INTERSECTIONS INC - FORM 10-Q

INTERSECTIONS INC - FORM 10-Q - August 11, 2014

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EX-31.1 - EX-31.1 - INTERSECTIONS INC	d689254dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2014

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

INTERSECTIONS INC.

(Exact name of registrant as specified in the charter)

DELAWARE

54-1956515

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

3901 Stonecroft Boulevard,

Chantilly, Virginia

20151

(Address of principal executive office)

(Zip Code)

(703) 488-6100

(Registrant’s telephone number including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of August 1, 2014 there were 21,693,028 shares of common stock, $0.01 par value, issued and 18,512,597 shares outstanding, with 3,180,431 shares of treasury stock.

Form 10-Q

June 30, 2014

Table of Contents


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)		3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013		3
Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013		4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 4. Controls and Procedures		50

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		50
Item 1A. Risk Factors		51
Item 6. Exhibits		52

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenue	$	64,313		$	80,727		$	130,272		$	162,283
Operating expenses:
Marketing		7,775			6,449			13,438			11,722
Commission		16,116			20,037			33,115			40,195
Cost of revenue		21,022			27,102			43,175			54,187
General and administrative		19,677			19,614			40,327			40,068
Depreciation		1,439			2,155			2,978			4,214
Amortization		853			864			1,706			1,728

Total operating expenses		66,882			76,221			134,739			152,114

(Loss) income from operations		(2,569	)		4,506			(4,467	)		10,169
Interest expense		(170	)		(88	)		(260	)		(164	)
Other expense, net		(287	)		(418	)		(139	)		(690	)

(Loss) income from continuing operations before income taxes		(3,026	)		4,000			(4,866	)		9,315
Income tax benefit (expense)		1,309			(1,898	)		1,193			(4,672	)

(Loss) income from continuing operations		(1,717	)		2,102			(3,673	)		4,643
Loss from discontinued operations, net of tax		(318	)		(531	)		(1,147	)		(867	)

Net (loss) income	$	(2,035	)	$	1,571		$	(4,820	)	$	3,776

Basic (loss) earnings per common share:
(Loss) income from continuing operations	$	(0.09	)	$	0.12		$	(0.20	)	$	0.26
Loss from discontinued operations		(0.02	)		(0.03	)		(0.06	)		(0.05	)

Basic (loss) earnings per common share	$	(0.11	)	$	0.09		$	(0.26	)	$	0.21

Diluted (loss) earnings per common share:
(Loss) income from continuing operations	$	(0.09	)	$	0.11		$	(0.20	)	$	0.25
Loss from discontinued operations		(0.02	)		(0.03	)		(0.06	)		(0.05	)

Diluted (loss) earnings per common share	$	(0.11	)	$	0.08		$	(0.26	)	$	0.20

Cash dividends paid per common share	$	0.00		$	0.20		$	0.20		$	0.40
Weighted average shares outstanding:
Basic		18,525			18,046			18,413			18,042
Diluted		18,525			18,911			18,413			18,879

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)


	June 30, 2014			December 31, 2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	12,412		$	20,920
Accounts receivable, net of allowance for doubtful accounts of $5 (2014) and $26 (2013)		19,405			21,070
Prepaid expenses and other current assets		8,167			5,515
Income tax receivable		6,019			0
Deferred subscription solicitation costs		6,923			7,086

Total current assets		52,926			54,591

PROPERTY AND EQUIPMENT, net		14,049			14,490
DEFERRED TAX ASSET, net		2,848			4,864
LONG-TERM INVESTMENT		8,384			8,384
GOODWILL		43,235			43,235
INTANGIBLE ASSETS, net		2,414			4,020
OTHER ASSETS		1,487			1,505

TOTAL ASSETS	$	125,343		$	131,089

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,470		$	955
Accrued expenses and other current liabilities		19,688			13,508
Accrued payroll and employee benefits		2,911			3,197
Capital leases, current portion		744			817
Commissions payable		484			502
Deferred revenue		4,053			4,287
Deferred tax liability, net, current portion		1,905			1,905
Current tax payable		0			3,149

Total current liabilities		31,255			28,320

OBLIGATIONS UNDER CAPITAL LEASES, less current portion		1,215			1,610
OTHER LONG-TERM LIABILITIES		3,546			3,696

TOTAL LIABILITIES		36,016			33,626

COMMITMENTS AND CONTINGENCIES (see notes 14 and 16)
STOCKHOLDERS’ EQUITY:
Common stock at $0.01 par value, shares authorized 50,000; shares issued 21,692 (2014) and 21,272 (2013); shares outstanding 18,512 (2014) and 18,092 (2013)		217			213
Additional paid-in capital		122,306			121,952
Treasury stock, shares at cost; 3,180 (2014) and 3,180 (2013)		(32,696	)		(32,696	)
(Accumulated deficit) retained earnings		(500	)		7,994

TOTAL STOCKHOLDERS’ EQUITY		89,327			97,463

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	125,343		$	131,089

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2014			2013
Net (loss) income	$	(4,820	)	$	3,776
Adjustments to reconcile net (loss) income to cash flows provided by operating activities:
Depreciation		3,938			4,288
Amortization		1,706			1,779
Amortization of debt issuance cost		135			37
Provision for doubtful accounts		(21	)		(25	)
Loss on disposal of fixed assets		196			0
Share based compensation		2,676			3,158
Excess tax benefit upon vesting of restricted stock units and stock option exercises		(275	)		(774	)
Accretion of interest on note receivable		0			(15	)
Amortization of non-cash consideration exchanged for additional investment		(618	)		(618	)
Amortization of deferred subscription solicitation costs		8,558			9,665
Reduction to value of long-term investment		0			677
Foreign currency transaction losses, net		0			38
Changes in assets and liabilities:
Accounts receivable		1,685			(3,077	)
Prepaid expenses and other current assets		(2,652	)		(1,064	)
Income tax, net		(9,169	)		(1,037	)
Deferred subscription solicitation costs		(8,393	)		(10,354	)
Other assets		(116	)		794
Accounts payable		585			797
Accrued expenses and other current liabilities		6,296			1,810
Accrued payroll and employee benefits		(285	)		(18	)
Commissions payable		(19	)		(140	)
Deferred revenue		384			(684	)
Deferred income tax, net		1,881			3,154
Other long-term liabilities		(150	)		13

Cash flows provided by operating activities		1,522			12,180

CASH FLOWS USED IN INVESTING ACTIVITIES:
Exercise of warrants in long-term investment		(0	)		(1,464	)
Cash paid for acquisition of technology related intangible		(100	)		0
Acquisition of property and equipment		(3,880	)		(2,088	)

Cash flows used in investing activities		(3,980	)		(3,552	)

CASH FLOWS USED IN FINANCING ACTIVITIES:
Cash distribution on vesting of restricted stock units		(0	)		(1,849	)
Purchase of treasury stock		(0	)		(2,401	)
Cash dividends paid on common shares		(3,674	)		(7,213	)
Excess tax benefit upon vesting of restricted stock units and stock option exercises		275			774
Capital lease payments		(469	)		(446	)
Cash proceeds from stock option exercises		0			212
Withholding tax payment on vesting of restricted stock units and stock option exercises		(2,182	)		(2,647	)

Cash flows used in financing activities		(6,050	)		(13,570	)

DECREASE IN CASH AND CASH EQUIVALENTS		(8,508	)		(4,942	)
CASH AND CASH EQUIVALENTS—Beginning of period		20,920			25,559

CASH AND CASH EQUIVALENTS—End of period	$	12,412		$	20,617

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	98		$	100

Cash paid for taxes	$	5,488		$	2,077

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Equipment additions accrued but not paid	$	117		$	157

Withholding tax payment accrued on vesting of restricted stock units and stock option exercises	$	13		$	0

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Business

In the three months ended March 31, 2014, we restructured our internal organization and, as a result, created an additional reporting segment and Corporate business unit. In accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we recast the applicable segment disclosures for the condensed consolidated financial statements. Our products and services are grouped into three reportable segments: Consumer Products and Services, Pet Health Monitoring and Bail Bonds Industry Solutions. Corporate headquarter office transactions including but not limited to legal, compliance, human resources, finance and internal audit expenses that have not been attributed to a particular segment are reported in Corporate.

Our Consumer Products and Services segment includes our identity theft protection and credit information management, data breach response, and insurance and membership products and services. Our identity theft protection and credit information management products and services provide multiple benefits to consumers, including access to their credit reports, credit monitoring, educational scores, credit education, reports and monitoring of additional information, identity theft recovery services, identity theft cost reimbursement insurance, and software and other technology tools and services. An individual consumer subscription may include access to some or all of these benefits. Our membership and insurance products and services are offered by our subsidiary, Intersections Insurance Services, and include accidental death and disability insurance and access or purchasing programs for healthcare, home, auto, financial and other services and information. Our consumer products and services historically have been offered through relationships with clients, including many of the largest financial institutions in the United States and Canada, and clients in other industries. In addition, we also offer many of our services directly to consumers. We conduct our consumer direct marketing primarily through online affiliates, search engine marketing and broadcast media. We also may market through other channels, including direct mail, print marketing, telemarketing and email. We also market our IDENTITY GUARD® products in conjunction with relationships outside the financial services industry.

Our Pet Health Monitoring segment includes the new platform and service for pet owners, primarily dog owners, provided by our subsidiary, i4c Innovations. VOYCE^™ is a platform that connects pets, their owners, and veterinarians with individualized pet health monitoring data, tailored pet health related content and information management tools. VOYCE^™ is comprised of two key parts – a wearable health band worn similarly to a dog collar and an online member area. The VOYCE^™ band operates using non-invasive, radio frequency based technology, an accelerometer, an onboard microcontroller and specialized algorithms. The VOYCE^™ band monitors vital key wellness indicators such as activity, rest patterns, calories burned, step count and resting heart rate and respiratory rate. This data is uploaded to the VOYCE^™ member area via WiFi which displays the data showing trends over time. This data is also coupled with the pet parent and dog’s profile and through proprietary algorithms provides personalized content written by top dog care experts exclusively for VOYCE^™. In addition, The VOYCE Experience^™ offers document storage and access anytime, anywhere, customized reminders, and the ability to set goals. We expect to launch VOYCE^™ later this year.

Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bonds industry provided by our subsidiary Captira Analytical.

In the three months ended June 30, 2014, we ceased ongoing operations at Intersections Business Intelligence Services as it qualified for classification as a discontinued operation under U.S. GAAP, as we do not have significant continuing involvement in the business and its operations and cash flows were eliminated from our ongoing operations. Therefore, we no longer have a Market Intelligence segment.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared by us in accordance with U.S. GAAP and applicable rules and regulations of the Securities and Exchange Commission. They include the accounts of the company and our subsidiaries. Our discontinued operations consist of Intersections Business Intelligence Services, a subsidiary which ceased operations in the three months ended June 30, 2014, and Net Enforcers, a subsidiary which ceased operations in the three months ended June 30, 2013, and are presented in discontinued operations for all prior periods in our condensed consolidated statements of operations. We determined that the U.S. GAAP requirements were met as we do not have significant continuing involvement in the businesses and their operations and cash flows were eliminated from our ongoing operations. We have not recast our condensed consolidated balance sheets or our condensed consolidated statements of cash flows. See Note 20 for additional information.

Our decision to consolidate an entity is based on our assessment that we have a controlling financial interest in such entity. All intercompany transactions have been eliminated. The condensed consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.

These condensed consolidated financial statements do not include all the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2013, as filed in our Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

We recognize revenue on 1) identity theft and credit management services, 2) accidental death insurance and 3) other monthly membership products.

Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts by our clients, but may be billed by us in some circumstances. The prices to subscribers of various configurations of our products and services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, our subscriptions typically are offered with trial, delayed billing or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed.

Identity Theft and Credit Management Services

We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain signed contracts with all of our large financial institution customers and paper and electronic confirmations with individual purchasers, b) delivery has occurred, c) the seller’s price to the buyer is fixed as sales are generally based on contract or list prices and payments from large financial institutions are collected within 30 days with no significant write-offs, and d) collectability is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection. Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. We also generate revenue through a collaborative arrangement which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement.

Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscription with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our historical experience. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year.

We also provide services for which certain financial institution clients are the primary obligors directly to their customers. Revenue from these arrangements is recognized when earned, which is at the time we provide the service, generally on a monthly basis. In some instances, we recognize revenue for the delivery of operational services including fulfillment events, information technology development hours or customer service minutes, rather than per customer fees.

We record revenue on a gross basis in the amount that we bill the subscriber when our arrangements with financial institution clients provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the credit risk for the amount billed to the subscriber. We record revenue in the amount that we bill our financial institution clients, and not the amount billed to their customers, when our financial institution client is the primary obligor, establishes price to the customer and bears the credit risk.

Accidental Death Insurance

monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized when earned. Marketing of our insurance products generally involves a trial period during which time the product is made available at no cost to the customer. No revenues are recognized until applicable trial periods are completed.

For insurance products, we record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products.

We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance carriers are excluded from our revenues and operating expenses. Insurance premiums collected but not remitted to insurance carriers as of June 30, 2014 and December 31, 2013 totaled $606 thousand and $609 thousand, respectively, and are included in accrued expenses and other current liabilities in our condensed consolidated balance sheets.

Other Membership Products

For membership products, we record revenue on a gross basis as we serve as the primary obligor in the transactions, have latitude in establishing price and bear credit risk for the amount billed to the subscriber.

We generate revenue from other types of subscription based products provided from our Bail Bonds Industry Solutions segment. We recognize revenue from providing management service solutions to the bail bond industry on a monthly subscription or transactional basis.

Goodwill, Identifiable Intangibles and Other Long Lived Assets

We record, as goodwill, the excess of the purchase price over the fair value of the identifiable net assets acquired in purchase transactions. We review our goodwill for impairment annually, as of October 31, or more frequently if indicators of impairment exist. Goodwill has been assigned to our reporting units for purposes of impairment testing. As of June 30, 2014, goodwill of $43.2 million resides in our Consumer Products and Services reporting unit, resulting from our acquisition of Intersections Insurance Services Inc., which has been evaluated as part of our Consumer Products and Services reporting unit. There is no goodwill remaining in our other reporting units.

On January 1, 2012, we adopted an accounting standard update, commonly referred to as the step zero approach that allows us to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. For reporting units in which the qualitative assessment concludes it is more likely than not that the fair value is more than its carrying value, the amended guidance eliminates the requirement to perform further goodwill impairment testing. For those reporting units where a significant change or event occurs, and where potential impairment indicators exist, we continue to utilize a two-step quantitative assessment to testing goodwill for impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others (a) a significant decline in our expected future cash flows; (b) a sustained, significant decline in our stock price and market capitalization; (c) a significant adverse change in legal factors or in the business climate; (d) unanticipated competition; (e) the testing for recoverability of a significant asset group within a reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact in our condensed consolidated financial statements.

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value using the best information available, using a combined income approach (discounted cash flow) and market based approach. The market approach measures the value of an entity through an analysis of recent sales or offerings of comparable companies. The income approach measures the value of the reporting units by the present values of its economic benefits. These benefits can include revenue and cost savings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for use of funds, trends within the industry, and risks associated with particular investments of similar type and quality as of the valuation date.

The estimated fair value of our reporting units is dependent on several significant assumptions, including our earnings projections, and cost of capital (discount rate). The projections use management’s best estimates of economic and market conditions over the projected period including business plans, growth rates in sales, costs, and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, estimates of future capital expenditures, changes in future working capital requirements and overhead cost allocation, based on each reporting unit’s relative benefit received from Corporate. There are inherent uncertainties related to these factors and management’s judgment in applying each to the analysis of the recoverability of goodwill.

We estimate fair value giving consideration to both the income and market approaches. Consideration is given to the line of business and operating performance of the entities being valued relative to those of actual transactions, potentially subject to corresponding economic, environmental, and political factors considered to be reasonable investment alternatives.

If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying value of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its goodwill carrying value to measure the amount of impairment charge, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of that reporting unit was the purchase price paid. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment charge is recognized in an amount equal to that excess.

We review long-lived assets, including finite-lived intangible assets, property and equipment and other long term assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Significant judgments in this area involve determining whether a triggering event has occurred and determining the future cash flows for assets involved. In conducting our analysis, we would compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be impaired. If the net book value exceeds the undiscounted cash flows, an impairment charge is measured and recognized. An impairment charge is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated by discounting the future cash flows associated with these assets.

Intangible assets subject to amortization may include customer, marketing and technology related intangibles, as well as trademarks. Such intangible assets, excluding customer related intangibles, are amortized on a straight-line basis over their estimated useful lives, which are generally three to ten years. Customer related intangible assets are amortized on either a straight-line or accelerated basis, depending upon the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up.

Deferred Subscription Solicitation and Advertising

Our deferred subscription solicitation costs consist of subscription acquisition costs, including telemarketing, web-based marketing expenses and direct mail such as printing and postage. We expense advertising costs the first time advertising takes place, except for direct-response marketing costs. Telemarketing, web-based marketing and direct mail expenses are direct response marketing costs, which are amortized on a cost pool basis over the period during which the future benefits are expected to be received, but no more than 12 months. The recoverability of amounts capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date by comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future benefit expected to result directly from such advertising costs. Probable remaining future benefit is estimated based upon historical subscriber patterns, and represents net revenues less costs incurred to earn those revenues. In estimating probable future benefit (on a per subscriber basis) we deduct our contractual cost to service that subscriber from the known sales price. We then apply the future benefit (on a per subscriber basis) to the number of subscribers expected to be retained in the future to arrive at the total probable future benefit. In estimating the number of subscribers we will retain (i.e., factoring in expected cancellations), we utilize historical subscriber patterns maintained by us that show attrition rates by client, product and marketing channel. The total probable future benefit is then compared to the costs of a given marketing campaign (i.e., cost pools), and if the probable future benefit exceeds the cost pool, the amount is considered to be recoverable. If direct response advertising costs were to exceed the estimated probable remaining future benefit, an adjustment would be made to the deferred subscription costs to the extent of any shortfall.

Commission Costs

Commissions that relate to annual subscriptions with full refund provisions and monthly subscriptions are expensed when incurred, unless we are entitled to a refund of the commission from our client. If annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a full refund of the previously paid commission for those annual subscriptions with a full refund provision and a pro-rata refund, equal to the unused portion of the subscription, for those annual subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions with full commission refund provisions are deferred until the earlier of expiration of the refund privileges or cancellation. Once the refund privileges have expired, the commission costs are recognized ratably in the same pattern that the related revenue is recognized. Commissions that relate to annual subscriptions with pro-rata refund provisions are deferred and charged to operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt of the refunded commission from our client, we record a reduction to the deferred commission.

Share Based Compensation

We currently have the 2006 and 2014 Stock Incentive Plans (“Stock Incentive Plans”). The 2014 Stock Incentive Plan was approved by the Board of Directors on March 17, 2014 and approved by the stockholders of the Company at the annual meetings of stockholders on May 14, 2014. The number of shares of common stock that may be issued under the 2014 Stock Incentive Plan may not exceed 3.0 million. Individual awards under the 2006 Plan may take the form of incentive stock options, nonqualified stock options, restricted stock awards and/or restricted stock units. Individual awards under the 2014 Plan may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and/or restricted stock unit awards. The Stock Incentive Plans provide us with the opportunity to compensate selected employees with stock options, restricted stock and restricted stock units. A stock option entitles the recipient to purchase shares of common stock from us at the specified exercise price. RSUs entitle the recipient to obtain stock or stock units, which vests over a set period of time. RSUs are granted at no cost to the employees and employees do not need to pay an exercise price to obtain the underlying common stock. All grants or awards made under the Stock Incentive Plans are governed by written agreements between us and the participants.

We use the Black-Scholes option-pricing model to fair value all options and the straight-line method to amortize this fair value as compensation cost over the requisite service period. In the six months ended June 30, 2014 and 2013, we did not grant options.

Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield as an input. We apply a dividend yield based on our history and expectation of dividend payouts.

Expected Volatility. The expected volatility of options granted is estimated based solely upon our historical share price volatility. We will continue to review our estimate in the future.

Risk free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk free interest rate based on the expected term of the underlying grants.

Expected Term. The expected term of options granted is based upon historical experience and represents the period of time that options granted are expected to be outstanding.

In addition, we estimate forfeitures based on historical stock option and restricted stock unit activity on a grant by grant basis. We may make changes to that estimate throughout the vesting period based on actual activity.

Long-Term Investment

We account for investments in non-consolidated entities using the cost method of accounting. We have a long-term investment in the convertible preferred stock of White Sky, Inc., a privately held company. We concluded that the convertible preferred stock does not meet the definition of in-substance common stock for reasons including, but not limited to, the substantive liquidation preferences and favorable redemption provisions as compared to other equity in White Sky. Therefore, we continue to account for our investment as a cost method investment.

We regularly review our investments for indications that fair value is less than the carrying value for reasons that are other than temporary. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others (a) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee; (b) a significant adverse change in the regulatory, economic, or technological environment of the investee; (c) a significant adverse change in the general market conditions of either the geographic area or the industry in which the investee operates; (d) a bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar security for an amount less than the cost of the investment; (e) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. Any adverse change in these factors could have a significant impact on the recoverability of our investments and could have a material impact in our condensed consolidated financial statements.

For purposes of our analysis, we take into consideration the features, if any, or varying provisions of each equity or debt security owned. For investments measured on a non-recurring basis, we estimate the fair value of our long-term investments by using the income approach based on discounted cash flows and the market based approach, as appropriate. We use various assumptions when determining the expected discounted cash flows including earnings projections, an appropriate cost of capital, long-term growth rate and intentions for how long we will hold the investments. Our investments are impaired if the fair value of the investments is less than the carrying value.

Income Taxes

We account for income taxes under the applicable provisions of U.S. GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided, if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

Accounting for income taxes in interim periods provides that at the end of each interim period we are required to make our best estimate of the consolidated effective tax rate expected to be applicable for our full calendar year. The rate so determined shall be used in providing for income taxes on a consolidated current year-to-date basis. Further, the rate is reviewed, if necessary, as of the end of each successive interim period during the year to our best estimate of our annual effective tax rate.

We believe that our tax positions comply with applicable tax law. As a matter of course, we may be audited by various taxing authorities and these audits may lead to proposed assessments where the ultimate resolution may result in us owing additional taxes. U.S. GAAP addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

Engineering, Research and Development Costs

Our subsidiary, i4c Innovations, has incurred costs in developing their VOYCE^TM pet health monitoring platform and service. In the three months ended March 31, 2014, we determined that the platform and service achieved specific functional requirements to complete the research and development stage. We incurred additional costs for engineering efforts focused on quality control, advanced testing and refining efforts during the early stages of commercial production. We have capitalized some of these costs as assets under construction in our condensed consolidated balance sheets, which are approximately $598 thousand as of June 30, 2014. In addition, we incurred other operating and start-up costs in our Pet Health Monitoring segment, which were expensed in our condensed consolidated statements of operations in the three and six months ended June 30, 2014.

In the three and six months ended June 30, 2013, we incurred research and development costs of $1.1 million and $1.3 million, respectively. In accordance with U.S. GAAP, expenditures for research and development of our new products and services are expensed as incurred and are included in general and administrative expenses in our condensed consolidated statements of operations. We included costs incurred for materials, rights to use intangible assets developed by others, outside contract services and a reasonable allocation of payroll costs.

3. Accounting Standards Updates

Accounting Standards Updates Recently Adopted

In February 2013, an update was made to “Liabilities”. The guidance in this update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following: the amount the reporting entity agreed to pay on the basis of its arrangement amount with its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in this update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied retrospectively to all periods presented. We have adopted the provisions of this update as of January 1, 2014 and there was no material impact to our condensed consolidated financial statements.

In April 2013, an update was made to “Presentation of Financial Statements”. The guidance in this update requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. The amendments in this update are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. We have adopted the provisions of this update as of January 1, 2014 and there was no material impact to our condensed consolidated financial statements.

that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We have adopted the provisions of this update as of January 1, 2014 and there was no material impact to our condensed consolidated financial statements.

In March 2014, an update was made to the Master Glossary. The amendment consolidates multiple instances of the same term into a single definition and makes minor improvements to the Master Glossary that are not expected to result in substantive changes to the application of existing guidance or create a significant administrative cost to most entities. Additionally, the amendment will make the Master Glossary easier to understand, as well as reduce the number of terms appearing in the Master Glossary. We have adopted the provisions of this update as of March 31, 2014 and there was no material impact to our condensed consolidated financial statements.

Accounting Standards Updates Not Yet Effective

In April 2014, an update was made to “Presentation of Financial Statements” and “Property, Plant, and Equipment”. The amendments in this update change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The amendments in this update require expanded disclosures for discontinued operations and are effective for all disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals that have not been reported in the financial statements previously issued or available for issuance. We will adopt the provisions of this update as of January 1, 2015 and do not anticipate a material impact to our condensed consolidated financial statements.

In May 2014, an update was made to “Revenue Recognition”. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, by creating a new Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the trade of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is 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 amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The amendments can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. We will adopt the provisions of this update as of January 1, 2017 and we are currently in the process of evaluating the impact, if any, on our condensed consolidated financial statements.

In June 2014, an update was made to “Compensation – Stock Compensation”. Current U.S. GAAP does not contain explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. The amendments in this update provide explicit guidance for those awards and that they are treated as a performance condition. For all entities, the amendments in this update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We will adopt the provisions of this update as of January 1, 2016 and do not anticipate a material impact to our condensed consolidated financial statements.

4. Earnings Per Common Share

Basic and diluted (loss) earnings per common share are determined in accordance with the applicable provisions of U.S. GAAP. Basic (loss) earnings per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method or the if-converted method, includes the potential exercise of stock options under our share-based employee compensation plans and vesting of restricted stock units.

Diluted loss per common share for the three and six months ended June 30, 2014 excludes options to purchase 3.1 million shares of common stock because they do not have a dilutive effect due to our loss from continuing operations. For the three and six months ended June 30, 2013 options to purchase 395 thousand and 1.2 million shares of common stock, respectively, have been excluded from the computation of diluted earnings per common share as their effect would be anti-dilutive. These shares could dilute earnings per common share in the future.

A reconciliation of basic (loss) earnings per common share to diluted (loss) earnings per common share is as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands, except per share data)						(In thousands, except per share data)
(Loss) income from continuing operations	$	(1,717	)	$	2,102		$	(3,673	)	$	4,643
Loss from discontinued operations		(318	)		(531	)		(1,147	)		(867	)

Net (loss) income available to common shareholders—basic and diluted	$	(2,035	)	$	1,571		$	(4,820	)	$	3,776

Weighted average common shares outstanding—basic		18,525			18,046			18,413			18,042
Dilutive effect of common stock equivalents		0			865			0			837

Weighted average common shares outstanding—diluted		18,525			18,911			18,413			18,879

Basic (loss) earnings per common share:
(Loss) income from continuing operations	$	(0.09	)	$	0.12		$	(0.20	)	$	0.26
Loss from discontinued operations	$	(0.02	)	$	(0.03	)	$	(0.06	)	$	(0.05	)

Basic (loss) earnings per common share	$	(0.11	)	$	0.09		$	(0.26	)	$	0.21

Diluted (loss) earnings per common share:
(Loss) income from continuing operations	$	(0.09	)	$	0.11		$	(0.20	)	$	0.25
Loss from discontinued operations	$	(0.02	)	$	(0.03	)	$	(0.06	)	$	(0.05	)

Diluted (loss) earnings per common share	$	(0.11	)	$	0.08		$	(0.26	)	$	0.20

5. Fair Value Measurement

Our cash and any investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy as they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued are based on quoted market prices in active markets and are primarily U.S. government and agency securities and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

For financial instruments such as cash and cash equivalents, short-term government debt instruments, trade accounts receivables, notes receivable, notes payable, leases payable, accounts payable and short-term and long-term debt, we consider the recorded value of the financial instruments to approximate the fair value based on the liquidity of these financial instruments. We did not have any transfers in or out of Level 1 and Level 2 in the three and six months ended June 30, 2014 or in the year ended December 31, 2013. We did not hold any instruments that are measured at fair value on a recurring basis in the three and six months ended June 30, 2014 and the year ended December 31, 2013. The fair value of our instruments measured on a non-recurring basis during the year ended December 31, 2013, are as follows (in thousands):


	Fair Value Measurements Using:
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Assets:
Long-Term Investment
December 31, 2013	$	8,384	$	0	$	0	$	8,384	$	(1,327	)

At June 30, 2014, we had no amounts outstanding under our revolving credit facility, which is a variable rate loan and therefore, fair value approximates book value.

6. Prepaid Expenses and Other Current Assets

The components of our prepaid expenses and other current assets are as follows:


	June 30, 2014		December 31, 2013
	(In thousands)
Prepaid services	$	281	$	809
Deposits		1,033		0
Other prepaid contracts		4,625		2,813
Other		2,228		1,893

	$	8,167	$	5,515

7. Deferred Subscription Solicitation and Commission Costs

Total deferred subscription solicitation costs included in the accompanying condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013 were $6.9 million and $7.1 million, respectively. Amortization of deferred subscription solicitation and commission costs, which are included in either marketing or commission expense in our condensed consolidated statements of operations, for the three months ended June 30, 2014 and 2013 were $4.2 million and $4.9 million, respectively. Amortization of deferred subscription solicitation and commission costs, which are included in either marketing or commission expense in our condensed consolidated statements of operations, for the six months ended June 30, 2014 and 2013 were $8.6 million and $9.7 million, respectively. Marketing costs, which are included in marketing expenses in our condensed consolidated statements of operations, as they did not meet the criteria for deferral, for the three months ended June 30, 2014 and 2013, were $3.6 million and $2.4 million, respectively. Marketing costs expensed as incurred related to marketing for the six months ended June 30, 2014 and 2013 were $4.8 million and $3.8 million, respectively.

8. Property and Equipment

Property and equipment consist of the following as of:


	June 30, 2014			December 31, 2013
	(In thousands)
Machinery and equipment	$	21,208		$	20,741
Software		36,882			36,302
Software development-in-progress ⁽¹⁾		3,569			2,444
Furniture and fixtures		1,750			1,732
Leasehold improvements		4,342			4,274
Building		725			725
Land		25			25

		68,501			66,243
Less: accumulated depreciation		(54,452	)		(51,753	)

Property and equipment — net	$	14,049		$	14,490

⁽¹⁾

Includes costs associated with software projects which are still in the application development stage as of June 30, 2014 and December 31, 2013, and as such, are not being amortized.

We record internally developed capitalized software as a component of software in property and equipment in our condensed consolidated balance sheets. In the six months ended June 30, 2014, due to discontinued operations, we reduced our property and equipment and associated accumulated depreciation balances by $1.2 million. We regularly review our capitalized software projects for impairment. We had no impairments in the three or six months ended June 30, 2014 and June 30, 2013.

We record depreciation expense for internally developed capitalized software in depreciation expense in our condensed consolidated statements of operations. Depreciation expense related to internally developed capitalized software for the three months ended June 30, 2014 and 2013 was $379 and $883 thousand, respectively. Depreciation expense related to internally developed capitalized software for the six months ended June 30, 2014 and 2013 was $847 thousand and $1.7 million, respectively. Gross carrying amounts related to internally developed capitalized software was $31.2 and $29.6 million at June 30, 2014 and December 31, 2013, respectively. Accumulated depreciation related to internally developed capitalized software was $29.3 and $28.4 million at June 30, 2014 and December 31, 2013, respectively. Amortization expense related to capitalized software, that is no longer in the application development stage, for the future periods is indicated below (in thousands):


For the remaining six months ending December 31, 2014	$	441
For the years ending December 31:
2015		745
2016		601
2017		92
Thereafter		0

Total	$	1,879

9. Long-Term Investments

Our long-term investment consists of an investment in convertible preferred stock of White Sky, a privately held company. As of June 30, 2014, we own 10.5 million convertible preferred shares of White Sky. We have no remaining warrants to purchase equity in White Sky. However, we may elect to participate in future rounds of funding.

Based on our analysis, we concluded that the convertible preferred stock does not meet the definition of in-substance common stock due to substantive liquidation preferences and favorable redemption provisions as compared to other equity in White Sky. Therefore, we will continue to account for our investment under the cost basis method of accounting. As of June 30, 2014, no indicators of impairment were identified and therefore we did not estimate the fair value of our long-term investment.

10. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill are as follows (in thousands):


	June 30, 2014
	Gross Carrying Amount		Accumulated Impairment Losses			Net Carrying Amount at January 1, 2014		Impairment		Net Carrying Amount at June 30, 2014
Consumer Products and Services	$	43,235	$	0		$	43,235	$	0	$	43,235
Bail Bonds Industry Solutions		1,390		(1,390	)		0		0		0

Total Goodwill	$	44,625	$	(1,390	)	$	43,235	$	0	$	43,235


	December 31, 2013
	Gross Carrying Amount		Accumulated Impairment Losses			Net Carrying Amount at January 1, 2013		Impairment		Net Carrying Amount at December 31, 2013
Consumer Products and Services	$	43,235	$	0		$	43,235	$	0	$	43,235
Bail Bonds Industry Solutions		1,390		(1,390	)		0		0		0

Total Goodwill	$	44,625	$	(1,390	)	$	43,235	$	0	$	43,235

We reviewed quantitative and qualitative factors associated with our respective reporting units to which goodwill is assigned including, but not limited to, adverse changes to the business environment, continued declining revenue, and sustained significant decline in our market capitalization. Based on this analysis, we estimated the fair value of our respective CP&S reporting unit as the first step in an interim goodwill impairment test. The estimated fair value of the reporting unit is dependent on several significant assumptions which include our earnings projections. In the three months ended June 30, 2014, our earnings projections included cost reductions and significant operational efficiencies intended to streamline operations and generate long-term profitable growth that we are in the process of formulating and presenting for approval by the Board of Directors. It is our intention to present this plan to the Board of Directors for approval and subsequently start the implementation in the third quarter of 2014 and we believe that the likelihood of this plan being withdrawn, delayed or materially modified is remote. Due to these unique circumstances in the three months ended June 30, 2014, the positive financial impacts of this plan, along with other significant assumptions including the cost of capital and long-term growth rate, were included in our income approach in order to estimate the reporting unit’s fair value. As of June 30, 2014, we performed the first step of the goodwill impairment test and passed. We will continue to monitor our market capitalization, along with other operational performance measures and general economic conditions. A continued downward trend in one or more of these factors could cause us to reduce the estimated fair value of our reporting units and recognize a corresponding impairment of our goodwill in connection with a future goodwill impairment test.

Our intangible assets consisted of the following (in thousands):


	June 30, 2014
	Gross Carrying Amount		Accumulated Amortization			Impairment		Net Carrying Amount
Amortizable intangible assets:
Customer related	$	38,691	$	(36,377	)	$	0	$	2,314
Marketing related		3,024		(3,024	)		0		0
Technology related		2,896		(2,796	)		0		100

Total amortizable intangible assets	$	44,611	$	(42,197	)	$	0	$	2,414


	December 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Impairment		Net Carrying Amount
Amortizable intangible assets:
Customer related	$	38,691	$	(34,671	)	$	0	$	4,020
Marketing related		3,024		(3,024	)		0		0
Technology related		2,796		(2,796	)		0		0

Total amortizable intangible assets	$	44,511	$	(40,491	)	$	0	$	4,020

As a result of the discontinued operations accounting for Net Enforcers, in the three months ended June 30, 2013, we reduced both the gross carrying amount and accumulated amortization on our amortizable intangible assets by $323 thousand. The intangible assets held by Net Enforcers, which are presented in discontinued operations, were fully amortized.

Intangible assets are amortized over a period of three to ten years. For the three months ended June 30, 2014 and 2013, we incurred aggregate amortization expense of $853 thousand and $864 thousand, respectively, which was included in amortization expense in our condensed consolidated statements of operations. For the six months ended June 30, 2014 and 2013, we incurred aggregate amortization expense of $1.7 million and $1.7 million, respectively, which was included in amortization expense in our condensed consolidated statements of operations. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):


For the remaining six months ending December 31, 2014	$	1,720
For the years ending December 31:
2015		461
2016		219
2017		14

	$	2,414

11. Other Assets

The components of our other assets are as follows:


	June 30, 2014		December 31, 2013
	(In thousands)
Prepaid contracts	$	370	$	188
Other		1,117		1,317

	$	1,487	$	1,505

12. Accrued Expenses and Other Current Liabilities

The components of our accrued expenses and other liabilities are as follows:


	June 30, 2014		December 31, 2013
	(In thousands)
Accrued marketing	$	1,455	$	1,060
Accrued cost of sales, including credit bureau costs		11,880		7,317
Accrued general and administrative expense and professional fees		4,843		3,609
Insurance premiums		606		609
Other		904		913

	$	19,688	$	13,508

13. Accrued Payroll and Employee Benefits

The components of our accrued payroll and employee benefits are as follows:


	June 30, 2014		December 31, 2013
	(In thousands)
Accrued payroll	$	297	$	511
Accrued benefits		2,105		2,141
Accrued severance		509		545

	$	2,911	$	3,197

In the three months ended June 30, 2014, we paid severance and severance related benefits of $187 thousand and recorded an additional $302 thousand for severance and severance-related benefits for involuntary terminations. In the six months ended June 30, 2014, we paid severance and severance related benefits of $717 thousand and recorded an additional $681 thousand of expense for severance and severance-related benefits for involuntary terminations.

14. Commitments and Contingencies

Leases

We have entered into long-term operating lease agreements for office space and capital leases for fixed assets. The minimum fixed commitments related to all non-cancellable leases are as follows:


	Operating Leases		Capital Leases
	(In thousands)
For the remaining six months ending December 31, 2014	$	1,613	$	406
For the years ending December 31:
2015		2,933		712
2016		2,805		439
2017		2,790		332
2018		2,896		305
2019		1,324		0
Thereafter		0		0

Total minimum lease payments	$	14,361		2,194

Less: amount representing interest				(235	)

Present value of minimum lease payments				1,959
Less: current obligation				(744	)

Long term obligations under capital lease			$	1,215

We did not enter into any capital leases in the three and six months ended June 30, 2014. Rental expenses included in general and administrative expenses were $769 thousand and $1.5 million for the three and six months ended June 30, 2014, respectively. Rental expenses included in general and administrative expenses were $775 thousand and $1.5 million for the three and six months ended June 30, 2013, respectively.

Legal Proceedings

On May 21, 2012, Intersections Insurance Services Inc. was served with a putative class action complaint (filed on May 14, 2012) against Intersections Insurance Services Inc. and Bank of America in the United States District Court for the Northern District of California. The complaint alleges various claims based on the sale of an accidental death and disability program. Intersections Insurance Services Inc. and Bank of America moved to dismiss the claims and to transfer the action to the United States District Court for the Central District of California. The motion to transfer to the Central District was granted, and Intersections Insurance Services Inc. and Bank of America then moved to dismiss the claims. The motions to dismiss were granted with prejudice on October 1, 2012. The plaintiffs appealed, and on June 24, 2014, the United States Court of Appeals for the Ninth Circuit upheld the dismissal.

On January 14, 2013, Intersections Insurance Services Inc. was served with a complaint (filed on October 2, 2012) on behalf of the Office of the West Virginia Attorney General in the Circuit Court of Mason County, West Virginia. The complaint alleges violations of West Virginia consumer protection laws based on the marketing of unspecified products. Intersections Insurance Services Inc. filed a motion for a more definite statement of the claims, which motion was denied by the court in December 2013. On January 21, 2014, Intersections Insurance Services Inc. filed an answer. In or about December 2013, the Office of the West Virginia Attorney General served Intersections Insurance Services Inc. with document requests. Intersections Insurance Services Inc. served objections to those requests in February 2014. There has been no other activity in the litigation since that time.

In September 2013, a putative class action lawsuit was filed in Illinois in Cook County Circuit Court against Intersections Inc., Intersections Insurance Services Inc., and Ocwen Financial Corporation, alleging violations of the Telephone Consumer Protection Act. The case was removed to the United States District Court for the Northern District of Illinois, Eastern Division. On October 30, 2013, Plaintiffs filed a stipulation voluntarily dismissing, without prejudice, Intersections Inc. from the case. On November 14, 2013, the plaintiffs filed an amended complaint against Intersections Insurance Services Inc. and Ocwen Loan Servicing, LLC. On November 27, 2013, Intersections Insurance Services Inc. and Ocwen Loan Servicing, LLC jointly filed a Motion to Dismiss and to Strike Class Allegations. On March 5, 2014, the motion was granted in part, and denied in part. Discovery has commenced in the case.

The company may become involved in litigation as a result of our normal business operations. We periodically analyze currently available information and make a determination of the probability of loss and provide a range of possible loss when we believe that sufficient and appropriate information is available. We accrue a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. If a loss is probable and a range of amounts can be reasonably estimated but no amount within the range is a better estimate than any other amount in the range, then the minimum of the range is accrued. We do not accrue a liability when the likelihood that the liability has been incurred is believed to be probable but the amount cannot be reasonably estimated or when the likelihood that a liability has been incurred is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is reasonably possible and the impact could potentially be material, we disclose the nature of the contingency and, where feasible, an estimate of the possible loss or range of loss. As of June 30, 2014, we do not have any significant liabilities accrued for any of the lawsuits mentioned above.

Other

In July 2014, the CFPB notified us that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB is considering whether to pursue an enforcement action, including seeking potential refunds to subscribers, assessing civil penalties and issuing a consent order against us. We analyzed all the information available in order to make a determination of the probability of loss, as well as whether the amount can be reasonably estimated. Based upon our analysis, we have recorded an estimated liability of $125 thousand that represents potential refunds for subscribers and is included in general and administrative expenses in our condensed consolidated statements of operations. It is not possible to predict a potential civil penalty amount, or a range of civil penalty amounts, due to the unique facts and circumstances involved. We are in the process of responding to the NORA and, to date, we have not been required to make any payments.

We may be subject to certain non-income (or indirect) taxes in various state jurisdictions. We continue to analyze what obligations, if any, we have to these state taxing authorities. In most cases, it is not possible to predict the maximum potential amount of future payments or determine if a collection obligation is probable due to the unique facts and circumstances involved, including the delivery nature of our services, the relationship through which our services are offered, as well as changing state laws and interpretations of those laws. In a minority of cases, based on certain state provisions and/or active discussions with states, we believe we are liable for a non-income business tax and have recorded a total estimated liability of $622 thousand, which includes interest and penalties. This amount is included in general and administrative expenses in our condensed consolidated statements of operations. To date, we have not been required to make any payments, nor have we received any formal assessments.

15. Other Long-Term Liabilities

The components of our other long-term liabilities are as follows:


	June 30, 2014		December 31, 2013
	(In thousands)
Deferred rent	$	3,057	$	3,190
Uncertain tax positions, interest and penalties not recognized		341		335
Other		148		171

	$	3,546	$	3,696

16. Debt and Other Financing

On November 16, 2012, we entered into an amended and restated Credit Agreement with Bank of America, N.A. Our Credit Agreement initially consisted of a revolving credit facility in the amount of $30.0 million and is secured by substantially all of our assets and a pledge by us of the equity interests we hold in certain of our subsidiaries. Our subsidiaries are co-borrowers under the Credit Agreement. We have never had any outstanding borrowings or letters of credit under the Credit Agreement.

On May 9, 2014, we entered into an amendment and waiver to the Credit Agreement with Bank of America, N.A., which, among other things, waived our projected non-compliance with the consolidated fixed charge coverage ratio for the measurement period ended June 30, 2014 and reduced the borrowing availability to $1. Absent the waiver, we would not have been in compliance with the consolidated fixed charge coverage ratio as of June 30, 2014, as our consolidated fixed charge coverage ratio as of June 30, 2014 was 0.52 as compared to the minimum requirement of 1.25. As a result of the amendment, we were not able to borrow under our Credit Agreement.

On June 26, 2014, we entered into a subsequent amendment to the Credit Agreement with Bank of America, N.A., to, among other things, (a) establish a new maturity date of March 31, 2015, (b) set the borrowing availability to $7.5 million, (c) reduce the maximum permitted leverage ratio to 2:00 to 1:00, (d) add a new minimum Year-to-Date Consolidated EBITDA covenant for each of last three fiscal quarters of 2014, (e) remove dividends from the consolidated fixed charge coverage ratio, and (f) eliminate certain permitted Restricted Payments, including, but not limited to, ordinary dividend payments, and a corresponding Permitted Investment. We are currently in compliance with all such covenants.

The amended Credit Agreement contains certain customary covenants, including among other things covenants that limit or restrict the following: the incurrence of liens; the making of investments; the incurrence of certain indebtedness; mergers, dissolutions, liquidations, or consolidations; acquisitions (other than certain permitted acquisitions); sales of substantially all of our or any of our subsidiaries’ assets; the declaration of certain dividends or distributions; transactions with affiliates (other than guarantors under the Credit Agreement) other than on fair and reasonable terms; and the creation or acquisition of any direct or indirect subsidiary of ours that is not a domestic subsidiary unless such subsidiary becomes a guarantor. We are also required to maintain compliance with certain financial covenants which include, but are not limited to, our consolidated leverage ratios, consolidated EBITDA ratios, consolidated fixed charge coverage ratios, customary covenants, representations and warranties, funding conditions and events of default.

17. Income Taxes

Our consolidated effective tax rate from continuing operations for the three months ended June 30, 2014 and 2013 was 43.3% and 47.5%, respectively. Our consolidated effective tax rate from continuing operations for the six months ended June 30, 2014 and 2013 was 24.5% and 50.2%, respectively. The significant decrease from the comparable period is primarily due to the ratio of book expenses that are not deductible for income tax purposes and the increase in loss from operations before income tax. There were no material changes to our uncertain tax positions during the six months ended June 30, 2014. During the six months ended June 30, 2013 we placed a valuation allowance of $677 thousand against the fair value adjustment related to the exercise of our White Sky warrants.

18. Stockholders’ Equity

Share Repurchase

In April 2005, our Board of Directors authorized a share repurchase program under which we can repurchase our outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. As of June 30, 2014, we had approximately $16.9 million remaining under our share repurchase program. However, we are prohibited from repurchasing any shares of common stock under our amended Credit Agreement. The repurchases may be made on the open market, in block trades, through privately negotiated transactions or otherwise, and the program may be suspended or discontinued at any time.

During the three and six months ended June 30, 2014, we did not repurchase any shares of common stock. In the three months ended June 30, 2013, we repurchased approximately 120 thousand shares of common stock at a weighted average price of $9.53 per share resulting in an aggregate cost to us of $1.1 million. In the six months ended June 30, 2013, we repurchased approximately 250 thousand shares of common stock at a weighted average price of $9.60 per share resulting in an aggregate cost to us of $2.4 million.

Dividends

The following summarizes our dividend activity for the six months ended June 30, 2014:


Announcement Date	Record Date	Payment Date	Cash Dividend Amount (per share)
March 6, 2014	March 20, 2014	April 3, 2014	$	0.20

The following summarizes our dividend activity for the year ended December 31, 2013:


Announcement Date	Record Date	Payment Date	Cash Dividend Amount (per share)
February 22, 2013	March 4, 2013	March 15, 2013	$	0.20
May 9, 2013	May 29, 2013	June 7, 2013	$	0.20
August 8, 2013	August 26, 2013	September 6, 2013	$	0.20
November 12, 2013	November 22, 2013	December 9, 2013	$	0.20

Under our amended Credit Agreement, we are prohibited from declaring and paying ordinary cash dividends.

Share Based Compensation

On August 24, 1999, the Board of Directors and stockholders approved the 1999 Stock Option Plan (the “1999 Plan”). The active period for this plan expired on August 24, 2009. The number of shares of common stock that have been issued under the 1999 Plan could not exceed 4.2 million shares pursuant to an amendment to the plan executed in November 2001. As of June 30, 2014, there were options to purchase 7 thousand shares outstanding. Individual awards under the 1999 Plan took the form of incentive stock options and nonqualified stock options.

On March 12, 2004 and May 5, 2004, the Board of Directors and stockholders, respectively, approved the 2004 Stock Option Plan (the “2004 Plan”) to be effective immediately prior to the consummation of the initial public offering. The active period for this plan expired on May 5, 2014. The number of shares of common stock that have been issued under the 2004 Plan could not exceed 2.8 million shares of common stock. As of June 30, 2014, we have options to purchase 828 thousand shares outstanding. Individual awards under the 2004 Plan took the form of incentive stock options and nonqualified stock options.

On March 8, 2006 and May 24, 2006, the Board of Directors and stockholders, respectively, approved the 2006 Stock Incentive Plan (the “2006 Plan”). The active period for this plan will remain in effect until March 7, 2016, unless terminated by the Board of Directors. The number of shares of common stock that may be issued under the 2006 Plan may not exceed 7.1 million, pursuant to an amendment approved by the Board of Directors and stockholders in May 2011. As of June 30, 2014, we have 301 thousand shares of common stock available for future grants of awards under the 2006 Plan, and awards for approximately 2.3 million shares outstanding. Individual awards under the 2006 Plan may take the form of incentive stock options, nonqualified stock options, restricted stock awards and/or restricted stock units. These awards generally vest over four years of continuous service.

On March 17, 2014 and May 14, 2014, the Board of Directors and stockholders, respectively, approved the 2014 Stock Incentive Plan (the “2014 Plan”). The number of shares of common stock that may be issued under the 2014 Plan may not exceed 3.0 million. As of June 30, 2014, no awards have been made under the 2014 Plan. Individual awards under the 2014 Plan may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and/or restricted stock unit awards.

The Compensation Committee administers the Plans, selects the individuals who will receive awards and establishes the terms and conditions of those awards. Shares of common stock subject to awards that have expired, terminated, or been canceled or forfeited are available for issuance or use in connection with future awards.

Stock Options

Total share-based compensation expense recognized for stock options, which is included in general and administrative expenses in our condensed consolidated statements of operations, for the three and six months ended June 30, 2014 was $52 thousand and $114 thousand, respectively. Total share-based compensation expense recognized for stock options, which is included in general and administrative expenses in our condensed consolidated statements of operations, for the three and six months ended June 30, 2013 was $261 thousand and $621 thousand, respectively.

The following table summarizes our stock option activity:


	Number of Shares			Weighted- Average Exercise Price		Aggregate Intrinsic Value		Weighted- Average Remaining Contractual Term
						(In thousands)		(In years)
Outstanding at December 31, 2013		1,355,158		$	6.49
Canceled		(77,694	)		15.96
Exercised		(54,938	)		4.08

Outstanding at June 30, 2014		1,222,526		$	6.00	$	986		4.58

Exercisable at June 30, 2014		1,192,525		$	5.80	$	986		4.52

There were no options granted during the three and six months ended June 30, 2014 and 2013, respectively.

For options exercised, intrinsic value is calculated as the difference between the market price on the date of exercise and the exercise price. The total intrinsic value of options exercised during the three and six months ended June 30, 2014 was $20 thousand and $137 thousand, respectively. The total intrinsic value of options exercised during the three and six months ended June 30, 2013 was $495 thousand and $538 thousand, respectively.

In the three and six months ended June 30, 2014, participants utilized a net withhold option exercise method, in which options were surrendered to cover payroll withholding tax, if applicable, and exercise price. In the three months ended June 30, 2014, approximately 26 thousand shares were exercised, of which 23 thousand cumulative net shares were issued to the participants and 3 thousand were surrendered and subsequently cancelled. In the six months ended June 30, 2014, approximately 55 thousand shares were exercised, of which 44 thousand cumulative net shares issued to the participants and 11 thousand were surrendered and subsequently cancelled. The total pre-tax cash outflow, included in withholding tax payments in our condensed consolidated statements of cash flows, for this net withhold option exercise method was $11 thousand and $83 thousand, respectively, for the three and six months ended June 30, 2014.

In the three and six months ended June 30, 2013, participants utilized a net withhold option exercise method, in which options were surrendered to cover payroll withholding tax, if applicable, and exercise price. In the three months ended June 30, 2013, approximately 37 thousand shares were exercised, of which 13 thousand cumulative net shares were issued to the participants and 24 thousand were surrendered and subsequently cancelled. In the six months ended June 30, 2013, approximately 43 thousand shares were exercised, of which 16 thousand cumulative net shares were issued to the participants and 27 thousand were surrendered and subsequently cancelled. The total pre-tax cash outflow, included in withholding tax payments in our condensed consolidated statements of cash flows, for this net withhold option exercise method was $79 thousand and $92 thousand, respectively, for the three and six months ended June 30, 2013.

As of June 30, 2014, there was $149 thousand of total unrecognized compensation cost related to unvested stock option arrangements granted under the Stock Incentive Plans. That cost is expected to be recognized over a weighted-average period of 0.8 years.

Restricted Stock Units

Total share based compensation recognized for restricted stock units, which is included in general and administrative expenses in our condensed consolidated statements of operations, for the three and six months ended June 30, 2014 was $1.4 million and $2.6 million, respectively. Total share based compensation recognized for restricted stock units, which is included in general and administrative expenses in our condensed consolidated statements of operations, for the three and six months ended June 30, 2013 was $1.4 million and $2.5 million, respectively.

The following table summarizes our restricted stock unit activity:


	Number of RSUs			Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Life
						(In years)
Outstanding at December 31, 2013		1,884,913		$	8.14
Granted		896,876			4.65
Canceled		(458,520	)		7.39
Vested		(412,608	)		7.64

Outstanding at June 30, 2014		1,910,661		$	6.80		2.81

As of June 30, 2014, there was $10.8 million of total unrecognized compensation cost related to unvested restricted stock units granted under the Stock Incentive Plans. That cost is expected to be recognized over a weighted-average period of 2.81 years.

19. Related Party Transactions

We have an investment in White Sky and a commercial agreement to incorporate and market each company’s respective services into various product offerings. In addition, we have an agreement with White Sky for them to provide various software development services and pay a commission fee. For the three and six months ended June 30, 2014, we remitted $15 thousand and $240 thousand related to this agreement. For both the three and six months ended June 30, 2013, we remitted $150 thousand related to this agreement. Development costs are capitalized and included in property and equipment in our condensed consolidated balance sheets and commission costs are included in the condensed consolidated statements of operations. During the three and six months ended June 30, 2013, we exercised 700 thousand and 1.4 million vested warrants in order to purchase additional shares of convertible preferred stock in White Sky, for which we paid $732 thousand and $1.5 million, respectively. As of June 30, 2014, there were no amounts due to White Sky under these agreements. See Note 9 for further information.

The chief executive officer and president of Digital Matrix Systems, Inc. (“DMS”) serves as our board member. We have service agreements with DMS for monitoring credit on a daily and quarterly basis, along with certain credit analysis services. In connection with these agreements, we paid monthly installments totaling $221 thousand and $365 thousand for the three and six months ended June 30, 2014. We paid monthly installments totaling $218 thousand and $468 thousand for the three and six months ended June 30, 2013. These amounts are included within cost of revenue and general and administrative expenses in our condensed consolidated statements of operations. As of June 30, 2014, we owed $157 thousand to DMS under this agreement.

We have a separate professional services agreement with DMS under which DMS provides additional development and consulting services pursuant to work orders that are agreed upon by the parties from time to time. We did not remit any payments to DMS in the three or six months ended June 30, 2014. As of June 30, 2014, there were no amounts due to DMS under this separate service agreement.

20. Discontinued Operations

Our discontinued operations consist of Intersections Business Intelligence Services, a subsidiary which ceased operations in the three months ended June 30, 2014, and Net Enforcers, a subsidiary which ceased operations in the three months ended June 30, 2013. For both entities, we determined that the U.S. GAAP requirements were met as we do not have significant continuing involvement in these business and their operations and cash flows were eliminated from our ongoing operations.

The following table summarizes the operating results of the discontinued operations included in the condensed consolidated statements of operations (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenue	$	6		$	38		$	57		$	223

Loss before income taxes from discontinued operations		(425	)		(809	)		(1,810	)		(1,319	)
Income tax benefit		107			278			663			452

Loss from discontinued operations	$	(318	)	$	(531	)	$	(1,147	)	$	(867	)

The following table summarizes the carrying values of the major assets and liabilities of our discontinued operations (in thousands):


	As of April 30, 2014		As of December 31, 2013
Accounts receivable	$	8	$	62
Prepaid expenses and other current assets		0		49
Property and equipment, net		49		1,009
Accounts payable	$	9	$	43
Accrued expenses and other current liabilities		34		145
Accrued payroll and employee benefits		155		55

21. Segment and Geographic Information

In the three months ended March 31, 2014, we restructured our internal organization and, as a result, created an additional reporting segment and Corporate business unit. In accordance with U.S. GAAP, we recast the applicable segment disclosures for the condensed consolidated financial statements. Our products and services are grouped into three reportable segments: Consumer Products and Services, Pet Health Monitoring and Bail Bonds Industry Solutions. Corporate headquarter office transactions such as legal, human resources, finance and internal audit that have not been attributed to a particular segment are reported in Corporate.

Our Consumer Products and Services segment includes our identity theft protection and credit information management, data breach response, and insurance and membership products and services. Our Pet Health Monitoring segment includes VOYCE^™, the new pet health monitoring platform and service provided by our subsidiary, i4c Innovations. We expect to launch VOYCE^™ later this year. Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bonds industry provided by Captira Analytical.

The following table sets forth segment information for the three and six months ended June 30, 2014 and 2013:


	Consumer Products and Services		Pet Health Monitoring			Bail Bonds Industry Solutions			Corporate			Consolidated
Three Months Ended June 30, 2014
Revenue	$	63,810	$	0		$	503		$	0		$	64,313
Depreciation		1,265		20			37			117			1,439
Amortization		853		0			0			0			853
Income (loss) from continuing operations before income taxes	$	7,133	$	(3,229	)	$	(63	)	$	(6,867	)	$	(3,026	)
Three Months Ended June 30, 2013
Revenue	$	80,263	$	0		$	464		$	0		$	80,727
Depreciation		1,920		0			47			188			2,155
Amortization		864		0			0			0			864
Income (loss) from continuing operations before income taxes	$	14,749	$	(2,116	)	$	(50	)	$	(8,583	)	$	4,000

Six Months Ended June 30, 2014
Revenue	$	129,312	$	0		$	960		$	0		$	130,272
Depreciation		2,623		31			80			244			2,978
Amortization		1,706		0			0			0			1,706
Income (loss) from continuing operations before income taxes	$	16,179	$	(6,517	)	$	(134	)	$	(14,394	)	$	(4,866	)
Six Months Ended June 30, 2013
Revenue	$	161,394	$	0		$	889		$	0		$	162,283
Depreciation		3,760		0			94			360			4,214
Amortization		1,728		0			0			0			1,728
Income (loss) from continuing operations before income taxes	$	30,739	$	(3,075	)	$	(240	)	$	(18,109	)	$	9,315

As of June 30, 2014
Property, plant and equipment, net	$	10,963	$	2,467		$	156		$	463		$	14,049
Total assets	$	100,297	$	3,915		$	1,048		$	20,083		$	125,343


	Consumer Products and Services		Pet Health Monitoring		Bail Bonds Industry Solutions		Market Intelligence		Corporate		Consolidated
As of December 31, 2013
Property, plant and equipment, net	$	11,848	$	182	$	234	$	1,009	$	1,217	$	14,490
Total assets	$	111,987	$	695	$	798	$	1,469	$	16,140	$	131,089

We plan to launch VOYCE^™ later this year and therefore, our Pet Health Monitoring segment did not generate revenue in the three and six months ended June 30, 2014 or June 30, 2013.

We generate revenue in the following geographic areas:


	United States		Canada		Consolidated
	(in thousands)
Revenue
For the three months ended June 30, 2014	$	56,648	$	7,665	$	64,313
For the six months ended June 30, 2014		115,020		15,252		130,272
For the three months ended June 30, 2013		72,045		8,682		80,727
For the six months ended June 30, 2013		145,811		16,472		162,283

22. Subsequent Events

In July 2014, our Board of Directors approved the separation without cause of two senior executives. As a result of the severance and other termination benefits payable to the specific executives, we expect to record an initial charge of approximately $1.7 million, before income taxes, in the third quarter of 2014 in our condensed consolidated financial statements. We are in the process of formulating a detailed plan intended to streamline operations with a focus on our corporate and consumer products and services cost structure. Provided the plan is approved by our Board of Directors, or we otherwise undertake additional cost-cutting initiatives, we will update our estimates of additional costs and charges as appropriate.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements as of December 31, 2013 and 2012, and for the years ended December 31, 2013, 2012 and 2011, included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the “Form 10-K”) and with the unaudited condensed consolidated financial statements and related notes thereto presented in this Form 10-Q.

Forward Looking Statements

Information contained in this discussion and analysis, other than historical information, may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases such as “should result,” “are expected to,” “we anticipate,” “we estimate,” “we project,” or similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in our Form 10-K under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, our quarterly and current reports filed with the Securities and Exchange Commission and the following important factors: the impact of foreign, federal, state and local laws and regulation, specifically laws and regulation affecting consumer marketing, financial products and services, financial institutions, credit information and consumer credit; the concentration of our products and services; the concentration of our suppliers and clients; our ability to continue our long-term business strategy, including growth through existing channels, products and services, development of new channels, products and services, acquisition and investments; demand for our services; our ability to maintain acceptable margins; our ability to maintain secure systems; our ability to control costs; the impact of competition; our ability to attract and retain qualified personnel; and the possibility that we may not make further dividend payments. A detailed discussion of these and other factors that may affect our future results is contained in our Form 10-K.

Readers are cautioned not to place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made, and we have no intention or obligation to publicly update or revise any forward-looking statement unless required to do so by securities laws.

Overview

coupled with the pet parent and dog’s profile and through proprietary algorithms provides personalized content written by top dog care experts exclusively for VOYCE^™. In addition, The VOYCE Experience^™ offers document storage and access anytime, anywhere, customized reminders, and the ability to set goals. We expect to launch VOYCE^™ later this year.

Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bonds industry provided by Captira Analytical.

Cost Restructuring

Consumer Products and Services

Our identity theft protection and credit information management products and services provide multiple benefits to consumers, including access to their credit reports, credit monitoring, educational scores, credit education, reports and monitoring of additional information, identity theft recovery services, identity theft cost reimbursement insurance, and software and other technology tools and services. Our membership and insurance products and services are offered by our subsidiary, Intersections Insurance Services, and include accidental death and disability insurance and access or purchasing programs for healthcare, home, auto, financial and other services and information.

We also offer breach response services to organizations responding to compromises of sensitive personal information. We help these clients notify the affected individuals and we provide the affected individuals with identity theft recovery and credit monitoring services.

Our consumer products and services historically have been offered primarily through relationships with clients. Most of our current subscribers for our products and services were acquired through our financial institution clients in the United States and Canada. We also offer our products and services through clients in other industries, including Internet service providers, retailers and e-commerce companies. In Canada, our products and services are offered through a marketing and distribution relationship with a Canadian company to the customers of financial institution and non-financial institution clients. In recent years, we have added a greater share of new subscribers by marketing directly to consumers through our IDENTITY GUARD^® brand and other brands. We conduct our consumer direct marketing primarily through online affiliates, search engine marketing and broadcast media. We also may market through other channels, including direct mail, print marketing, telemarketing and email. We also market our IDENTITY GUARD^® products in conjunction with relationships outside the financial services industry.

Our services are or have been marketed to potential subscribers and non-subscriber customers through a variety of marketing channels, including direct mail, outbound telemarketing, inbound telemarketing, inbound customer service, account activation calls, email, mass media and the Internet. Some of our marketing arrangements with our clients have called for us to fund marketing activity and others have called for our clients to fund the marketing. The mix between our company-funded and client-funded marketing programs varies from year to year based upon our and our clients’ strategies.

Our client arrangements are distinguished from one another primarily by the allocation between us and the client of the economic risk and reward of the marketing campaigns. The general characteristics of each arrangement are described below, although the arrangements with particular clients may contain unique characteristics:

•

Direct marketing arrangements: Under direct marketing arrangements, we bear most of the new subscriber marketing costs and pay our client a commission for revenue derived from subscribers. These commissions could be payable upfront in a lump sum on a per newly enrolled subscriber basis, periodically over the life of a subscriber, or through a combination of both. These arrangements generally result in negative cash flow over the first several months after a program is launched due to the upfront nature of the marketing investments. In some arrangements, we pay the client a service fee for access to the client’s customers or billing of the subscribers by the client, and we may reimburse the client for certain of its out-of-pocket marketing costs incurred in obtaining the subscriber. Even in a direct marketing arrangement, some marketing channels may entail limited or no marketing expenses. In those cases, we generally pay higher commissions to our clients compared to channels where we incur more substantial marketing expenses. In addition to these direct marketing arrangements with clients, the financial results we report under direct marketing includes our consumer direct marketing, which is, independent of these client arrangements.

•

Indirect marketing arrangements: Under indirect marketing arrangements, our client bears the marketing expense and pays us a service fee or percentage of the revenue. Indirect marketing arrangements also include some clients who pay us fees for operational services including but not limited to fulfillment events, information technology development hours or customer service activities. Because the subscriber acquisition cost is borne by our client under these arrangements, our revenue per subscriber is typically lower than under direct marketing arrangements. Indirect marketing arrangements generally provide positive cash flow earlier than direct arrangements. The majority of our non-subscriber customers are acquired under indirect marketing relationships that primarily generate little or no revenue per customer for us.

The classification of a client relationship as direct or indirect is based on whether we or the client pay the marketing expenses. Our accounting policies for revenue recognition, however, are not based on the classification of a client arrangement as direct or indirect. We look to the specific client arrangement to determine the appropriate revenue recognition policy, as discussed in detail in Note 2 to our condensed consolidated financial statements. In the past, we have purchased from clients certain customer portfolios, including the rights to future cash flows. We typically classify the post-purchase customer portfolio as a direct marketing arrangement regardless of how it may have been characterized prior to purchase because we receive all future revenues and bear all associated risks and expenses for these customers following the purchase transaction.

Our typical contracts for direct marketing arrangements, and some indirect marketing arrangements, provide that after termination of the contract we may continue to provide our services to existing subscribers for periods ranging from two years to indefinite, substantially under the applicable terms in effect at the time of termination. Under certain of our agreements, however, including most indirect marketing arrangements, the clients may require us to cease providing services under existing subscriptions. Clients under most contracts may also require us to cease providing services to their customers under existing subscriptions if the contract is terminated for material breach by us or based on various events such as certain legal or regulatory changes, a party’s bankruptcy or insolvency, or other events. Even in contracts under which we have a right to provide our services to existing subscribers after termination, we often are substantially dependent on those clients to cooperate in allowing continued servicing, including continued billing by those clients. For example, in January 2014, Capital One sent us a notice of its decision to terminate its marketing agreement with us. Under the notice, Capital One cancelled existing subscriptions, as of June 30, 2014. We generated approximately $1.0 million per month under this agreement. We negotiated an arrangement under which we continued to receive transition service fees, subject to certain conditions, through July 31, 2014.

We historically have depended upon a few large financial institutions in the United States for a significant portion of our new subscriber additions and our revenue. In the six months ended June 30, 2014 and 2013, approximately 10% and 29%, respectively, of our new subscribers were derived from U.S. financial institutions and approximately 60% and 66%, respectively, of our Consumer Products and Services segment revenue were derived from agreements with U.S. financial institutions. Revenue from subscribers obtained through our largest client, Bank of America, as a percentage of Consumer Products and Services segment revenue, constituted approximately 44% and 44% in the six months ended June 30, 2014 and 2013, respectively. Bank of America and our other major financial institution clients have suspended or terminated their marketing of our products, and most other marketing through financial institutions has been reduced, suspended or terminated. We believe this is due to a number of factors, including regulatory scrutiny of the sales, marketing and administration of add-on products by financial institutions and changes in the financial institutions’ strategies. As a result, our new subscriber additions were 25% lower in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 despite growth in new subscriber additions from consumer direct and non-financial institution clients. We expect ongoing regulatory review and scrutiny of sales of add-on and other consumer financial products and services, including identity theft protection products, to continue to be a focus of the Consumer Financial Protection Bureau and other regulators. As a result, marketing of our products by our major financial institution clients, and most other marketing by our financial institution clients, has been reduced, suspended or terminated, and we do not know whether the marketing of our products by financial institutions will be resumed, or whether, if resumed, they will return to prior levels. Some financial institution clients also have suspended billing of or cancelled certain subscribers, and may suspend billing of or cancel other subscribers. We believe these cancellations and suspensions are based on regulatory actions or changes in the regulatory environment, and others are based on changes in the marketing and customer relationship strategies of our financial institution clients. We expect to continue to incur material costs as a result of this ongoing regulatory review and scrutiny. We or our financial institution clients also may take remedial actions including the issuing of refunds or cancellation of subscribers, and our clients may seek indemnification or contribution from us relating to those remedial actions. On April 7, 2014, Bank of America entered into consent orders with the CFPB and Office of Comptroller of the Currency under which Bank of America provided remediation to certain customers of identity theft products for which we are a service provider, as well as identity theft protection products of another service provider, based on allegations of unfairness with respect to how and when those customers were charged. Further, as a result of this regulatory environment, we have made, and may make additional changes to our practices and products, we may experience additional subscriber cancellations, and we, or our clients, may be subject to further regulatory or legal actions.

We provided information to the CFPB in response to the previously reported Civil Investigative Demand regarding the provision of “ancillary products related to credit card or deposit accounts” and a subsequent request for information received in January 2014. In July 2014, the CFPB notified us that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB is considering whether to pursue an enforcement action, including seeking potential refunds to subscribers, assessing civil penalties and issuing a consent order against us. We are in the process of responding to the NORA letter and, to date, we have not been required to make any payments. See Note 14, “Commitments and Contingencies—Legal Proceedings” to the consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.

Other Data

The following table details other selected subscriber and financial data (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Subscribers at beginning of period		2,772			4,202			2,870			4,489
New subscribers—indirect		2			24			7			59
New subscribers—direct		98			114			217			243
Cancelled subscribers within first 90 days of subscription		(37	)		(52	)		(77	)		(100	)
Cancelled subscribers after first 90 days of subscription		(508	)		(501	)		(690	)		(785	)
Reclassified subscribers****		0			0			0			(119	)

Subscribers at end of period		2,327			3,787			2,327			3,787
Non-Subscriber Customers		8			3,434			8			3,434

Total Customers at end of period		2,335			7,221			2,335			7,221

Indirect subscribers		22.4	%		46.2	%		22.4	%		46.2	%
Direct subscribers		77.6	%		53.8	%		77.6	%		53.8	%

		100.0	%		100.0	%		100.0	%		100.0	%

Cancellations within first 90 days of subscription*		36.9	%		37.7	%		34.2	%		33.0	%
Cancellations after first 90 days of subscription**		43.3	%		25.8	%		43.3	%		25.8	%
Overall retention***		54.6	%		69.3	%		54.6	%		69.3	%

*	Percentage of cancellation within the first 90 days to subscriber additions for the period.

**	Percentage of cancellations greater than 90 days to the number of subscribers at the beginning of the period plus new subscribers during the period less cancellations within the first 90 days on a rolling 12 month basis.

***	On a rolling 12 month basis by taking subscribers at the end of the period divided by the sum of the subscribers at the beginning of the period plus additions for the period.

****	During the three months ended March 31, 2013, we refined the criteria we use to calculate and report the “Other Data” depicted in the table above, resulting in approximately 119 thousand customers being reclassified out of our Subscriber count and into our Non-Subscriber Customers.

Non-Subscriber Customers include consumers who receive or are eligible for certain limited versions of our products and services as benefits of their accounts with our clients. Non-Subscriber Customers also include consumers for whom we provide limited administrative services in connection with their transfer from a client’s prior service provider. We generate an immaterial percentage of our revenue from Non-Subscriber Customers. In the year ended December 31, 2013, Non-Subscriber Customers decreased significantly due to the cancellation by two of our financial institution clients of two portfolios totaling 3.5 million subscribers.

In prior years, certain of our clients changed their customer billing and cancellation practices related to our products. We believe these changes are a result of inquiries from the federal regulatory agencies that oversee these clients. As of June 30, 2014, we currently have approximately 46 thousand subscribers on billing hold as a result of these changes.

Pet Health Monitoring

Through our subsidiary, i4c Innovations, we plan to launch VOYCE^™, a new pet health monitoring platform and service later this year. Initial availability of VOYCE^™ will be available to dog owners. VOYCE^™ is a platform that connects pets, their owners, and veterinarians with individualized pet health monitoring data, tailored pet health related content and information management tools. VOYCE^™ is comprised of two key parts – a wearable health band worn similarly to a dog collar and an online member area. The VOYCE^™ band operates using non-invasive, radio frequency based technology, an accelerometer, an onboard microcontroller and specialized algorithms. The VOYCE^™ band monitors vital key wellness indicators such as activity, rest patterns, calories burned, step count and resting heart rate and respiratory rate. This data is uploaded to the VOYCE^™ member area via WiFi which displays the data showing trends over time. This data is also coupled with the pet parent and dog’s profile and through proprietary algorithms provides personalized content written by top dog care experts exclusively for VOYCE^™. In addition, The VOYCE Experience^™ offers document storage and access anytime, anywhere, customized reminders, and the ability to set goals. We believe VOYCE^™ uniquely provides a combination of health data monitoring for pets and customized information for pet owners.

Bail Bonds Industry Solutions

Through our subsidiary, Captira Analytical, we provide automated service solutions for the bail bonds industry. These services include data management, bookkeeping, accounting, reporting, and decision making tools which allow bail bondsmen, general agents and sureties to run their offices more efficiently, to exercise greater operational and financial control over their businesses, and to make better underwriting decisions. We believe these services are the only fully integrated suite of bail bonds management applications of comparable scope available in the marketplace today. These services are sold to retail bail bondsmen on a “per seat” license basis plus additional transactional charges for various optional services. Additionally, this segment has developed a suite of services for bail bonds insurance companies, general agents and sureties which are sold on either a transactional or recurring revenue basis.

Critical Accounting Policies

Management Estimates

In preparing our condensed consolidated financial statements, we make estimates and assumptions that can have a significant impact on our financial position and results of operations. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We have identified the following policies as critical to our business operations and the understanding of our results of operations. For further information on our critical and other accounting policies, see Note 2 to our condensed consolidated financial statements.

Revenue Recognition

We recognize revenue on 1) identity theft and credit management services, 2) accidental death insurance and 3) other monthly membership products.

Identity Theft and Credit Management Services

Accidental Death Insurance

We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain paper and electronic confirmations with individual purchases, b) delivery has occurred at the completion of a product trial period, c) the seller’s price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectability is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized when earned. Marketing of our insurance products generally involves a trial period during which time the product is made available at no cost to the customer. No revenues are recognized until applicable trial periods are completed.

For insurance products, we record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products.

Other Membership Products

We generate revenue from other types of subscription based products provided from our Bail Bonds Industry Solutions segment. We recognize revenue from providing management service solutions to the bail bonds industry on a monthly subscription or transactional basis.

Goodwill, Identifiable Intangibles and Other Long Lived Assets

two-step quantitative assessment to testing goodwill for impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others (a) a significant decline in our expected future cash flows; (b) a sustained, significant decline in our stock price and market capitalization; (c) a significant adverse change in legal factors or in the business climate; (d) unanticipated competition; (e) the testing for recoverability of a significant asset group within a reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact in our condensed consolidated financial statements.

Deferred Subscription Solicitation and Advertising

expected to result directly from such advertising costs. Probable remaining future benefit is estimated based upon historical subscriber patterns, and represents net revenues less costs incurred to earn those revenues. In estimating probable future benefit (on a per subscriber basis) we deduct our contractual cost to service that subscriber from the known sales price. We then apply the future benefit (on a per subscriber basis) to the number of subscribers expected to be retained in the future to arrive at the total probable future benefit. In estimating the number of subscribers we will retain (i.e., factoring in expected cancellations), we utilize historical subscriber patterns maintained by us that show attrition rates by client, product and marketing channel. The total probable future benefit is then compared to the costs of a given marketing campaign (i.e., cost pools), and if the probable future benefit exceeds the cost pool, the amount is considered to be recoverable. If direct response advertising costs were to exceed the estimated probable remaining future benefit, an adjustment would be made to the deferred subscription costs to the extent of any shortfall.

Commission Costs

Share Based Compensation

We use the Black-Scholes option-pricing model to fair value all options and the straight-line method to amortize this fair value as compensation cost over the requisite service period. In the three and six months ended June 30, 2014 and 2013, we did not grant options.

Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield as an input. We apply a dividend yield based on our history and expectation of dividend payouts.

Expected Volatility. The expected volatility of options granted is estimated based solely upon our historical share price volatility. We will continue to review our estimate in the future.

Expected Term. The expected term of options granted is based upon historical experience and represents the period of time that options granted are expected to be outstanding.

Long-Term Investment

Income Taxes

Engineering, Research and Development Costs

Our subsidiary, i4c Innovations, has incurred costs in developing their VOYCE^™ pet health monitoring platform and service. In the three months ended March 31, 2014, we determined that the platform and service achieved specific functional requirements to complete the research and development stage. We incurred additional costs for engineering efforts focused on quality control, advanced testing and refining efforts during the early stages of commercial production. We have capitalized some of these costs as assets under construction in our condensed consolidated balance sheets, which are approximately $598 thousand as of June 30, 2014. In addition, we incurred other operating and start-up costs in our Pet Health Monitoring segment, which were expensed in our condensed consolidated statements of operations in the three and six months ended June 30, 2014.

Accounting Standards Updates Recently Adopted

In July 2013, an update was made to “Income Taxes”. The guidance in this update state that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We have adopted the provisions of this update as of January 1, 2014 and there was no material impact to our condensed consolidated financial statements.

Accounting Standards Updates Not Yet Effective

Results of Continuing Operations

In the three months ended March 31, 2014, we restructured our internal organization and, as a result, created an additional reporting segment and Corporate business unit. In accordance with U.S. GAAP, we recast the applicable segment disclosures for the condensed consolidated financial statements. Our products and services are grouped into three reportable segments: Consumer Products and Services, Pet Health Monitoring and Bail Bonds Industry Solutions. Corporate headquarter office transactions including but not limited to legal, compliance, human resources, finance and internal audit expenses that have not been attributed to a particular segment are reported in Corporate.

Our Consumer Products and Services segment includes our identity theft protection and credit information management, data breach response, and insurance and membership products and services. Our Pet Health Monitoring segment includes VOYCE^™, the new pet health monitoring platform and service provided by our subsidiary, i4c Innovations. We expect to launch VOYCE^™ later this year. Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bonds industry provided by Captira Analytical.

For a discussion of ongoing trends negatively affecting our business, please see “Item 1A. Risk Factors” and “Trends Due to Regulatory Environment” under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K.

Three Months Ended June 30, 2014 vs. Three Months Ended June 30, 2013 (in thousands):

The condensed consolidated results of continuing operations are as follows:


	Consumer Products and Services		Pet Health Monitoring			Bail Bonds Industry Solutions			Corporate			Consolidated
Three Months Ended June 30, 2014
Revenue	$	63,810	$	0		$	503		$	0		$	64,313
Operating expenses:

Marketing		7,324		451			0			0			7,775
Commission		16,066		0			50			0			16,116
Cost of revenue		20,885		95			42			0			21, 022
General and administrative		9,954		2,663			437			6,623			19,677
Depreciation		1,265		20			37			117			1,439
Amortization		853		0			0			0			853

Total operating expenses		56,347		3,229			566			6,740			66,882

Income (loss) from operations	$	7,463	$	(3,229	)	$	(63	)	$	(6,740	)	$	(2,569	)

Three Months Ended June 30, 2013
Revenue	$	80,263	$	0		$	464		$	0		$	80,727
Operating expenses:
Marketing		6,449		0			0			0			6,449
Commission		20,037		0			0			0			20,037
Cost of revenue		27,079		0			23			0			27,102
General and administrative		8,701		2,116			444			8,353			19,614
Depreciation		1,920		0			47			188			2,155
Amortization		864		0			0			0			864

Total operating expenses		65,050		2,116			514			8,541			76,221

Income (loss) from operations	$	15,213	$	(2,116	)	$	(50	)	$	(8,541	)	$	4,506

Consumer Products and Services Segment

Our income from operations for our Consumer Products and Services segment decreased in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The decrease in income from operations is primarily due to decreased revenue from our U.S. financial institution clients resulting from both decreased marketing and the cancellation of certain subscriber populations, partially offset by a decrease in cost of revenue and commission expense.


	Three Months Ended June 30,
	2014		2013		Difference			%
Revenue	$	63,810	$	80,263	$	(16,453	)		(20.5	)%
Operating expenses:
Marketing		7,324		6,449		875			13.6	%
Commission		16,066		20,037		(3,971	)		(19.8	)%
Cost of revenue		20,885		27,079		(6,194	)		(22.9	)%
General and administrative		9,954		8,701		1,253			14.4	%
Depreciation		1,265		1,920		(655	)		(34.1	)%
Amortization		853		864		(11	)		(1.3	)%

Total operating expenses		56,347		65,050		(8,703	)		(13.4	)%

Income from operations	$	7,463	$	15,213	$	(7,750	)		(50.9	)%

Revenue. The decrease in revenue continues to be primarily due to a reduction in new subscribers as a result of the decisions by our financial institution clients to continue to halt, reduce or delay marketing. Financial institutions have ceased or significantly decreased their marketing of add-on or ancillary products, including our products, which we believe to be due at least in part to increased regulatory scrutiny of financial institution marketing of add-on products. As a result, our new subscriber additions were 28% lower in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. We do not know whether the marketing of our products by financial institutions will resume, or whether, if resumed, they will return to prior levels. For example, in January 2014, Capital One sent us a notice of its decision to terminate its marketing agreement with us. Under the notice, Capital One cancelled existing subscriptions, as of June 30, 2014. We generated approximately $1.0 million per month under this agreement. We negotiated an arrangement under which we continued to receive transition service fees, subject to certain conditions, through July 31, 2014.

During the three months ended June 30, 2014, we did not have an impairment related to our goodwill and our fair value exceeded our carrying value by approximately 41%. We will continue to monitor our market capitalization, along with other operational performance measures and general economic conditions. A continued downward trend in one or more of these factors could cause us to reduce the estimated fair value of our reporting units and recognize a corresponding impairment of our goodwill in connection with a future goodwill impairment test.

The value of our goodwill is dependent upon our projected future operating performance in our Consumer Products and Services reporting unit. Due to the concentration of our clients in the financial services industry, and the ongoing regulatory changes in that industry with respect to sales, marketing and administration of “add on” products, including ours, we have experienced and may continue to experience significant changes in our projected future operating performance, which could lead to impairment charges for some or all of our recorded goodwill.

Revenue decreases from U.S. financial institution clients were partially offset by increased revenue from our consumer direct product line as a result of growth in the subscriber base. We expect growth in our subscriber base and increased revenue for the remainder of 2014 for our consumer direct business.

The following table provides details of our consumer products and services revenue and subscriber information for the three months ended June 30, 2014 and 2013, respectively (in thousands):

Consumer Products and Services Revenue


	Consumer Products and Services Revenue				Percent of Consumer Products and Services Revenue
	2014		2013		2014			2013
Direct marketing arrangements	$	56,182	$	64,970		88.0	%		80.9	%
Indirect marketing arrangements		7,628		15,293		12.0	%		19.1	%

Total Consumer Products and Services Revenue	$	63,810	$	80,263		100.0	%		100.0	%

Bank of America	$	27,706	$	34,355		43.5	%		42.8	%
Consumer Direct		11,832		10,509		18.5	%		13.1	%
Canadian business lines		7,665		8,682		12.0	%		10.8	%
All other clients		16,607		26,717		26.0	%		33.3	%

Total Consumer Products and Services Revenue	$	63,810	$	80,263		100.0	%		100.0	%

Consumer Products and Services Subscribers


	Consumer Products and Services Subscribers				Percent of Consumer Products and Services Subscribers
	2014		2013		2014			2013
Bank of America		854		1,018		36.7	%		26.9	%
Consumer Direct		331		285		14.2	%		7.5	%
Canadian business lines		317		319		13.6	%		8.4	%
All other clients		825		2,165		35.5	%		57.2	%

Total Consumer Products and Services Subscribers		2,327		3,787		100.0	%		100.0	%

Bank of America		0		0		0.0	%		0.0	%
Consumer Direct		57		53		57.0	%		38.4	%
Canadian business lines		34		37		34.0	%		26.8	%
All other clients		9		48		9.0	%		34.8	%

Total Consumer Products and Services New Subscribers		100		138		100.0	%		100.0	%

Marketing Expenses. Marketing expenses consist of subscriber acquisition costs, including affiliate marketing payments, search engine marketing, web-based marketing, radio, television, telemarketing, print and direct mail expenses such as printing and postage. In the three months ended June 30, 2014, approximately 98% of our consumer products and services marketing expenses resulted from marketing activities for consumer direct, insurance services and Canadian subscriber acquisitions. The increase in marketing expenses is primarily a result of an increase in marketing for our direct to consumer business. In future quarters, we expect our direct to consumer marketing to continue to increase. Amortization of deferred subscription solicitation costs related to marketing of our products for the three months ended June 30, 2014 and 2013 were $3.8 million and $4.1 million, respectively. Marketing costs expensed as incurred for the three months ended June 30, 2014 and 2013 were $3.6 million and $2.4 million, respectively, primarily related to broadcast media for our direct to consumer business, which do not meet the criteria for capitalization.

As a percentage of revenue, marketing expenses increased to 11.5% for the three months ended June 30, 2014 from 8.0% for the three months ended June 30, 2013.

Commission Expenses. Commission expenses consist of commissions paid to our clients. The decrease is related to a decrease in subscribers from our direct marketing arrangements. We expect our commission expenses to continue to decline in future quarters primarily due to normal attrition of subscribers in our financial institution client portfolios with no new marketing activity.

As a percentage of revenue, commission expenses slightly increased to 25.2% for the three months ended June 30, 2014 from 25.0% for the three months ended June 30, 2013.

Cost of Revenue. Cost of revenue consists of the costs of operating our customer service and information processing centers, data costs, and billing costs for subscribers and one-time transactional sales. The decrease in cost of revenue is primarily the result of lower volumes of data fulfillment and service costs for subscribers, offset by an increase in the effective rates for data.

As a percentage of revenue, cost of revenue decreased to 32.7% for the three months ended June 30, 2014 compared to 33.7% for the three months ended June 30, 2013.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our sales, marketing, information technology, program and account management functions, as well as certain fixed expenses related to customer service, account administration and fulfillment activities and certain legal and other corporate overhead costs which can be specifically attributed to the Consumer Products & Services segment. The increase is primarily related to an increase in legal fees, partially offset by reductions to personnel related costs. There were no severance and severance-related benefits for the three months ended June 30, 2014. We incurred expenses for severance and severance-related benefits for the three months ended June 30, 2013 of $160 thousand.

Total share based compensation expense for the three months ended June 30, 2014 and 2013 was $197 thousand and $394 thousand, respectively. In the three months ended June 30, 2014, we did not incur compensation expense for payments to restricted stock unit holders equivalent to the dividends that would have been received on those shares had they been fully vested. For the three months ended June 30, we incurred compensation expense of $95 thousand for payments to restricted stock unit holders equivalent to the dividends that would have been received on these shares had they been fully vested.

As a percentage of revenue, general and administrative expenses increased to 15.6% for the three months ended June 30, 2014 from 10.8% for the three months ended June 30, 2013.

Depreciation. Depreciation expenses consist primarily of depreciation expenses related to our fixed assets and capitalized software. The decrease is primarily due to assets that were fully depreciated in prior periods, partially offset by depreciation on new assets acquired in the three months ended June 30, 2014.

As a percentage of revenue, depreciation expenses decreased to 2.0% in the three months ended June 30, 2014 from 2.4% in the three months ended June 30, 2013.

Amortization. Amortization expenses consist primarily of the amortization of our intangible assets. Amortization expense decreased in the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

As a percentage of revenue, amortization expenses increased slightly to 1.3% for the three months ended June 30, 2014 from 1.1% in the three months ended June 30, 2013.

Pet Health Monitoring Segment

In the three months ended June 30, 2014, we spent approximately $3.2 million on continued engineering efforts, advanced testing, pre-launch advertising and other start-up costs associated with our future launch of VOYCE^™ a new pet health monitoring platform and service. VOYCE^™ is a platform that connects pets, their owners, and veterinarians with individualized pet health monitoring data, tailored pet health related content and information management tools. VOYCE^™ is comprised of two key parts – a wearable health band worn similarly to a dog collar and an online member area. The VOYCE^™ band operates using non-invasive, radio frequency based technology, an accelerometer, an onboard microcontroller and specialized algorithms. The VOYCE^™ band monitors vital key wellness indicators such as activity, rest patterns, calories burned, step count and resting heart rate and respiratory rate. This data is uploaded to the VOYCE^™ member area via WiFi which displays the data showing trends over time. This data is also coupled with the pet parent and dog’s profile and through proprietary algorithms provides personalized content written by top dog care experts exclusively for VOYCE^™. In addition, The VOYCE Experience^™ offers document storage and access anytime, anywhere, customized reminders, and the ability to set goals.

We expect revenue and operating costs, including cost of revenue, marketing and ongoing engineering and testing costs to increase as we prepare to launch our new platform and service.


	Three Months Ended June 30,
	2014			2013			Difference			%
Revenue	$	0		$	0		$	0			0.0	%
Operating expenses:
Marketing		451			0			451			100.0	%
Cost of revenue		95			0			95			100.0	%
General and administrative		2,663			2,116			547			25.9	%
Depreciation		20			0			20			100.0	%

Total operating expenses		3,229			2,116			1,113			52.6	%

Loss from operations	$	(3,229	)	$	(2,116	)	$	(1,113	)		(52.6	)%

Revenue. The Pet Health Monitoring segment is in a pre-revenue stage of development, with expected initial sales later in 2014.

Marketing Expenses. Marketing expense consists of subscriber acquisition costs, including pre-launch demonstrations, advertising and printed materials. We incurred marketing expenses in our pre-launch efforts of VOYCE^™.

Cost of Revenue. Cost of revenue consists of manufacturing fees, production costs and content data fees associated with our platform and subscription service. We incurred cost of revenue expenses in our pre-launch anticipation of VOYCE^™. We plan to make our products available for sale later this year.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, information technology, program and account management functions. The increase is primarily due to increased payroll, along with consulting and other start-up expenses incurred as we prepare to launch our new platform and service later this year. In the three months ended March 31, 2014, we completed the research and development stage, as we determined that the platform and service achieved specific functional requirements, and incurred costs for engineering efforts focused on quality control, advanced testing and refining efforts during the early stages of commercial production.

Depreciation. Depreciation expenses consist primarily of depreciation expenses related to our fixed assets. Depreciation expense increased in three months ended June 30, 2014 as new assets were placed into service.

Bail Bonds Industry Solutions Segment

Our loss from operations in our Bail Bonds Industry Solutions segment decreased for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The decrease in loss from operations is primarily due to increased commission expense offset by a growth in revenue.


	Three Months Ended June 30,
	2014			2013			Difference			%
Revenue	$	503		$	464		$	39			8.4	%
Operating expenses:
Commission		50			0			50			100.0	%
Cost of revenue		42			23			19			82.6	%
General and administrative		437			444			(7	)		(1.6	)%
Depreciation		37			47			(10	)		(21.3	)%

Total operating expenses		566			514			52			10.1	%

Loss from operations	$	(63	)	$	(50	)	$	(13	)		(26.0	)%

Revenue. The increase in revenue is the result of revenue from new clients. We expect revenue to continue to increase in 2014.

Commission. Commission expense consists of commissions paid to our clients. We have entered into contractual agreements with our clients that require us to pay commission in certain circumstances. Commission expense increased in the three months ended June 30, 2014 as a result of these new agreements.

As a percentage of revenue, commission expense increased to 9.9% for the three months ended June 30, 2014 compare to zero for the three months ended June 30, 2013.

Cost of Revenue. Cost of revenue consists of monitoring and credit bureau expenses. Cost of revenue increased slightly for the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

As a percentage of revenue, cost of revenue increased to 8.3% for the three months ended June 30, 2014 compared to 5.0% for the three months ended June 30, 2013.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, marketing, information technology, and program and account functions. General and administrative expenses decreased slightly compared to the three months ended June 30, 2013.

Depreciation. Depreciation expenses consist primarily of depreciation expenses related to our fixed assets. Depreciation expense decreased in the three months ended June 30, 2014 compared to the three months ended June 30, 2013.

As a percentage of revenue, depreciation decreased to 7.4% for the three months ended June 30, 2014 compared to 10.1% for the three months ended June 30, 2013.

Corporate

In the three months ended March 31, 2014, we recast our segment presentation to include a Corporate business unit in order to arrive at consolidated amounts. In the three months ended June 30, 2014, our loss from operations of $6.7 million primarily

consisted of general and administrative and depreciation expenses. General and administrative expenses primarily consisted of legal, compliance, human resources, finance and internal audit expenses that have not been attributed to a particular segment. General and administrative expenses for the three months ended June 30, 2014 and 2013 were $6.6 million and $7.9 million, respectively. The decrease is primarily due to decreased legal fees. We incurred expenses for severance and severance-related benefits for the three months ended June 30, 2014 of $322 thousand. There were no expenses for severance and severance-related benefits for the three months ended June 30, 2013.

Total share based compensation expense for the three months ended June 30, 2014 and 2013 was $1.3 million and $1.2 million, respectively. In the three months ended June 30, 2014, we did not incur compensation expense for payments to restricted stock unit holders equivalent to the dividends that would have been received on those shares had they been fully vested. For the three months ended June 30, 2013, we incurred compensation expense of $375 thousand for payments to restricted stock unit holders equivalent to the dividends that would have been received on these shares had they been fully vested.

Six Months Ended June 30, 2014 vs. Six Months Ended June 30, 2013 (in thousands):

The condensed consolidated results of continuing operations are as follows:


	Consumer Products and Services		Pet Health Monitoring			Bail Bonds Industry Solutions			Corporate			Consolidated
Six Months Ended June 30, 2014
Revenue	$	129,312	$	0		$	960		$	0		$	130,272
Operating expenses:

Marketing		12,555		883			0			0			13,438
Commission		33,065		0			50			0			33,115
Cost of revenue		42,874		228			73			0			43,175
General and administrative		20,093		5,375			890			13,969			40,327
Depreciation		2,623		31			80			244			2,978
Amortization		1,706		0			0			0			1,706

Total operating expenses		112,916		6,517			1,093			14,213			134,739

Income (loss) from operations	$	16,396	$	(6,517	)	$	(133	)	$	(14,213	)	$	(4,467	)

Six Months Ended June 30, 2013
Revenue	$	161,394	$	0		$	889		$	0		$	162,283
Operating expenses:
Marketing		11,722		0			0			0			11,722
Commission		40,195		0			0			0			40,195
Cost of revenue		54,063		0			124			0			54,187
General and administrative		18,402		3,075			911			17,680			40,068
Depreciation		3,760		0			94			360			4,214
Amortization		1,728		0			0			0			1,728

Total operating expenses		129,870		3,075			1,129			18,040			152,114

Income (loss) from operations	$	31,524	$	(3,075	)	$	(240	)	$	(18,040	)	$	10,169

Consumer Products and Services Segment

Our income from operations in our Consumer Products and Services segment decreased in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The decrease in income from operations is primarily due to decreased revenue from our U.S. financial institution clients resulting from both decreased marketing and the cancellation of certain subscriber populations, partially offset by a decrease in cost of revenue and commission expense.


	Six Months Ended June 30,
	2014		2013		Difference			%
Revenue	$	129,312	$	161,394	$	(32,082	)		(19.9	)%
Operating expenses:
Marketing		12,555		11,722		833			7.1	%
Commission		33,065		40,195		(7,130	)		(17.7	)%
Cost of revenue		42,874		54,063		(11,189	)		(20.7	)%
General and administrative		20,093		18,402		1,691			9.2	%
Depreciation		2,623		3,760		(1,137	)		(30.2	)%
Amortization		1,706		1,728		(22	)		(1.3	)%

Total operating expenses		112,916		129,870		(16,954	)		(13.1	)%

Income from operations	$	16,396	$	31,524	$	(15,128	)		(48.0	)%

Revenue. The decrease in revenue continues to be primarily due to a reduction in new subscribers as a result of the decisions by our financial institution clients to continue to halt, reduce or delay marketing. Financial institutions have ceased or significantly decreased their marketing of add-on or ancillary products, including our products, which we believe to be due at least in part to increased regulatory scrutiny of financial institution marketing of add-on products. As a result, our new subscriber additions were 25% lower in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. We do not know whether the marketing of our products by financial institutions will resume, or whether, if resumed, they will return to prior levels. For example, in January 2014, Capital One sent us a notice of its decision to terminate its marketing agreement with us. Under the notice, Capital One cancelled existing subscriptions, as of June 30, 2014. We generated approximately $1.0 million per month under this agreement. We negotiated an arrangement under which we continued to receive transition service fees, subject to certain conditions, through July 31, 2014.

During the six months ended June 30, 2014, we did not have an impairment related to our goodwill and our fair value exceeded our carrying value by approximately 41%. We will continue to monitor our market capitalization, along with other operational performance measures and general economic conditions. A continued downward trend in one or more of these factors could cause us to reduce the estimated fair value of our reporting units and recognize a corresponding impairment of our goodwill in connection with a future goodwill impairment test.

The following table provides details of our consumer products and services revenue and subscriber information for the six months ended June 30, 2014 and 2013, respectively (in thousands):

Consumer Products and Services Revenue


	Consumer Products and Services Revenue				Percent of Consumer Products and Services Revenue
	2014		2013		2014			2013
Direct marketing arrangements	$	113,939	$	130,324		88.1	%		80.7	%
Indirect marketing arrangements		15,373		31,070		11.9	%		19.3	%

Total Consumer Products and Services Revenue	$	129,312	$	161,394		100.0	%		100.0	%

Bank of America	$	56,837	$	70,262		44.0	%		43.6	%
Consumer Direct		23,071		20,406		17.8	%		12.6	%
Canadian business lines		15,252		16,472		11.8	%		10.2	%
All other clients		34,152		54,254		26.4	%		33.6	%

Total Consumer Products and Services Revenue	$	129,312	$	161,394		100.0	%		100.0	%

Consumer Products and Services Subscribers


	Consumer Products and Services Subscribers				Percent of Consumer Products and Services Subscribers
	2014		2013		2014			2013
Bank of America		854		1,018		36.7	%		26.9	%
Consumer Direct		331		285		14.2	%		7.5	%
Canadian business lines		317		319		13.6	%		8.4	%
All other clients		825		2,164		35.5	%		57.2	%

Total Consumer Products and Services Subscribers		2,327		3,786		100.0	%		100.0	%

Bank of America		1		1		0.4	%		0.3	%
Consumer Direct		125		119		55.8	%		39.4	%
Canadian business lines		68		75		30.4	%		24.8	%
All other clients		30		107		13.4	%		35.5	%

Total Consumer Products and Services New Subscribers		224		302		100.0	%		100.0	%

Marketing Expenses. In the six months ended June 30, 2014, approximately 98% of our consumer products and services marketing expenses resulted from marketing activities for consumer direct, insurance services and Canadian subscriber acquisitions. The increase in marketing expenses is primarily a result of an increase in marketing for our direct to consumer business. In future quarters, we expect our consumer direct marketing to continue to increase. Amortization of deferred subscription solicitation costs related to marketing for the six months ended June 30, 2014 and 2013 were $7.7 million and $7.9 million, respectively. Marketing costs expensed as incurred for the six months ended June 30, 2014 and 2013 were $4.8 million and $3.8 million, respectively, primarily related to broadcast media for our direct to consumer business, which do not meet the criteria for capitalization.

As a percentage of revenue, marketing expenses increased to 9.7% for the six months ended June 30, 2014 from 7.3% for the six months ended June 30, 2013.

Commission Expenses. The decrease is related to a decrease in subscribers from our direct marketing arrangements. We expect our commission expenses to continue to decline in future quarters primarily due to normal attrition of subscribers in our financial institution client portfolios with no new marketing activity.

As a percentage of revenue, commission expenses decreased to 25.6% for the six months ended June 30, 2014 from 24.9% for the six months ended June 30, 2013.

Cost of Revenue. The decrease is primarily the result of lower volumes of data fulfillment and service costs for subscribers, offset by an increase in the effective rates for data.

As a percentage of revenue, cost of revenue decreased to 33.2% for the six months ended June 30, 2014 compared to 33.5% for the six months ended June 30, 2013.

General and Administrative Expenses. The increase is primarily related to an increase in legal and professional fees, partially offset by reductions to personnel related costs. There were no expenses for severance and severance-related benefits for the six months ended June 30, 2014. We incurred expenses for severance and severance-related benefits for the six months ended June 30, 2013 of $602 thousand.

Total share based compensation expense for the six months ended June 30, 2014 and 2013 were $356 thousand and $758 thousand, respectively. In addition, for the six months ended June 30, 2014 and 2013, we incurred compensation expense of $111 thousand and $170 thousand, respectively, for payments to restricted stock unit holders equivalent to the dividends that would have been received on these shares had they been fully vested.

As a percentage of revenue, general and administrative expenses increased to 15.5% for the six months ended June 30, 2014 from 11.4% for the six months ended June 30, 2013.

Depreciation. The decrease is primarily due to assets that were fully depreciated in prior periods, partially offset by depreciation on new assets acquired in the six months ended June 30, 2014.

As a percentage of revenue, depreciation expenses decreased slightly to 2.0% in the six months ended June 30, 2014 from 2.3% in the six months ended June 30, 2013.

Amortization. Amortization expense decreased in the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

As a percentage of revenue, amortization expenses increased slightly to 1.3% in the six months ended June 30, 2014 from 1.1% in the six months ended June 30, 2013.

Pet Health Monitoring Segment

In the six months ended June 30, 2014, we spent approximately $6.5 million on continued engineering efforts, advanced testing, pre-launch advertising and other start-up costs associated with our future launch of VOYCE^™, a new pet health monitoring platform and service.

We expect revenue and operating costs, including cost of revenue, marketing and ongoing engineering and testing costs to increase as we prepare to launch our new platform and service.


	Six Months Ended June 30,
	2014			2013			Difference			%
Revenue	$	0		$	0		$	0			0.0	%
Operating expenses:
Marketing		883			0			883			100.0	%
Cost of revenue		228			0			228			100.0	%
General and administrative		5,375			3,075			2,300			74.8	%
Depreciation		31			0			31			100.0	%

Total operating expenses		6,517			3,075			3,442			111.9	%

Loss from operations	$	(6,517	)	$	(3,075	)	$	(3,442	)		(111.9	)%

Revenue. The Pet Health Monitoring segment is in a pre-revenue stage of development, with expected initial sales later in 2014.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, information technology, program and account management functions. The increase is primarily due to increased payroll along with consulting and other start-up expenses incurred as we prepare to launch our new platform and service later this year. In the three months ended March 31, 2014, we completed the research and development stage, as we determined that the platform and service achieved specific functional requirements, and incurred costs for engineering efforts focused on quality control, advanced testing and refining efforts during the early stages of commercial production. We incurred expenses for severance and severance-related benefits for the six months ended June 30, 2014 of $305 thousand. There were no expenses for severance and severance-related benefits for the six months ended June 30, 2013.

Depreciation. Depreciation expenses consist primarily of depreciation expenses related to our fixed assets. Depreciation expense increased in six months ended June 30, 2014 as new assets were placed into service.

Bail Bonds Industry Solutions Segment

Our loss from operations in our Bail Bonds Industry Solutions segment decreased for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 primarily due to a growth in revenue.


	Six Months Ended June 30,
	2014			2013			Difference			%
Revenue	$	960		$	889		$	71			8.0	%
Operating expenses:
Commission		50			0			50			100.0	%
Cost of revenue		73			124			(51	)		(41.1	)%
General and administrative		890			911			(21	)		(2.3	)%
Depreciation		80			94			(14	)		(14.9	)%

Total operating expenses		1,093			1,129			(36	)		(3.2	)%

Loss from operations	$	(133	)	$	(240	)	$	107			44.6	%

Revenue. The increase in revenue is the result of revenue from new clients. We expect revenue to continue to increase in 2014.

Commission. Commission expense consists of commission paid to our clients. We have entered into contractual agreements with our clients that require us to pay commission in certain circumstances. Commission expense increased in the three months ended June 30, 2014 as a result of these new agreements.

As a percentage of revenue, commission expenses increased to 5.2% for the six months ended June 30, 2014 compared to zero for the six months ended June 30, 2013.

Cost of Revenue. Cost of revenue decreased in the six months ended June 30, 2014 compared to the six months ended June 30, 2013.

As a percentage of revenue, cost of revenue decreased to 7.6% for the six months ended June 30, 2014 compared to 13.9% for the six months ended June 30, 2013.

General and Administrative Expenses. General and administrative expenses decreased slightly compared to the six months ended June 30, 2013.

Depreciation. Depreciation expense decreased slightly compared to the six months ended June 30, 2013.

As a percentage of revenue, depreciation decreased to 8.3% for the six months ended June 30, 2014 compared to 10.6% for the six months ended June 30, 2013.

Corporate

In the three months ended March 31, 2014, we recast our segment presentation to include a Corporate business unit in order to arrive at consolidated amounts. In the six months ended June 30, 2014, our loss from operations of $14.2 million primarily consisted of general and administrative and depreciation expenses. General and administrative expenses primarily consisted of legal, compliance, human resources, finance and internal audit expenses that have not been attributed to a particular segment. General and

administrative expenses for the six months ended June 30, 2014 and 2013 were $14.0 million and $16.8 million, respectively. The decrease is primarily due to decreased legal and professional fees. We incurred expenses for severance and severance-related benefits for the six months ended June 30, 2014 and 2013 of $322 thousand and $291 thousand, respectively.

Total share based compensation expense for the six months ended June 30, 2014 and 2013 was $2.3 million and $2.4 million, respectively. In addition, for the six months ended June 30, 2014 and 2013, we incurred compensation expense of $320 thousand and $637 thousand, respectively, for payments to restricted stock unit holders equivalent to the ordinary cash dividends that would have been received on these shares had they been fully vested.

Results of Discontinued Operations

Our discontinued operations consists of Intersections Business Intelligence Services, which ceased operations in the three months ended June 30, 2014, and Net Enforcers, which ceased operations in the three months ended June 30, 2013. For both entities, we determined that the U.S. GAAP requirements were met as we do not have significant continuing involvement in these business and their operations and cash flows were eliminated from our ongoing operations.

The following table summarizes the operating results of the discontinued operations included in the condensed consolidated statements of operations (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenue	$	6		$	38		$	57		$	223

Loss before income taxes from discontinued operations		(425	)		(809	)		(1,810	)		(1,319	)
Income tax benefit		107			278			663			452

Loss from discontinued operations	$	(318	)	$	(531	)	$	(1,147	)	$	(867	)

Interest Expense

Interest expense increased to $170 thousand for the three months ended June 30, 2014 from $88 thousand for the three months ended June 30, 2013. Interest expense increased to $260 thousand for the six months ended June 30, 2014 from $164 thousand for the six months ended June 30, 2013. The increase in interest expense is primarily attributable to a non-cash decrease in unamortized debt financing costs in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.

Other Income (Expense)

Other expense was $287 thousand in the three months ended June 30, 2014 as compared to $418 thousand in the three months ended June 30, 2013. Other expense was $139 thousand in the six months ended June 30, 2014 as compared $690 thousand in the six months ended June 30, 2013. The decrease was primarily due to an expense incurred in the six months ended June 30, 2013 associated with reducing the value of our long-term investment that did not occur in the six months ended June 30, 2014.

Income Taxes

Our consolidated effective tax rate from continuing operations for the three months ended June 30, 2014 and 2013 was 43.3% and 47.5%, respectively. Our consolidated effective tax rate from continuing operations for the six months ended June 30, 2014 and 2013 was 24.5% and 50.2%, respectively. The significant decrease from the comparable period is primarily due to the ratio of book expenses, that are not deductible for income tax purposes, and the increase in loss from operations before income tax. There were no material changes to our uncertain tax positions during the six months ended June 30, 2014. During the six months ended June 30, 2013 we placed a valuation allowance of $677 thousand against the fair value adjustment related to the exercise of our White Sky warrants.

Liquidity and Capital Resources

Cash Flow

Cash and cash equivalents were $12.4 million as of June 30, 2014 compared to $20.9 million as of December 31, 2013. We believe our cash and cash equivalents are highly liquid investments and may include short-term U.S. Treasury securities with original maturity dates of less than or equal to 90 days.

Our accounts receivable balance as of June 30, 2014 was $19.4 million compared to $21.1 million as of December 31, 2013. Our accounts receivable balance consists primarily of credit card transactions that have been approved but not yet deposited into

our account and several large balances with some of our top financial institutions clients. The likelihood of non-payment has historically been remote with respect to our consumer products and services clients billed, however, we do provide for an allowance for doubtful accounts with respect to bail bonds clients. We are continuing to monitor our allowance for doubtful accounts with respect to our financial institution obligors. In addition, we provide for a refund allowance, which is included in liabilities in our condensed consolidated balance sheets, against transactions that may be refunded in subsequent months. This allowance is based on historical results.

Our sources of capital include cash and cash equivalents, cash provided by operations, amounts available (if any) under our Credit Agreement and other external sources of funds. Our short-term and long-term liquidity depends primarily upon our level of net income, working capital management and bank borrowing capacity. We had a working capital surplus of $21.7 million as of June 30, 2014 compared to $26.3 million as of December 31, 2013.

We believe that we have sufficient cash provided by operations and cash on hand to fund our ongoing operating requirements. However, if there is a material change in our anticipated cash provided by operations or working capital needs, our liquidity could be negatively affected.


	Six Months Ended June 30,
	2014			2013			Difference
	(In thousands)
Cash flows provided by operating activities	$	1,522		$	12,180		$	(10,658	)
Cash flows used in investing activities		(3,980	)		(3,552	)		(428	)
Cash flows used in financing activities		(6,050	)		(13,570	)		7,520

Net decrease in cash and cash equivalents		(8,508	)		(4,942	)		(3,566	)
Cash and cash equivalents, beginning of period		20,920			25,559			(4,639	)

Cash and cash equivalents, end of period	$	12,412		$	20,617		$	(8,205	)

The decrease in cash flows provided by operations was the result of the decrease in revenue, increase in income tax payments and an increase in expenses for data fulfillment partially offset increase in accrued but unpaid operating expenses at quarter end compared to the prior year. In addition, our cash flows provided by operations decreased due to our continued cash investments in our i4c Innovations subsidiary. We expect to continue to fund the growth and development of i4c Innovations, as well as continue to expand our consumer direct marketing.

We are in the process of formulating a detailed plan intended to streamline operations with a focus on our corporate and consumer products and services cost structure. Provided the plan is approved by our Board of Directors, we expect to increase severance expense and cash used in operations for the remainder of 2014. See “— Cost Restructuring” for further discussion.

The slight increase in cash flows used in investing activities for the six months ended June 30, 2014 was attributable to the increase in purchases of property and equipment primarily for our Pet Health Monitoring segment.

In the six months ended June 30, 2013, we had a cash distribution for the vesting of restricted stock units and purchased treasury stock, which did not occur in the six months ended June 30, 2014 and therefore, contributed to the decrease in cash flows used in financing activities in the six months ended June 30, 2014. In addition, we did not pay a cash dividend in the three months ended June 30, 2014.

The following summarizes our dividend activity for the six months ended June 30, 2014:


Announcement Date	Record Date	Payment Date	Cash Dividend Amount (per share)
March 6, 2014	March 20, 2014	April 3, 2014	$	0.20

The following summarizes our dividend activity for the year ended December 31, 2013:


Announcement Date	Record Date	Payment Date	Cash Dividend Amount (per share)
February 22, 2013	March 4, 2013	March 15, 2013	$	0.20
May 9, 2013	May 29, 2013	June 7, 2013	$	0.20
August 8, 2013	August 26, 2013	September 6, 2013	$	0.20
November 12, 2013	November 22, 2013	December 9, 2013	$	0.20

Under our amended Credit Agreement, we are prohibited from declaring and paying ordinary cash dividends.

Credit Facility and Borrowing Capacity

On June 26, 2014, we entered into a subsequent amendment to the Credit Agreement with Bank of America, N.A., to, among other things, (a) establish a new maturity date of March 31, 2015, (b) set the borrowing availability to $7.5 million, (c) reduce the maximum permitted leverage ratio to 2:00 to 1:00, (d) add a new minimum Year-to-Date Consolidated EBITDA covenant for each of last three fiscal quarters of 2014, (e) remove dividends from the consolidated fixed charge coverage ratio, and (f) eliminate certain permitted Restricted Payments, including, but not limited to, ordinary dividend payments, and a corresponding Permitted Investment. We believe we are currently in compliance with all such covenants. As of June 30, 2014, we are able to borrow the full $7.5 million available under our amended Credit Agreement.

Share Repurchase

Other

In July 2014, the CFPB notified us that, in accordance with the CFPB’s discretionary NORA process, the CFPB is considering whether to pursue an enforcement action, including seeking potential refunds to subscribers, assessing civil penalties and issuing a consent order against us. We analyzed all the information available in order to make a determination of the probability of loss, as well as whether the amount can be reasonably estimated. Based upon our analysis, we have recorded an estimated liability of $125 thousand that represents potential refunds for subscribers and is included in general and administrative expenses in our condensed consolidated statements of operations. It is not possible to predict a potential civil penalty amount, or a range of civil penalty amounts, due to the unique facts and circumstances involved. We are in the process of responding to the NORA and, to date, we have not been required to make any payments.

interpretations of those laws. In a minority of cases, based on certain state provisions and/or active discussions with states, we believe we are liable for a non-income business tax and have recorded a total estimated liability of $622 thousand, which includes interest and penalties. This amount is included in general and administrative expenses in our condensed consolidated statements of operations. To date, we have not been required to make any payments, nor have we received any formal assessments.

Item 4. Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Our officers have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

There have been no changes in our internal control over financial reporting during the three months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued an updated version of its Internal Control – Integrated Framework (2013 Framework). Originally issued in 1992 (1992 Framework), the framework helps organizations design, implement and evaluate the effectiveness of internal control concepts and simplify their use and application. The 1992 Framework remains available during the transition period, which extends to December 15, 2014, after which time COSO will consider it as superseded by the 2013 Framework. As of June 30, 2014, Registrants continue to utilize the 1992 Framework during the transition to the 2013 Framework by the end of 2014.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

The following risk factor supplements and/or updates the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013:

We have limited availability to borrow under our amended Credit Agreement. As a result, we may be unable to meet our future capital requirements to grow our business, which could adversely impact our financial condition and growth strategy.

As of June 30, 2014, we have limited availability to borrow under our amended Credit Agreement. We may need to raise additional funds in the future in order to operate and expand our business. Our ability to meet our future capital requirements and grow our business by investing in and marketing our products and services could be materially adversely affected if we are unable to obtain borrowing availability under our Credit Agreement or otherwise obtain financing in the future. There can be no assurance that additional funds will be available on terms acceptable to us, or at all. Our inability to obtain additional financing could have a material adverse effect on our financial condition.

We cannot assure you that we will continue to declare dividends or have the available cash to make dividend payments, which could cause our stock price to decline.

We continue to monitor our dividend policy. Under our amended Credit Agreement, we are prohibited from declaring and paying ordinary cash dividends. The declaration, amount and payment of any dividends is at the sole discretion of our Board of Directors. We are not obligated under any applicable laws, our governing documents or any contractual agreements or otherwise to continue to declare or pay any dividends. Our Board of Directors may take into account, among other things, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, available financing alternatives, plans for expansion, general economic conditions, tax, legal, regulatory and contractual restrictions and implications, including under any outstanding debt documents, and such other factors as our Board of Directors may deem relevant in determining whether to declare or pay any dividend. As a result, in the absence of dividends, you will not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

Item 6. Exhibits


10.1		Amendment to Credit Agreement and Waiver, dated May 9, 2014, to Amended and Restated Credit Agreement dated November 15, 2012 by and among Intersections Inc., Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer, and the other lenders party thereto from time to time (Incorporated by reference to Exhibit 10.1, filed with the Registrant’s Form 8-K filed on July 1, 2014)

10.2		Amendment No. 2 to Credit Agreement, dated as of June 26, 2014, to Amended and Restated Credit Agreement dated November 15, 2012 by and among Intersections Inc., Bank of America, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer, and the other lenders party thereto from time to time (Incorporated by reference to Exhibit 10.2, filed with the Registrant’s Form 8-K filed on July 1, 2014)

31.1*		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

*	Filed herewith

**	Furnished herewith

SIGNATURE

Pursuant to the requirements 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.


	INTERSECTIONS INC.

Date: August 11, 2014	By:	/s/ John G. Scanlon
		John G. Scanlon
		Chief Financial Officer

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