439 — — — — Adjusted EBITDA $ 9,984 $ 24,189 $ 47,872 $ 72,648 $ 90,311 (1) (2) (1) (1) Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors.” Management Overview QuinStreet is a leader in performance marketing online. We have built a strong set of capabilities to engage Internet visitors in targeted media and to connect our marketing clients with their potential customers online. We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients. We deliver 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 defined by our agreements with them. References to the delivery of customers means a sale or completed customer transaction (e.g., bound insurance policies or customer appointments with clients). Because we bear the costs of media, our programs must deliver value to our clients and provide for a media yield, or generation of an acceptable margin on our media costs, that provides a sound financial outcome for us. To deliver leads, inquiries, clicks, calls, applications, and customers to our clients, generally we: Our primary financial objective has been and remains creating revenue growth from sustainable sources, at target levels of profitability. Our primary financial objective is not to maximize profits, but rather to achieve target levels of profitability while investing in various growth initiatives, as we continue to believe we are in the early stages of a large, long-term market opportunity. Our Direct Marketing Services (“DMS”) business accounted for substantially all of our net revenue in fiscal years 2015, 2014 and 2013. Our DMS business derives its net revenue from fees earned through the delivery of qualified leads, inquiries, clicks, calls, applications, or customers and, to a lesser extent, display advertisements, or impressions. Through a vertical focus, targeted media presence and our technology platform, we are able to deliver targeted, measurable marketing results to our clients. Our two largest client verticals within our DMS business are financial services and education. Our financial services client vertical represented 42%, 39% and 40% of net revenue in fiscal years 2015, 2014 and 2013. Our 35 • own or access targeted media through business arrangements (e.g., revenue sharing agreements) or by purchasing media (e.g., clicks from major search engines); • run advertisements or other forms of marketing messages and programs in that media to create visitor responses in the form most typically of leads or inquiries (contact information and intent or requests), clicks (to further qualification or matching steps, or to online client applications or offerings), calls (to our owned and operated call centers or that of our clients or their agents), applications (e.g., for enrollment or a financial product), or customers (e.g., bound insurance policies); • match these leads, inquiries, clicks, calls, applications, or customers to client offerings or brands that we believe can meet visitor interests or needs and client targets and requirements; and • optimize client matches and media yield such that we achieve desired results for clients and a sound financial outcome for us. Table of Contents education client vertical represented 38%, 43% and 44% of net revenue in fiscal years 2015, 2014 and 2013. Other DMS client verticals, consisting primarily of business-to-business technology, home services and medical, represented 20%, 18% and 16% of net revenue in fiscal years 2015, 2014 and 2013. We generated the majority of our revenue from sales to clients in the United States. Trends Affecting our Business Client Verticals To date, our financial services and education client verticals have generated the majority of our revenue. We expect that a majority of our revenue in fiscal year 2016 will also be generated from clients in these client verticals. Our financial services client vertical has been affected by a number of factors, including the limited availability of high quality media at acceptable margins caused by changes in search engine algorithms, acquisition of media sources by competitors and increased competition for quality media. These effects may continue to impact our business in the near future. To offset this impact, we have broadened our product set with enhanced click, lead, call and policy products, where we expect better monetization to provide greater access to high quality media sources. Our education client vertical has been significantly affected by regulations and enforcement activity affecting for-profit educational institutions over the past several years. For example, in January 2014, the Department of Education initiated an investigation of a publicly traded for-profit education client with respect to its enrollment activities and job placement, among other things, and in July 2014, the Department of Education signed an agreement with the client requiring it to wind down or sell its campuses. In addition, in October 2014, the Department of Education announced final regulations on gainful employment which went into effect on July 1, 2015. The regulation requires career college programs to prepare students for gainful employment in a recognized occupation which requires the programs’ graduates’ annual loan payments to be less than a defined percentage of earnings. Programs that do not pass the test could lose access to federal financial aid, which typically constitutes an important source of funding for these programs. As a result, such programs may be modified, curtailed, or eliminated. Similar regulatory and enforcement activities have affected and are expected to continue to affect our clients’ businesses and marketing practices, which may result in a decrease in these clients’ spending with us, and fluctuations in the volume and mix of our business with these clients. To offset the impact these activities have had on the for-profit educational clients, we have broadened our product set from our traditional lead business with the addition of better qualified and matched leads or inquiries, clicks and calls to our product mix; we believe these new enhanced products better match for-profit education client needs in the regulatory environment. We have also broadened our markets in education to include not-for-profit schools and international markets in Brazil and India. Development, Acquisition and Retention of Targeted Media One of the primary challenges of our business is acquiring or creating media that is high quality and targeted enough to attract prospects for our clients at costs that work for our business model. In order to grow our business, we must be able to develop or acquire and retain quality targeted media on a cost-effective basis. Consolidation of media sources, changes in search engine algorithms and increased competition on available media has, during some periods, limited and may continue to limit our ability to generate revenue. Seasonality Our results are subject to significant fluctuation as a result of seasonality. In particular, our quarters ending December 31 (our second fiscal quarter) are typically characterized by seasonal weakness. In our second fiscal 36 Table of Contents quarters, there is lower availability of lead supply from some forms of media during the holiday period on a cost effective basis and some of our clients have lower budgets. In our quarters ending March 31 (our third fiscal quarter), this trend generally reverses with better lead availability and often new budgets at the beginning of the year for our clients with fiscal years ending December 31. Regulations Our revenue has fluctuated as a result of recently adopted or amended regulations and the increased enforcement of existing regulations. Our business is affected directly because we operate websites and conduct telemarketing and email marketing, and indirectly as clients adjust their operations as a result of regulatory changes and enforcement activity that affect their industries. One example of a regulatory change that may affect our business is the Telephone Consumer Protection Act (the “TCPA”), which the Federal Communications Commission amended to, among other things, impose heightened consent and opt-out requirements that companies conducting telemarketing must follow. Certain provisions of the regulations became effective in July 2012, and additional regulations requiring prior express written consent for certain types of telemarketing calls became effective in October 2013. Our efforts to comply with the TCPA has not had a material impact on traffic conversion rates. Our clients may make business decisions based on their own experiences with the TCPA regardless of our products, and the changes we implemented to comply with the regulations. Those decisions may negatively affect our revenue or profitability. Clients in our financial services vertical have increasingly been affected by laws and regulations as a result of the adoption of new regulations under The Dodd–Frank Wall Street Reform and Consumer Protection Act and the increased enforcement of new and pre-existing laws and regulations. In addition, our education client vertical has been significantly affected by the adoption of regulations affecting for-profit educational institutions over the past several years, and a higher level of governmental scrutiny is expected to continue. The effect of these regulations, or any future regulations, may continue to result in fluctuations in the volume and mix of our business with these clients. Basis of Presentation General We operate in one reportable segment: DMS. The remainder of our business is classified as “All Other”. See Note 13, Segment Information, to our consolidated financial statements for further discussion and financial information regarding our reportable segment. Net Revenue Our DMS business generates revenue from fees earned through the delivery of qualified leads, inquiries, clicks, calls, applications, customers and, to a lesser extent, display advertisements, or impressions. We deliver targeted and measurable results through a vertical focus that we classify into the following client verticals: financial services, education, and “other” (which includes business-to-business technology, home services and medical). Cost of Revenue Cost of revenue consists primarily of media costs, personnel costs, amortization of intangible assets, depreciation expense and amortization of internal software development costs related to revenue-producing technologies. Media costs consist primarily of fees paid to third-party publishers that are directly related to a revenue-generating event and pay-per-click (PPC) ad purchases from Internet search companies. We pay these third-party publishers and Internet search companies on a revenue-share, cost-per-lead (CPL), cost-per-click, (CPC), or cost-per-thousand-impressions (CPM) basis. Personnel costs include salaries, stock-based 37 Table of Contents compensation expense, bonuses and employee benefit costs. Personnel costs are primarily related to individuals associated with maintaining our servers and websites, our call center operations, our editorial staff, client management, creative team, content, compliance group and media purchasing analysts. Costs associated with software incurred in the development phase or obtained for internal use are capitalized and amortized in cost of revenue over the software’s estimated useful life. We anticipate that our cost of revenue will increase more than our revenue for the near term as we invest in new media partnerships to drive long-term growth as well as a greater gross margin over time. Operating Expenses We classify our operating expenses into three categories: product development, sales and marketing, and general and administrative. Our operating expenses consist primarily of personnel costs and, to a lesser extent, professional services fees, rent and other costs. Personnel costs for each category of operating expenses generally include salaries, stock-based compensation expense, bonuses, commissions and employee benefit costs. Product Development. Product development expenses consist primarily of personnel costs and professional services fees associated with the development and maintenance of our technology platforms, development and launching of our websites, product-based quality assurance and testing. We are constraining expenses generally to the extent practicable; however we expect product and development expenses to increase in absolute dollars in the future. Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, advertising, professional services fees, and travel costs. We are constraining expenses generally to the extent practicable; however we expect sales and marketing expenses to increase in absolute dollars in the future. General and Administrative . General and administrative expenses consist primarily of personnel costs of our executive, finance, legal, employee benefits and compliance, technical support and other administrative personnel, as well as accounting and legal professional services fees, and insurance. We are constraining expenses generally to the extent practicable; however we expect general and administrative expenses to increase in absolute dollars in the future. Interest and Other Expense, Net Interest and other expense, net, consists primarily of interest income, interest expense, and other income and expense. Interest income represents interest earned on our cash, cash equivalents and marketable securities, which may increase or decrease depending on market interest rates and the amounts invested. Interest expense is related to our term loan facility, revolving loan facility, the related interest rate swap, promissory notes issued in connection with our acquisitions, and imputed interest on non-interest bearing notes. Borrowings under our revolving loan facility, the aggregate principal amount of outstanding promissory notes and related interest expense could increase if, among other things, we make additional acquisitions through debt financing. Other income and expense includes gains and losses on foreign currency exchange, gains and losses on sales of websites and domain names that were not considered to be strategically important to our business, and other non-operating items. Income Tax Benefit from (Provision for) We are subject to tax in the United States as well as other tax jurisdictions or countries in which we conduct business. Earnings from our limited non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax. 38 Table of Contents Results of Operations The following table sets forth our consolidated statement of operations for the periods indicated: Net Revenue Net revenue was approximately flat in fiscal year 2015 compared to fiscal year 2014. Our financial services client vertical revenue increased $7.3 million, or 6%, primarily due to our enhanced click, lead, call and policy products which enabled us to access higher quality media for our clients and has led to increased client budgets. Our education client vertical revenue decreased $14.1 million, or 12%, as a result of our education clients’ lower budgets, largely due to uncertainty surrounding regulations and enforcement activity affecting for-profit educational institutions and their operational adjustment to this activity. Revenue from other client verticals increased $6.4 million, or 13%, primarily due to increased client demand in our business-to-business technology and home services client verticals partially offset by decreased client demand in our medical client vertical. Net revenue decreased $22.6 million, or 7%, in fiscal year 2014 compared to fiscal year 2013. Our financial services client vertical revenue decreased $8.2 million, or 7%, primarily due to our inability to cost effectively 39 Fiscal Year Ended 2015 2014 2013 (In thousands) Net revenue $ 282,140 100.0 % $ 282,549 100.0 % $ 305,101 100.0 % Cost of revenue 252,002 89.3 241,907 85.6 251,591 82.5 Gross profit 30,138 10.7 40,642 14.4 53,510 17.5 Operating expenses: Product development 17,948 6.4 19,548 6.9 19,048 6.2 Sales and marketing 14,544 5.1 16,385 5.8 14,705 4.8 General and administrative 16,823 6.0 17,046 6.0 16,226 5.3 Impairment of goodwill — — 95,641 33.8 92,350 30.3 Operating loss (19,177 ) (6.8 ) (107,978 ) (38.1 ) (88,819 ) (29.1 ) Interest income 72 — 115 — 115 — Interest expense (3,818 ) (1.3 ) (3,825 ) (1.4 ) (5,200 ) (1.7 ) Other income (expense), net 2,671 0.9 1,493 0.5 (69 ) — Loss before income taxes (20,252 ) (7.2 ) (110,195 ) (39.0 ) (93,973 ) (30.8 ) Benefit from (provision for) taxes 244 0.1 (36,209 ) (12.8 ) 26,601 8.7 Net loss $ (20,008 ) (7.1 )% $ (146,404 ) (51.8 )% $ (67,372 ) (22.1 )% Cost of revenue and operating expenses include stock-based compensation expense as follows: Cost of revenue $ 3,120 1.1 % $ 2,767 1.0 % $ 3,930 1.3 % Product development 2,395 0.8 2,429 0.9 2,765 0.9 Sales and marketing 2,144 0.8 2,937 1.0 3,264 1.1 General and administrative 2,196 0.8 2,296 0.8 2,057 0.7 Fiscal Year Ended June 30, 2015 - 2014 % Change 2014 - 2013 % Change 2015 2014 2013 (In thousands) Net revenue $ 282,140 $ 282,549 $ 305,101 (0 %) (7 %) Cost of revenue 252,002 241,907 251,591 4 % (4 %) Gross profit $ 30,138 $ 40,642 $ 53,510 (26 %) (24 %) (1) (1) (1) Table of Contents access sufficient high quality media during the first three quarters of the year, as well as due to a reduction in mortgage inquiry traffic caused by an increase in interest rates. Our education client vertical revenue decreased $15.0 million, or 11%, primarily as a result of our education clients’ lower budgets, largely due to uncertainty surrounding regulations and enforcement activity affecting for-profit educational institutions and their operational adjustment to this activity. Revenue from other client verticals increased $0.6 million, or 1%, primarily due to increased client demand in our business-to-business technology and home services client verticals partially offset by decreased client demand in our medical client vertical. Cost of Revenue and Gross Margin Cost of revenue increased $10.1 million, or 4%, in fiscal year 2015 compared to fiscal year 2014, driven by increased media costs of $11.1 million, increased personnel costs of $3.2 million and increased other expenses of $2.5 million, offset by decreased amortization of intangible assets of $7.1 million. The increased media costs were attributable to increased costs for high quality media. The increased personnel costs were attributable to an increase in average headcount. The decreased amortization of intangible assets were attributable to assets from historical acquisitions becoming fully amortized and a reduced number of acquisitions in recent periods. Gross margin was 11% in fiscal year 2015 compared to 14% in fiscal year 2014. The decrease in gross margin was attributable to increased media costs associated with our investments in optimizing high quality media in our financial services vertical. Cost of revenue decreased $9.7 million, or 4%, in fiscal year 2014 compared to fiscal year 2013, driven by decreased media costs of $6.7 million, decreased amortization of intangible assets and depreciation of $6.4 million, and decreased stock-based compensation expense of $1.2 million, partially offset by increased personnel costs of $2.6 million and other increases of $2.0 million. The decreased media costs were primarily attributable to lower revenue levels offset by a lower mix of traffic from owned and operated websites. The decreased amortization of intangible assets were attributable to an amortization charge associated with certain licensed patents in fiscal year 2013, assets from historical acquisitions becoming fully amortized and a reduced number of acquisitions in recent periods. The increased personnel costs were attributable to an increase in average headcount. Gross margin was 14% in fiscal year 2014 compared to 18% in fiscal year 2013. The decrease in gross margin is attributable to lower revenue levels and a lower mix of traffic from owned and operated websites. Operating Expenses Product Development Expenses Product development expenses decreased $1.6 million, or 8%, in fiscal year 2015 compared to fiscal year 2014, primarily due to decreased personnel costs of $1.1 million due to a decrease in average salaries. Product development expenses increased $0.5 million, or 3%, in fiscal year 2014 compared to fiscal year 2013, primarily due to increased personnel costs of $0.8 million, offset by a decrease in stock-based compensation expense of $0.3 million. 40 Fiscal Year Ended June 30, 2015 - 2014 % Change 2014 - 2013 % Change 2015 2014 2013 (In thousands) Product development $ 17,948 $ 19,548 $ 19,048 (8 %) 3 % Sales and marketing 14,544 16,385 14,705 (11 %) 11 % General and administrative 16,823 17,046 16,226 (1 %) 5 % Impairment of goodwill — 95,641 92,350 (100 %) 4 % Operating expenses $ 49,315 $ 148,620 $ 142,329 (67 %) 4 % Table of Contents Sales and Marketing Expenses Sales and marketing expenses decreased $1.8 million, or 11%, in fiscal year 2015 compared to fiscal year 2014, primarily due to decreased stock-based compensation expense of $0.8 million, decreased advertising costs of $0.5 million and decreased personnel costs of $0.4 million. Sales and marketing expenses increased $1.7 million, or 11%, in fiscal year 2014 compared to fiscal year 2013, primarily due to increased advertising expenses for our current product offerings of $1.0 million and increased personnel costs of $0.6 million. General and Administrative Expenses General and administrative expenses decreased $0.2 million, or 1%, in fiscal year 2015 compared to fiscal year 2014. General and administrative expenses increased $0.8 million, or 5%, in fiscal year 2014 compared to fiscal year 2013. This was primarily due to an additional business tax assessment of $0.8 million, an increase in software license fees and maintenance contracts of $0.4 million, an increase in bad debt expense of $0.3 million and an increase in stock-based compensation expense of $0.2 million offset by a decrease in personnel costs of $1.0 million. Impairment of Goodwill As discussed under “Critical Accounting Policies and Estimates,” there was no goodwill impairment charge recognized for the year ended June 30, 2015. We recognized a goodwill impairment charge of $95.6 million for the year ended June 30, 2014 and $92.4 million for the year ended June 30, 2013 due to declines sustained in our public market capitalization. Interest and Other Expense, Net Interest and other expense, net decreased $1.1 million, or 52%, in fiscal year 2015 compared to fiscal year 2014, primarily due to an increase in other income of $1.2 million. This increase can be attributed to an increase in gains on the sale of domain names that were not considered to be strategically important to our business of $2.8 million, offset by a gain of $0.9 million recognized in fiscal year 2014 related to the sale of our shares of preferred stock in our DemandBase investment and an expense of $0.3 million due to the termination of the interest rate swap in connection with our repayment in full of the term loan facility. Interest and other expense, net decreased $2.9 million, or 57%, in fiscal year 2014 compared to fiscal year 2013, primarily due to an increase in other income of $1.6 million and a decrease in interest expense of $1.4 million. The increase in other income is due to the gain of $0.9 million on the sale of our shares of preferred stock in our DemandBase investment and the sale of domain names that were not considered to be strategically important to our business for a gain of $0.5 million. The decrease in interest expense is due to the accelerated amortization of approximately $0.7 million of unamortized deferred upfront costs incurred in connection with the amendment of our term loan facility in fiscal year 2013 and decreased debt obligations. 41 Fiscal Year Ended June 30, 2015 - 2014 % Change 2014 - 2013 % Change 2015 2014 2013 (In thousands) Interest income $ 72 $ 115 $ 115 (37 %) 0 % Interest expense (3,818 ) (3,825 ) (5,200 ) (0 %) (26 %) Other income (expense), net 2,671 1,493 (69 ) (79 %) (2264 %) Interest and other expense, net $ (1,075 ) $ (2,217 ) $ (5,154 ) (52 %) (57 %) Table of Contents Benefit from (Provision for) Taxes We recorded a benefit from taxes of $0.2 million in fiscal year 2015 primarily due to the carryback of prior year tax losses. We recorded a provision for taxes of $36.2 million in fiscal year 2014 primarily due to a one-time non-cash charge to establish a valuation allowance against the majority of our deferred tax assets. The increase in our effective tax rate for the fiscal year 2015 compared to fiscal year 2014 was primarily due to a one-time, non-cash charge recognized in fiscal year 2014 to establish a valuation allowance for a specific portion of our deferred tax assets. The decrease in our effective tax rate for the fiscal year 2014 compared to fiscal year 2013 was primarily due to a one-time, non-cash charge to establish a valuation allowance for a specific portion of our deferred tax assets in 2014. Selected Quarterly Financial Data The following table sets forth our unaudited quarterly condensed consolidated statements of operations data for the eight quarters ended June 30, 2015. We have prepared the statements of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this report and, in the opinion of management, each statement of operations includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report. These quarterly operating results are not necessarily indicative of our operating results for any future period. 42 Fiscal Year Ended June 30, 2015 2014 2013 (In thousands) Benefit from (provision for) taxes $ 244 $ (36,209 ) $ 26,601 Effective tax rate 1.2 % (32.8 %) 28.3 % Three Months Ended June 30, 2015 Mar 31, 2015 Dec 31, 2014 Sept 30, 2014 June 30, 2014 Mar 31, 2014 Dec 31, 2013 Sept 30, 2013 (In thousands, except per share data) (unaudited) Net revenue $ 70,912 $ 75,345 $ 66,694 $ 69,189 $ 67,555 $ 71,888 $ 66,145 $ 76,961 Costs of revenue 63,006 65,192 60,395 63,409 60,553 61,646 56,116 63,592 Gross profit 7,906 10,153 6,299 5,780 7,002 10,242 10,029 13,369 Operating expenses: Product development 4,095 4,653 4,244 4,956 4,754 4,859 4,776 5,159 Sales and marketing 3,639 3,881 3,357 3,667 4,689 3,881 3,659 4,156 General and administrative 3,829 4,300 4,079 4,615 4,217 4,284 4,411 4,134 Impairment of goodwill — — — — 95,641 — — — Operating loss (3,657 ) (2,681 ) (5,381 ) (7,458 ) (102,299 ) (2,782 ) (2,817 ) (80 ) Interest income 11 7 28 26 31 30 27 27 Interest expense (1,092 ) (760 ) (786 ) (1,180 ) (912 ) (911 ) (976 ) (1,026 ) Other (expense) income, net (330 ) 40 636 2,325 1,544 (3 ) (29 ) (19 ) Loss before income taxes (5,068 ) (3,394 ) (5,503 ) (6,287 ) (101,636 ) (3,666 ) (3,795 ) (1,098 ) Benefit from (provision for) taxes 40 178 26 — 2,873 993 (40,234 ) 159 Net loss $ (5,028 ) $ (3,216 ) $ (5,477 ) $ (6,287 ) $ (98,763 ) $ (2,673 ) $ (44,029 ) $ (939 ) Table of Contents Adjusted EBITDA We include adjusted EBITDA in this report because (i) we seek to manage our business to a level of adjusted EBITDA as a percentage of net revenue, (ii) it is a key basis upon which our management assesses our operating performance, (iii) it is one of the primary metrics investors use in evaluating Internet marketing companies, (iv) it is a factor in the evaluation of the performance of our management in determining compensation, and (v) it is an element of certain financial covenants under our revolving loan facility. We define adjusted EBITDA as net loss less benefit from (provision for) taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other expense, net, impairment of goodwill and restructuring. We use adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), non-recurring charges and the non-cash impact of depreciation, amortization, stock-based compensation expense, and impairment of goodwill. Since adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel and in evaluating acquisition opportunities. In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: 43 Three Months Ended June 30, 2015 Mar 31, 2015 Dec 31, 2014 Sept 30, 2014 June 30, 2014 Mar 31, 2014 Dec 31, 2013 Sept 30, 2013 (In thousands, except per share data) (unaudited) Net loss per share: Basic $ (0.11 ) $ (0.07 ) $ (0.12 ) $ (0.14 ) $ (2.25 ) $ (0.06 ) $ (1.01 ) $ (0.02 ) Diluted $ (0.11 ) $ (0.07 ) $ (0.12 ) $ (0.14 ) $ (2.25 ) $ (0.06 ) $ (1.01 ) $ (0.02 ) Other Financial Data: Adjusted EBITDA $ 2,905 $ 4,270 $ 2,131 $ 678 $ 1,802 $ 6,279 $ 6,477 $ 9,631 (1) Net loss per share for the four quarters of each fiscal year may not sum to the total for the fiscal year because of the different number of shares outstanding during each period. • adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements; • adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • adjusted EBITDA does not consider the potentially dilutive impact of issuing stock-based compensation to our management team and employees; • adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; (1) Table of Contents Due to these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, adjusted EBITDA should be considered alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA to net loss, the most comparable GAAP measure, for each of the periods indicated: We seek to manage our business to a level of adjusted EBITDA as a percentage of net revenue. We do so on a fiscal year basis by varying our operations to balance revenue growth and costs throughout the fiscal year. We do not seek to manage our business to a level of adjusted EBITDA on a quarterly basis and we expect our adjusted EBITDA margins to vary from quarter to quarter. Liquidity and Capital Resources As of June 30, 2015, our principal sources of liquidity consisted of cash and cash equivalents of $60.5 million, cash we expect to generate from operations, and our $25.0 million revolving loan facility, which is committed until June 2017, and under which we have drawn $15.0 million. Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. We believe our cash equivalents are liquid and accessible. Our short-term and long-term liquidity requirements primarily arise from our working capital requirements, debt service on our $25.0 million revolving loan facility, and acquisitions from time to time. Our primary operating cash requirements include the payment of media costs, personnel costs, costs of information technology systems and office facilities. Our ability to fund these requirements will depend on our future cash flows, which are determined, in part, by future operating performance and are, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control, and also our ability to access our revolving loan facility. Even though we may not need additional funds, we may still elect to obtain additional debt, issue additional equity securities, or draw down on or increase our borrowing capacity under our current revolving loan facility for other reasons. 44 • adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and • other companies, including companies in our industry, may calculate adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure. Three Months Ended June 30, 2015 Mar 31, 2015 Dec 31, 2014 Sept 30, 2014 June 30, 2014 Mar 31, 2014 Dec 31, 2013 Sept 30, 2013 (In thousands) (unaudited) Net loss $ (5,028 ) $ (3,216 ) $ (5,477 ) $ (6,287 ) $ (98,763 ) $ (2,673 ) $ (44,029 ) $ (939 ) Interest and other income (expense), net 1,411 713 122 (1,171 ) (663 ) 884 978 1,018 (Benefit from) provision for taxes (40 ) (178 ) (26 ) — (2,873 ) (993 ) 40,234 (159 ) Depreciation and amortization 4,089 4,370 4,986 5,422 6,142 6,611 6,668 6,676 Stock-based compensation expense 2,473 2,581 2,526 2,275 2,318 2,450 2,626 3,035 Impairment of goodwill — — — — 95,641 — — — Restructuring — — — 439 — — — — Adjusted EBITDA $ 2,905 $ 4,270 $ 2,131 $ 678 $ 1,802 $ 6,279 $ 6,477 $ 9,631 Adjusted EBITDA as a percentage of net revenue 4 % 6 % 3 % 1 % 3 % 9 % 10 % 13 % Table of Contents We believe that our existing cash, cash equivalents, cash generated from operations and our available borrowings under the revolving loan facility will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Net Cash Provided by Operating Activities Cash flows from operating activities are primarily the result of our net loss adjusted for depreciation and amortization, stock-based compensation expense, impairment of goodwill and changes in working capital components. Cash flows provided by operating activities were $6.1 million for fiscal year 2015 compared to $18.4 million for fiscal year 2014 and $50.7 million for fiscal year 2013. Cash flows provided by operating activities in fiscal year 2015 consisted of a net loss of $20.0 million, which included a restructuring charge of $0.4 million, offset by non-cash adjustments of $26.6 million. In addition, there was a net decrease in cash from changes in working capital of $0.4 million. The non-cash adjustments consisted of depreciation and amortization of $18.9 million, stock-based compensation net of tax benefits of $9.9 million, and gain on the sale of domain names that were not considered to be strategically important to our business of $3.3 million. The changes in working capital accounts were primarily due to an increase in accounts receivable of $4.4 million, offset by an increase in accounts payable and accrued liabilities of $2.4 million and a decrease in net deferred taxes of $1.8 million. The increase in accounts receivable as well as the increase in accounts payable and accrued liabilities were primarily due to the timing of payments. Cash flows provided by operating activities in fiscal year 2014 consisted of a net loss of $146.4 million, offset by non-cash adjustments of $130.4 million and changes in working capital of $34.4 million. The non-cash adjustments primarily consisted of depreciation and amortization of $26.1 million, stock-based compensation expense net of tax benefits of $9.9 million, and impairment of goodwill of $95.6 million, offset by other adjustments, net of $1.1 million. The changes in working capital accounts were primarily due to a decrease in net deferred taxes of $45.1 million and an increase in accounts payable and accrued liabilities of $0.4 million partially offset by an increase in prepaid expenses and other current assets of $6.3 million, an increase in accounts receivable of $3.5 million, and a decrease in deferred revenue and other noncurrent liabilities of $1.3 million. The decrease in deferred taxes was due to a one-time charge to establish a valuation allowance. The increase in accounts receivable was due to timing of collections. Cash flows provided by operating activities in fiscal year 2013 consisted of a net loss of $67.4 million, offset by non-cash adjustments of $136.6 million. In addition, there was a net increase in cash from changes in working capital of $18.5 million. The non-cash adjustments consisted primarily of depreciation and amortization of $32.3 million, stock-based compensation expense net of tax benefits of $11.9 million, and impairment of goodwill of $92.4 million. The changes in working capital accounts were primarily due to an increase in deferred taxes of $30.8 million resulting from tax deductible goodwill write-off, a decrease in accounts receivable of $15.3 million, a net decrease in accounts payable and accrued liabilities of $6.0 million, and a decrease in prepaid expenses and other assets of $3.2 million. The decrease in accounts receivable were primarily due to better collections. The net decrease in accounts payable and accrued and prepaid expenses and other assets were primarily due to timing of payments. 45 Fiscal Year Ended June 30, 2015 2014 2013 (In thousands) Cash flows provided by operating activities $ 6,133 $ 18,377 $ 50,665 Cash flows provided by (used in) investing activities 33,270 (10,731 ) (7,469 ) Cash flows used in financing activities (63,119 ) (13,539 ) (21,616 ) Table of Contents Net Cash Provided by (Used in) Investing Activities Cash flows from investing activities include capital expenditures, capitalized internal development costs, and purchases, sales and maturities of marketable securities. Cash flows provided by investing activities were $33.3 million for fiscal year 2015, compared to cash used in investing activities of $10.7 million for fiscal year 2014 and $7.5 million for fiscal year 2013. Cash provided by investing activities in fiscal year 2015 was primarily due to net sales and maturities of marketable securities of $38.7 million and proceeds from the sale of domain names that were not considered to be strategically important to our business of $3.4 million, offset by capital expenditures and internal software development costs of $5.7 million and a purchase of an investment of $2.5 million. Cash used in investing activities in fiscal year 2014 was primarily due to capital expenditures and internal software development costs of $7.9 million, licenses of intangible assets of $2.8 million and acquisition costs of $0.9 million offset by proceeds from a sale of an investment of $1.4 million and other investing activities of $0.5 million. Net investments in marketable securities totaled $1.0 million. Cash used in investing activities in fiscal year 2013 was primarily due to capital expenditures and internal software development costs of $3.9 million and licenses of intangible assets of $2.5 million. Net investments in marketable securities totaled $1.1 million. Net Cash Used in Financing Activities Cash flows from financing activities include proceeds from the exercise of stock options, withholding taxes related to restricted stock net of share settlement, excess tax benefits from stock-based compensation, proceeds from revolving loan facility, and principal payments on bank debt and acquisition-related notes payable. Cash flows used by financing activities were $63.1 million for fiscal year 2015 compared to $13.5 million for fiscal year 2014 and $21.6 million for fiscal year 2013. Cash used in financing activities in fiscal year 2015 was primarily due to principal payments on our term loan facility and acquisition-related notes payable of $78.0 million and withholding taxes related to restricted stock net share settlement of $1.2 million, offset by proceeds from the revolving loan facility of $15.0 million and exercises of stock options of $1.3 million. Cash used in financing activities in fiscal year 2014 was primarily due to principal payments on acquisition-related notes payable and our term loan facility and related fees of $15.5 million and withholding taxes related to restricted stock net of share settlement of $1.9 million offset by proceeds received from exercises of stock options of $3.3 million and excess tax benefits from exercises of stock options of $0.5 million. Cash used in financing activities in fiscal year 2013 was primarily due to principal payments on acquisition-related notes payable and our term loan facility and related fees of $15.8 million and repurchases of our common stock of $6.2 million under our stock repurchase program partially offset by proceeds received from exercises of stock options of $0.5 million. Off-Balance Sheet Arrangements During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We have variable interest entities, none of which we are the primary beneficiary. 46 Table of Contents Contractual Obligations Our contractual obligations relate primarily to borrowings under our revolving loan facility, acquisition-related note payable, and operating leases. The following table sets forth payments due under our contractual obligations as of June 30, 2015: The above table does not include approximately $3.1 million of long-term income tax liabilities for uncertainty in income taxes due to the fact that we are unable to reasonably estimate the timing of these potential future payments. Loan Facility As of June 30, 2014, we were party to a credit agreement (the “Credit Agreement”) with Comerica Bank (the “Bank”), the administrative agent and lead arranger, which consisted of a $100.0 million five-year term loan facility and a $50.0 million five-year revolving loan facility maturing on November 4, 2016. On June 11, 2015, we entered into the Third Amendment to Credit Agreement (“Third Amendment”) with the Bank to, among other things, pay off in full and terminate the term loan facility, reduce the revolving loan facility from $50.0 million to $25.0 million, and extend the expiration date of the Credit Agreement from November 4, 2016 to June 11, 2017. Borrowings under the revolving loan facility bear interest at a rate of the Eurodollar rate plus 3.00%, and are secured by substantially all of our assets. Pursuant to the Third Amendment, the revolving loan facility is subject to a borrowing base consisting of eligible receivables and certain other customary conditions. We must pay an annual facility fee of $62,500 and an annual unused fee of 0.25% of the undrawn revolving loan facility credit commitments. The Company has the right to prepay the revolving loan facility or permanently reduce the revolving loan facility credit commitments without premium or penalty, in whole or in part at any time. The Credit Agreement, as amended, contains limitations on the Company’s ability to sell assets, make acquisitions, pay dividends, incur capital expenditures and requires us to comply with certain additional covenants. We must also comply with certain financial covenants only when there are amounts outstanding under the revolving loan facility or to draw down amounts under the revolving loan facility. We were in compliance with all covenants under the Credit Agreement as of June 30, 2015 and 2014. As of June 30, 2015, there were no amounts outstanding under the term loan facility, as the term loan facility had been terminated on June 11, 2015. As of June 30, 2014, there was $77.5 million outstanding under the term loan facility. As of June 30, 2015, $15.0 million was outstanding under the revolving loan facility. There were no amounts outstanding under the revolving loan facility as of June 30, 2014. Interest Rate Swap As of June 30, 2014, we held an interest rate swap to reduce our exposure to the financial impact of changing interest rates under our term loan facility. In June 2015, in connection with our repayment in full of the 47 Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years (In thousands) Revolving Loan Facility $ 15,000 $ — $ 15,000 $ — $ — Operating Leases 11,573 3,645 6,568 1,360 — Promissory Note 50 50 — — — Total $ 26,623 $ 3,695 $ 21,568 $ 1,360 $ — Table of Contents term loan facility, we also terminated the interest rate swap agreement. Upon settlement, we recognized an expense of $0.3 million to other income (expense), net in the consolidated statement of operations. Headquarters Lease We entered into a lease agreement in February 2010 for approximately 63,998 square feet of office space located at 950 Tower Lane, Foster City, California. The term of the lease began on November 1, 2010 and expires on October 31, 2018. The monthly base rent was abated for the first 12 calendar months under the lease, and remained at $0.1 million through the 24th calendar month of the term of the lease. After this 24 month period, monthly base rent increased to $0.2 million for the subsequent 12 months and now increases approximately 3% after each 12-month anniversary during the remaining term, including any extensions under our options to extend. We have two options to extend the term of the lease for one additional year for each option following the expiration date of the lease or renewal term, as applicable. Critical Accounting Policies and Estimates We have prepared our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In doing so, we are required 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 reporting period. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Actual results may differ significantly from these estimates. We believe that the critical accounting policies listed below involve our more significant judgments, estimates and assumptions and, therefore, could have the greatest potential impact on our consolidated financial statements. In addition, we believe that a discussion of these policies is necessary to understand and evaluate the consolidated financial statements contained in this report. See Note 2, Summary of Significant Accounting Principles, of our consolidated financial statements for further information on our critical and other significant accounting policies. Revenue Recognition More than 99% of total revenue is derived from the DMS business. DMS revenue is derived primarily from fees which are earned through the delivery of qualified leads, inquiries, clicks, calls, applications, customers and, to a lesser extent, display advertisements, or impressions. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified lead or click is delivered to the client provided that no significant obligations remain. Under our revenue recognition policies, we allocate revenue in an arrangement using the estimated selling price (“ESP”) of deliverables if vendor-specific objective evidence (“VSOE”) of selling price based on historical stand-alone sales or third-party evidence (“TPE”) of selling price does not exist. Due to the unique nature of some of our multiple deliverable revenue arrangements, we may not be able to establish selling prices based on historical stand-alone sales or third-party evidence, therefore we may use our best estimate to establish selling prices for these arrangements under the standard. We establish best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as class of client, size of transaction, 48 Table of Contents available media inventory, pricing strategies and market conditions. We believe the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction. From time to time, we may agree to credit a client for certain leads, inquiries, clicks, calls, applications, or customers if they fail to meet the contractual or other guidelines of a particular client. We have established a sales reserve based on historical experience. To date, such credits have been within our expectations. For a portion of our revenue, we have agreements with providers of online media or third-party publishers used in the generation of qualified leads, inquiries, clicks, calls, applications, or customers. We receive a fee from our clients and pay a fee to publishers either on a revenue-share, cost-per-lead, cost-per-click or cost-per-thousand-impressions basis. We are the primary obligor in the transaction. As a result, the fees paid by our clients are recognized as revenue and the fees paid to our publishers are included in cost of revenue. All other revenue is comprised of (i) set-up and professional services fees and (ii) usage fees. Set-up and professional service fees that do not provide stand-alone value to a client are recognized over the contractual term of the agreement or the expected client relationship period, whichever is longer, effective when the application reaches the “go-live” date. We define the “go-live” date as the date when the application enters into a production environment or all essential functionalities have been delivered. Usage fees are recognized on a monthly basis as earned. Deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition. Stock-Based Compensation We measure and record the expense related to stock-based transactions based on the fair values of the awards as determined on the date of grant. For stock options, we selected and have historically used the Black-Scholes option pricing model to estimate the fair value. In applying the Black-Scholes option pricing model, our determination of fair value is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the stock options and the employees’ actual and projected stock option exercise and pre-vesting employment termination behaviors. We estimate the expected volatility of our common stock based on our historical volatility over the stock option’s expected term. We have no history or expectation of paying dividends on our common stock. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected term of the stock options. The fair value of restricted stock units is determined based on the closing price of our common stock on the date of grant. We recognize stock-based compensation expense over the requisite service period using the straight-line method, based on awards ultimately expected to vest. We estimate future forfeitures at the date of grant and revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Goodwill We conduct a test for the impairment of goodwill at the reporting unit level on at least an annual basis and whenever there are events or changes in circumstances that would more likely than not reduce the estimated fair value of a reporting unit below its carrying value. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows and determining appropriate discount rates, growth rates, an appropriate control premium and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit which could trigger impairment. 49 Table of Contents We have two reporting units for purposes of allocating and testing goodwill, DMS and DSS, which is included in the “All Other” reportable segment. We performed our annual goodwill impairment test on April 30, 2015 for fiscal year 2015. We conducted a qualitative assessment to determine whether it was necessary to perform a two-step quantitative goodwill impairment test. In assessing the qualitative factors, we considered the impact of key factors such as changes in industry and competitive environment, stock price, actual revenue performance compared to previous years, forecasts and cash flow generation. Based on the results of the qualitative assessment, there were no indicators of impairment. We performed our annual goodwill impairment test on April 30, 2014 for fiscal year 2014. While we were permitted to conduct a qualitative assessment to determine whether it was necessary to perform a two-step quantitative goodwill impairment test, for our annual goodwill impairment test in the fourth quarter of fiscal 2014, we performed a quantitative test for both of our reporting units. In the first step of the annual impairment test, we compared the fair value of each reporting unit to its carrying value. We estimated the fair value of the DSS reporting unit using only the income approach as market comparables were not meaningful. We concluded that the carrying value of the DSS reporting unit exceeded its estimated fair value. Therefore we performed a Step 2 analysis, as required, and recorded a goodwill impairment charge of $1.2 million for the entire goodwill of our DSS reporting unit. We estimated the fair value of our DMS reporting unit based on our market capitalization and determined that there were no instances of impairment in our DMS reporting unit. Our public market capitalization sustained a decline after June 30, 2014 primarily due to our operating results in the fourth quarter of fiscal year 2014, to a value below the net book carrying value of our equity. As a result, we determined that this triggered the necessity to conduct an interim goodwill impairment test as of June 30, 2014. We first tested the long-lived assets related to the DMS reporting unit as of June 30, 2014 and, based on the undiscounted cash flows, determined that these assets were not impaired. A two-step process was then required to test goodwill impairment. The first step was to determine if there was an indication of impairment by comparing the estimated fair value to its carrying value including goodwill. Goodwill is considered impaired if the carrying value exceeds the estimated fair value. Upon indication of impairment, a second step is performed to determine the amount of the impairment by comparing the implied fair value of the reporting unit’s goodwill with its carrying value. We estimated the fair value of our DMS reporting unit using a weighting of fair values derived most significantly from the market approach which approximated our market capitalization and to a lesser extent the income approach. Under the market approach, we utilize publicly-traded comparable company information to determine revenue and earnings multiples that were used to value our reporting units adjusted for an estimated control premium. As the DMS reporting unit represented substantially the entire Company, the market approach was reconciled to our market capitalization. Under the income approach, we estimated the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used was based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows. The second step of the goodwill impairment test required us to fair value all assets and liabilities of our DMS reporting unit to determine the implied fair value of goodwill. We compared the implied fair value of the reporting unit’s goodwill to its carrying value. This test resulted in a non-cash goodwill impairment charge in aggregate of $95.6 million for the year ended June 30, 2014. The inputs used to measure the estimated fair value of goodwill are classified as a Level 3 fair value measurement due to the significance of unobservable inputs in income approach using company-specific information. 50 Table of Contents Long-Lived Assets We evaluate long-lived assets, such as property and equipment and purchased intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We apply judgment when estimating the fair value of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize an impairment loss if estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. As mentioned in the Goodwill section above, our public market capitalization sustained a decline after June 30, 2014 and, based on the undiscounted cash flows, determined that these assets were not impaired as of June 30, 2014. We re-evaluated our long-lived assets as of April 30, 2015 and determined that these assets were not impaired. Income Taxes We account for income taxes using an asset and liability approach to record deferred taxes. Our deferred income tax assets represent temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities that will result in deductible amounts in future years, including net operating loss carry forwards. A valuation allowance is recorded against our deferred tax assets which are not expected to be realized. Our judgment regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. We recorded a valuation allowance against the majority of our deferred tax assets at the end of fiscal year 2014 due to the significant negative evidence that the near term realization of certain assets were deemed unlikely. As of June 30, 2015, we believe it is not more likely than not that the net deferred tax assets will be fully realizable and therefore, we continue to maintain the valuation allowance. Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements for information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business. These risks include primarily foreign currency exchange and interest rate risks. Interest Rate Risk We invest our cash equivalents primarily in money market funds. Unrestricted cash and cash equivalents are held for working capital purposes and acquisition financing. We do not enter into investments for trading or speculative purposes. We believe that we do not have material exposure to changes in the fair value of these investments as a result of changes in interest rates due to the short-term nature of our investments. Declines in interest rates may reduce future investment income. However, a hypothetical decline of 1% in the interest rate on our investments would not have a material effect on our consolidated financial statements. As of June 30, 2015, our revolving loan facility had an outstanding balance of $15.0 million. Interest on borrowings under the revolving loan facility is payable quarterly at the Eurodollar rate plus 3.00%. Our exposure to interest rate risk under the revolving loan facility will depend on the extent to which we utilize such facility. A hypothetical change of 1% from prevailing interest rates as of June 30, 2015 would not have a material effect on our interest rate expense. 51 Table of Contents Foreign Currency Exchange Risk To date, our client agreements have been predominately denominated in U.S. dollars, and accordingly, we have limited exposure to foreign currency exchange rate fluctuations related to client agreements, and do not currently engage in foreign currency hedging transactions. As the local accounts for some of our foreign operations are maintained in the local currency of the respective country, we are subject to foreign currency exchange rate fluctuations associated with the remeasurement to U.S. dollars. A hypothetical change of 10% in foreign currency exchange rates would not have a material effect on our consolidated financial statements. 52 Table of Contents Item 8. Financial Statements and Supplementary Data QUINSTREET, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 53 Page Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm 54 Consolidated Balance Sheets 55 Consolidated Statements of Operations 56 Consolidated Statements of Comprehensive Loss 57 Consolidated Statements of Stockholders’ Equity 58 Consolidated Statements of Cash Flows 59 Notes to Consolidated Financial Statements 60 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of QuinStreet, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of QuinStreet, Inc. and its subsidiaries at June 30, 2015 and June 30, 2014, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Jose, California August 19, 2015 54 Table of Contents QUINSTREET, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) See notes to consolidated financial statements 55 June 30, June 30, 2015 2014 Assets Current assets Cash and cash equivalents $ 60,468 $ 84,177 Marketable securities — 38,630 Accounts receivable, net 46,240 41,979 Deferred tax assets 166 223 Prepaid expenses and other assets 11,503 11,647 Total current assets 118,377 176,656 Property and equipment, net 8,565 11,126 Goodwill 56,118 55,451 Other intangible assets, net 19,030 31,441 Deferred tax assets, noncurrent 2 1,712 Other assets, noncurrent 3,061 457 Total assets $ 205,153 $ 276,843 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 20,425 $ 19,517 Accrued liabilities 27,146 27,854 Deferred revenue 1,208 1,175 Debt 49 17,698 Total current liabilities 48,828 66,244 Debt, noncurrent 15,000 59,565 Other liabilities, noncurrent 5,740 5,883 Total liabilities 69,568 131,692 Commitments and contingencies (See Note 9) Stockholders’ equity Common stock: $0.001 par value; 100,000,000 shares authorized; 44,617,850 and 44,025,908 shares issued and outstanding at June 30, 2015 and June 30, 2014, respectively 45 44 Additional paid-in capital 249,358 239,558 Accumulated other comprehensive loss (413 ) (1,054 ) Accumulated deficit (113,405 ) (93,397 ) Total stockholders’ equity 135,585 145,151 Total liabilities and stockholders’ equity $ 205,153 $ 276,843 Table of Contents QUINSTREET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) See notes to consolidated financial statements 56 Fiscal Year Ended June 30, 2015 2014 2013 Net revenue $ 282,140 $ 282,549 $ 305,101 Cost of revenue 252,002 241,907 251,591 Gross profit 30,138 40,642 53,510 Operating expenses: Product development 17,948 19,548 19,048 Sales and marketing 14,544 16,385 14,705 General and administrative 16,823 17,046 16,226 Impairment of goodwill — 95,641 92,350 Operating loss (19,177 ) (107,978 ) (88,819 ) Interest income 72 115 115 Interest expense (3,818 ) (3,825 ) (5,200 ) Other income (expense), net 2,671 1,493 (69 ) Loss before income taxes (20,252 ) (110,195 ) (93,973 ) Benefit from (provision for) taxes 244 (36,209 ) 26,601 Net loss $ (20,008 ) $ (146,404 ) $ (67,372 ) Net loss per share: Basic $ (0.45 ) $ (3.36 ) $ (1.57 ) Diluted $ (0.45 ) $ (3.36 ) $ (1.57 ) Weighted average shares used in computing net loss per share Basic 44,454 43,528 42,816 Diluted 44,454 43,528 42,816 Cost of revenue and operating expenses include stock-based compensation expense as follows: Cost of revenue $ 3,120 $ 2,767 $ 3,930 Product development 2,395 2,429 2,765 Sales and marketing 2,144 2,937 3,264 General and administrative 2,196 2,296 2,057 (1) (1) (1) Table of Contents QUINSTREET, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) See notes to consolidated financial statements 57 Fiscal Year Ended June 30, 2015 2014 2013 Net loss $ (20,008 ) $ (146,404 ) $ (67,372 ) Other comprehensive income (loss) Investments Change in unrealized gain (loss) 13 (17 ) (16 ) Less: reclassification adjustment related to realized loss, net of tax of $0 16 — — Net change 29 (17 ) (16 ) Foreign currency translation adjustment (18 ) (49 ) (32 ) Interest rate swap Change in unrealized gain 225 24 483 Less: reclassification adjustment related to realized loss (gain), net of tax of $0 405 — (8 ) Net change 630 24 475 Other comprehensive income (loss) 641 (42 ) 427 Comprehensive loss $ (19,367 ) $ (146,446 ) $ (66,945 ) Table of Contents QUINSTREET, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share data) See notes to consolidated financial statements 58 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings (Accumulated Deficit) Total Shareholders’ Equity Shares Amount Shares Amount Balance at June 30, 2012 43,350,831 $ 43 (128,800 ) $ (1,178 ) $ 220,552 $ (1,439 ) $ 120,379 $ 338,357 Issuance of common stock upon exercise of stock options 120,508 — — — 457 — — 457 Release of restricted stock 53,910 — — — — — — — Stock-based compensation — — — — 12,109 — — 12,109 Withholding taxes related to restricted stock net share settlement — — — — (244 ) — — (244 ) Excess tax benefits from stock-based compensation — — — — 140 — — 140 Repurchase of common stock — — (509,565 ) (4,979 ) — — — (4,979 ) Retirement of treasury stock (638,365 ) — 638,365 6,157 (6,157 ) — — — Net loss — — — — — — (67,372 ) (67,372 ) Other comprehensive income — — — — — 427 — 427 Balance at June 30, 2013 42,886,884 $ 43 — $ — $ 226,857 $ (1,012 ) $ 53,007 $ 278,895 Issuance of common stock upon exercise of stock options 731,936 1 — — 3,652 — — 3,653 Release of restricted stock 407,088 — — — — — — — Stock-based compensation — — — — 10,562 — — 10,562 Withholding taxes related to restricted stock net share settlement — — — — (1,958 ) — — (1,958 ) Excess tax benefits from stock-based compensation — — — — 445 — — 445 Net loss — — — — — — (146,404 ) (146,404 ) Other comprehensive loss — — — — — (42 ) — (42 ) Balance at June 30, 2014 44,025,908 $ 44 — $ — $ 239,558 $ (1,054 ) $ (93,397 ) $ 145,151 Issuance of common stock upon exercise of stock options 211,878 1 — — 974 — — 975 Release of restricted stock 380,064 — — — — — — — Stock-based compensation — — — — 9,989 — — 9,989 Withholding taxes related to restricted stock net share settlement — — — — (1,163 ) — — (1,163 ) Excess tax benefits from stock-based compensation — — — — — — — — Net loss — — — — — — (20,008 ) (20,008 ) Other comprehensive income — — — — — 641 — 641 Balance at June 30, 2015 44,617,850 $ 45 — $ — $ 249,358 $ (413 ) $ (113,405 ) $ 135,585 Table of Contents QUINSTREET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) See notes to consolidated financial statements Fiscal Year Ended June 30, 2015 2014 2013 Cash Flows from Operating Activities Net loss $ (20,008 ) $ (146,404 ) $ (67,372 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 18,867 26,097 32,325 Impairment of goodwill — 95,641 92,350 Write-off of bank loan upfront fees 809 — 680 Provision for sales returns and doubtful accounts receivable 142 (104 ) (781 ) Stock-based compensation 9,855 10,429 12,016 Excess tax benefits from stock-based compensation — (543 ) (156 ) Gains on sale of investment and domain names (3,331 ) (1,413 ) — Other adjustments, net 247 296 146 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (4,403 ) (3,484 ) 15,309 Prepaid expenses and other assets (186 ) (6,331 ) 3,344 Deferred taxes 1,786 45,075 (30,758 ) Accounts payable 2,030 539 (4,582 ) Accrued liabilities 494 (161 ) (1,382 ) Deferred revenue 33 (702 ) (725 ) Other liabilities, noncurrent (202 ) (558 ) 251 Net cash provided by operating activities 6,133 18,377 50,665 Cash Flows from Investing Activities Capital expenditures (3,346 ) (5,455 ) (1,341 ) Business acquisitions (500 ) (875 ) — Other intangibles — (2,816 ) (2,515 ) Internal software development costs (2,342 ) (2,494 ) (2,511 ) Purchases of marketable securities (16,600 ) (50,770 ) (51,030 ) Proceeds from maturities of marketable securities 26,849 49,768 49,911 Proceeds from sales of marketable securities 28,427 — — Purchase of investment (2,500 ) — — Proceeds from sale of investment — 1,437 — Proceeds from sale of domain names 3,371 476 — Other investing activities (89 ) (2 ) 17 Net cash provided by (used in) investing activities 33,270 (10,731 ) (7,469 ) Cash Flows from Financing Activities Proceeds from exercise of common stock options 1,300 3,329 457 Proceeds from revolving loan facility 15,000 — — Principal payments on term loan facility (77,500 ) (12,500 ) (7,500 ) Payment of bank loan upfront fees (272 ) — (200 ) Principal payments on acquisition-related notes payable (484 ) (2,953 ) (8,128 ) Excess tax benefits from stock-based compensation — 543 156 Withholding taxes related to restricted stock net share settlement (1,163 ) (1,958 ) (244 ) Repurchases of common stock — — (6,157 ) Net cash used in financing activities (63,119 ) (13,539 ) (21,616 ) Effect of exchange rate changes on cash and cash equivalents 7 (47 ) 6 Net (decrease) increase in cash and cash equivalents (23,709 ) (5,940 ) 21,586 Cash and cash equivalents at beginning of period 84,177 90,117 68,531 Cash and cash equivalents at end of period $ 60,468 $ 84,177 $ 90,117 Supplemental Disclosure of Cash Flow Information Cash paid for interest 3,052 3,762 4,333 Cash paid for income taxes 237 1,569 2,163 Supplemental Disclosure of Noncash Investing and Financing Activities Retirement of treasury stock — — 6,157 Short term payables — — 2,500 Purchases of property and equipment 1,832 — 2,041 59 Table of Contents QUINSTREET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company QuinStreet, Inc. (the “Company”) is a leader in performance marketing online. The Company was incorporated in California on April 16, 1999 and reincorporated in Delaware on December 31, 2009. The Company provides customer acquisition programs for clients in various industry verticals such as financial services and education. The corporate headquarters are located in Foster City, California, with additional offices in the United States, Brazil and India. 2. Summary of Significant Accounting Policies Principles of Consolidation The 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 do 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. Certain amounts have been reclassified to conform to current year presentation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates. Revenue Recognition Direct Marketing Services (“DMS”) revenue, which constituted more than 99% in fiscal year 2015, 2014, and 2013, is derived from fees which are earned through the delivery of qualified leads, clicks, calls, customers and, to a lesser extent, display advertisements, or impressions. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified lead, inquiry, click, call, application, customer or impression is delivered to the client provided that no significant obligations remain. The Company allocates revenue in an arrangement using the estimated selling price (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) of selling price based on historical stand-alone sales or third-party evidence (“TPE”) of selling price. Due to the unique nature of some of its multiple deliverable revenue arrangements, the Company may not be able to establish selling prices based on historical stand-alone sales or third-party evidence, therefore the Company may use its best estimate to establish selling prices for these arrangements under the standard. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, class of client, size of transaction, available media inventory, pricing strategies and market conditions. The Company believes the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction. 60 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) From time to time, the Company may agree to credit a client for certain leads, inquiries, clicks, calls, applications, customers or impressions if they fail to meet the contractual or other guidelines of a particular client. The Company has established a sales reserve based on historical experience. To date, such credits have been within management’s expectations. For a portion of its revenue, the Company has agreements with providers of online media or traffic, publishers, used in the generation of qualified leads, inquiries, clicks, calls, applications, and customers. The Company receives a fee from its clients and pays a fee to publishers as a portion of revenue generated or on a cost per lead, cost per click or cost per thousand impressions basis. The Company is the primary obligor in the transaction. As a result, the fees paid by the Company’s clients are recognized as revenue and the fees paid to its publishers are included in cost of revenue. All other revenue, which constituted less than 1% in fiscal year 2015, 2014, and 2013, comprises (i) set-up and professional services fees and (ii) usage fees. Set-up and professional service fees that do not provide stand-alone value to a client are recognized over the contractual term of the agreement or the expected client relationship period, whichever is longer, effective when the application reaches the “go-live” date. The Company defines the “go-live” date as the date when the application enters into a production environment or all essential functionalities have been delivered. Usage fees are recognized on a monthly basis as earned. Deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company’s investment portfolio consists of money market funds. Cash is deposited with financial institutions that management believes are creditworthy. To date, the Company has not experienced any losses on its investment portfolio. The Company’s accounts receivable are derived from clients located principally in the United States. The Company performs ongoing credit evaluation of its clients, does not require collateral, and maintains allowances for potential credit losses on client accounts when deemed necessary. No client accounted for 10% or more of net accounts receivable or net revenue for fiscal years 2015, 2014 or 2013. Fair Value of Financial Instruments The Company’s financial instruments consist principally of cash equivalents, accounts receivable, accounts payable, an acquisition-related promissory note and a revolving loan facility. The fair value of the Company’s cash equivalents is determined based on quoted prices in active markets for identical assets for its money market funds. The recorded values of the Company’s accounts receivable and accounts payable approximate their current fair values due to the relatively short-term nature of these accounts. The fair value of the acquisition-related promissory note approximates its recorded amounts as the interest rates on similar financing arrangements available to the Company at June 30, 2015 approximate the interest rates implied when the acquisition-related promissory note was originally issued and recorded. The Company believes that the fair value of the revolving loan facility approximates its recorded amount at June 30, 2015 as the interest rate on the revolving loan facility is variable and is based on market interest rates and after consideration of default and credit risk. 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. Cash equivalents consist of money market funds at June 30, 2015. 61 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: Internal Software Development Costs The Company incurs costs to develop software for internal use. The Company expenses all costs that relate to the planning and post-implementation phases of development as product development expense. Costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life if the product is expected to have a useful life beyond six months. Costs associated with repair or maintenance of existing sites or the developments of website content are included in cost of revenue in the accompanying statements of operations. The Company’s policy is to amortize capitalized internal software development costs on a product-by-product basis using the straight-line method over the estimated economic life of the application, which is generally two years. The Company capitalized $2.5 million, $2.5 million, and $2.5 million in fiscal years 2015, 2014 and 2013. Amortization of internal software development costs is reflected in cost of revenue. Goodwill The Company conducts a test for the impairment of goodwill at the reporting unit level on at least an annual basis and whenever there are events or changes in circumstances that would more likely than not reduce the estimated fair value of a reporting unit below its carrying value. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows and determining appropriate discount rates, growth rates, an appropriate control premium and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit which could trigger impairment. The Company has two reporting units for purposes of allocating and testing goodwill, DMS and DSS. The Company performed its annual goodwill impairment test on April 30, 2015 for fiscal year 2015. The Company conducted a qualitative assessment to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. In assessing the qualitative factors, the Company considered the impact of key factors such as changes in industry and competitive environment, stock price, actual revenue performance compared to previous years, forecasts and cash flow generation. Based on the results of the qualitative assessment, there were no indicators of impairment. The Company performed its annual goodwill impairment test on April 30, 2014 for fiscal year 2014. While the Company was permitted to conduct a qualitative assessment to determine whether it was necessary to perform a two-step quantitative goodwill impairment test, for its annual goodwill impairment test in the fourth quarter of fiscal 2014, the Company performed a quantitative test for both of its reporting units. In the first step of the annual impairment test, the Company compared the fair value of each reporting unit to its carrying value. The Company estimated the fair value of the DSS reporting unit using only the income approach as market comparables were not meaningful. The Company concluded that the carrying value of the 62 Computer equipment 3 years Software 3 years Furniture and fixtures 3 to 5 years Leasehold improvements the shorter of the lease term or the estimated useful lives of the improvements Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) DSS reporting unit exceeded its estimated fair value. Therefore it performed a Step 2 analysis, as required, and recorded a goodwill impairment charge of $1.2 million for the entire goodwill of its DSS reporting unit. The Company estimated the fair value of its DMS reporting unit based on the Company’s market capitalization and determined that there were no instances of impairment in its DMS reporting unit. The Company’s public market capitalization sustained a decline after June 30, 2014 primarily due to the Company’s operating results in the fourth quarter of fiscal year 2014, to a value below the net book carrying value of the Company’s equity. As a result, the Company determined that this triggered the necessity to conduct an interim goodwill impairment test as of June 30, 2014. The Company first tested the long-lived assets related to the DMS reporting unit as of June 30, 2014 and, based on the undiscounted cash flows, determined that these assets were not impaired. A two-step process was then required to test goodwill impairment. The first step was to determine if there is an indication of impairment by comparing the estimated fair value to its carrying value including goodwill. Goodwill is considered impaired if the carrying value exceeds the estimated fair value. Upon indication of impairment, a second step is performed to determine the amount of the impairment by comparing the implied fair value of the reporting unit’s goodwill with its carrying value. The Company estimated the fair value of its DMS reporting unit using a weighting of fair values derived most significantly from the market approach which approximated the Company’s market capitalization and to a lesser extent the income approach. Under the market approach, the Company utilized publicly-traded comparable company information to determine revenue and earnings multiples that are used to value its reporting units adjusted for an estimated control premium. As the DMS reporting unit represented substantially the entire Company, the market approach was reconciled to the Company’s market capitalization. Under the income approach, the Company estimated the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections were based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used was based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows. The second step of the goodwill impairment test required the Company to fair value all assets and liabilities of its DMS reporting unit to determine the implied fair value of goodwill. The Company compared the implied fair value of the reporting unit’s goodwill to its carrying value. This test resulted in a non-cash goodwill impairment charge in aggregate of $95.6 million for the year ended June 30, 2014. The inputs used to measure the estimated fair value of goodwill are classified as a Level 3 fair value measurement due to the significance of unobservable inputs in income approach using company specific information. Long-Lived Assets The Company evaluates long-lived assets, such as property and equipment and purchased intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company applies judgment when assessing the fair value of the assets based on the undiscounted future cash flows the assets are expected to generate and recognizes an impairment loss if estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. As mentioned in the Goodwill section above, our public market capitalization sustained a decline after June 30, 2014 and, based on the undiscounted cash flows, determined that these assets were not impaired as of June 30, 2014. The Company re-evaluated its long-lived assets as of April 30, 2015 and determined that these assets were not impaired. 63 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Intangible asset are amortized on a straight-line basis over the estimated useful lives of the assets. The weighted average useful life of intangible assets was 8 years as of June 30, 2015 and 7 years as of June 30, 2014. Advertising Costs The Company expenses advertising costs the first time the advertising takes place. The Company’s advertising costs were $0.7 million and $1.1 million in fiscal years 2015 and 2014. The Company did not incur any advertising costs for fiscal year 2013. Income Taxes The Company accounts for income taxes using an asset and liability approach to record deferred taxes. The Company’s deferred income tax assets represent temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities that will result in deductible amounts in future years. Based on estimates, the carrying value of the Company’s net deferred tax assets assumes that it is more likely than not that the Company will be able to generate sufficient future taxable income in the respective tax jurisdictions. The Company’s judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. Foreign Currency Translation The Company’s foreign operations are subject to exchange rate fluctuations. The majority of the Company’s sales and expenses are denominated in U.S. dollars. The functional currency for the majority of the Company’s foreign subsidiaries is the U.S. dollar. For these subsidiaries, assets and liabilities denominated in foreign currency are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for nonmonetary assets and liabilities. Net revenue, cost of revenue and expenses are generally remeasured at average exchange rates in effect during each period. Gains and losses from foreign currency remeasurement are included in other income (expense), net in the consolidated statement of operations. Certain foreign subsidiaries designate the local currency as their functional currency. For those subsidiaries, the assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average exchange rates for the period. The foreign currency translation adjustments are included in accumulated other comprehensive loss as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are recorded in other income (expense), net and were not material for any period presented. Comprehensive Loss Comprehensive loss consists of two components, net loss and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net loss. The Company’s comprehensive loss and accumulated other comprehensive loss consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale and unrealized gains and losses on the interest rate swap. Total accumulated other comprehensive loss is displayed as a separate component of stockholders’ equity. Derivative Instrument During the third quarter of fiscal year 2012, the Company entered into an interest rate swap agreement to hedge the interest rate exposure relating to its borrowing under its term loan facility. The Company does not speculate using derivative instruments. The Company entered into this derivative instrument arrangement solely for the purpose of risk management. 64 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The current and noncurrent portion of the interest rate swap was recorded in accrued liabilities and other liabilities, noncurrent, respectively, on the consolidated balance sheets at fair value based upon quoted market prices at June 30, 2014. Changes in the fair value of this interest rate swap are recorded in other comprehensive (loss) income because the Company has designated the swap as a cash flow hedge. Gains or losses on the interest rate swap as reported in other comprehensive income (loss) are classified to interest expense in the period the hedged item affects earnings. In June 2015, in conjunction with the termination of the term loan facility, the Company terminated its interest rate swap. Refer to Note 8, Debt, for additional information regarding the Company’s interest rate swap. Loss Contingencies The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. Management considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to its management to determine whether such accruals should be adjusted and whether new accruals are required. From time to time, the Company is involved in disputes, litigation and other legal actions. The Company records a charge equal to at least the minimum estimated liability for a loss contingency only when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be reasonably estimated. The actual liability in any such matters may be materially different from the Company’s estimates, which could result in the need to adjust the liability and record additional expenses. Stock-Based Compensation The Company measures and records the expense related to stock-based transactions based on the fair values of stock-based payment awards, as determined on the date of grant. To estimate the fair value of stock options, the Company selected the Black-Scholes option pricing model. In applying the Black-Scholes option pricing model, the Company’s determination of the fair value of the stock option is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the stock options and the employees’ actual and projected stock option exercise and pre-vesting employment termination behaviors. The fair value of restricted stock units is determined based on the closing price of the Company’s common stock on the date of grant. For awards with graded vesting the Company recognizes stock-based compensation expense over the requisite service period using the straight-line method, based on awards ultimately expected to vest. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Refer to Note 10, Stock Benefit Plans, for additional information regarding stock-based compensation. 401(k) Savings Plan The Company sponsors a 401(k) defined contribution plan covering all U.S. employees. There were no employer contributions under this plan for fiscal years 2015, 2014 or 2013. 65 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Recent Accounting Pronouncements In July 2013, the FASB issued a new accounting standard update on the financial presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance becomes effective for fiscal years beginning after December 15, 2014, and it should be applied prospectively to unrecognized tax benefits that exist at the effective date, although retrospective application is permitted. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements. In May 2014, the FASB issued a new accounting standard update on revenue from contracts with clients. The new guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance becomes effective for fiscal years beginning after December 15, 2017, and interim periods within those years with early adoption permitted. The Company is currently assessing the impact of this new guidance. In June 2014, the FASB issued a new accounting standard update on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period, which amends ASC 718, “Compensation — Stock Compensation.” The amendment provides guidance on the treatment of shared-based payment awards with a specific performance target, requiring that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The new guidance becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the impact of this guidance. In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new guidance becomes effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements. In April 2015, the FASB issued a new accounting standard update on the presentation of debt issuance costs. The new guidance provides that debt issuance costs related to a recognized debt liability be presented as a direct reduction from its carrying value. The new guidance becomes effective for fiscal years beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements. 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. 66 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table presents the calculation of basic and diluted net loss per share: 4. Fair Value Measurements, Marketable Securities and Variable Interest Entities Fair Value Measurements 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 June 30, 2015 and 2014, 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 June 30, 2015 and 67 Fiscal Year Ended 2015 2014 2013 (In thousands, except per share data) Numerator: Basic and Diluted: Net loss $ (20,008 ) $ (146,404 ) $ (67,372 ) Denominator: Basic and Diluted: Weighted average shares of common stock used in computing basic and diluted net loss per share 44,454 43,528 42,816 Net loss per share: Basic and Diluted $ (0.45 ) $ (3.36 ) $ (1.57 ) Securities excluded from weighted average shares used in computing diluted net loss per share because the effect would have been anti-dilutive: 8,198 8,843 9,417 Diluted EPS does not reflect any potential common stock relating to stock options or restricted stock units due to net loss incurred for fiscal years 2015, 2014 and 2013. The assumed issuance of any additional shares would be anti-dilutive. 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. (1) (2) (1) (2) Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 2014, the Company used Level 2 assumptions for its U.S. municipal securities, certificates of deposit, acquisition-related promissory notes, revolving loan facility, term loan facility, and interest rate swap. 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 June 30, 2015 and 2014, the Company did not have any Level 3 financial assets or liabilities. The Company’s financial assets and liabilities as of June 30, 2015 and 2014 were categorized as follows in the fair value hierarchy (in thousands): Marketable Securities All liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with maturities greater than three months at the date of purchase are classified as marketable securities. The Company’s marketable securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale designation as of each balance sheet date. Available-for-sale securities are carried 68 Fair Value Measurements as of June 30, 2015 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Total Assets: Money market funds $ 20,156 $ — $ 20,156 Liabilities: Acquisition-related promissory note $ — $ 49 $ 49 Revolving loan facility — 15,000 15,000 $ — $ 15,049 $ 15,049 Fair Value Measurements as of June 30, 2014 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Total Assets: U.S. municipal securities $ — $ 12,816 $ 12,816 Certificates of deposit — 26,293 26,293 Money market funds 38,641 — 38,641 $ 38,641 $ 39,109 $ 77,750 Liabilities: Acquisition-related promissory notes $ — $ 603 $ 603 Term loan facility — 76,660 76,660 Interest rate swap — 630 630 $ — $ 77,893 $ 77,893 These liabilities are carried at historical cost on the Company’s consolidated balance sheets. (1) (1) (1) (1) (1) Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) at fair value, with unrealized gains and losses, net of tax, reported in accumulated comprehensive loss as a component of stockholders’ equity and are presented as current assets as they are available for current operations. The following table summarizes unrealized gains and losses related to cash equivalents and available-for-sale securities held by the Company as of June 30, 2015 and 2014 (in thousands): The Company realized losses of an immaterial amount from sales of its securities for the year ended June 30, 2015. The Company did not realize any gains or losses from sales of its securities for the year ended June 30, 2014. As of June 30, 2015 and 2014, the Company did not hold securities that had maturity dates greater than one year. Variable Interest Entities In April 2015, the Company purchased an interest in a privately held entity that is a VIE. 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 require significant assumptions and judgments, including the identification of significant activities and an assessment of our ability to direct those activities. Based on the results of the assessment performed, the Company has concluded that it is not the primary beneficiary as it does not have the ability to exert significant influence over the VIE’s operations. Accordingly, the interest of $2.5 million as of June 30, 2015 is recognized at cost in other assets, noncurrent on the Company’s consolidated balance sheet. The Company’s interest was evaluated for impairment as of June 30, 2015 which did not result in any indications of impairment. The Company’s maximum exposure to loss as a result of the unconsolidated VIE was $2.5 million at June 30, 2015, which represents the value of the Company’s investment in the VIE. 5. Balance Sheet Components Accounts Receivable, Net Accounts receivable, net is comprised of the following (in thousands): 69 As of June 30 2015 Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Money market funds $ 20,156 $ — $ — $ 20,156 As of June 30, 2014 Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. municipal securities $ 12,812 $ 4 $ — $ 12,816 Certificates of deposit 26,330 — 37 26,293 Money market funds 38,641 — — 38,641 $ 77,783 $ 4 $ 37 $ 77,750 June 30, 2015 2014 Accounts receivable $ 48,304 $ 43,901 Less: Allowance for doubtful accounts (440 ) (364 ) Less: Allowance for sales returns (1,624 ) (1,558 ) $ 46,240 $ 41,979 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Property and Equipment, Net Property and equipment, net is comprised of the following (in thousands): Depreciation expense was $4.0 million, $3.9 million and $3.3 million for fiscal years 2015, 2014 and 2013. Amortization expense related to internal software development costs was $2.4 million, $2.6 million and $2.2 million for fiscal years 2015, 2014 and 2013. Prepaid Expenses and Other Assets Prepaid expenses and other assets are comprised of the following (in thousands): Accrued liabilities Accrued liabilities are comprised of the following (in thousands): 70 June 30, 2015 2014 Computer equipment $ 13,656 $ 15,111 Software 11,079 10,508 Furniture and fixtures 3,124 3,024 Leasehold improvements 1,806 1,796 Internal software development costs 26,056 23,603 55,721 54,042 Less: Accumulated depreciation and amortization (47,156 ) (42,916 ) $ 8,565 $ 11,126 June 30, 2015 2014 Income tax receivable $ 9,719 $ 9,333 Prepaid expenses 1,571 1,649 Other assets 213 665 Total prepaid expenses and other assets $ 11,503 $ 11,647 June 30, 2015 2014 Accrued media costs $ 14,728 $ 14,407 Accrued compensation and related expenses and taxes payable 8,007 7,103 Accrued professional service and other business expenses 4,411 6,344 Total accrued liabilities $ 27,146 $ 27,854 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 6. Intangible Assets, Net and Goodwill Intangible assets, net consisted of the following (in thousands): Amortization of intangible assets was $12.5 million, $19.6 million and $26.8 million for fiscal years 2015, 2014 and 2013. Amortization expense for the Company’s acquisition-related intangible assets as of June 30, 2015 for each of the next five years and thereafter is as follows (in thousands): The changes in the carrying amount of goodwill for fiscal years 2015 and 2014 were as follows (in thousands): The additions to goodwill in fiscal year 2015 relate to the Company’s acquisition of a Brazil-based online lead generation company in exchange for $0.5 million in cash upon closing of the acquisition and estimated payments totaling $0.3 million to be paid in the five years following the acquisition date upon the achievement of certain financial metrics. The additions to goodwill in fiscal year 2014 relate to the Company’s acquisition of an online publishing business in exchange for $0.9 million. There was no impairment charge recorded during fiscal year 2015. The impairment charge recorded during fiscal year 2014 is described in Note 2, Summary of Significant Accounting Policies. 71 June 30, 2015 June 30, 2014 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer/publisher/advertiser relationships $ 37,056 $ (33,916 ) $ 3,140 $ 37,040 $ (31,185 ) $ 5,855 Content 62,162 (54,629 ) 7,533 62,196 (50,348 ) 11,848 Website/trade/domain names 31,533 (24,697 ) 6,836 31,652 (21,482 ) 10,170 Acquired technology and others 36,742 (35,221 ) 1,521 36,744 (33,176 ) 3,568 $ 167,493 $ (148,463 ) $ 19,030 $ 167,632 $ (136,191 ) $ 31,441 Year Ending June 30, Amortization 2016 $ 9,279 2017 6,079 2018 1,991 2019 798 2020 773 Thereafter 110 $ 19,030 Total Balance at June 30, 2013 $ 150,456 Additions 636 Impairment (95,641 ) Balance at June 30, 2014 $ 55,451 Additions 667 Balance at June 30, 2015 $ 56,118 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 7. Income Taxes The components of loss before income taxes are as follows (in thousands): The components of the (benefit from) provision for taxes are as follows (in thousands): The reconciliation between the statutory federal income tax and the Company’s effective tax rates as a percentage of income before income taxes is as follows: 72 Fiscal Year Ended June 30, 2015 2014 2013 US $ (18,917 ) $ (109,257 ) $ (89,087 ) Foreign (1,335 ) (938 ) (4,886 ) $ (20,252 ) $ (110,195 ) $ (93,973 ) Fiscal Year Ended June 30, 2015 2014 2013 Current Federal $ (2,140 ) $ (8,885 ) $ 3,388 State (149 ) (374 ) 577 Foreign 129 361 365 Total current (benefit from) provision for income taxes $ (2,160 ) $ (8,898 ) $ 4,330 Deferred Federal $ 1,954 $ 42,842 $ (29,763 ) State — 2,265 (1,249 ) Foreign (38 ) — 81 Total deferred provision for (benefit from) income taxes 1,916 45,107 (30,931 ) (Benefit from) provision for income taxes $ (244 ) $ 36,209 $ (26,601 ) Fiscal Year Ended June 30, 2015 2014 2013 Federal tax rate 34.0 % 34.0 % 35.0 % States taxes, net of federal benefit 5.8 % 2.4 % 0.9 % Foreign rate differential (1.1 )% (0.6 )% (1.1 )% Stock-based compensation expense (13.3 )% (3.6 )% (1.7 )% Change in valuation allowance (25.0 )% (60.5 )% (1.0 )% Impairment of goodwill — (4.3 )% (4.6 )% Research and development credits 1.6 % 0.3 % — Other (0.8 )% (0.7 )% 0.8 % Effective income tax rate 1.2 % (32.8 )% 28.3 % Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The components of the current and long-term deferred tax (liabilities) assets, net are as follows (in thousands): The Company recorded a valuation allowance against the majority of the Company’s deferred tax assets at the end of fiscal year 2014 due to the significant negative evidence that the near term realization of certain assets were deemed unlikely. The Company regularly assesses the continuing need for a valuation allowance against its deferred tax assets. Significant judgment is required to determine whether a valuation allowance continues to be necessary and the amount of such valuation allowance, if appropriate. The Company considers all available evidence, both positive and negative to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the continued need for a valuation allowance the Company considers, among other things, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, and the duration of statutory carryforward periods. As of June 30, 2015, the Company believes it is not more likely than not that the net deferred tax assets will be fully realizable and therefore continues to maintain a full valuation allowance against its deferred tax assets. As of June 30, 2015, the Company had a federal operating loss carryforward of approximately $14.1 million. As of June 30, 2015, the Company’s state operating loss carryforward was approximately $13.8 million. Included in the federal, California and other state net operating loss carryovers above was $0.1 million, $0.2 million and $0.3 million, respectively, related to stock option windfall deductions which, when realized will be credited to equity. The federal and state net operating loss carryforwards may be subject to various limitations under the Internal Revenue Code and applicable state tax law. The federal and state net operating losses, if not used, will begin to expire on June 30, 2035 and June 30, 2034, respectively. The operating loss carryforward in Brazil is approximately $0.8 million and does not have an expiration date. The operating loss carryforward in India is approximately $2.5 million which will begin to expire on June 30, 2020. The Company has federal and California research and development tax credit carry-forwards of approximately 73 Fiscal Year Ended June 30, 2015 2014 Current: Reserves and accruals $ 3,091 $ 2,686 Stock options 1,942 2,035 Other 74 91 Total current deferred tax assets 5,107 4,812 Valuation allowance - ST (4,940 ) (4,589 ) Current deferred tax assets, net $ 166 $ 223 Noncurrent: Reserves and accruals $ 1,134 $ 1,309 Stock options 5,825 6,106 Intangible assets 53,261 57,083 Net operating loss 5,717 255 Fixed assets (702 ) (1,193 ) Tax Credits 2,785 1,568 Other 93 167 Total noncurrent deferred tax assets 68,113 65,295 Valuation allowance - LT (68,301 ) (63,583 ) Noncurrent deferred tax (liabilities) assets, net $ (188 ) $ 1,712 Total deferred tax (liabilities) assets, net $ (22 ) $ 1,935 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) $1.0 million and $3.8 million, respectively, to offset future taxable income. The federal research and development tax credits, if not used, will begin to expire on June 30, 2033, while the state tax credit carry-forwards do not have an expiration date and may be carried forward indefinitely. United States federal income taxes have not been provided for the $2.0 million of cumulative undistributed earnings of the Company’s foreign subsidiaries as of June 30, 2015. The Company’s present intention is that such undistributed earnings be permanently reinvested offshore, with the exception of the undistributed earnings of its Canadian subsidiary. The Company would be subject to additional United States taxes if these earnings were repatriated. The amount of the unrecognized deferred income tax liability related to these earnings is not material to the financial statements. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands): The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s benefit from (provision for) income taxes. As of June 30, 2015, the Company has accrued $1.1 million for interest and penalties related to the unrecognized tax benefits. The balance of unrecognized tax benefits and the related interest and penalties is recorded as a noncurrent liability on the Company’s consolidated balance sheet. As of June 30, 2015, unrecognized tax benefits of $2.0 million, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. The Company is no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations by tax authorities for years before 2010. The Company files income tax returns in the United States, various U.S. states and certain foreign jurisdictions. As of June 30, 2015, the tax years 2010 through 2014 remain open in the U.S., the tax years 2010 through 2014 remain open in the various state jurisdictions, and the tax years 2012 through 2014 remain open in various foreign jurisdictions. 8. Debt Loan Facility In November 2011, the Company was party to a credit agreement (“Credit Agreement”) with Comerica Bank (the “Bank”), the administrative agent and lead arranger. The Credit Agreement consisted of a $100.0 million five-year term loan facility, with annual principal amortization of 5%, 10%, 15%, 20% and 50%, and a $200.0 million five-year revolving loan facility maturing on November 4, 2016. On February 15, 2013, the Company entered into the First Amendment to Credit Agreement and Amendment to Guaranty (“First Amendment”) with the Bank to, among other things: (1) amend the definition of 74 Fiscal Year 2015 2014 2013 Balance at the beginning of the year $ 3,077 $ 2,692 $ 2,436 Gross increases - current period tax positions 337 379 389 Gross increases - prior period tax positions 115 323 132 Gross decreases - prior period tax positions (44 ) — — Reductions as a result of lapsed statute of limitations (222 ) (317 ) (265 ) Balance at the end of the year $ 3,263 $ 3,077 $ 2,692 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) EBITDA; and (2) reduce the $200.0 million five-year revolving loan facility to $100.0 million, effective as of February 15, 2013. On July 17, 2014, the Company entered into the Second Amendment to Credit Agreement (“Second Amendment”) with the Bank to, among other things, amend the financial covenants and reduce the revolving loan facility from $100.0 million to $50.0 million, each effective as of June 30, 2014. Upfront arrangement fees incurred in connection with the Second Amendment totaled $0.3 million and were deferred and amortized over the remaining term of the arrangement. In connection with the reduction of the revolving loan facility credit line capacity, the Company accelerated amortization of approximately $0.3 million of unamortized deferred upfront costs. On June 11, 2015, the Company entered into the Third Amendment to Credit Agreement (“Third Amendment”) with the Bank to, among other things, pay off in full and terminate the term loan facility, amend the financial covenants, reduce the revolving loan facility from $50.0 million to $25.0 million, and extend the expiration date of the Credit Agreement from November 4, 2016 to June 11, 2017. Pursuant to the Third Amendment, each of the revolving loan facility lenders (other than the Bank) assigned its revolving loan facility credit commitments to the Bank, resulting in the Bank remaining as sole lender under the Credit Agreement. Upfront arrangement fees incurred in connection with the Third Amendment were not material. In connection with the termination of the term loan facility, the Company accelerated amortization of approximately $0.5 million of unamortized deferred upfront costs. The Credit Agreement, as amended from time to time, is secured by substantially all of the Company’s assets. Borrowings under the revolving loan facility are subject to a borrowing base consisting of eligible receivables and certain other customary conditions. Pursuant to the Second Amendment, (1) the applicable margin for base rate borrowings was set at (a) 1.375% for the revolving loan facility or (b) 1.75% for the term loan facility, and (2) the applicable margin for Eurodollar rate borrowings was set at (a) 2.375% for the revolving loan facility or (b) 2.75% for the term loan facility. Thereafter, the applicable margin on base rate and Eurodollar rate borrowings varied depending on our funded debt to EBITDA ratio. Pursuant to the Third Amendment, borrowings under the revolving loan facility bear interest at a Eurodollar rate plus 3.00%, without reference to the Company’s funded debt to EBITDA ratio. EBITDA under the Credit Agreement is defined as net loss less benefit from (provision for) taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other expense, net, acquisition costs for business combinations, extraordinary or non-recurring non-cash expenses or losses including, without limitation, goodwill impairments, and any extraordinary or non-recurring cash expenses in an aggregate amount not to exceed $5.0 million for the life of the Credit Agreement, as amended from time to time. The Company must pay an annual facility fee of $62,500 and an annual unused fee of 0.25% of the undrawn revolving loan facility credit commitments. The Company has the right to prepay the revolving loan facility or permanently reduce the revolving loan facility credit commitments without premium or penalty, in whole or in part at any time. The Credit Agreement, as amended, contains limitations on the Company’s ability to sell assets, make acquisitions, pay dividends, incur capital expenditures, and also requires the Company to comply with certain additional covenants. In addition, pursuant to the Third Amendment, the Company is required to maintain 75 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) financial covenants as follows when there are amounts outstanding under the revolving loan facility or in order to draw 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 ending June 30, 2015; (b) $2,000,000 for the quarter ending September 30, 2015; (c) $3,000,000 for the quarter ending December 31, 2015; (d) $4,000,000 for the quarter ending March 31, 2016; (e) $5,000,000 for the quarter ending June 30, 2016. Thereafter, minimum EBITDA increases each quarter in $1,000,000 increments; provided that there shall be no loss in EBITDA greater than $2,000,000 in any fiscal quarter during such trailing four quarter period. 2. Minimum adjusted quick ratio as of the end of each month of not less than 1.25 to 1.00. The Company was in compliance with the covenants of the Credit Agreement, as amended, as of June 30, 2015 and 2014. As of June 30, 2015, there were no amounts outstanding under the term loan facility, as the term loan facility had been terminated on June 11, 2015. There was $77.5 million outstanding under the term loan facility as of June 30, 2014. As of June 30, 2015, $15.0 million was outstanding under the revolving loan facility. There were no amounts outstanding under the revolving loan facility as of June 30, 2014. Interest Rate Swap The Company entered into an interest rate swap to reduce its exposure to the financial impact of changing interest rates under its term loan facility. The swap encompasses the principal balances scheduled to be outstanding as of January 1, 2014 and thereafter, such principal amount totaling $85.0 million in January 2014 and amortizing to $35.0 million in November 2016. The effective date of the swap is April 9, 2012 with a maturity date of November 4, 2016. The swap agreement exchanges a variable interest rate base (Eurodollar margin) for a fixed interest rate of 0.97% over the term of the agreement. This interest rate swap is designated as a cash flow hedge of the interest rate risk attributable to forecasted variable interest payments. The effective portion of the fair value gains or losses on this swap are included as a component of accumulated other comprehensive loss. In June 2015, in connection with the repayment in full and termination of the term loan facility, the Company also terminated the interest rate swap agreement. Upon settlement, the Company recognized an expense of $0.3 million to other income (expense), net in the consolidated statement of operations. Promissory Notes The Company did not issue any promissory notes in fiscal year 2015, 2014 and 2013. All of the promissory notes are non-interest-bearing. For these notes, interest was imputed such that the notes carry an interest rate commensurate with that available to the Company in the market for similar debt instruments. Accretion of promissory notes recorded as interest expense was not material during fiscal year 2015. Accretion of promissory notes recorded as interest expense was $0.1 million during each of the fiscal years 2014 and 2013. 76 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Debt Maturities The maturities of debt as of June 30, 2015 were as follows (in thousands): 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 and equipment under non-cancelable operating leases with various expiration dates through fiscal year 2020. Rent expense for fiscal years 2015, 2014 and 2013 was $3.5 million, $3.6 million and $3.4 million. 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 all noncancelable operating leases as of June 30, 2015 were as follows (in thousands): In February 2010, the Company entered into a lease agreement for its corporate headquarters located at 950 Tower Lane, Foster City, California. The term of the lease began on November 1, 2010 and expires on October 31, 2018. The Company has the option to extend the term of the lease twice by one additional year. The monthly base rent was abated for the first 12 calendar months under the lease, and was $0.1 million through the 24th calendar month of the term of the lease. Monthly base rent increased to $0.2 million for the subsequent 77 Year Ending June 30, Promissory Note Revolving Loan Facility 2016 $ 50 $ — 2017 — 15,000 50 15,000 Less: imputed interest and unamortized discounts (1 ) — Less: current portion (49 ) — Noncurrent portion of debt $ — $ 15,000 Year Ending June 30, Operating Leases 2016 $ 3,645 2017 3,323 2018 3,245 2019 1,303 2020 57 $ 11,573 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 12 months and now increases approximately 3% after each 12-month anniversary during the remaining term, including any extensions under options to extend. 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 paid 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 June 30, 2015 and 2014. 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 a third party’s intellectual property rights. Where practicable, the Company limits its liabilities under such indemnities. Subject to these limitations, the term of such indemnity 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. The payments under such agreements to date have not been significant. Accordingly, the Company had no liabilities recorded for these agreements as of June 30, 2015 and 2014. 10. Stock Benefit Plans Stock-Based Compensation In fiscal years 2015, 2014 and 2013, the Company recorded stock-based compensation expense of $9.9 million, $10.4 million and $12.0 million. There was no excess tax benefits recognized in fiscal year 2015 due to the Company’s full valuation allowance. The Company recognized related excess tax benefits of $0.5 million and $0.1 million in fiscal years 2014 and 2013. There was no gross benefit of tax deductions recognized in fiscal year 2015 due to the Company’s full valuation allowance. The Company included as part of cash flows from financing activities a gross benefit of tax deductions of $0.5 million and $0.2 million in fiscal years 2014 and 2013 related to stock-based compensation. Stock Incentive Plans In November 2009, the Company’s board of directors adopted the 2010 Equity Incentive Plan (the “2010 Incentive Plan”) and the Company’s stockholders approved the 2010 Incentive Plan in January 2010. The 2010 Incentive Plan became effective upon the completion of the IPO of the Company’s common stock in February 2010. Awards granted after January 2008 but before the adoption of the 2010 Incentive Plan continue to be governed by the terms of the 2008 Equity Incentive Plan (the “2008 Plan”). All outstanding stock awards granted before January 2008 continue to be governed by the terms of the Company’s amended and restated 1999 Equity Incentive Plan (the “1999 Plan”). 78 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The 2010 Incentive Plan provides for the grant of incentive stock options (“ISOs”), 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 for the grant of performance cash awards. The Company may issue ISOs only to its employees. NQSOs and all other awards may be granted to employees, including officers, nonemployee directors and consultants. To date, the Company has issued ISOs, NQSOs, RSUs and performance-based stock awards under the 2010 Incentive Plan. ISOs and NQSOs are generally granted to employees with an exercise price equal to the market price of the Company’s common stock at the date of grant. Stock options granted to employees generally have a contractual term of seven years and vest over four years of continuous service, with 25 percent of the stock options vesting on the one-year anniversary of the date of grant and the remaining 75 percent vesting in equal monthly installments over the three year period thereafter. Restricted stock units granted to employees prior to fiscal year 2013 generally vest over five years of continuous service, with 15 percent of the restricted stock units vesting on the one-year anniversary of the date of grant, 60 percent vesting in equal quarterly installments over the following three years and the remaining 25 percent vesting in equal quarterly installments over the last year of the vesting period. Restricted stock units granted to employees starting in fiscal year 2013 generally vest over four years of continuous service, with 25 percent of the restricted stock units vesting on the one-year anniversary of the date of grant and 6.25% vesting quarterly thereafter for the next 12 quarters. An aggregate of 11,411,822 shares of the Company’s common stock were reserved for issuance under the 2010 Incentive Plan as of June 30, 2015, and this amount will be increased by any outstanding stock awards that expire or terminate for any reason prior to their exercise or settlement. The number of shares of the Company’s common stock reserved for issuance is increased annually through July 1, 2019 by up to five percent of the total number of shares of the Company’s common stock outstanding on the last day of the preceding fiscal year. The maximum number of shares that may be issued under the 2010 Incentive Plan is 30,000,000. There were 9,348,679 shares available for issuance under the 2010 Incentive Plan as of June 30, 2015. In November 2009, the Company’s board of directors adopted the 2010 Non-Employee Directors’ Stock Award Plan (the “Directors’ Plan”) and the stockholders approved the Directors’ Plan in January 2010. The Directors’ Plan became effective upon the completion of the Company’s IPO. The Directors’ Plan provides for the automatic grant of NQSOs and restricted stock units to non-employee directors and also provides for the discretionary grant of NQSOs and restricted stock units. Stock options granted to new non-employee directors vest in equal monthly installments over four years; annual stock option grants to existing directors vest in equal monthly installments over one year and the initial and annual RSU grants vest quarterly over a period of four years. Starting in fiscal year 2015, initial and annual RSU grants vest daily over a period of four years. An aggregate of 2,047,770 shares of the Company’s common stock were reserved for issuance under the Directors’ Plan as of June 30, 2015. This amount is increased annually, by the sum of 200,000 shares and the aggregate number of shares of the Company’s common stock subject to awards granted under the Directors’ Plan during the immediately preceding fiscal year. There were 803,142 shares available for issuance under the Directors’ Plan as of June 30, 2015. Valuation Assumptions The Company estimates the fair value of stock option awards at the date of grant using the Black-Scholes option-pricing model. Options are granted with an exercise price equal to the fair value of the common stock as of the date of grant. The Company calculates the weighted average expected life of options using the simplified method pursuant to the accounting guidance for share-based payments as it does not have sufficient historical exercise experience. The Company estimates the expected volatility of its common stock based on its historical volatility over the stock option’s expected term. The Company has no history or expectation of paying dividends 79 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) on its common stock. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected term of the stock options. The weighted average Black-Scholes model assumptions and the weighted average grant date fair value of stock options in fiscal years 2015, 2014 and 2013 were as follows: 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. Stock Option Award Activity The following table summarizes the stock option award activity under the Company’s stock incentive plans from June 30, 2013 to June 30, 2015: 80 Fiscal Year Ended June 30, 2015 2014 2013 Expected term (in years) 4.6 4.6 4.6 Expected volatility 46 % 48 % 54 % Expected dividend yield 0.0 % 0.0 % 0.0 % Risk-free interest rate 1.6 % 1.4 % 0.7 % Grant date fair value $ 1.87 $ 3.67 $ 3.82 Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding at June 30, 2013 10,039,450 $ 10.31 3.39 $ 5,693,691 Granted 1,449,608 8.98 Exercised (731,936 ) 4.99 Forfeited (790,175 ) 10.75 Expired (2,454,355 ) 10.93 Outstanding at June 30, 2014 7,512,592 $ 10.32 3.27 $ 225,182 Granted 453,608 4.65 Exercised (211,878 ) 4.60 Forfeited (292,815 ) 9.92 Expired (1,583,066 ) 10.46 Outstanding at June 30, 2015 5,878,441 $ 10.07 2.88 $ 950,759 Vested and expected-to-vest at June 30, 2015 5,757,585 $ 10.13 2.82 $ 888,953 Vested and exercisable at June 30, 2015 4,921,713 $ 10.52 2.44 $ 484,367 The expected-to-vest options are the result of applying the pre-vesting forfeiture assumption to total outstanding options. (1) (1) Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes additional information regarding outstanding and exercisable stock options at June 30, 2015: The following table summarizes the total intrinsic value, the cash received and the actual tax benefit of all options exercised during fiscal years 2015, 2014 and 2013: As of June 30, 2015, there was $2.6 million of total unrecognized compensation expense related to unvested stock options which is expected to be recognized over a weighted average period of 2.07 years. Restricted Stock Unit Activity The following table summarizes the restricted stock unit activity under the Company’s stock incentive plans from June 30, 2013 to June 30, 2015: 81 Options Outstanding Options Exercisable Range or Exercise Prices Number of Shares Weighted Average Remaining Contractual Term Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price $3.91-$5.94 677,001 5.96 $ 5.06 307,732 $ 4.90 $5.96-$9.00 476,045 3.34 $ 7.50 397,419 $ 7.48 $9.01-$9.01 798,014 0.99 $ 9.01 798,014 $ 9.01 $9.23-$9.55 959,877 4.31 $ 9.47 642,124 $ 9.43 $9.64-$9.91 655,205 3.58 $ 9.68 496,196 $ 9.69 $10.28-$10.28 631,536 0.08 $ 10.28 631,536 $ 10.28 $10.34-$11.67 1,006,268 2.54 $ 11.32 974,197 $ 11.31 $12.43-$15.60 181,000 3.84 $ 14.19 181,000 $ 14.19 $16.89-$16.89 104,295 1.74 $ 16.89 104,295 $ 16.89 $19.00-$19.00 389,200 1.36 $ 19.00 389,200 $ 19.00 $3.91-$19.00 5,878,441 2.88 $ 10.07 4,921,713 $ 10.52 Fiscal Year Ended June 30, 2015 2014 2013 Intrinsic value $ 131 $ 1,875 $ 423 Cash received 975 3,652 457 Tax benefit — — 113 Shares Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding at June 30, 2013 1,660,209 $ 9.70 1.47 $ 14,328 Granted 1,049,276 9.11 Vested (650,254 ) 7.81 Forfeited (411,894 ) 9.57 Outstanding at June 30, 2014 1,647,337 $ 10.10 1.32 $ 9,077 Granted 3,443,278 5.26 Vested (606,209 ) 5.11 Forfeited (751,776 ) 7.04 Outstanding at June 30, 2015 3,732,630 $ 7.06 1.32 $ 24,064 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of June 30, 2015, there was $14.8 million of total unrecognized compensation expense related to restricted stock units which is expected to be recognized over a weighted average period of 2.84 years. 11. Stockholders’ Equity Retirement of Treasury Stock During the fiscal years ended 2015 and 2014, the Company did not retire any shares of treasury stock. During the fiscal year ended 2013, the Company retired 638,365 shares of treasury stock, with a carrying value of approximately $6.2 million. These retired shares are now included in the Company’s pool of authorized but unissued shares. The retired treasury stock was initially recorded using the cost method. The Company’s accounting policy upon the retirement of treasury stock is to deduct its par value from common stock, reduce additional paid-in capital by the amount recorded in additional paid-in capital when the stock was originally issued and any remaining excess of cost as a deduction (increase) of retained earnings (accumulated deficit). 12. Related Party Transactions On April 22, 2013, the Company entered into an agreement (the “Transition Agreement”) with Bronwyn Syiek, the Company’s President, which provides for the transition and conclusion of Ms. Syiek’s employment with the Company. Pursuant to the Transition Agreement, Ms. Syiek continued to work full time as the Company’s President at her existing base salary through September 30, 2013. Ms. Syiek was eligible for, and received, a bonus for fiscal year 2013. On September 18, 2013, the Company entered into an amendment to the Transition Agreement, (the “Amended Transition Agreement”) whereby the amendment replaced the agreement in its entirety. Pursuant to the Amended Transition Agreement Ms. Syiek’s employment with the Company terminated on October 1, 2013, at which point Ms. Syiek entered into a consulting agreement with the Company, in consideration for which her “Continuous Service” (as defined in the Company’s 2010 Equity Incentive Plan) continued for certain of her equity awards. Ms. Syiek received $37,400 in cash compensation under the consulting agreement. The consulting agreement terminated on March 30, 2014. In connection with its continuing review of non-strategic assets in March 2014, the Company elected to dispose of its equity investment in DemandBase, Inc. (“DemandBase”). In this regard, the Company contacted a number of existing DemandBase investors, including Split Rock Partners II, LP (“Split Rock”). Split Rock is managed by Split Rock Partners II Management, LLC, of which the Company’s director Mr. Simons is a managing director. In addition, the Company’s director Mr. Sands is a member of the board of directors of DemandBase and is also a managing partner of Costanoa Venture Capital, which is an investor in DemandBase. Accordingly, as the Company’s sale of the shares to Split Rock could be deemed a related person transaction, the Company conducted an auction process with respect to the sale of the DemandBase shares. Split Rock ultimately prevailed in that process, and the Company’s Audit Committee approved the sale in accordance with the Company’s related person transactions policy. On April 11, 2014 the Company entered into a Stock Purchase Agreement with Split Rock whereby the partnership purchased all 1,436,781 shares of Series D Preferred Stock of DemandBase owned by the Company for a total purchase price of $1,436,781. 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 is its chief executive officer. The Company’s chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about operating segments, including net sales and operating loss before depreciation and amortization, stock-based compensation expense and goodwill impairment. 82 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Company determined its reportable operating segment is DMS, which derives revenue from fees earned through the delivery of qualified leads, inquiries, clicks, calls, applications, customers and, to a lesser extent, impressions. The remaining segment does not meet the quantitative threshold for an individually reportable segment and is therefore included in the “All other” line in the following table. The Company evaluates the performance of its operating segment based on operating income before depreciation and amortization, stock-based compensation expense and goodwill impairment. The Company does not allocate all of its assets, or its depreciation and amortization expense, stock-based compensation expense, goodwill impairment, interest income, interest expense, other income (expense), net and income tax expense by segment. Accordingly, the Company does not report such information. Summarized information by segment was as follows (in thousands): The following tables set forth net revenue and long-lived assets by geographic area (in thousands): 83 Fiscal Year Ended June 30, 2015 2014 2013 Net revenue by segment: DMS $ 281,225 $ 281,490 $ 304,085 All other 915 1,059 1,016 Total net revenue 282,140 282,549 305,101 Segment operating income before depreciation, amortization, stock-based compensation expense, and goodwill impairment: DMS 9,007 23,558 47,316 All other 538 631 556 Total segment operating income before depreciation, amortization, stock-based compensation expense, and goodwill impairment: 9,545 24,189 47,872 Depreciation and amortization (18,867 ) (26,097 ) (32,325 ) Stock-based compensation expense (9,855 ) (10,429 ) (12,016 ) Impairment of goodwill — (95,641 ) (92,350 ) Total operating loss $ (19,177 ) $ (107,978 ) $ (88,819 ) Fiscal Year Ended June 30, 2015 2014 2013 Net revenue: United States $ 276,182 $ 278,791 $ 302,178 International 5,958 3,758 2,923 Total net revenue $ 282,140 $ 282,549 $ 305,101 June 30, June 30, 2015 2014 Property and equipment, net: United States $ 8,313 $ 10,878 International 252 248 Total property and equipment, net $ 8,565 $ 11,126 Table of Contents Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2015, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of its assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of internal control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management has assessed the effectiveness of the internal control over financial reporting as of June 30, 2015. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework (2013 Framework). Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of June 30, 2015. 84 Table of Contents The effectiveness of our internal control over financial reporting as of June 30, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this annual report on Form 10-K. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. 85 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item concerning directors and executive officers is incorporated herein by reference from the sections to be titled “Election of Class III Directors,” “Board of Directors,” and “Directors and Executive Officers” in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 2015 annual meeting of stockholders (the “Proxy Statement”). The Proxy Statement is expected to be filed no later than 120 days after the end of our fiscal year ended June 30, 2015. The information required by this item with respect to Section 16(a) of the Exchange Act is incorporated herein by reference from the section to be titled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement. Code of Ethics We have adopted a Code of Conduct and Ethics that applies to all of our employees, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), agents and representatives, including directors and consultants. We will make any required disclosure of future amendments to our Code of Conduct and Ethics, or waivers of such provisions, applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions or our directors on the investor relations page of our corporate website ( www.quinstreet.com) . Item 11. Executive Compensation The information required by this item will be set forth in the sections to be titled “Report of the Compensation Committee,” “Board of Directors” and “Executive Compensation” in our Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item will be set forth in the sections to be titled “Executive Compensation” and “Stock Ownership of Certain Beneficial Owners and Management” in our Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item will be included in the section to be titled “Stock Ownership of Certain Beneficial Owners and Management” and “Board of Directors” in the Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this item will be set forth in the section to be titled “Ratification of the Selection of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm” in our Proxy Statement and is incorporated herein by reference. 86 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules (a) We have filed the following documents as part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements 2. Financial Statement Schedules The following financial statement schedule is filed as a part of this report: Schedule II: Valuation and Qualifying Accounts The activity in the allowance for doubtful accounts, sales returns and the deferred tax asset valuation allowance are as follows (in thousands): Note: Additions to the allowance for doubtful accounts and the valuation allowance are charged to expense. Additions to the allowance for sales credits are charged against revenue. All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto. (b) Exhibits See the exhibit index immediately following the signature page of this Annual Report on Form 10-K. 87 Page Report of Independent Registered Public Accounting Firm 54 Consolidated Balance Sheets 55 Consolidated Statements of Operations 56 Consolidated Statements of Comprehensive Loss 57 Consolidated Statements of Stockholders’ Equity 58 Consolidated Statements of Cash Flows 59 Notes to Consolidated Financial Statements 60 Balance at the beginning of the year Charged to expenses/ against revenue Write-offs net of recoveries Balance at the end of the year Allowance for doubtful accounts and sales returns Fiscal year 2013 $ 2,807 $ 97 $ (878 ) $ 2,026 Fiscal year 2014 $ 2,026 $ 322 $ (426 ) $ 1,922 Fiscal year 2015 $ 1,922 $ 923 $ (781 ) $ 2,064 Deferred tax asset valuation allowance Fiscal year 2013 $ — $ 947 $ — $ 2,026 Fiscal year 2014 $ 947 $ 67,225 $ — $ 68,172 Fiscal year 2015 $ 68,172 $ 5,069 $ — $ 73,241 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 19, 2015. POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints Douglas Valenti and Gregory Wong, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission hereby ratifying and confirming that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 88 QuinStreet, Inc. By: /s/ Douglas Valenti Douglas Valenti Chairman and Chief Executive Officer Signature Title Date /s/ Douglas Valenti Douglas Valenti Chairman of the Board and Chief Executive Officer (Principal Executive Officer) August 19, 2015 /s/ Gregory Wong Gregory Wong Chief Financial Officer and Senior Vice President (Principal Financial and Accounting Officer) August 19, 2015 /s/ William Bradley William Bradley Director August 19, 2015 /s/ Stuart M. Huizinga Stuart M. Huizinga Director August 19, 2015 /s/ Robin Josephs Robin Josephs Director August 19, 2015 /s/ John G. McDonald John G. McDonald Director August 19, 2015 /s/ David Pauldine David Pauldine Director August 19, 2015 Table of Contents 89 Signature Title Date /s/ Gregory Sands Gregory Sands Director August 19, 2015 /s/ Marjorie T. Sennett Marjorie T. Sennett Director August 19, 2015 /s/ James Simons James Simons Director August 19, 2015 /s/ Dana Stalder Dana Stalder Director August 19, 2015 Table of Contents EXHIBIT INDEX 90 Exhibit No. Description of Exhibit 2.1 Stock Purchase Agreement, dated November 5, 2010, by and among QuinStreet, Inc., Car Insurance.com, Inc., Car Insurance Agency, Inc., Car Insurance Holdings, Inc., CarInsurance.com, Inc., Lloyd Register IV, Lloyd Register III, David Fitzgerald, Timothy Register, Randy Horowitz and Erick Pace. 3.1 Amended and Restated Certificate of Incorporation. 3.2 Bylaws. 4.1 Form of QuinStreet, Inc.’s Common Stock Certificate. 10.1 + QuinStreet, Inc. 2008 Equity Incentive Plan. 10.2 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for non-executive officer employees). 10.3 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for executive officers). 10.4 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for non-employee directors). 10.5 + QuinStreet, Inc. 2010 Equity Incentive Plan. 10.6 + Forms of Option Agreement and Option Grant Notice under 2010 Equity Incentive Plan (for non-executive officer employees). 10.7 + Forms of Option Agreement and Option Grant Notice under 2010 Equity Incentive Plan (for executive officers). 10.8 + Forms of Senior Management Restricted Stock Unit (RSU) Grant Notice and Agreement under 2010 Equity Incentive Plan (for executive officers). 10.9 + Forms of Restricted Stock Unit (RSU) Grant Notice and Agreement under 2010 Equity Incentive Plan (for non-executive officer employees). 10.10 + Form of Restricted Stock Unit Agreement under 2010 Equity Incentive Plan (for non-employee directors) 10.11 + QuinStreet, Inc. 2010 Non-Employee Directors’ Stock Award Plan. 10.12 + Forms of Option Agreement and Option Grant Notice for Initial Grants under the 2010 Non-Employee Directors’ Stock Award Plan. 10.13 + Forms of Option Agreement and Option Grant Notice for Annual Grants under the 2010 Non-Employee Directors’ Stock Award Plan. 10.15 + Annual Incentive Plan. 10.16 Second Amended and Restated Revolving Credit and Term Loan Agreement, by and among QuinStreet, Inc., the lenders thereto and Comerica Bank as Administrative Agent Sole Lead Arranger and Sole Bookrunner, Bank of America N.A. as Syndication Agent, and Union Bank, N.A. as Documentation Agent dated as of November 4, 2011. 10.17 First Amendment to Second Amended and Restated Revolving Credit and Term Loan Agreement and Amendment to Guaranty dated as of February 15, 2013. 10.18 Office Lease Metro Center, dated as of February 25, 2010, between the registrant and CA-Metro Center Limited Partnership (8) (6) (7) (3) (1) (1) (1) (1) (2) (17) (20) (15) (15) (21) (12) (13) (14) (11) (9) (16) (5) Table of Contents 91 Exhibit No. Description of Exhibit 10.19 + Form of Indemnification Agreement made by and between QuinStreet, Inc. and each of its directors and executive officers. 10.20 Assurance of Voluntary Compliance dated June 26, 2012 by and among QuinStreet, Inc. and the Attorneys General of the States of Alabama, Arizona, Arkansas, Delaware, Florida, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Mississippi, Missouri, Nevada, New York, North Carolina, Ohio, Oregon, South Carolina, Tennessee and West Virginia. 10.21 License and Investment Agreement by and among QuinStreet, Inc., Bronwyn Syiek and TownB Corporation dated August 23, 2012. 10.23 Transition Agreement dated September 18, 2013 between the Company and Scott Mackley. 10.24 Transition Agreement dated September 18, 2013 between the Company and Bronwyn Syiek. 10.26 Second Amendment to the Second Amended and Restated Revolving Credit and Term Loan Agreement, as amended from time to time, dated as of July 17, 2014, by and among QuinStreet, Inc., Comerica Bank, as administrative agent, and certain lenders party thereto. 10.27 + Forms of Senior Management Performance-Based Restricted Stock Unit (RSU) Grant Notice and Agreement under 2010 Equity Incentive Plan (for executive officers). 10.28 + Form of Deferred Restricted Stock Unit Agreement under 2010 Non-Employee Directors’ Stock Award Plan. 10.29 Third Amendment, to the Second Amended and Restated Revolving Credit and Term Loan Agreement, as amended from time to time, dated as of June 11, 2015, by and among QuinStreet, Inc., Comerica Bank, as administrative agent, and certain lenders party thereto. 10.30*+ Forms of Performance-Based Restricted Stock Unit (RSU) Grant Notice and Agreement under 2010 Equity Incentive Plan (for non-executive officer employees) 23.1* Consent of Independent Registered Public Accounting Firm. 24.1* Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K). 31.1* Certification of the Chief Executive Officer of QuinStreet, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2* Certification of the Chief Financial Officer of QuinStreet, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1** Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. 101.INS** XBRL Instance Document 101.SCH** XBRL Taxonomy Extension Schema Document 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document 101. LAB** XBRL Taxonomy Extension Label Linkbase Document 101. PRE** XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith. ** Furnished herewith. + Indicates management contract or compensatory plan. (4) (10) (23) (18) (19) (22) (24) (25) (26) Table of Contents 92 Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Registration Statement on Form S-1 (SEC File No. 333-163228) filed on November 19, 2009. Incorporated by reference Exhibit 99.9 to QuinStreet Inc.’s Registration Statement on Form S-8 (SEC File No. 333-165534) filed on March 17, 2010. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on January 14, 2010. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Amendment No. 3 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on January 26, 2010. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-34628) filed on May 12, 2010. Incorporated by reference to Exhibit 3.2 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to Exhibit 3.4 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on November 8, 2010. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-34628) filed on November 8, 2011. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on June 27, 2012. Incorporated by reference to Exhibit 10.12 to QuinStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No.333-163228) filed on January 14, 2010. Incorporated by reference to Exhibit 99.12 to QuinStreet Inc.’s Registration Statement on Form S-8 (SEC File No. 333-165534) filed on March 17, 2010. Incorporated by reference to Exhibit 99.13 to QuinStreet Inc.’s Registration Statement on Form S-8 (SEC File No. 333-165534) filed on March 17, 2010. Incorporated by reference to Exhibit 99.14 to QuinStreet Inc.’s Registration Statement on Form S-8 (SEC File No. 333-165534) filed on March 17, 2010. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-34628) filed on August 23, 2012. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-34628) filed on February 15, 2013. Incorporated by reference to Exhibit 99.10 to QuinStreet Inc.’s Registration Statement on Form S-8 (SEC File No. 333-165534) filed on March 17, 2010. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on September 19, 2013. Incorporated by reference to Exhibit 10.2 to QuinStreet Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on September 19, 2013. Incorporated by reference to Exhibit 99.11 to QuinStreet Inc.’s Registration Statement on Form S-8 (SEC File No. 333-165534) filed on March 17, 2010. Incorporated by reference to the same numbered exhibit to QuinStreet Inc.’s Annual Report on Form 10-K (SEC File No. 001-34628) filed on August 20, 2013. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) Table of Contents 93 Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on July 22, 2014. Incorporated by reference to Exhibit 10.19 to QuinStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-34628) filed on August 23, 2012. Incorporated by reference to Exhibit 10.27 to QuinStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-34628) filed on September 12, 2014. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-34628) filed on February 6, 2015. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Current Report on Form Annual Report on Form 8-K (SEC File No. 001-34628) filed on June 12, 2015. (22) (23) (24) (25) (26) Exhibit 10.30 Q UIN S TREET , I NC . P ERFORMANCE -B ASED R ESTRICTED S TOCK U NIT (RSU) G RANT N OTICE 2010 E QUITY I NCENTIVE P LAN QuinStreet, Inc. (the “ Company ”), pursuant to its 2010 Equity Incentive Plan (the “ Plan ”), hereby grants to you as the Participant named below a Performance-Based Restricted Stock Unit Award with respect to the number of shares of the Company’s Common Stock set forth below. This Performance-Based Restricted Stock Unit Award is subject to all of the terms and conditions as set forth herein, in the Performance-Based Restricted Stock Unit Agreement (the “ Agreement ”), the Plan and the 2010 Equity Incentive Plan Prospectus (the “ Plan Prospectus ”), all of which are attached hereto and incorporated herein in their entirety. No Monetary Payment Required . You are not required to make any monetary payment (other than applicable Tax Obligations (as defined in the Agreement)) as a condition to receiving the Performance-Based Restricted Stock Unit Award or shares of Common Stock issued upon vesting and settlement of the Performance-Based Restricted Stock Unit Award. Additional Terms/Acknowledgements: The Participant acknowledges receipt of, and understands and agrees to, this Performance-Based Restricted Stock Unit (RSU) Grant Notice, the Agreement, the Plan Prospectus, and the Plan. Participant further acknowledges that as of the Date of Grant, this Performance-Based Restricted Stock Unit (RSU) Grant Notice, the Agreement, the Plan Prospectus, and the Plan set forth the entire understanding between Participant and the Company regarding this Award. Participant: Date of Grant: Target Performance Units: Performance Period: Performance Criteria: Vesting Schedule : The final number of Performance Units to be awarded and eligible for vesting (the “ Earned Performance Units ”) shall be [ ] of the Target Performance Units set forth above based on achievement of the Performance Criteria as determined by the Compensation Committee of the Company’s Board of Directors following the end of the Performance Period (the “ Determination Date ”). If the number of Earned Performance Units is less than the number of Target Performance Units, the excess shall be forfeited on the Determination Date. Earned Performance Units shall become vested (subject to the conditions in the Agreement) in installments over [ ] as follows: [ ] A TTACHMENTS : Performance-Based Restricted Stock Unit Agreement, 2010 Equity Incentive Plan, 2010 Equity Incentive Plan Prospectus Q UIN S TREET , I NC . 2010 E QUITY I NCENTIVE P LAN P ERFORMANCE -B ASED R ESTRICTED S TOCK U NIT A GREEMENT Pursuant to the Performance-Based Restricted Stock Unit (RSU) Grant Notice (“ Grant Notice ”) and this Performance-Based Restricted Stock Unit Agreement (this “ Agreement ”), QuinStreet, Inc. (the “ Company ”) has granted you a “Target” award of Performance-Based Restricted Stock Unit Award (“ Performance-Based Restricted Stock Unit Award ”) under its 2010 Equity Incentive Plan (the “ Plan ”) subject to the terms, conditions, and restrictions set forth in this Agreement, the Grant Notice, and the Plan. Each Performance-Based Restricted Stock Unit (“ Performance Unit ”) represents the right to receive one share of the Company’s Common Stock indicated in the Grant Notice on the terms and conditions set forth herein and in the Grant Notice. Defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your Performance-Based Restricted Stock Unit Award are as follows: 1. V ESTING . Subject to the limitations contained herein, your Earned Performance Units will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. The amount of Earned Performance Units will be based on the achievement of certain Performance Criteria over the relevant Performance Period as specified in the Grant Notice. Immediately upon termination of your Continuous Service for any reason, any unvested portion of your Earned Performance Units shall be forfeited without consideration. 2. C ONVERSION I NTO S HARES . Shares of Common Stock will be issued on the applicable vesting date (or, to the extent not administratively feasible, as soon as practicable thereafter). As a condition to such issuance, you shall have satisfied your Tax Obligations as specified in this Agreement and shall have completed, signed and returned any documents and taken any additional action that the Company deems appropriate to enable it to accomplish the delivery of such shares. In no event will the Company be obligated to issue a fractional share. 3. T AX T REATMENT . (a) Regardless of any actions taken by the Company, you will be ultimately responsible for any withholding tax liabilities, whether as a result of federal, state or other law and whether for the payment and satisfaction of any income tax, social security tax, payroll tax, or payment on account of other tax related to withholding obligations that arise by reason of the Performance-Based Restricted Stock Unit Award, incurred in connection with the Performance-Based Restricted Stock Unit Award becoming vested and Common Stock being issued, or otherwise incurred in connection with the Performance-Based Restricted Stock Unit Award (collectively, “ Tax Obligations ”). (b) Unless otherwise determined by the Company in its sole discretion, and subject to applicable law, the Company shall require you to satisfy the Tax Obligations (as defined below) by the Company deducting from the shares of Common Stock otherwise deliverable to you in settlement of applicable portion of the Performance-Based Restricted Stock Unit Award on the vesting date a number of whole shares having a fair market value (as determined by the Company) as of the date on which the Tax Obligations arise not in excess of the amount of such Tax Obligations determined by the applicable minimum statutory withholding rates. The Company may in its sole discretion permit you to elect an alternative method of satisfying your Tax Obligations with notice to the Company, which may include the following if specified by the Company (and the Company may with notice to you require any of the following methods): (i) by payment by you to the Company in cash or by check an amount equal to the minimum amount of taxes that the Company concludes it is required to withhold under applicable law; or (ii) by the sale by you of a number of shares of Common Stock that are issued on the applicable vesting date under the Performance-Based Restricted Stock Unit Award, which the Company determines is sufficient to generate an amount that meets the Tax Obligations plus additional shares to account for rounding and market fluctuations, and payment of such tax withholding to the Company, and such shares may be sold as part of a block trade with other Participants. You hereby authorize the Company to withhold such tax withholding amount from any amounts owing to you to the Company and to take any action necessary in accordance with this paragraph. (c) The Performance-Based Restricted Stock Unit Award is intended to qualify for the short-term deferral exception to Section 409A of the Code described in the regulations promulgated thereunder, and therefore shares of Common Stock will be issued within 2 1 ⁄ 2 months after the taxable year in which the applicable portion of the Performance-Based Restricted Stock Unit Award is no longer subject to a substantial risk of forfeiture. 4. S ECURITIES L AW C OMPLIANCE . Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to deliver any Common Stock during any period when the Company determines that the conversion of any portion of the Performance-Based Restricted Stock Unit Award or the delivery of shares hereunder would violate any federal, state or other applicable laws and/or may issue shares subject to any restrictive legends that, as determined by the Company’s counsel, is necessary to comply with securities or other regulatory requirements. 5. R ESTRICTIONS ON T RANSFER OF A WARDS . You understand and agree that the Performance-Based Restricted Stock Unit Award may not be sold, given, transferred, assigned, pledged or otherwise hypothecated. 6. C APITALIZATION A DJUSTMENTS . The number of shares of Common Stock subject to your Performance-Based Restricted Stock Unit Award may be adjusted from time to time for Capitalization Adjustments. 7. N O S TOCKHOLDER R IGHTS . You will have no voting or other rights as the Company’s other stockholders with respect to the shares of Common Stock underlying the Performance-Based Restricted Stock Unit Award until issuance of such shares. 8. D IVIDEND E QUIVALENT U NITS . Unless otherwise determined by the Compensation Committee of the Company’s Board of Directors in its sole discretion, you shall not have any rights to dividends or dividend equivalents in the event that the Company pays a cash dividend to holders of Common Stock generally. 9. A WARD NOT A S ERVICE C ONTRACT . Your Performance-Based Restricted Stock Unit Award is not an employment or service contract, and nothing in your Performance-Based Restricted Stock Unit Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your Performance-Based Restricted Stock Unit Award shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 10. N OTICES . Any notices provided for in your Performance-Based Restricted Stock Unit Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 11. G OVERNING P LAN D OCUMENT . Your Performance-Based Restricted Stock Unit Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Performance-Based Restricted Stock Unit Award, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Performance-Based Restricted Stock Unit Award and those of the Plan, the provisions of the Plan shall control. Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-198714, 333-190735, 333-183517, 333-176272, 333-168322, and 333-165534) of QuinStreet, Inc. of our report dated August 19, 2015 relating to the consolidated financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California August 19, 2015 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Douglas Valenti, certify that: 1. I have reviewed this annual report on Form 10-K of QuinStreet, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: August 19, 2015 /s/ Douglas Valenti Douglas Valenti Chairman and Chief Executive Officer (Principal Executive Officer) Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Gregory Wong, certify that: 1. I have reviewed this annual report on Form 10-K of QuinStreet, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: August 19, 2015 /s/ Gregory Wong Gregory Wong Chief Financial Officer and Senior Vice President (Principal Financial and Accounting Officer) Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The certification set forth below is being submitted in connection with the report on Form 10-K of QuinStreet, Inc. (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code. Douglas Valenti, the Chief Executive Officer and Gregory Wong, the Chief Financial Officer of QuinStreet, Inc., each certifies that, to the best of his knowledge: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of QuinStreet, Inc. Date: August 19, 2015 /s/ Douglas Valenti Name: Douglas Valenti Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Gregory Wong Name: Gregory Wong Chief Financial Officer and Senior Vice President (Principal Financial and Accounting Officer) 

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