Quotient Technology Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2017

OR

For the transition period from              to             

Commission File Number: 001-36331

Quotient Technology Inc.

(Exact Name of Registrant as Specified in Its Charter)

(650) 605-4600

(Registrant’s Telephone Number, Including Area Code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by checkmark 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 time period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

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

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

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

As of October 31, 2017, the registrant had 92,784,396 shares of common stock outstanding.

QUOTIENT TECHNOLOGY INC.

INDEX

REPORT ON

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2017

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PART I - FINANCIAL INFORMATION

QUOTIENT TECHNOLOGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

See Accompanying Notes to Condensed Consolidated Financial Statements

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QUOTIENT TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

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QUOTIENT TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

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QUOTIENT TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See Accompanying Notes to Condensed Consolidated Financial Statements

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QUOTIENT TECHNOLOGY INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Description of Business

Quotient Technology Inc. (“Quotient” or, the “Company”), is a provider of an industry leading digital platform that enables consumer packaged goods (“CPG”) brands and retailers to engage shoppers through personalized and targeted promotions and media. Through our platform, CPGs and retailers are able to use online and in-store point-of-sale (POS) shopper data and analytics to drive sales with improved efficiency, as compared to traditional offline promotional and advertising vehicles.

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The Company’s condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior period balances have been reclassified to conform to the current period's presentation. The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2017 or for any other period.

There have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on its condensed consolidated financial statements and related notes, except for Company electing to change its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective basis with a cumulative effect adjustment of $3.4 million recorded to accumulated deficit balance as of January 1, 2017.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s condensed consolidated financial statements and accompanying notes. Such management estimates include, but are not limited to, revenue recognition, collectability of accounts receivable, recoverability of non-refundable distribution fees, the valuation and useful lives of intangible assets and property and equipment, goodwill, stock-based compensation, contingent consideration and income taxes. Actual results may differ from the Company’s estimates, and such differences may be material to the accompanying condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). In addition, the FASB issued subsequent ASUs, which serve to clarify certain aspects of ASU 2014-09. The amendments are based on the principle that revenue should be recognized 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. Additionally, the standard requires reporting companies to also disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB agreed to delay the effective date of this amendment by one year, accordingly, the Company is required to adopt the amendments in the first quarter of 2018. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Early adoption is permitted, but not before the original effective date of the amendment, which was the first quarter of 2017.

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The Company is continuing to evaluate the overall impact of the new standard on its accounting policies, processes, system requirements, and internal controls over financial reporting. In addition to internal resources, the Company engaged third-party service providers to assist with the evaluation. The Company has made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. The Company currently anticipates adopting the standard using the modified retrospective method. While the Company is still in the process of completing its analysis on the impact the guidance will have on its consolidated financial statements, related disclosures, and internal controls over financial reporting, it does not expect the impact to be material.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. Lessees initially recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The lease liability is measured at the present value of the lease payments over the lease term. The right-of-use asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. The standard is effective for public business entities for annual reporting periods beginning after December 15, 2018, and interim periods within that reporting period, which is the first quarter of 2019 for the Company. Early adoption is permitted. ASU 2016-02 is required to be adopted using a modified retrospective approach. The Company is currently evaluating the impact of adopting this new accounting guidance on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The standard is effective for public business entities for annual reporting years beginning after December 15, 2017, and interim periods within that reporting period, which is the first quarter of 2018 for the Company. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting guidance on the consolidated financial statements.

Accounting Pronouncements Adopted

In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  The guidance requires all of the tax effects related to share based payments to be recorded through the income statement. The guidance also removes the present requirement to delay recognition of an excess tax benefit (“windfall tax benefit”) until it reduces current taxes payable; instead it is recognized at the time of settlement, subject to normal valuation allowance consideration. While the simplification will eliminate some administrative complexities, it will increase the volatility of income tax expense. The standard was effective for the Company beginning January 1, 2017, and interim periods within that reporting period. Early adoption was permitted. The Company adopted ASU 2016-09 in the first quarter of 2017. Upon adoption, the Company elected to change its accounting policy to account for forfeitures as they occur. The change was applied on a modified retrospective basis with a cumulative effect adjustment of $3.4 million recorded to accumulated deficit balance as of January 1, 2017. The amendments related to accounting for previously unrecognized excess tax benefits as deferred tax assets have been adopted on a modified retrospective basis with a cumulative-effect adjustment to opening retained earnings of $25.5 million, fully offset by a valuation allowance. This adjustment resulted in no impact to retained earnings upon adoption. The amendments related to accounting for excess tax benefits have been adopted prospectively, resulting in no impact as the Company is in a net operating loss position with a full valuation allowance.

3. Fair Value Measurements

The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

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The Company’s fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in thousands):

The valuation technique used to measure the fair value of money market funds included using quoted prices in active markets. The money market funds have a fixed net asset value (NAV) of $1. The valuation technique to measure the fair value of certificate of deposits included using quoted prices in active markets for similar assets.

The fair value of contingent consideration related to the acquisition of Crisp Media, Inc. (“Crisp”) was estimated using an option pricing method and was based on significant inputs not observable in the market, thus classified as a Level 3 instrument. The inputs include expected achievement of certain financial metrics over the contingent consideration period, historical volatility and discount rate. Refer to Note 6 for further details related to the acquisition.

The fair value of contingent consideration related to the acquisition of Shopmium S.A. (“Shopmium”) was estimated using a Monte Carlo simulation and was based on significant inputs not observable in the market, thus classified as a Level 3 instrument. The inputs include the expected achievement of certain revenue and profit milestones for the years ending December 31, 2016 and 2017, historical volatility and risk-free interest rate.

The following table represents the change in the contingent consideration (in thousands):

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For the three and nine months ended September 30, 2017, the Company recorded losses of $1.4 million and $1.2 million, respectively, related to the changes in fair value of contingent consideration. The change in fair value of Shopmium contingent consideration is due to a decline in expected revenue and profit milestones for the years ending December 31, 2016 and 2017. The change in fair value of Crisp contingent consideration is due to an increase in expected achievement of certain financial metrics over the contingent consideration period. The changes in the fair value of the contingent consideration are included as a component of operations in the accompanying condensed consolidated statements of operations.

There were no transfers between fair value hierarchies during the three and nine months ended September 30, 2017 and 2016.

4. Allowance for Doubtful Accounts  

The summary of activity in the allowance for doubtful accounts is as follows (in thousands):

5. Balance Sheet Components

Property and Equipment, Net

Property and equipment consist of the following (in thousands):

Depreciation and amortization expense related to property and equipment was $1.6 million and $4.1 million for the three months ended September 30, 2017 and 2016, respectively, and $5.3 million and $12.0 million for the nine months ended September 30, 2017 and 2016, respectively.

The Company capitalized internal use software development and enhancement costs of $1.0 million and $0.3 million during the three months ended September 30, 2017 and 2016, respectively, and $3.1 million and $0.4 million during the nine months ended September 30, 2017 and 2016, respectively. During the three and nine months ended September 30, 2017, the Company had zero and $0.6 million in amortization expense related to internal use software, included in property and equipment depreciation and amortization expense above, and recorded as cost of revenues, as compared to $2.6 million and $7.9 million, respectively, during the comparable period of 2016. The unamortized capitalized development and enhancement costs were $3.7 million and $1.2 million as of September 30, 2017 and December 31, 2016, respectively.

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Accrued Compensation and Benefits

Accrued compensation and benefits consist of the following (in thousands):

Other Current Liabilities  

Other current liabilities consist of the following (in thousands):

6. Acquisitions

On May 31, 2017, the Company acquired all the outstanding shares of Crisp, a mobile marketing and advertising company, delivering shopper marketing media campaigns for CPGs and retailers. Crisp’s mobile media expertise complements Quotient’s proprietary shopper data, retail network and existing promotions and media offerings.

The total preliminary acquisition consideration of $51.9 million consisted of $24.1 million in cash, 1,177,927 shares of the Company’s common stock with a fair value of $13.0 million or $11.00 per share, and contingent consideration of up to $24.5 million payable in cash with a fair value of $14.8 million. The contingent consideration payout is based on Crisp achieving certain financial metrics over a period of one year after closing and is payable within 105 days after May 31, 2018. At the date of acquisition, the contingent consideration’s fair value of $14.8 million was determined by using an option pricing method. Fair value of contingent consideration is remeasured every reporting period. Refer to Note 3 for the fair value of contingent consideration at September 30, 2017.

The Crisp acquisition provides the Company with customer relationships, developed technologies and trade names. The fair value of the customer relationships intangible asset was determined by using a discounted cash flow model. The fair values of developed technologies and trade names intangible assets were determined by using the relief from royalty methods. The excess of the consideration paid over the fair value of the net tangible assets and identifiable intangible assets acquired is recorded as goodwill. The goodwill is attributable to expected synergies from combined operations and Crisp’s knowhow.

The transaction was accounted for as a business combination. Accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company expensed all transaction costs in the period in which they were incurred.

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The following table summarizes the preliminary acquisition consideration and the related fair values of the assets acquired and liabilities assumed (in thousands):

The following sets forth each component of identifiable intangible assets acquired in connection with the Crisp acquisition (in thousands):

7. Intangible Assets

Intangible assets consist of the following (in thousands):  

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As of September 30, 2017, and December 31, 2016, the Company has a domain name with a gross value of $0.4 million with an indefinite useful life that is not subject to amortization.

Amortization expense related to intangible assets subject to amortization was $2.9 million and $2.1 million during the three months ended September 30, 2017 and 2016, respectively, and $7.9 million and $4.3 million during the nine months ended September 30, 2017 and 2016, respectively. Estimated future amortization expense related to intangible assets as of September 30, 2017 is as follows (in thousands):    

8. Stock-based Compensation

2013 Equity Incentive Plan

In October 2013, the Company adopted the 2013 Equity Incentive Plan (the “2013 Plan”), which became effective in March 2014 and serves as the successor to the Company’s 2006 Stock Plan (the “2006 Plan”). Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units, performance shares and units to employees, directors and consultants.

Stock Options

The fair value of each option was estimated on the date of grant for the period presented using the following assumptions:

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The weighted-average grant-date fair value of options granted was $5.81 and $6.87 per share during the three months ended September 30, 2017 and 2016, respectively, and $6.33 and $5.25 per share during the nine months ended September 30, 2017 and 2016, respectively.

Restricted Stock Units

The fair value of restricted stock units (“RSUs”) equals the market value of the Company’s common stock on the date of the grant. The RSUs are excluded from issued and outstanding shares until they are vested.

On September 28, 2017 (the “Grant Date”), the Company granted 128,205 performance-based RSUs (“PSU Award”), under the 2013 Equity Incentive Plan, to Mir Aamir, in connection with his promotion to President and Chief Executive Officer. The PSU Award represents the right to receive shares of the Company’s common stock upon meeting certain vesting conditions which were tied to achievement of certain Company stock price goals. The fair value of the PSU Award was measured using a Monte Carlo simulation. During the three months ended September 30, 2017, the expense recognized in the consolidated financial statements related to the PSU Award was insignificant. Subsequent to September 30, 2017, the Company modified the terms of the PSU Award to provide incentives based on targets that can be directly tied to the Company’s performance. Refer to Part II – Other Information, Item 5. for further details.

A summary of the Company’s stock option and RSU award activity under the 2013 Plan is as follows:

The aggregate intrinsic value disclosed in the table above is based on the difference between the exercise price of the options and the fair value of the Company’s common stock.

The aggregate total fair value of options which vested was $1.5 million and $0.9 million during the three months ended September 30, 2017 and 2016, respectively, and $5.5 million and $2.4 million during the nine months ended September 30, 2017 and 2016, respectively.

Employee Stock Purchase Plan

Eligible employees can enroll and elect to contribute up to 15% of their base compensation through payroll withholdings in each offering period which is six months in duration, subject to certain limitations. The purchase price of the stock is the lower of 85% of the fair market value on (a) the first day of the offering period or (b) the purchase date.

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The fair value of the option feature is estimated using the Black-Scholes model for the period presented based on the following assumptions:

As of September 30, 2017, a total of 642,124 shares of common stock were issued under the 2013 Employee Stock Purchase Plan (“ESPP”), since inception of the plan. As of September 30, 2017, a total of 1,757,876 shares are available for issuance under the ESPP.

Stock-based Compensation Expense

The following table sets forth the total stock-based compensation expense resulting from stock options, RSUs and ESPP included in the Company’s condensed consolidated statements of operations (in thousands):

As of September 30, 2017, there was $62.9 million of unrecognized stock-based compensation expense, of which $12.2 million is related to stock options and ESPP shares and $50.7 million is related to RSUs. The total unrecognized stock-based compensation expense related to stock options and ESPP as of September 30, 2017 will be amortized over a weighted-average period of 2.7 years. The total unrecognized stock-based compensation expense related to RSUs as of September 30, 2017 will be amortized over a weighted-average period of 2.4 years.

During the three and nine months ended September 30, 2017, the Company capitalized $0.2 million of stock-based compensation cost in projects in process as part of property and equipment, net on the accompanying consolidated balance sheets.

9. Common Stock Repurchase Program

The Company’s Board of Directors has approved programs for it to repurchase shares of its common stock. In April 2017, the Board of Directors authorized a share repurchase program (“2017 Program”) for the Company to repurchase up to $50.0 million of its common stock. The 2017 Program has a one year duration beginning on May 5, 2017. Stock repurchases may be made from time-to-time and the timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors. The Company may suspend, modify or terminate this repurchase program at any time without prior notice. During the nine months ended September 30, 2017, the Company did not repurchase any shares of its common stock. As of September 30, 2017, $50.0 million remains available for future share repurchases under the 2017 Program.

Subsequent to September 30, 2017, the Board of Directors authorized the retirement of 9,647,708 shares of the Company’s treasury stock.

10. Income Taxes

The Company recorded an income tax benefit of $0.1 million and an income tax provision $0.1 million during the three and nine months ended September 30, 2017, respectively, and an income tax provision of $0.1 million and $0.2 million during the three and nine months ended September 30, 2016, respectively. The income tax benefit for the three months

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ended September 30, 2017 was primarily attributable to a net decrease in foreign profits. The income tax provision for the nine months ended September 30, 2017 was primarily attributable to foreign income taxed at non-US tax rates. The income tax provision for the three and nine months ended September 30, 2016 was primarily attributable to a net increase in deferred tax liabilities associated with the change in fair value of contingent consideration related to an acquisition and a decrease in foreign income taxed at non-US tax rates.

11. Net Loss Per Share

The computation of the Company’s basic and diluted net loss per share is as follows (in thousands, except per share data):

The outstanding common equivalent shares excluded from the computation of the diluted net loss per share for the periods presented because including them would have been antidilutive are as follows (in thousands):

12. Commitments and Contingencies

Leases

As of September 30, 2017, the Company’s minimum payments under its non-cancelable operating and capital leases are as follows (in thousands):

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The Company leases various office facilities, including its corporate headquarters in Mountain View, California and various sales offices, under non-cancelable operating lease agreements that expire through December 2024. In the first quarter of 2016, the Company entered into a lease agreement for an office facility located in Cincinnati, Ohio which will expire in June 2024.

The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease periods. Additionally, the Company leases certain equipment under non-cancelable operating leases at its facilities and its leased data center operations.

Rent expense pursuant to all operating lease agreements was $1.1 million and $1.3 million for the three months ended September 30, 2017 and 2016, respectively, and $3.3 million and $3.2 million during the nine months ended September 30, 2017 and 2016, respectively.

Purchase Obligations

The Company has unconditional purchase commitments which expire through 2034 in the amount of $6.5 million for marketing arrangements relating to the purchase of a 20-year suite license for a professional sports team which it uses for sales and marketing purposes.

The Company also has unconditional purchase commitments, primarily related to software license fees and marketing services, of $5.7 million as of September 30, 2017.

Promissory Note

In January 2017, the Company entered into a promissory note agreement with a lender to finance the purchase of computer equipment for $0.8 million to be paid in quarterly installments over three years. As of September 30, 2017, the Company had a remaining balance of $0.7 million under the agreement, which is included in other current liabilities and other non-current liabilities on the condensed consolidated balance sheets.

Indemnification

In the normal course of business, to facilitate transactions related to the Company’s operations, the Company indemnifies certain parties, including CPGs, advertising agencies and other third parties including retailers. The Company has agreed to hold certain parties harmless against losses arising from claims of intellectual property infringement or other liabilities relating to or arising from our products or services or other contractual infringement. The term of these indemnity provisions generally survive termination or expiration of the applicable agreement. To date, the Company has not recorded any liabilities related to these agreements.

Litigation

In the ordinary course of business, the Company may be involved in lawsuits, claims, investigations, and proceedings consisting of intellectual property, commercial, employment, and other matters. The Company records a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. In the event that one or more of these matters were to result in a claim against the Company, an adverse outcome, including a judgment or settlement, may cause a material adverse effect on the Company’s future business, operating results, or financial condition.

The Company believes that liabilities associated with existing claims are remote, therefore the Company has not recorded any accrual for claims as of September 30, 2017 and December 31, 2016. The Company expenses legal fees in the period in which they are incurred.

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13. Employee Benefit Plan

The Company maintains a defined-contribution plan under Section 401(k) of the Internal Revenue Code. The 401(k) plan provides retirement benefits for eligible employees. Eligible employees may elect to contribute to the 401(k) plan. The Company provides a match of up to the lesser of 3% of each employee’s annual salary or $6,000, which vests fully over four years of continuous employment. The Company’s matching contribution expense was $0.4 million and $0.3 million during the three months ended September 30, 2017 and 2016, respectively, and $1.3 million and $1.4 million during the nine months ended September 30, 2017 and 2016, respectively.

14. Information About Geographic Areas

Revenues generated outside of the United States were insignificant for all periods presented. Additionally, as the Company’s assets are primarily located in the United States, information regarding geographical location is not presented, as such amounts are immaterial to these condensed consolidated financial statements taken as a whole.

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K filed on February 16, 2017 with the SEC. In addition to historical financial information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934. The forward looking statements reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences are described in “Risk Factors” set forth in our Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q.

Overview

Quotient Technology Inc. is a provider of an industry leading digital platform that enables consumer packaged goods (“CPG”) brands and retailers to engage shoppers through personalized and targeted promotions and media. Through our platform, CPGs and retailers are able to use online engagement data and in-store point-of-sale (“POS”) shopper data and analytics to drive sales with improved efficiency, as compared to traditional offline promotional and advertising vehicles.

We operate our platform across a broad distribution network, reaching over 40 million shoppers at critical moments in their paths to purchase. Our network includes the website and mobile app of our flagship consumer brand, Coupons.com, as well as our other owned and operated properties, and thousands of our publisher partners. In addition, we operate our platform, Retailer iQ, on a co-branded or white label basis with our retailer partners, providing them a digital platform to directly engage with their shoppers across their websites, mobile, ecommerce, and social channels. Retailer iQ integrates with retailers’ POS technology and leverages a broad set of shopper insights, including online behaviors, purchase, and purchase intent data to deliver personalized and targeted promotions and media. Retailers using Retailer iQ are primarily in the grocery, drug, dollar, club and mass merchandise channels, where most CPG products are sold.

Our network is made up of three constituents: more than 2,000 brands from approximately 700 CPGs; retailers across multiple classes of trade such as grocery, drug, dollar, club, and mass merchandise channels; and consumers visiting our web, mobile properties, social channels, as well as those of our CPGs and retailers.

The relationship between our CPGs, retailers, publishers and shoppers, has resulted in a network effect, which we believe gives us a significant competitive advantage over both offline and other online competitors. As our shopper audience increases, our platform becomes more valuable to CPGs and retailers, which, in turn, rely more heavily on our platform for their digital promotions and media. In addition, the breadth of content offered from these leading brands enables us to attract and retain more retailers, publishers and shoppers. As our network expands, we generate more shopper data and insights, which improve our ability to deliver more relevant and personalized promotions and media.

We primarily generate revenue by providing digital promotions and media solutions to our customers. Our customers include many of the leading food, beverage, drug, personal and household product manufacturers. Together, these CPG companies represent over 2,000 brands.

Our retailer partners include leading grocery, drug, dollar, club and mass merchandise retailers which distribute and accept coupons distributed through Quotient. Our retailers also include a broad range of specialty stores, including clothing, electronics, home improvement and many others which offer coupon codes through our platform.

We generate promotion revenues from digital transactions on our network. Each time a consumer activates a digital coupon on our platform we are generally paid a fee. Activation of a digital coupon can include: printing it for physical redemption at a retailer; saving it to a retailer loyalty account for automatic digital redemption; using a mobile device to scan a retailer receipt with the appropriate purchase for automatic digital redemption and cash back. As our business evolves, we will continue to experiment with different pricing models and fee arrangements with CPGs and retailers, which may impact how we monetize transactions. For example, we have recently experimented with pricing strategies based on return on investment, or ROI, some of which require us to receive fees upon redemption of digital coupons rather than activation, as further discussed below in “Risk Factors”. Promotion revenues includes coupon codes in which we are generally paid a fee when a consumer makes a purchase using a coupon code from our platform. We generally pay a distribution fee to retailers or publishers when a consumer activates a digital promotion on their website or mobile app. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Non-GAAP Financial Measure and Key Operating Metrics” for more information.

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We generate media revenue through the placement of online advertisements from CPGs and retailers that are displayed on our websites and mobile apps, as well as those of our publishers, retailers and other third parties. We also generate media revenue by leveraging our verified buyer audience reach and proprietary data to serve targeted media and measurement across the web, and mobile. We generally pay a distribution fee to select retailers or publishers when certain shopper data is used to conduct targeted media campaigns.

Seasonality

Some of the Company’s products experience seasonal sales and buying patterns mirroring those in the CPG, retail, and e-commerce markets, including back-to-school and holiday campaigns, where demand increases during the second half of the Company’s fiscal year. We believe that this seasonality pattern has affected, and will continue to affect, our business and the associated revenues during the first half and second half of our fiscal year. We recognized 52%, 53% and 53% of our annual revenue during the second half of 2016, 2015 and 2014, respectively.

Third Quarter 2017 Overview

Quarterly revenues of $82.0 million in the third quarter of 2017 increased by $15.5 million, or 23%, from revenues of $66.5 million in the same period in 2016. Our net loss of $10.8 million in the third quarter of 2017 decreased by $0.5 million, as compared to the net loss of $11.3 million in the same period in 2016. The year over year increase in our quarterly revenues primarily related to an increase in media revenue, including revenue related to Crisp, and an increase in digital promotions driven by the continued growth of Retailer iQ. The decrease in our net loss in the third quarter of 2017, as compared to the same period in 2016, was primarily the result of the growth in revenues and the benefit from the non-recurring one-time charge of $7.4 million, recorded during the third quarter of 2016, associated with certain distribution fees under an arrangement with a retailer partner, partially offset by the change in fair value of escrowed shares and contingent consideration resulting from the Crisp acquisition, an increase in cost of revenues due to the increase in distribution fees paid to retailers and third-parties, and an increase in operating expenses including sales, marketing, general and administrative. While we continue to make important investments in our technology and infrastructure, we remain focused on operational efficiencies and expense management.

Our operating expenses may increase in the future as we continue to (1) invest in (i) research and development to enhance our platform and investments in newer product offerings including Quotient Insights; (ii) sales and marketing to acquire new CPG and retailer customers and increase revenues from our existing customers; and; (iii) corporate infrastructure; (2) incur additional general and administrative expenses associated with being a public company, including increased legal and accounting expenses, and compliance costs associated with the Sarbanes-Oxley Act; (3) amortize expenses related to intangibles assets associated with a services and data agreement and other strategic acquisitions; and (4) remeasure the fair value of shares held in escrow until released and changes in fair value of contingent consideration over the earnout periods.  

Non-GAAP Financial Measure and Key Operating Metrics

Adjusted Earnings Before Income Taxes, Depreciation and Amortization (“Adjusted EBITDA”), a non-GAAP financial measure, is a key metric used by our management and our Board of Directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short and long-term operational plans, and to determine bonus payouts. In particular, we believe that the exclusion of certain income and expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, Adjusted EBITDA is a key financial metric used by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA excludes non-cash charges, such as depreciation, amortization and stock-based compensation, because such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations and can vary significantly between periods. Additionally, it excludes the effects of income taxes, other (income) expense net, one-time charge for certain distribution fees, change in fair value of escrowed shares and contingent consideration, net, charges related to Enterprise Resource Planning (“ERP”) software implementation costs, certain acquisition related costs and restructuring charges.

We define a “transaction” as any action that generates revenue, directly or indirectly, including per item transaction fees, set up fees, volume-based fixed fees and revenue sharing. Transactions continue to exclude retailer offers that generate no direct revenue. Transactions indirectly generate revenue when the action is not paid for on a per item basis, but is part of an agreement which generates revenue for offer services; for example, transactions after a fixed fee cap has been reached would be included in our definition. This definition of transaction does not impact the number of transactions reported in prior filings. While the number of transactions on our platform has been an important indicator of our ability to

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grow our revenues historically, as our business continues to evolve with the shift to digital paperless and we experiment with different pricing models to monetize transactions, we believe transaction volume on our platform can become a less predictive indicator of future operating performance.

Net loss, Adjusted EBITDA and number of transactions for each of the periods presented were as follows (in thousands):

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

A reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, for each of the periods presented is as follows (in thousands):