UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended September 30, 2015

OR

Commission file number: 000-50580

 

INTERSECTIONS INC.

(Exact name of registrant as specified in the charter)

 

 

 

(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  o

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  o

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  o    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 November 5, 2015 there were 23,700,034 shares of common stock, $0.01 par value, issued and 20,206,128 shares outstanding, with 3,493,906 shares of treasury stock.

 

 

 

 

 

---

 

Form 10-Q

September 30, 2015

Table of Contents

 

 

 

2

---

 

PART I. FINANCIAL INFORMATION

INTERSECTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

3

---

 

INTERSECTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements

 

 

4

---

 

INTERSECTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements

5

---

 

INTERSECTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

We operate the business in four reportable segments: Personal Information Services; Insurance and Other Consumer 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, and shared information technology expenses that have not been attributed to a particular segment continue to be reported in our Corporate business unit.

Our Personal Information Services segment helps consumers understand, monitor, manage and protect against the risks associated with the exposure of their personal information and includes the business we acquired in June 2015 from White Sky, Inc. (“White Sky”) of innovating and developing easy-to-use consumer authentication and e-commerce solutions. Our current services include: credit reports, credit monitoring, educational credit scores and credit education; reports, monitoring and education about other personal information and risks, such as public records, identity validation, new accounts and Internet risks; identity theft recovery services; identity theft cost reimbursement insurance; and software and other technology tools and services. 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. We are continuing to develop innovative new services to address the increasing awareness by consumers of the risks associated with their personal information. Our services historically were marketed primarily through financial institutions in the U.S. and Canada, and we historically depended upon a few large financial institutions in the U.S. for a significant portion of our revenue. Because almost all marketing by U.S. financial institutions has been terminated, our strategy to reignite growth in this segment includes expanding our product offerings to include new personal information and identity theft protection capabilities, leveraging our IDENTITY GUARD® brand and consumer direct marketing in the U.S. and Canada, growing and adding to our non-financial institution marketing and distribution relationships in the U.S., and expanding and adding to both our financial institution and non-financial institution relationships in Canada. We market our IDENTITY GUARD^® brand directly to consumers and through affiliates in the U.S. and Canada.

Our Insurance and Other Consumer Services segment includes insurance and membership products for consumers, offered on a subscription basis. This segment focuses on helping consumers use insurance and other services to manage various personal risks and achieve personal goals, and includes the business we acquired in March 2015 from Health at Work Wellness Actuaries LLC (“Health at Work”) of designing wellness-driven health plans and engagement programs. As in our Personal Information Services segment, almost all marketing of this segment’s products through financial institutions has terminated. Some of our subscriber portfolios have been cancelled by the applicable financial institutions, and our continued servicing of other subscribers may be cancelled as a result of actions taken by one or more financial institutions. We are in the process of developing new insurance products, health and wellness services and expanding into new marketing channels to generate revenue.

Our Pet Health Monitoring segment includes the new health and wellness platform and service for veterinarians and dog owners and is provided by our subsidiary, i4c Innovations, which does business as Voyce. VOYCE™, which was launched in March 2015, is a platform that connects pets, their owners, veterinarians and other caregivers 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 monitor worn similarly to a dog collar and an online wellness center (member area) where pet medical records can be stored and reminders and goals can be set and tracked. 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, including key vital signs like resting respiratory and heart rates, rest and quality of rest, activity and the intensity of that activity, and caloric burn. This data is uploaded to the VOYCE™ member area via Wi-Fi 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, self-set reminders, and the ability to set goals. In July 2015, we introduced VOYCE PRO™ to the veterinary community. VOYCE PRO™ offers a program to remotely monitor dog patients and provide veterinarians with objective data to help identify and manage recurring health issues and work collaboratively with pet owners to find proactive solutions. We began contracting with veterinarian hospitals and commenced training and onboarding programs to effectively deploy the service.

Our Bail Bonds Industry Solutions segment includes the automated service solutions for the bail bonds industry provided by Captira Analytical. This segment’s proprietary solutions provide easy and efficient ways for bail bondsmen, general agents and sureties to organize and share data and make better decisions. Leveraging its existing software platform, we are continuing to expand into similarly challenged and underserved related industries.

6

---

 

In the three months ended June 30, 2014, we ceased ongoing operations at Intersections Business Intelligence Services and it qualified for classification as a discontinued operation under U.S. GAAP, as we did not have significant continuing involvement in the business and its operations and cash flows were eliminated from our ongoing operations.

 

 

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission, and in management’s opinion reflect all normal and recurring adjustments necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. 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 is presented for all prior periods in our condensed consolidated statements of operations. We have not recast our condensed consolidated balance sheets or our condensed consolidated statements of cash flows. For additional information, please see Note 21. 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, 2014, 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) insurance services, 3) other monthly membership products and transaction services and 4) the pet wellness products and services.

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 subscriptions 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.

7

---

 

We record revenue on a gross basis in the amount that we bill the subscriber when our arrangements 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 also provide services for which certain financial institution clients are the primary obligors directly to their customers. We record revenue in the amount that we bill certain 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.

Revenue from these arrangements is recognized on a monthly basis when earned, which is at the time we provide the service. 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.

Insurance Services

We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain paper and electronic confirmations with individual purchasers, b) delivery has occurred, 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.

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 September 30, 2015 and December 31, 2014 totaled $480 thousand and $511 thousand, respectively, and are included in accrued expenses and other current liabilities in our condensed consolidated balance sheets.

Other Membership Products and Transaction Services

For other 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 and recognize revenue from our services in our Bail Bonds Industry Solutions segment from providing management service solutions to the bail bond industry on a monthly subscription or transactional basis. We also generate and recognize revenue on a transactional basis in our Insurance and other Consumer Services segment from consulting services provided by Health at Work, the business we acquired in March 2015 that designs wellness-driven health plans and engagement programs.

Pet Wellness Products and Services

We recognize revenue in our Pet Health Monitoring segment from the sale of the hardware, the monthly subscription monitoring service and shipping and handling costs. We recognize revenue when: a) persuasive evidence of an arrangement exists as we maintain electronic confirmations with individual purchasers, b) delivery of the product and service has occurred, c) the seller’s price to the buyer is fixed, cancellation privileges have lapsed and the price of the product is agreed to by the customer as a condition of the sales transaction and d) collectability is reasonably assured as individual customers pay by credit card, which has limited our risk of non-collection. We recognize revenue on a gross basis in the amount that we bill the subscriber when our arrangements 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. As VOYCE™ is a new product and sufficient history on the frequency of returns is unavailable to estimate a returns allowance, revenue is deferred until cancellation privileges lapse, which is currently 30 days after purchase for hardware revenue and 60 days after purchase for service revenue. Service revenue for prepaid subscriptions is recognized ratably over the applicable service period, since prepaid subscriptions have pro-rata refund provisions. Due to the deferral period of both the hardware and the service, we currently do not have an allowance for discretionary product or subscription refunds. We will continue to monitor our actual returns in future periods in order to develop sufficient history on returns and cancellation privileges in order to reevaluate the deferral periods.

In accordance with U.S. GAAP, cost of hardware revenue is also deferred over the respective revenue deferral periods and is recorded in the same period. The deferred cost of hardware revenue is included in prepaid expenses and other current assets in our

8

---

 

condensed consolidated balance sheets. Free trials with no future service agreement are recognized immediately as expense under cost of service and hardware revenue in our condensed consolidated statements of operations.

We classify and recognize amounts billed to customers related to shipping and handling as hardware revenue and amounts incurred related to shipping and handling as cost of hardware revenue in our condensed consolidated statements of operations.

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. As required by U.S. GAAP, goodwill is reflected as an asset in our Personal Information Services and Insurance and Other Consumer Services segments’ balance sheets, resulting from our acquisitions of White Sky and Health at Work as well as our prior acquisition of Intersections Insurance Services Inc. In 2014, we were required to allocate goodwill, based on relative fair value, between our Personal Information Services and Insurance and Other Consumer Services reporting units. As of September 30, 2015, goodwill of $12.9 million resided in our Insurance and Other Consumer Services reporting unit and goodwill of $7.2 million resided in our Personal Information Services reporting unit. There is no goodwill remaining in our other reporting units.

In evaluating whether indicators of impairment exist, an initial assessment of qualitative factors to determine whether it is necessary to perform the goodwill impairment test can be utilized (commonly referred to as the step zero approach). 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 test 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 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. The market based approach measures the value of an entity through an analysis of recent sales or offerings of comparable companies and using revenue and other multiples of comparable companies as a reasonable basis to estimate our implied multiples. 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. In addition, we consider the uncertainty of realizing the projected cash flows in the analysis.

The estimated fair values of our reporting units are 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 the functions that reside in Corporate. We perform a detailed analysis of our Corporate overhead costs for purposes of establishing the overhead allocation baseline for the projection period. Overhead allocation methods include, but are not limited to, the percentage of the payroll within each reporting unit, allocation of existing support function costs based on estimated usage by the reporting units, and vendor specific costs incurred by Corporate that can be reasonably attributed to a particular reporting unit. These allocations are adjusted over the projected period in our discounted cash flow analysis based on the forecasted changing relative needs of the reporting units. Throughout the forecast period, the majority of Corporate’s total overhead expenses are allocated to our Personal Information Services reporting unit. We believe this overhead allocation method fairly allocates costs to each reporting unit, and we will continue to review, and possibly refine, these allocation methods as our businesses grow and mature. 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.

9

---

 

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 two 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.

Marketing costs incurred in the Pet Health Monitoring segment currently do not meet the criteria for deferral and therefore are included in marketing expenses in our condensed consolidated statements of operations.

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 commissions 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.

10

---

 

Share Based Compensation

We currently issue equity and equity-based awards under the 2006 and 2014 Stock Incentive Plans (“Plans”). Individual awards under the 2006 Stock Incentive 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 Stock Incentive Plan may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and/or restricted stock units.

We use the Black-Scholes option-pricing model to value all stock options and the straight-line method to amortize this fair value as compensation cost over the requisite service period. During the nine months ended September 30, 2015 and 2014, we did not grant stock options. We use the stock price on the grant date to value all restricted stock awards and restricted stock units (together, “RSUs”) and the straight line method to amortize the compensation cost over the requisite service period. We consider our historical and projected dividends, along with participation rights of the grants, in calculating the grant date fair value.

In addition, we estimate forfeitures based on historical stock option and restricted stock unit activity on a grant by grant basis. We consider many factors in our estimated forfeiture rate including, but not limited to, historical actual forfeitures by type of employee and one-time unusual events. We may make changes to that estimate throughout the vesting period based on actual activity. If actual forfeitures occur prior to the vest date and the pre-vest forfeiture amount exceeds the estimated forfeiture rate, we reverse the cumulative share based compensation expense for the unvested grants. In accordance with U.S. GAAP, we ensure that the share based compensation expense is equivalent to actual vestings prior to, or at, the actual vesting date on a grant by grant basis.

Long-Term Investment

We account for investments in non-consolidated entities using the cost method of accounting. Prior to June 2015, we had a long-term investment in convertible preferred stock of White Sky, a privately held company. We previously concluded that the convertible preferred stock did 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 accounted for our investment as a cost method investment.

On June 26, 2015, we acquired substantially all of the assets and certain liabilities of White Sky. As a result, as of September 30, 2015, we no longer have a cost method investment and include the assets acquired from White Sky in our condensed consolidated balance sheets, and beginning in the three months ended September 30, 2015, included White Sky’s results of operations in our condensed consolidated statements of operations.

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.

In accordance with U.S. GAAP, we were required to remeasure our long-term investment in White Sky to fair value immediately prior to the acquisition. We remeasured the long-term investment using a form of the market approach, including the actual observable price paid for the assets in the nine months ended September 30, 2015 less estimated liquidating shareholder distribution amounts.

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. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and future reversal of existing deferred tax assets and liabilities, sufficient sources of taxable income in available carryback periods, tax-planning strategies, and historical results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three trailing years of cumulative operating

11

---

 

income (loss). 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. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.

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.

In addition to the amount of tax resulting from applying the estimated annual effective tax rate to income from operations before income taxes, we included certain items treated as discrete events to arrive at an estimated overall tax amount for the three and nine months ended September 30, 2015. For additional information, please see Note 18.

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 result in 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. U.S. GAAP provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

Our income tax expense and liability and/or receivable, deferred tax assets and liabilities, and liabilities for uncertain tax benefits reflect management’s best assessment of estimated current and future taxes to be paid or received. Significant judgments and estimates are required in determining the consolidated income tax expense.

Inventory

Inventory consists primarily of finished goods for our Voyce products, although we may at times also maintain an inventory of raw materials from our third-party manufacturer. We outsource hardware manufacturing to a third-party manufacturer and may purchase accessories from third-party suppliers. Inventories are valued using the first-in, first-out method and are carried at the lower of cost or market.

Pursuant to our manufacturing agreement with the supplier, we may be required to purchase excess materials if the materials are not used in production within the periods specified in the agreement. If not obsolete, the supplier may then repurchase such materials from us for future hardware production.

 

 

Accounting Standards Updates Recently Adopted

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. We adopted the provisions of this update as of January 1, 2015 and there was no material impact to our condensed consolidated financial statements.

Accounting Standards Updates Not Yet Effective

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. In August 2015, an update was issued which deferred the effective date of the May 2014 update by one year. As a result, the amendments in the update will be

12

---

 

effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted, but not before the original effective date. 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, 2018 and we are currently in the process of evaluating the impact, if any, to our condensed consolidated financial statements.

In August 2014, an update was made to “Presentation of Financial Statements – Going Concern”. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for the annual periods, and the interim periods within those years, ending after December 15, 2016. Early adoption is permitted. We will adopt the provisions of this update as of January 1, 2017 and do not anticipate a material impact to our condensed consolidated financial statements.

In January 2015, an update was made to “Income Statement – Extraordinary and Unusual Items.” Subtopic 225-20, “Income Statement—Extraordinary and Unusual Items,” previously required that an entity separately classify, present, and disclose as an extraordinary item events and transactions that are both unusual and infrequent in nature. The amendments in this update eliminate the concept of extraordinary items. This guidance is effective for annual periods ending after December 15, 2015. Early adoption is permitted. We will adopt the provisions of this update as of December 31, 2015 and do not anticipate a material impact to our condensed consolidated financial statements.

In February 2015, an update was made to “Amendments to the Consolidation Analysis.” The amendments in this update change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Affected entities include limited partnerships and similar legal entities, as well as reporting entities that are involved with variable interest entities. This guidance is effective for annual and interim periods beginning after December 15, 2015. Early 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.

In April 2015, an update was made to “Interest – Imputation of Interest.” To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Previously, debt issuance costs were recognized as a deferred charge, that is, an asset on the balance sheet. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. In August 2015, an update was issued to add guidance for debt issuance costs related to line-of-credit arrangements. The update allows an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. This guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted, and we are currently in the process of evaluating the impact of early adoption, if any, to our condensed consolidated financial statements.

In June 2015, an update was issued with various technical corrections and improvements intended to clarify the Codification, correct unintended application of guidance, and make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice. The provisions in this update are not expected to have a material impact to our condensed consolidated financial statements.

In July 2015, an update was made to “Inventory”. The amendments in this update simplify the measurement of inventory. The amendments require that an entity measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update are effective for annual periods, and the interim periods within those years, beginning after December 15, 2016, and should be applied prospectively. Early adoption is permitted, and we are currently in the process of evaluating the impact of early adoption, if any, to our condensed consolidated financial statements.

In September 2015, an update was made to “Business Combinations”. The amendments in this update require that adjustments to provisional amounts that are identified during the measurement period should be recognized in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Further, the amendments require the entity to

13

---

 

disclose the portions of the amount recorded in current-period earnings by line item what would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this update are effective for annual periods, and the interim periods within those years, beginning after December 15, 2015, and should be applied prospectively. Early 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.

We reviewed other recently issued accounting pronouncements and determined that they are not applicable to our business.

 

 

Health at Work Wellness Actuaries LLC

On March 3, 2015, our wholly owned subsidiary, Intersections Insurance Services Inc., acquired the business from Health at Work. Health at Work designs wellness-driven health plans and engagement programs for employers, insurers and wellness groups. Our acquisition of the business from Health at Work aligns with our growth strategy to build our Insurance and Other Consumer Services segment through a combination of innovative insurance and non-insurance services for consumers, employers and the insurance industry. In connection with this acquisition, we issued 413 thousand shares of common stock to Health at Work. The following table summarizes the consideration transferred to Health at Work (in thousands):

 

 

We are obligated under the asset purchase agreement to make aggregate earn-out payments to the members of Health at Work during three one-year measurement periods from March 1, 2015 through February 28, 2018 of up to approximately $1.0 million per measurement period, based upon revenue generated by the legacy business during such measurement periods and subject to the terms and conditions specified in the asset purchase agreement. In accordance with U.S. GAAP, we recorded the earn-out payments as post-combination share based compensation expense, which is recognized pro-rata over the requisite service period and included in general and administrative expenses in our Insurance and Other Consumer Services segment. The earn-out is subject to performance and service vesting conditions and is payable in stock and a portion in cash, depending on the market price of the stock in accordance with the asset purchase agreement. We estimated the expense for both the equity and liability awards, and vesting and other conditions may impact the number of common shares issued and, therefore, the amount of future share based compensation expense. As of September 30, 2015, our estimated cash payment for the liability award for the first one-year measurement period is approximately $332 thousand.

In accordance with U.S. GAAP, we used the acquisition method of accounting, which requires that assets acquired, including intangible assets, be recognized at their fair value as of the acquisition date. The determination was made by management through various means, primarily by obtaining a third party valuation of identifiable intangible assets acquired.

The following table summarizes the final fair values of the assets acquired at the date of acquisition (in thousands):

 

 

The goodwill arising from the acquisition consists largely of an assembled workforce and economies of scale of the combined operations. All of the goodwill was assigned to the Insurance and Other Consumer Services segment and is not expected to be deductible for income tax purposes. Acquisition-related costs in connection with the Health at Work transaction for the nine months ended September 30, 2015 were $88 thousand and are included in general and administrative expenses in our condensed consolidated statements of operations.

The financial impact of the acquisition of Health at Work is not material to our condensed consolidated financial statements. Accordingly, pro forma results of operations and other disclosures have not been presented.

14

---

 

White Sky, Inc.

On June 26, 2015, we acquired all of the assets and certain liabilities of White Sky. White Sky innovates and develops easy-to-use consumer authentication and e-commerce solutions. Our acquisition of the business from White Sky provides opportunities to expand product integration as well as development, marketing and operational efficiencies in our Personal Information Services segment.

Under the terms of the purchase agreement, White Sky is required to make liquidating distributions to its shareholders, including us, in accordance with the preferences set forth in White Sky’s Eighth Amended and Restated Certificate of Incorporation (the “distributions”). The distributions were not made as the first reporting date, and therefore we estimated the cash distribution amounts in order to calculate the purchase price and fair value of the acquisition. As a result, actual variance to our estimated distribution amounts may result in adjustments to the allocation of the purchase price during the remainder of the measurement period. In connection with this acquisition, and subject to post-closing adjustments in accordance with the asset purchase agreement, we issued 353 thousand shares of common stock to White Sky and received 210 thousand shares of our common stock as a liquidating distribution during the three months ended September 30, 2015. The following table summarizes the estimated purchase price transferred to White Sky (in thousands):

 

 

In accordance with U.S. GAAP, we remeasured our previously held equity interest in White Sky to fair value immediately prior to the acquisition. We remeasured the long-term investment using a form of the market approach, including the actual observable price paid for the assets in the nine months ended September 30, 2015, less the estimated liquidating shareholder distribution amounts. Based on this analysis, we determined that the fair value of our cost basis investment of $1.0 million was less than the carrying value of $8.4 million, and therefore we recognized an impairment charge of $7.4 million in the nine months ended September 30, 2015, which is included in impairment of intangibles and other long-lived assets in our condensed consolidated statements of operations. For additional information regarding the inputs to the pre-acquisition fair value, please see Note 6.

In accordance with U.S. GAAP, we used the acquisition method of accounting, which requires that assets acquired, including intangible assets, be recognized at their fair value as of the acquisition date. The estimated determination was made by management through various means, primarily by obtaining a third party valuation of identifiable intangible assets acquired. We have preliminarily recorded our best estimates of the fair values of the assets acquired and the identifiable intangible assets. We continue to evaluate and gather information on the closing balance sheet, including estimated distributions made to us by White Sky, that existed at the acquisition date. As of September 30, 2015, there were no material changes to the closing balance sheet, however, we may make changes to the amounts recorded during the remainder of the measurement period. The following table summarizes the estimated fair values of the assets acquired at the date of acquisition (in thousands):

 

 

The goodwill arising from the acquisition consists largely of an assembled workforce and economies of scale of the combined operations. All of the goodwill was assigned to the Personal Information Services segment and is expected to be deductible for income tax purposes over 15 years. Acquisition-related costs in connection with the White Sky transaction for the nine months ended September 30, 2015 were $159 thousand and are included in general and administrative expenses in our condensed consolidated statements of operations.

15

---

 

Supplemental Pro Forma Information

White Sky’s operating results from the date of acquisition through June 30, 2015 are insignificant and therefore, those results were excluded from our condensed consolidated statements of operations. Therefore, we began to include White Sky’s results of operations in our financial results beginning in the three months ended September 30, 2015. The following unaudited pro forma results have been prepared as if the acquisition of White Sky occurred on January 1, 2014 (in thousands):

 

 

These amounts have been calculated after applying our accounting policies and adjusting the results to reflect additional amortization that would have been charged assuming the fair value adjustments to amortizable intangible assets had been applied, eliminating intercompany transactions and the associated income tax impacts. Supplemental pro forma earnings for the three and nine months ended September 30, 2015 were adjusted to exclude $284 thousand of acquisition-related costs incurred by both us and White Sky in the nine months ended September 30, 2015. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated as of January 1, 2014, nor is it indicative of future operating results. The pro forma information does not include any adjustments for potential revenue enhancements, cost synergies or other operating efficiencies.

 

 

Basic and diluted loss per common share is determined in accordance with the applicable provisions of U.S. GAAP. Basic loss per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted loss per common share is equivalent to basic loss per common share, as U.S. GAAP provides that a loss cannot be diluted by potential common stock, which includes the potential exercise of stock options under our share based employee compensation plans and vesting of our restricted stock/restricted stock units.

For the three and nine months ended September 30, 2015, options to purchase common stock and unvested restricted stock units estimated to be 3.9 million shares were excluded from the computation of diluted loss per common share as their effect would be anti-dilutive. For the three and nine months ended September 30, 2014, options to purchase common stock and unvested restricted stock units estimated to be 2.9 million shares were excluded from the computation of diluted loss 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 per common share to diluted loss per common share is as follows (in thousands, except per share data):

 

 

 

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.

16

---

 

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, trade accounts receivables, inventory, 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 nine months ended September 30, 2015 or in the year ended December 31, 2014. We did not hold any significant instruments that are measured at fair value on a recurring basis as of September 30, 2015 or December 31, 2014. On a non-recurring basis, we measured goodwill under Level 3 of the fair value hierarchy as of December 31, 2014. For additional information related to our valuation technique and inputs used in the fair value measurement, please see Note 12.

We are required under U.S. GAAP to remeasure the fair value of a previously held investment at the date controlling interest is acquired. Therefore, on a non-recurring basis, we measured our long-term investment in White Sky immediately prior to the acquisition of substantially all of White Sky’s assets under Level 2 of the fair value hierarchy in the nine months ended September 30, 2015. We remeasured the long-term investment using a form of the market approach, including the actual observable price paid for the assets in the nine months ended September 30, 2015, less estimated liquidating shareholder distribution amounts. Based on this analysis, we determined that the fair value of our cost basis investment was less than the carrying value and therefore, we recognized an impairment charge of $7.4 million in the nine months ended September 30, 2015, which is included in our condensed consolidated statements of operations. We have historically utilized the income approach, based on discounted cash flows, to measure the fair value of our long-term investment. However, due to the acquisition of White Sky and the availability of an observable, quoted price for identifiable assets and liabilities in an orderly transaction, we appropriately modified our valuation technique. For additional information related to the acquisition, please see Note 4.

As of September 30, 2015 and December 31, 2014, we had no amounts outstanding under our revolving credit facility, which is a variable rate loan and therefore, fair value approximates book value.

 

 

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

 

 

 

We had an inventory balance of $1.9 million as of September 30, 2015, which included $1.6 million of finished goods and $360 thousand of raw materials for our Pet Health Monitoring segment. We had no inventory balance as of December 31, 2014. We did not record a charge for excess or obsolete inventory in the three or nine months ended September 30, 2015 or 2014.

 

 

Total deferred subscription solicitation costs included in the accompanying condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 was $7.3 million and $6.9 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 three months ended September 30, 2015 and 2014 was $4.4 million and $4.1 million, respectively. Amortization of deferred subscription solicitation and commission costs for the nine months ended September 30, 2015 and 2014 was $13.1 million and $12.6 million, respectively. Marketing costs expensed as incurred, 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 September 30, 2015 and 2014 were $1.1 million and $1.3 million, respectively. Marketing costs expensed as incurred related to marketing for the nine months ended September 30, 2015 and 2014 were $4.0 million and $6.0 million, respectively.

 

 

17

---

 

Property and equipment consisted of the following as of:

 

 

Depreciation of property and equipment for the three months ended September 30, 2015 and 2014 was $1.5 million and $1.3 million, respectively. Depreciation of property and equipment for the nine months ended September 30, 2015 and 2014 was $4.4 million and $4.3 million, respectively.

In the three months ended September 30, 2015, we had retirements that reduced our property and equipment and accumulated depreciation balances by $9.2 million. In the three months ended September 30, 2014, we had retirements that reduced our property and equipment and accumulated depreciation balances by $426 thousand. In the nine months ended September 30, 2015, we had retirements that reduced our property and equipment and accumulated depreciation balances by $10.1 million. In the nine months ended September 30, 2014, due to retirements and discontinued operations, we reduced our property and equipment and accumulated depreciation balances by $1.7 million and $1.4 million, respectively.

We record internally developed capitalized software as a component of software in property and equipment in our condensed consolidated balance sheets. We regularly review our capitalized software projects for impairment. We had no impairments of internally developed capitalized software in the three or nine months ended September 30, 2015 or 2014. We record depreciation for internally developed capitalized software in depreciation expense in our condensed consolidated statements of operations. In the nine months ended September 30, 2015, in connection with the launch of our Voyce products, we reclassified $4.1 million of software development-in-progress into internally developed capitalized software, and we began to depreciate the software in the same period. Internally developed capitalized software consisted of the following during the nine months ended September 30, 2015 and 2014 (in thousands):

 

 

18

---

 

Depreciation expense related to capitalized software no longer in the application development stage, for the future periods is indicated below (in thousands):

 

 

 

On June 26, 2015, we acquired substantially all of the assets and certain liabilities of White Sky. As a result, as of September 30, 2015, we no longer have a cost method investment and included the assets acquired from White Sky in our condensed consolidated balance sheets, and beginning in the three months ended September 30, 2015, included White Sky’s results of operations in our condensed consolidated statements of operations. In accordance with U.S. GAAP, we were required to remeasure our long-term investment in White Sky to fair value immediately prior to the acquisition. We remeasured the fair value of White Sky using the stock and cash consideration paid to acquire substantially all the assets, less the estimated liquidating shareholder distributions to us, which resulted in an acquisition-date fair value of our investment of approximately $1.0 million. Since the carrying value of $8.4 million was in excess of the acquisition-date fair value, we recorded an impairment charge of $7.4 million in the nine months ended September 30, 2015. For additional information, please see Note 4.

 

 

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

 

 

During the three and nine months ended September 30, 2015, we did not have an impairment related to our goodwill. The increase in goodwill during the nine months ended September 30, 2015 was due to the businesses we acquired from Health at Work and White Sky. For additional information, please see Note 4.

To the extent our Personal Information Services or Insurance and Other Consumer Services reporting units realize actual operating results in the future below forecasted results, or realize decreases in forecasted results as compared to previous forecasts, or in the event the estimated fair value of those reporting units decrease (as a result, among other things, of changes in market capitalization, including further declines in our stock price), we may incur additional goodwill impairment charges in the future. Future impairment charges on our Personal Information Services reporting unit will be recognized in the operating results of our Personal Information Services segment and our Insurance and Other Consumer Services segment, based on a pro-rata allocation of goodwill.

19

---

 

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

 

 

 

Intangible assets increased in the nine months ended September 30, 2015 primarily as a result of asset additions from business acquisitions. During the nine months ended September 30, 2015 and year ended December 31, 2014, there were no adverse changes in our long-lived assets, which would cause a need for an impairment analysis.

Intangible assets are amortized over a period of two to ten years. For the three months ended September 30, 2015 and 2014, we had an aggregate amortization expense of $206 thousand and $853 thousand, respectively, which was included in amortization expense in our condensed consolidated statements of operations. For the nine months ended September 30, 2015 and 2014, we incurred aggregate amortization expense of $481 thousand and $2.6 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):

 

 

 

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

 

 

20

---

 

We are subject to certain non-income (or indirect) business taxes in various state jurisdictions. In the nine months ended September 30, 2015, we reduced our estimated liability for non-income business taxes by approximately $1.5 million, primarily from cash payments to resolve obligations to state taxing authorities. We expect to resolve a majority of the remaining obligations and significantly reduce the liability in the remainder of the year ending December 31, 2015. In addition, during the three months ended September 30, 2015, we paid $1.2 million related to the consent order we entered into with the Consumer Financial Protection Bureau (the “CFPB”) in July 2015. For additional information related to the non-income business taxes and the consent order, please see Note 15.

 

 

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

 

 

In the year ended December 31, 2014, our Board of Directors approved, and we initiated a plan intended to streamline operations and reduce the cost structure primarily in our Corporate business unit and Personal Information Services segment. The plan consisted primarily of a workforce reduction, including key leadership positions. During the nine months ended September 30, 2015, we continued to execute the plan and reduced the restructuring liability by $2.3 million. Of this amount, $1.1 million was for our Personal Information Services segment and $1.2 million was for our Corporate business unit. This expense is included in general and administrative expense in our condensed consolidated statements of operations. The following table summarizes the non-restructuring and restructuring activity during the nine months ended September 30, 2015 and 2014 (in thousands):

 

 

We expect the remaining cost reduction actions to occur in the remainder of the year ending December 31, 2015. We will continue to review and adjust our cost base, which may result in additional charges for severance and severance-related benefits in the future.

In the three months ended September 30, 2015, we recorded $1.3 million of expense for severance and severance-related benefits unrelated to the restructuring plan. We did not have any expense for severance and severance-related benefits unrelated to the restructuring plan in the three months ended September 30, 2014.

 

 

21

---

 

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:

 

 

In the three and nine months ended September 30, 2015, we entered into new capital leases for fixed assets with an acquisition value of $286 and $713 thousand, respectively. We did not enter into any capital leases in the three or nine months ended September 30, 2014. Rental expenses included in general and administrative expenses for the three months ended September 30, 2015 and 2014 were $630 thousand and $680 thousand, respectively. Rental expenses included in general and administrative expenses for the nine months ended September 30, 2015 and 2014 were $1.9 million and $2.1 million, respectively.

Legal Proceedings

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. Discovery in this case is pending.

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 voluntary production of information received in January 2014. In July 2015, a consent order was entered in the U.S. District Court for the Eastern District of Virginia. Under the consent order we agreed to pay a penalty of $1.2 million in the three months ended September 30, 2015, and we expect to pay approximately $63 thousand of refunds to certain subscribers. We also agreed under the consent order to be subject to certain ongoing injunctive relief and other compliance requirements, which we do not believe substantially change our existing practices or business. Based on the entry of the consent order, we increased our estimated liability by $600 thousand in the nine months ended September 30, 2015 to a total amount of $1.3 million, which represented estimated subscriber refunds and the $1.2 million civil monetary penalty, which was paid to the CFPB in the three months ended September 30, 2015.

We may become involved in other 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 September 30, 2015, we continued to have no significant liabilities accrued for any of the legal proceedings mentioned above.

We believe based on information currently available that the amount, if any, accrued for the above contingencies, including the CFPB matter, is adequate. However, legal proceedings are inherently unpredictable and, although we believe that accruals are

22

---

 

adequate and we intend to vigorously defend ourselves against such matters, unfavorable resolution could occur, which could have a material effect on our condensed consolidated financial statements, taken as a whole.

Other

In 2014, we analyzed our facts and circumstances related to potential obligations in state jurisdictions, including the delivery nature of our services, the relationship through which our services are offered, and changing state laws and interpretations of those laws, and determined it was probable that we have obligations in some jurisdictions. As a result, we recorded a liability for non-income business taxes of $4.5 million as of December 31, 2014, which included the underpayment of taxes, penalties and interest, which we believed was probable under U.S. GAAP. The following table summarizes the non-income tax liability activity during the nine months ended September 30, 2015 (in thousands):

 

 

We expect to resolve a majority of the remaining obligations and significantly reduce the liability in the remainder of the year ending December 31, 2015 by any variety of settlement options including, but not limited to, voluntary disclosures, negotiation, and standard appeals process, and may adjust the liability at such time. We formally appealed the remaining portion of the liability for one state based on the applicability of the specific state tax laws to our services, and we continue to accrue the estimable amount that we believe is probable under U.S. GAAP. Additionally, we continue to analyze what other obligations, if any, we have to other state taxing authorities. We believe it is reasonably possible that other states may approach us or that the scope of the taxable base in any state may increase. However, it is not possible to predict the potential amount of future payments due to the unique facts and circumstances involved.

In 2014, we entered into a new contract with a credit reporting agency, to which we agreed to pay non-refundable minimum payments of $5.4 million in the year ending December 31, 2015. This amount is expensed on a pro-rata basis for the nine months ended September 30, 2015 and is included in cost of revenue in our condensed consolidated statements of operations.

Due to the variability of the inputs for the earn-out provisions in the business we acquired from Health at Work, future share based compensation expense may have a material impact on the operating results of our Insurance and Other Consumer Services segment. For additional information, see Notes 4 and 19.

Orders we place for the production of our Voyce hardware product by our third party manufacturer may result in unconditional purchase obligations and may require us to make some payment at the time the order is placed. Unconditional purchase obligations do not include agreements that are cancelable by us without penalty. In the nine months ended September 30, 2015, we did not record a liability for any unconditional purchase obligations.

 

 

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

 

 

 

In 2014, we entered into a new loan and security agreement with Silicon Valley Bank, which was amended in April 2015 (“Loan Agreement”). In connection with the Loan Agreement, we and certain subsidiaries also entered into a secured guaranty and pledge agreement, an intellectual property security agreement and other related documents. The Loan Agreement as amended provides

23

---

 

for a revolving credit facility in the amount of $5.0 million and a maturity date of October 7, 2016, unless the facility is otherwise terminated pursuant to the terms of the Loan Agreement. Amounts borrowed under the Loan Agreement bear interest, at our option, at either the LIBOR plus a margin of 3.5% or the Prime rate plus a margin of 2.5%. Further, the interest rate payable in the event of a default was increased by 2.5% and is equal to the Prime rate plus a margin of 4.5%.

The Loan 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 Loan Agreement) other than on fair and reasonable terms; and the formation or acquisition of any direct or indirect domestic or first-tier foreign subsidiary unless such subsidiary becomes a co-borrower or guarantor.

We are also required to maintain compliance with certain financial covenants, which include a minimum liquidity ratio and consolidated EBITDA ratios, as well as customary covenants, representations and warranties, funding conditions and events of default. As of September 30, 2015, we did not have any outstanding borrowings under the Loan Agreement.

 

 

Our consolidated effective tax rate from continuing operations for the three months ended September 30, 2015 and 2014 was 35.5% and 60.0%, respectively. The decrease from the comparable period is primarily due to the increase in loss from operations before income taxes as a ratio of book expenses that are not deductible for income tax purposes. Our consolidated effective tax rate from continuing operations for the nine months ended September 30, 2015 and 2014 was (56.3)% and 48.2%, respectively. The significant decrease in the nine months ended September 30, 2015 from the comparable period is primarily due to the establishment of a valuation allowance on our existing definite-lived net deferred tax assets, as well as an impairment loss on our investment in White Sky, which is not deductible for income tax purposes.

We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We assess the available positive and negative evidence using a consistent approach to determine if, on a more likely than not basis, that some or all of our deferred tax assets will not be realized and therefore, establish a valuation allowance. We continued to evaluate all significant positive and negative evidence including, but not limited to, triggering a three-year cumulative loss, as adjusted for permanent items; insufficient sources of taxable income in prior carryback periods in order to utilize all of the existing definite-lived net deferred tax assets; unavailability of prudent and feasible tax-planning strategies; negative adjustments to our projected taxable income; and scheduling of the future reversals of existing temporary differences. Our conclusion was based on our consideration of the relative weight of the available evidence, and for purposes of establishing a valuation allowance, the three-year cumulative loss position, as adjusted for permanent items, is considered a significant piece of negative objective evidence. As a result of the negative evidence outweighing the positive evidence as of June 30, 2015, we recorded a non-cash discrete expense in the six months ended June 30, 2015 of $16.0 million in our condensed consolidated statements of operations related to the establishment of a valuation allowance on our net deferred tax assets for the portion of the future tax benefit that, more likely than not, will not be realized. This was partially offset by the pro-rata portion of the income tax benefit related to the current year projected net operating loss that is realizable via carryback.

The amount of deferred tax assets considered realizable as of September 30, 2015 could be adjusted if facts and circumstances in future reporting periods change, including, but not limited to, the reduction of actual and projected taxable income in the carryforward periods.

 

 

Share Based Compensation

We currently issue equity and equity-based awards under the 2006 and 2014 Stock Incentive Plans (“Plans”), and we have two inactive stock incentive plans, the 1999 Stock Option Plan and the 2004 Stock Option Plan. The total number of shares of common stock that may be issued under the Plans may not exceed 10.1 million. As of September 30, 2015 we have 2.0 million shares of common stock available for future grants of awards under the Plans, and awards for approximately 3.2 million shares are outstanding under all of our active and inactive plans. Individual awards under these plans may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and/or restricted stock units.

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 in the Plans that have expired, terminated, or been canceled or forfeited are available for issuance or use in connection with future awards.

24

---

 

There were no stock options granted or exercised during the nine months ended September 30, 2015 and 2014. The following table summarizes our restricted stock unit and restricted stock award (“RSUs”) activity:

 

 

Total share based compensation expense recognized for stock options and RSUs, which is included in general and administrative expense in our condensed consolidated statements of operations, for the three months ended September 30, 2015 and 2014 was $1.2 million and $509 thousand, respectively. Total share based compensation expense recognized for stock options and RSUs for the nine months ended September 30, 2015 and 2014 was $3.9 million and $3.2 million, respectively.

As of September 30, 2015, there was $8.5 million of total unrecognized compensation cost related to unvested RSUs granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.5 years.

In addition to the unrecognized compensation cost related to unvested RSUs, we determined the majority of the earn-out provisions in the business acquired from Health at Work in the nine months ended September 30, 2015 to be share based compensation expense. In the three and nine months ended September 30, 2015, we recorded share based compensation expense of $232 thousand and $561 thousand, respectively, which is included in general and administrative expenses in our condensed consolidated financial statements, and we estimate the remaining unrecognized compensation cost for the first one-year measurement period to be approximately $274 thousand. However, due to the variability of the inputs for the performance and market conditions, we are unable to reasonably estimate the unrecognized compensation costs for the remaining two one-year measurements periods from March 1, 2016 through February 28, 2018. The variability of the inputs in the remaining two one-year measurement periods may have a material impact on the operating results of our Insurance and Other Consumer Services segment.

Other

We did not have any dividend activity in the three months ended September 30, 2015 or 2014, or in the nine months ended September 30, 2015. In the nine months ended September 30, 2014, we declared and paid cash dividends of $0.20 per share. During the three and nine months ended September 30, 2015 and 2014, we did not repurchase any shares of common stock. In the three months ended September 30, 2015, we received 210 thousand shares of our common stock related to the liquidating distribution of WS Delaware, Inc. For additional information please see Notes 4 and 20. In addition, as a result of shares withheld for tax purposes on the vesting of a restricted stock award, we increased our treasury shares by 74 thousand in the nine months ended September 30, 2015. Under our Loan Agreement, we are currently prohibited from declaring and paying ordinary cash dividends or repurchasing any shares of common stock.

 

 

Digital Matrix Systems, Inc. – The chief executive officer and president of Digital Matrix Systems, Inc. (“DMS”) serves as one of our board members. 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, in the three months ended September 30, 2015 and 2014, we paid monthly installments totaling $216 thousand and $246 thousand, respectively. In the nine months ended September 30, 2015 and 2014, we paid monthly installments totaling $721 thousand and $610 thousand, respectively, in connection with these agreements. These amounts are included within cost of services revenue and general and administrative expenses in our condensed consolidated statements of operations. As of September 30, 2015, we owed $142 thousand to DMS under this agreement.

Health at Work Wellness Actuaries LLC – On March 3, 2015, our wholly owned subsidiary, Intersections Insurance Services Inc., acquired substantially all of the assets of Health at Work. In connection with this acquisition, we issued 413 thousand shares of our common stock to Health at Work, of which Andrew Sykes, President of Intersections Insurance Services Inc. is the majority member, and we are obligated to make earn-out payments to the members of Health at Work, including Mr. Sykes, for the three one-

25

---

 

year measurement periods from March 1, 2015 through February 28, 2018 of up to approximately $1.0 million per measurement period, based upon revenue generated by the legacy business during such measurement periods and subject to the terms and conditions specified in the asset purchase agreement.

WS Delaware, Inc. – We have an investment in WS Delaware, Inc., formerly known as White Sky, Inc. and, as a result of the acquisition in June 2015, WS Delaware, Inc. owned 353 thousand shares of our common stock. In the three months ended September 30, 2015, WS Delaware, Inc. made liquidating distributions to its shareholders, including all of the shares of our common stock, of which we received 210 thousand shares. For additional information, please see Note 4 related to the acquisition of White Sky, Inc.

 

 

Our discontinued operations consist of Intersections Business Intelligence Services (“IBIS”), a subsidiary which ceased operations in the three months ended June 30, 2014. We determined that IBIS met the requirements 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.

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

 

 

 

Our products and services are grouped into four reportable segments: Personal Information Services, Insurance and Other Consumer Services, Pet Health Monitoring and Bail Bonds Industry Solutions. Corporate headquarter office transactions such as legal, compliance, human resources, finance and internal audit, and shared information technology expenses that have not been attributed to a particular segment are reported in Corporate.

Our Personal Information Services segment offers services to help consumers understand, monitor, manage and protect against the risks associated with the exposure of their personal information. Our Insurance and Other Consumer Services segment includes our insurance and other membership products and services and includes the health and wellness services business we acquired from Health at Work. Our Pet Health Monitoring segment includes the new pet health monitoring platform and services provided by our subsidiary, i4c Innovations, which does business as Voyce. Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bonds industry provided by Captira Analytical.

26

---

 

The following table sets forth segment information for the three and nine months ended September 30, 2015 and 2014:

 

 

The following table sets forth segment information as of September 30, 2015 and December 31, 2014:

 

 

We generated revenue in the following geographic areas:

 

 

27

---

 

 

On November 13, 2015, we entered into irrevocable subscription agreements with certain affiliates pursuant to which such affiliates agreed to purchase up to 3.0 million shares of our common stock at a price of $2.50 per share for aggregate gross proceeds of up to $7.5 million. The closing of the subscription is expected to take place in the three months ending December 31, 2015. We intend to use the proceeds from the sale for working capital and general corporate purposes. The shares will be issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended.

 

 

28

---

 

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2013 and 2014, and as of December 31, 2013 and 2014, included in our Annual Report on Form 10-K for the year ended December 31, 2014 (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

Statements in this discussion and analysis relating to future plans, results, performance, expectations, achievements and the like are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,'' “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Those forward-looking statements involve known and unknown risks and uncertainties and are subject to change based on various factors and uncertainties that may cause actual results to differ materially from those expressed or implied by those statements, including the impact of the regulatory environment on our business, including the investigation or examination of our financial institution clients and the continuing attention by the Consumer Financial Protection Bureau and other regulatory agencies to our industry; the continued dependence on a small number of financial institutions to service our U.S. financial institution customer base; our ability to execute our strategy and previously announced transformation plan; our incurring additional restructuring and/or impairment charges; the timing and success of new product launches, including our Identity Guard®, Voyce™ and Voyce Pro™ platforms, adjustments in investments in our Identity Guard® and insurance services businesses and other growth initiatives; our ability to control costs; and our needs for additional capital to grow our business, including our ability to maintain borrowing availability under our loan agreement or seek additional sources of debt and/or equity financing. Factors and uncertainties that may cause actual results to differ include but are not limited to the risks disclosed under “Item 1. Business—Government Regulation” and “Item 1A. Risk Factors” in the Company’s most recent Annual Report on Form 10-K, and in its recent Quarterly Reports on Form 10-Q and other filings with the U.S. Securities and Exchange Commission. The Company undertakes no obligation to revise or update any forward-looking statements unless required by applicable law.

Overview

We operate the business in four reportable segments: Personal Information Services; Insurance and Other Consumer 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, and shared information technology expenses that have not been attributed to a particular segment continue to be reported in Corporate.

Our Personal Information Services segment offers services to help consumers understand, monitor, manage and protect against the risks associated with the exposure of their personal information. This segment also includes the business we acquired in June 2015 from White Sky, Inc. (“White Sky”) of innovating and developing easy-to-use consumer authentication and e-commerce solutions. Our Insurance and Other Consumer Services segment includes our insurance and other membership products and services. This segment also includes the business we acquired in March 2015 from Health at Work Wellness Actuaries LLC (“Health at Work”) of designing wellness-driven health plans and engagement programs. Our Pet Health Monitoring segment includes the new pet health monitoring platform and services provided by our subsidiary, i4c Innovations, which does business as Voyce. Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bonds industry provided by Captira Analytical.

Cost Restructuring

In the year ended December 31, 2014, our Board of Directors approved, and we initiated a plan intended to streamline operations and reduce the cost structure primarily in our Corporate business unit and Personal Information Services segment. The plan consisted primarily of a workforce reduction, including key leadership positions. We made these changes in order to better align our costs with the current operating environment and improve the progress of our product line growth initiatives. Certain of these measures, such as severance costs, are expected to decrease cash provided by operations through the remainder of the year ending December 31, 2015, followed thereafter by reductions to cost of services revenue and general and administrative expenses in our condensed consolidated statements of operations.

Actions taken through September 30, 2015 are expected to achieve over $15.0 million of annualized cost savings. Costs in our Pet Health Monitoring segment have and will continue to increase, partially offsetting the cost savings. We will continue to review and adjust our cost base for the remainder of 2015 in an effort to achieve the original targeted cost reductions. For additional information, please see Note 14 to our condensed consolidated financial statements.

29

---

 

Personal Information Services

Our Personal Information Services segment helps consumers understand, monitor, manage and protect against the risks associated with the exposure of their personal information and includes the business we acquired in June 2015 from White Sky of innovating and developing easy-to-use consumer authentication and e-commerce solutions. Our current services include credit reports, credit monitoring, educational credit scores and credit education; reports, monitoring and education about other personal information and risks, such as public records, identity validation, new accounts and Internet risks; identity theft recovery services; identity theft cost reimbursement insurance; and software and other technology tools and services. 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. We are continuing to develop innovative new services to address the increasing awareness by consumers of the risks associated with their personal information.

Our services historically were marketed primarily through financial institutions in the U.S. and Canada, and we historically depended upon a few large financial institutions in the U.S. for a significant portion of our revenue. Although almost all marketing by U.S. financial institutions has been terminated, our strategy to reignite growth in this segment includes expanding our product offerings to include new personal information and identity theft protection capabilities, leveraging our IDENTITY GUARD® brand and consumer direct marketing in the U.S. and Canada, growing and adding to our non-financial institution marketing and distribution relationships in the U.S., and expanding and adding to both our financial institution and non-financial institution relationships in Canada. We market our IDENTITY GUARD^® brand directly to consumers and through affiliates in the U.S. and Canada.

In the nine months ended September 30, 2015 and 2014, approximately 61% and 67%, respectively, of our Personal Information Services segment revenue were derived from agreements with U.S. financial institutions. Revenue in the nine months ended September 30, 2015 and 2014 from Bank of America, our largest financial institution client that ceased marketing of our services in 2011, constituted approximately 47% and 46%, respectively, of our Personal Information Services segment revenue. We continue to provide our services to the subscribers we acquired through Bank of America before December 31, 2011, subject to normal attrition and other ongoing adjustments by us or Bank of America, which may result in cancellation of certain subscribers or groups of subscribers. In February 2015, we entered into an amendment of our agreement with Bank of America. Pursuant to the amendment, we receive a cost reimbursement surcharge that applies to our continued servicing of subscribers during future periods. The surcharge amount is based on the net reconciliation of certain of Bank of America’s costs in connection with refunds issued to subscribers and our increased costs of service. In addition, our servicing of subscribers under one of our marketing agreements with Citibank terminated in April 2015, and we ceased to service approximately 415 thousand subscribers under this agreement. In the nine months ended September 30, 2015 and 2014, we generated revenue under this agreement of $3.8 million and $11.0 million, respectively. We continue to service additional subscribers that were acquired pursuant to other agreements with Citibank.

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 voluntary production of information received in January 2014. In July 2015, a consent order was entered in the U.S. District Court for the Eastern District of Virginia. Under the consent order we agreed to pay a penalty of $1.2 million in the three months ended September 30, 2015, and we expect to pay approximately $63 thousand of refunds to certain subscribers. We also agreed under the consent order to be subject to certain ongoing injunctive relief and other compliance requirements, which we do not believe substantially change our existing practices or business. In addition, add-on or ancillary products like those offered in our Personal Information Services and Insurance and Other Consumer Services segments remain subject to continuing review by federal and state regulators.

As discussed above, we initiated in 2014 a plan intended to streamline operations and reduce the cost structure primarily in our Corporate business unit and Personal Information Services segment. See “—Cost Restructuring” above.

Insurance and Other Consumer Services

Our Insurance and Other Consumer Services segment includes insurance and membership products for consumers, offered on a subscription basis. This segment focuses on helping consumers use insurance and other services to manage various personal risks and achieve personal goals, and includes the business we acquired in March 2015 from Health at Work of designing wellness-driven health plans and engagement programs. As in our Personal Information Services segment, historically almost all of this segment’s products were marketed through financial institutions on an add-on or ancillary basis, and all such marketing has terminated. Some of our subscriber portfolios also have been cancelled by the applicable financial institutions, and our continued servicing of other subscribers may be cancelled as a result of actions taken by one or more financial institutions. We are in the process of developing new insurance and health and wellness products and services, and expanding into new marketing channels, to generate revenue.

30

---

 

Pet Health Monitoring

Our Pet Health Monitoring segment includes the new health and wellness platform and service for veterinarians and dog owners, respectively, and is provided by our subsidiary, i4c Innovations, which does business as Voyce. VOYCE™ is our pet health monitoring platform and information management service that collects, translates, monitors and distributes wellness indicators to veterinarians, the service industry for dogs, and consumers including key vital signs like resting respiratory and heart rates, rest and quality of rest, activity and the intensity of that activity, and caloric burn. We aid consumers in monitoring their pet’s well-being and provide valuable data and insight to them and veterinarians in a manner never previously available. Data collected from our proprietary wearable pet health band is translated and coupled with content written by top dog care experts exclusively for VOYCE™ to create a professional, highly relevant, personalized customer experience. The platform also offers the ability to store pet medical records, set reminders, and create and track goals.

VOYCE™ was made available to consumers beginning in March 2015 in a controlled launch. During the nine months ended September 30, 2015, direct to consumer marketing was substantially reduced as we began repositioning our marketing message and certain product features to be better aligned and supportive of our VOYCE PRO™ service. In July 2015, we introduced VOYCE PRO™ to the veterinary community and began to focus our development and marketing efforts towards that community. VOYCE PRO™ offers a program to remotely monitor dog patients and provide veterinarians with objective data to help identify and manage recurring health issues and work collaboratively with pet owners to find proactive solutions. We began contracting with veterinarian hospitals and commenced training and onboarding programs to effectively deploy the service, including with two leading national veterinary hospital owners in the United States.  In addition, subsequent to September 30, 2015, we entered into an agreement with a market leading supplier of animal health technology, products and other services to distribute our VOYCE PRO™ product throughout the veterinary community and we entered into an agreement with a large animal health company to perform certain research services using the Voyce product for up to twelve months.   As a result, we anticipate revenue, and associated cost of revenue and commission expense, to increase in 2016 for this segment.

Bail Bonds Industry Solutions

Our Bail Bonds Industry Solutions segment includes the automated service solutions for the bail bonds industry provided by Captira Analytical. This segment’s proprietary solutions provide easy and efficient ways for bail bondsmen, general agents and sureties to organize and share data and make better decisions. Leveraging its existing software platform, we are continuing to expand into similarly challenged and underserved related industries. This segment’s operating results do not significantly impact our consolidated financial results.

Accounting Policies

Management Estimates

In preparing our condensed consolidated financial statements, we make estimates and assumptions that can have a significant impact on our consolidated 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 condensed consolidated results of operations. For further information on our critical and other accounting policies, please see Note 2 to our condensed consolidated financial statements.

Revenue Recognition

We recognize revenue on 1) identity theft and credit management services, 2) insurance services, 3) other monthly membership products and transaction services and 4) the pet wellness products and services.

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

31

---

 

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 subscriptions 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 record revenue on a gross basis in the amount that we bill the subscriber when our arrangements 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 also provide services for which certain financial institution clients are the primary obligors directly to their customers. We record revenue in the amount that we bill certain 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.

Revenue from these arrangements is recognized on a monthly basis when earned, which is at the time we provide the service. 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.

Insurance Services

We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain paper and electronic confirmations with individual purchasers, b) delivery has occurred, 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.

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 September 30, 2015 and December 31, 2014 totaled $480 thousand and $511 thousand, respectively, and are included in accrued expenses and other current liabilities in our condensed consolidated balance sheets.

Other Membership Products and Transaction Services

For other 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 and recognize revenue from our services in our Bail Bonds Industry Solutions segment from providing management service solutions to the bail bond industry on a monthly subscription or transactional basis. We also generate and recognize revenue on a transactional basis in our Insurance and other Consumer Services segment from consulting services provided by Health at Work, the business we acquired in March 2015 that designs wellness-driven health plans and engagement programs.

Pet Wellness Products and Services

We recognize revenue in our Pet Health Monitoring segment from the sale of the hardware, the monthly subscription monitoring service and shipping and handling costs. We recognize revenue when: a) persuasive evidence of an arrangement exists as we maintain electronic confirmations with individual purchasers, b) delivery of the product and service has occurred, c) the seller’s price to the buyer is fixed, cancellation privileges have lapsed and the price of the product is agreed to by the customer as a condition of the sales

32

---

 

transaction and d) collectability is reasonably assured as individual customers pay by credit card, which has limited our risk of non-collection. We recognize revenue on a gross basis in the amount that we bill the subscriber when our arrangements 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. As VOYCE™ is a new product and sufficient history on the frequency of returns is unavailable to estimate a returns allowance, revenue is deferred until cancellation privileges lapse, which is currently 30 days after purchase for hardware revenue and 60 days after purchase for service revenue. Service revenue for prepaid subscriptions is recognized ratably over the applicable service period, since prepaid subscriptions have pro-rata refund provisions. Due to the deferral period of both the hardware and the service, we currently do not have an allowance for discretionary product or subscription refunds. We will continue to monitor our actual returns in future periods in order to develop sufficient history on returns and cancellation privileges in order to reevaluate the deferral periods.

In accordance with U.S. GAAP, cost of hardware revenue is also deferred over the respective revenue deferral periods and is recorded in the same period. The deferred cost of hardware revenue is included in prepaid expenses and other current assets in our condensed consolidated balance sheets. Free trials with no future service agreement are recognized immediately as expense under cost of service and hardware revenue in our condensed consolidated statements of operations.

We classify and recognize amounts billed to customers related to shipping and handling as hardware revenue and amounts incurred related to shipping and handling as cost of hardware revenue in our condensed consolidated statements of operations.

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. As required by U.S. GAAP, goodwill is reflected as an asset in our Personal Information Services and Insurance and Other Consumer Services segments’ balance sheets, resulting from our acquisitions of White Sky and Health at Work as well as our prior acquisition of Intersections Insurance Services Inc. In 2014, we were required to allocate goodwill, based on relative fair value, between our Personal Information Services and Insurance and Other Consumer Services reporting units. As of September 30, 2015, goodwill of $12.9 million resided in our Insurance and Other Consumer Services reporting unit and goodwill of $7.2 million resided in our Personal Information Services reporting unit. There is no goodwill remaining in our other reporting units.

In evaluating whether indicators of impairment exist, an initial assessment of qualitative factors to determine whether it is necessary to perform the goodwill impairment test can be utilized (commonly referred to as the step zero approach). 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 test 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 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. The market based approach measures the value of an entity through an analysis of recent sales or offerings of comparable companies and using revenue and other multiples of comparable companies as a reasonable basis to estimate our implied multiples. 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. In addition, we consider the uncertainty of realizing the projected cash flows in the analysis.

The estimated fair values of our reporting units are 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 the functions that reside in Corporate. We perform a detailed analysis of our Corporate overhead costs for purposes of establishing the overhead allocation baseline for the projection period. Overhead allocation methods include, but are

33

---

 

not limited to, the percentage of the payroll within each reporting unit, allocation of existing support function costs based on estimated usage by the reporting units, and vendor specific costs incurred by Corporate that can be reasonably attributed to a particular reporting unit. These allocations are adjusted over the projected period in our discounted cash flow analysis based on the forecasted changing relative needs of the reporting units. Throughout the forecast period, the majority of Corporate’s total overhead expenses are allocated to our Personal Information Services reporting unit. We believe this overhead allocation method fairly allocates costs to each reporting unit, and we will continue to review, and possibly refine, these allocation methods as our businesses grow and mature. 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 two 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.

Marketing costs incurred in the Pet Health Monitoring segment currently do not meet the criteria for deferral and therefore are included in marketing expenses in our condensed consolidated statements of operations.

34

---

 

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 commissions 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 issue equity and equity-based awards under the 2006 and 2014 Stock Incentive Plans (“Plans”). Individual awards under the 2006 Stock Incentive 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 Stock Incentive Plan may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and/or restricted stock units.

We use the Black-Scholes option-pricing model to value all stock options and the straight-line method to amortize this fair value as compensation cost over the requisite service period. During the nine months ended September 30, 2015 and 2014, we did not grant stock options. We use the stock price on the grant date to value all restricted stock awards and restricted stock units (together, “RSUs”) and the straight line method to amortize the compensation cost over the requisite service period. We consider our historical and projected dividends, along with participation rights of the grants, in calculating the grant date fair value.

In addition, we estimate forfeitures based on historical stock option and restricted stock unit activity on a grant by grant basis. We consider many factors in our estimated forfeiture rate including, but not limited to, historical actual forfeitures by type of employee and one-time unusual events. We may make changes to that estimate throughout the vesting period based on actual activity. If actual forfeitures occur prior to the vest date and the pre-vest forfeiture amount exceeds the estimated forfeiture rate, we reverse the cumulative share based compensation expense for the unvested grants. In accordance with U.S. GAAP, we ensure that the share based compensation expense is equivalent to actual vestings prior to, or at, the actual vesting date on a grant by grant basis.

Long-Term Investment

We account for investments in non-consolidated entities using the cost method of accounting. Prior to June 2015, we had a long-term investment in convertible preferred stock of White Sky, a privately held company. We previously concluded that the convertible preferred stock did 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 accounted for our investment as a cost method investment.

On June 26, 2015, we acquired substantially all of the assets and certain liabilities of White Sky. As a result, as of September 30, 2015, we no longer have a cost method investment and include the assets acquired from White Sky in our condensed consolidated balance sheets, and beginning in the three months ended September 30, 2015, included White Sky’s results of operations in our condensed consolidated statements of operations.

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.

35

---

 

In accordance with U.S. GAAP, we were required to remeasure our long-term investment in White Sky to fair value immediately prior to the acquisition. We remeasured the long-term investment using a form of the market approach, including the actual observable price paid for the assets in the nine months ended September 30, 2015 less estimated liquidating shareholder distribution amounts.

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. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and future reversal of existing deferred tax assets and liabilities, sufficient sources of taxable income in available carryback periods, tax-planning strategies, and historical results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three trailing years of cumulative operating income (loss). 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. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.

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.

In addition to the amount of tax resulting from applying the estimated annual effective tax rate to income from operations before income taxes, we included certain items treated as discrete events to arrive at an estimated overall tax amount for the three and nine months ended September 30, 2015. For additional information, please see Note 18 to our condensed consolidated financial statements.

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 result in 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. U.S. GAAP provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

Our income tax expense and liability and/or receivable, deferred tax assets and liabilities, and liabilities for uncertain tax benefits reflect management’s best assessment of estimated current and future taxes to be paid or received. Significant judgments and estimates are required in determining the consolidated income tax expense.

Inventory

Inventory consists primarily of finished goods for our Voyce products, although we may at times also maintain an inventory of raw materials from our third-party manufacturer. We outsource hardware manufacturing to a third-party manufacturer and may purchase accessories from third-party suppliers. Inventories are valued using the first-in, first-out method and are carried at the lower of cost or market.

Pursuant to our manufacturing agreement with the supplier, we may be required to purchase excess materials if the materials are not used in production within the periods specified in the agreement. If not obsolete, the supplier may then repurchase such materials from us for future hardware production.

Accounting Standards Updates Recently Adopted and Accounting Standards Updates Not Yet Effective

For information about accounting standards updates recently adopted and accounting standards updates not yet effective, please see Note 3 to our condensed consolidated financial statements.

36

---

 

Results of Continuing Operations

Three Months Ended September 30, 2015 and 2014 (in thousands):

The condensed consolidated results of operations are as follows:

 

 

37

---

 

Personal Information Services Segment

Income from operations for our Personal Information Services segment increased in the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The increase in income from operations is primarily due to decreases in cost of revenue, commission, and general and administrative expenses, partially offset by a decrease in revenue from our U.S. financial institution clients resulting from both ceased marketing and the prior cancellations of certain subscriber portfolios.

 

 

Services Revenue. The decrease in revenue continues to be primarily due to the reduction in subscribers and revenue from financial institution clients as a result of the decisions by them to terminate marketing, as well as the cancellation of certain subscriber portfolios by many of the same financial institution clients in the latter part of 2014 and in the first half of 2015. Our servicing of subscribers under one of our marketing agreements with Citibank terminated in April 2015, and we ceased to service approximately 415 thousand subscribers under this agreement. In the three months ended September 30, 2015 and 2014, we generated revenue under this agreement of $104 thousand and $3.4 million, respectively. In addition, we continue to experience normal attrition in our existing financial institution generated subscriber base, which has also contributed to the decrease in revenue. As a result, our revenue and earnings from U.S. financial institutions continues to decrease.

Revenue decreases from U.S. and Canadian financial institution clients were partially offset by a 24.1% increase in revenue from our consumer direct products due to year over year growth in the subscriber base of approximately 15.3%. Revenue in our Canadian business lines decreased primarily due to the cancellations of certain subscriber portfolios by financial institution clients in the three months ended September 30, 2015. As a result of the cancellations, we ceased servicing approximately 113 thousand subscribers which generated revenue of $189 thousand and $3.0 million in the three months ended September 30, 2015 and 2014, respectively. We expect continued growth in our subscriber base and increased revenue for the remainder of 2015 for our consumer direct products.

Our business is managed as one that will build our IDENTITY GUARD^® brand and Canadian business lines as growth engines for our identity theft and privacy protection solution, and continue to provide the highest level of service for our existing U.S. financial institution clients. The following tables provide details of our Personal Information Services segment revenue and subscriber information for the three months ended September 30, 2015 and 2014 (in thousands):

Personal Information Services Segment Revenue

 

 

38

---

 

Personal Information Services Segment Subscribers

 

 

Marketing Expenses. Marketing expenses consist of subscriber acquisition costs, including affiliate marketing payments, search engine marketing, web-based marketing, print and direct mail expenses such as printing and postage. In the three months ended September 30, 2015 and 2014, our marketing expenses resulted primarily from marketing activity for consumer direct and Canadian subscriber acquisitions. The slight increase is primarily due to an increase in marketing for our consumer direct business, partially offset by a decrease in marketing for our Canadian business. Amortization of deferred subscription solicitation costs related to marketing of our products for the three months ended September 30, 2015 and 2014 were $4.1 million and $3.6 million, respectively. Marketing costs expensed as incurred for the three months ended September 30, 2015 and 2014 were $603 thousand and $1.1 million, respectively, primarily related to broadcast media for our consumer direct business, which do not meet the criteria for capitalization.

As a percentage of revenue, marketing expenses increased to 10.4% for the three months ended September 30, 2015 from 8.6% for the three months ended September 30, 2014.

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

As a percentage of revenue, commission expenses decreased to 24.8% for the three months ended September 30, 2015 from 26.0% for the three months ended September 30, 2014.

Cost of Services 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 is primarily the result of lower volumes of data fulfillment and service costs for subscribers, partially offset by an increase in the effective rates for data. We expect to continue to realize higher effective rates for data due to our renegotiated service agreements, some of which have minimum fixed fees or have higher rates for lower volumes. In February 2015, we entered into an amendment of our agreement with Bank of America. Pursuant to the amendment, we receive a cost reimbursement surcharge that applies to our continued servicing of subscribers during future periods. The surcharge amount is based on the net reconciliation of certain of Bank of America’s costs in connection with refunds issued to subscribers and our increased costs of service. Additionally, we recorded an estimated liability of $2.5 million in the three months ended September 30, 2014 for the possible underpayment of non-income business taxes compared to an adjustment to the liability of $47 thousand in the three months ended September 30, 2015.

As a percentage of revenue, cost of revenue decreased to 34.3% for the three months ended September 30, 2015 from 41.6% for the three months ended September 30, 2014.

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 Personal Information Services segment. The decrease is primarily due to decreased payroll, which included severance, and legal fees.

In the year ended December 31, 2014, our Board of Directors approved and we initiated a cost restructuring plan, which resulted in severance and severance-related benefits. We did not have severance and severance-related benefits in this segment in the three months ended September 30, 2015. Severance and severance-related benefits, both related and unrelated to the restructuring plan approved in 2014, for the three months ended September 30, 2014 was $2.6 million. For additional information, please see Note 14 to our condensed consolidated financial statements.

39

---

 

We did not have any share based compensation expense in this segment for the three months ended September 30, 2015. Share based compensation expense for the three months ended September 30, 2014 was $191 thousand.

As a percentage of revenue, general and administrative expenses decreased to 16.4% for the three months ended September 30, 2015 from 18.2% for the three months ended September 30, 2014.

Depreciation. Depreciation consists primarily of depreciation expense 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 asset additions placed into service in the three months ended September 30, 2015.

As a percentage of revenue, depreciation increased slightly to 2.2% for the three months ended September 30, 2015 from 1.9% for the three months ended September 30, 2014.

Amortization. Amortization consists primarily of the amortization of our intangible assets. The decrease is due to intangible assets that were fully amortized in prior periods, partially offset by amortization on new asset additions related to our acquisition of White Sky that were placed into service in the three months ended September 30, 2015.

As a percentage of revenue, amortization decreased to 0.1% for the three months ended September 30, 2015 from 1.3% in the three months ended September 30, 2014.

Insurance and Other Consumer Services Segment

Our income from operations for our Insurance and Other Consumer Services segment decreased for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The decrease in income from operations is primarily due to decreased revenue and increased payroll related costs, partially offset by decreases in commission expenses.

 

 

Services Revenue. The decrease in revenue is due to the normal attrition in our existing subscriber base, which consists of purchasers of both insurance and membership services that have recurring subscription benefits, and minimal new subscription sales due to substantially ceased marketing efforts by most of our clients for these products. We had approximately 79 thousand subscribers as of September 30, 2015, which is a 26.2% decrease from our subscriber base of 107 thousand subscribers as of September 30, 2014. This segment includes the operating results of the business we acquired in March 2015 from Health at Work of designing wellness-driven health plans and engagement programs. We are in the process of developing new insurance and other products and expanding into new marketing channels to generate revenue.

Marketing Expenses. Marketing expenses consist of subscriber acquisition costs, including affiliate marketing payments, print and direct mail expenses such as printing and postage. Marketing expenses decreased in the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

As a percentage of revenue, marketing expenses decreased to 0.5% for the three months ended September 30, 2015 from 3.0% for the three months ended September 30, 2014 as a result of substantially eliminating marketing efforts for insurance and membership services.

Commission Expenses. Commission expenses consist of commissions paid to our clients and other partners. The decrease is related to a decrease in overall subscribers for which commissions are paid. We expect our commission expenses to continue to decline in future periods primarily due to normal attrition of subscribers in our existing portfolios with no new marketing activity.

40

---

 

As a percentage of revenue, commission expenses increased to 34.0% for the three months ended September 30, 2015 from 32.2% for the three months ended September 30, 2014.

Cost of Services Revenue. Cost of revenue consists of the costs of operating our customer service center and network costs for subscribers. The decrease is primarily due to decreased network fees, partially offset by increased severance and severance-related benefits included in cost of revenue. Severance and severance-related benefits allocated to our customer services function in the three months ended September 30, 2015, unrelated to the restructuring plan approved in 2014, were $88 thousand. We did not have severance and severance-related benefits in this segment in the three months ended September 30, 2014.

As a percentage of revenue, cost of revenue decreased to 8.2% for the three months ended September 30, 2015 from 10.5% for the three months ended September 30, 2014.

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, and share based compensation expense related to the earn-out provisions of the Health at Work business acquisition. The increase is primarily due to increased payroll related costs, primarily share based compensation and additional headcount from the acquisition.

We determined the majority of the earn-out provisions in the business acquired from Health at Work in the nine months ended September 30, 2015 to be share based compensation expense. In the three months ended September 30, 2015, we recorded $232 thousand of share based compensation expense, which is included in general and administrative expenses in our condensed consolidated financial statements, and we estimate the remaining unrecognized compensation cost for the first one-year measurement period to be approximately $274 thousand. However, due to the variability of the inputs for the performance and market conditions, we are unable to reasonably estimate the unrecognized compensation costs for the remaining two one-year measurements periods from March 1, 2016 through February 28, 2018. The variability of the inputs in the remaining two one-year measurement periods may have a material impact on the future operating results of our Insurance and Other Consumer Services segment.

For the reasons noted above, as a percentage of revenue, general and administrative expenses increased significantly to 67.8% for the three months ended September 30, 2015 from 18.0% for the three months ended September 30, 2014.

Impairment of Goodwill. As required by U.S. GAAP, goodwill is reflected as an asset in our Personal Information Services and Insurance and Other Consumer Services segments’ balance sheets, resulting from our prior acquisition of Intersections Insurance Services Inc. and our more recent acquisitions of Health at Work and White Sky.

The fair value of the Insurance and Other Consumer Services reporting unit, which was tested in 2014, was significantly in excess of its carrying value. During the three months ended September 30, 2015 and 2014, we did not have any impairment of goodwill in our Personal Information Services reporting unit. The fair value of the Personal Information Services reporting unit was in excess of its carrying value by approximately 211% as of September 30, 2015. Subsequent to the goodwill impairment charge incurred in the year ended December 31, 2014, the percentage by which the fair value exceeds the carrying value of our Personal Information Services reporting unit continues to increase, primarily due to the establishment of a valuation allowance on our existing deferred tax assets which significantly reduced the reporting unit’s carrying value.  As a result of the significantly increased percentage in the three months ended September 30, 2015 and the other-than-temporary reduced carrying value, we no longer consider the Personal Information Services reporting unit to be at risk of failing step one of the impairment test. To the extent our Personal Information Services or Insurance and Other Consumer Services reporting units realize actual operating results in the future below forecasted results, or realize decreases in forecasted results as compared to previous forecasts, or in the event the estimated fair value of those reporting units decrease (as a result, among other things, of changes in market capitalization, including further declines in our stock price), we may incur goodwill impairment charges in the future. Future impairment charges on our Personal Information Services reporting unit will be recognized in the operating results of our Personal Information Services segment and our Insurance and Other Consumer Services segment, based on a pro-rata allocation of goodwill.

Depreciation. Depreciation consists primarily of depreciation expenses related to our fixed assets.

As a percentage of revenue, depreciation increased slightly to 2.0% for the three months ended September 30, 2015 from 1.5% for the three months ended September 30, 2014.

Amortization. Amortization consists primarily of the amortization of our intangible assets. Amortization increased for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

As a percentage of revenue, amortization increased to 4.9% for the three months ended September 30, 2015 from 2.8% for the three months ended September 30, 2014.

41

---

 

Pet Health Monitoring Segment

Loss from operations in our Pet Health Monitoring segment increased in the three months ended September 30, 2015 compared to the three months ended September 30, 2014. In early 2015, we launched the VOYCE™ consumer offering, a new pet health monitoring platform and service, and began fulfilling customer orders. In the three months ended September 30, 2015, we substantially reduced marketing of the consumer offering and launched VOYCE PRO™, our service provided through veterinarians. We began contracting with veterinarian hospitals and offering the service and expect to incur training and other onboarding costs as we develop the sales market. The increase in loss from operations is due to increased marketing for the launch of VOYCE PRO™ and depreciation on assets placed into service for the launch.

 

 

Services and Hardware Revenue. In the three months ended September 30, 2015, we recognized revenue on the sale of services and hardware, including the fixed portion of shipping and handling receipts. We defer revenue on the sale of the hardware and subscription service until return and cancellation rights have substantially lapsed, and our deferred revenue balance was $9 thousand as of September 30, 2015. We expect revenue from the VOYCE PRO™ offering to increase for the remainder of 2015 and into 2016 as we onboard and train veterinarian hospitals.

Marketing Expenses. Marketing expenses consist of subscriber acquisition costs, including demonstrations, advertising and printed materials, which do not meet the criteria for capitalization. We incurred, and expect to continue to incur, marketing expenses for our service in the future.

Cost of Services and Hardware Revenue. Cost of revenue consists of product and manufacturing costs, taxes and other fees, content development and customer service costs associated with our hardware and subscription service. We defer the cost of the hardware revenue and recognize the expense in the same period as the associated revenue, and our deferred cost of revenue balance was $7 thousand as of September 30, 2015. In addition, we incurred, and expect to continue to incur, cost of services and hardware revenues in the future.

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 decrease is primarily due to decreases in legal and professional fees, partially offset by a decrease in the capitalization of internal use software and an increase in payroll related costs.

Depreciation. Depreciation consists primarily of depreciation expense related to our fixed assets. Depreciation increased in the three months ended September 30, 2015 as new assets were placed into service related to our product launches.

Amortization. Amortization consists primarily of the amortization of our intangible assets. Amortization increased in the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

42

---

 

Bail Bonds Industry Solutions Segment

Loss from operations in our Bail Bonds Industry Solutions Segment increased for three months ended September 30, 2015 compared to the three months ended September 30, 2014. The increase in loss from operations is primarily due to increased general and administrative expenses.

 

 

Services Revenue. The slight increase in revenue is the result of revenue from new clients as we leverage our existing software platform and expand our services to other related industries. We expect to expand our services and acquire additional clients, and as a result, we expect revenue to continue to increase in 2015 and 2016.

Marketing Expenses.  Marketing expenses consist of advertising costs, web-based marketing and other marketing program expenses. Marketing expenses increased for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

As a percentage of revenue, marketing expenses increased to 3.7% for the three months ended September 30, 2015 from 1.5% for the three months ended September 30, 2014.

Commission Expenses. Commission expenses consist of commissions paid to our partners. We entered into contractual agreements with our partners that require us to pay commission in certain circumstances.

As a percentage of revenue, commission expenses decreased slightly to 1.4% for the three months ended September 30, 2015 from 1.5% for the three months ended September 30, 2014.

Cost of Services Revenue. Cost of revenue consists of monitoring and credit bureau expenses. Cost of revenue increased for the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

As a percentage of revenue, cost of revenue increased to 10.6% for the three months ended September 30, 2015 from 9.6% for the three months ended September 30, 2014.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, marketing, information technology, and account functions. General and administrative expenses increased in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, primarily due to an increase in payroll related costs.

As a percentage of revenue, general and administrative expenses increased to 115.7% for the three months ended September 30, 2015 from 94.0% for the three months ended September 30, 2014.

Depreciation. Depreciation consists primarily of depreciation of our fixed assets. Depreciation decreased in the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

As a percentage of revenue, depreciation decreased to 3.3% for the three months ended September 30, 2015 from 7.0% for the three months ended September 30, 2014.

43

---

 

Corporate

In the three months ended September 30, 2015, our loss from operations of $6.9 million primarily consisted of general and administrative expenses. General and administrative expenses primarily consisted of legal, compliance, human resources, finance, internal audit and shared information technology expenses that have not been attributed to a particular reportable segment. General and administrative expenses for the three months ended September 30, 2015 and 2014 were $6.8 million and $7.8 million, respectively.

In the year ended December 31, 2014, our Board of Directors approved and we initiated a cost restructuring plan, which resulted in severance and severance-related benefits. Severance and severance-related benefits expenses, both related and unrelated to the restructuring plan approved in 2014, for the three months ended September 30, 2015 and 2014 were $1.0 million and $1.5 million, respectively. For additional information, please see Note 14 to our condensed consolidated financial statements. Total share based compensation expense for the three months ended September 30, 2015 and 2014 was $1.2 million and $319 thousand, respectively.

Nine Months Ended September 30, 2015 and 2014 (in thousands):

The condensed consolidated results of operations are as follows:

 

 

44

---

 

Personal Information Services Segment

Income from operations for our Personal Information Services segment increased in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase in income from operations is primarily due to decreases in cost of revenue, commission, and general and administrative expenses, partially offset by a decrease in revenue from our U.S. financial institution clients resulting from both ceased marketing and the prior cancellations of certain subscriber portfolios.

 

 

Services Revenue. The decrease in revenue continues to be primarily due to the reduction in subscribers and revenue from financial institution clients as a result of the decisions by them to terminate marketing, as well as the cancellation of certain subscriber portfolios by many of the same financial institution clients in the latter part of 2014 and in the first half of 2015. Our servicing of subscribers under one of our marketing agreements with Citibank terminated in April 2015, and we ceased to service approximately 415 thousand subscribers under this agreement. In the nine months ended September 30, 2015 and 2014, we generated revenue under this agreement of $3.8 million and $11.0 million, respectively. In addition, we continue to experience normal attrition in our existing financial institution generated subscriber base, which has also contributed to the decrease in revenue. As a result, our revenue and earnings from U.S. financial institutions continues to decrease.

Revenue decreases from U.S. and Canadian financial institution clients were partially offset by a 15.8% increase in revenue from our consumer direct products due to year over year growth in the subscriber base of approximately 15.3%. Revenue in our Canadian business lines decreased primarily due to the cancellations of certain subscriber portfolios by financial institution clients in the nine months ended September 30, 2015. As a result of the cancellations, we ceased servicing approximately 113 thousand subscribers which generated revenue of $4.7 million and $9.0 million in the nine months ended September 30, 2015 and 2014, respectively. We expect continued growth in our subscriber base and increased revenue in 2015 for our consumer direct products.

Our business is managed as one that will build our IDENTITY GUARD^® brand and Canadian business lines as growth engines for our identity theft and privacy protection solution, and continue to provide the highest level of service for our existing U.S. financial institution clients. The following tables provide details of our Personal Information Services segment revenue and subscriber information for the nine months ended September 30, 2015 and 2014 (in thousands):

Personal Information Services Segment Revenue

 

 

45

---

 

Personal Information Services Segment Subscribers

 

 

Marketing Expenses. In the nine months ended September 30, 2015 and 2014, our marketing expenses resulted primarily from marketing activity for consumer direct and Canadian subscriber acquisitions. The decrease in marketing expenses is primarily due to a decrease in marketing for our consumer direct business. Amortization of deferred subscription solicitation costs related to marketing of our products for the nine months ended September 30, 2015 and 2014 were $12.3 million and $10.8 million, respectively. Marketing costs expensed as incurred for the nine months ended September 30, 2015 and 2014 were $1.5 million and $6.0 million, respectively, primarily related to broadcast media for our consumer direct business, which do not meet the criteria for capitalization.

As a percentage of revenue, marketing expenses was 9.5% for the nine months ended September 30, 2015 and 2014.

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

As a percentage of revenue, commission expenses decreased to 24.9% for the nine months ended September 30, 2015 from 25.3% for the nine months ended September 30, 2014.

Cost of Services Revenue. The decrease is primarily the result of lower volumes of data fulfillment and service costs for subscribers, partially offset by an increase in the effective rates for data. We expect to continue to realize higher effective rates for data due to our renegotiated service agreements, some of which have minimum fixed fees or have higher rates for lower volumes. In February 2015, we entered into an amendment of our agreement with Bank of America. Pursuant to the amendment, we receive a cost reimbursement surcharge that applies to our continued servicing of subscribers during future periods. The surcharge amount is based on the net reconciliation of certain of Bank of America’s costs in connection with refunds issued to subscribers and our increased costs of service. Additionally, we recorded an estimated liability of $3.0 million in the nine months ended September 30, 2014 for the possible underpayment of non-income business taxes, as compared to an adjustment to the liability of $345 thousand in the nine months ended September 30, 2015.

As a percentage of revenue, cost of revenue decreased to 32.8% for the nine months ended September 30, 2015 from 36.9% for the nine months ended September 30, 2014.

General and Administrative Expenses. The decrease is primarily due to decreased payroll, which included severance, and legal fees. To reflect the consent order entered on July 6, 2015 in our CFPB investigation, we recorded additional penalty expense of $600 thousand in the nine months ended September 30, 2015 to equal the total expected payment of penalties and refunds in the amount of $1.3 million. For additional information, please see Note 15 to our condensed consolidated financial statements.

In the year ended December 31, 2014, our Board of Directors approved and we initiated a cost restructuring plan, which resulted in severance and severance-related benefits. Severance and severance-related benefits, both related and unrelated to the restructuring plan approved in 2014, for the nine months ended September 30, 2015 and 2014 were $87 thousand and $2.6 million, respectively. For additional information, please see Note 14 to our condensed consolidated financial statements.

For the nine months ended September 30, 2015, we did not incur any share based compensation expense or any additional compensation expense for dividend equivalent payments to restricted stock unit holders. For the nine months ended September 30, 2014, share based compensation expense was $547 thousand and we incurred an additional compensation expense of $111 thousand for dividend equivalent payments to restricted stock unit holders.

46

---

 

As a percentage of revenue, general and administrative expenses decreased to 15.6% for the nine months ended September 30, 2015 from 16.2% for the nine months ended September 30, 2014.

Depreciation. The decrease is primarily due to assets that were fully depreciated in prior periods, partially offset by depreciation on new asset additions placed into service in the nine months ended September 30, 2015.

As a percentage of revenue, depreciation expense increased slightly to 2.2% for the nine months ended September 30, 2015 from 2.0% for the nine months ended September 30, 2014.

Amortization. The decrease is due to intangible assets that were fully amortized in prior periods, partially offset by amortization on new asset additions related to our acquisition of White Sky that were placed into service in the nine months ended September 30, 2015.

As a percentage of revenue, amortization expense decreased to less than 0.1% for the nine months ended September 30, 2015 from 1.3% for the nine months ended September 30, 2014.

Insurance and Other Consumer Services Segment

Our income from operations for our Insurance and Other Consumer Services segment decreased significantly for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The decrease in income from operations is primarily due to decreased revenue and increased payroll related costs, partially offset by decreases in commission and marketing expenses.

 

 

Services Revenue. The decrease in revenue is due to the normal attrition in our existing subscriber base, which consists of purchasers of both insurance and membership services that have recurring subscription benefits, and minimal new subscription sales due to substantially ceased marketing efforts by most of our clients for these products. We had approximately 79 thousand subscribers as of September 30, 2015, which is a 26.2% decrease from our subscriber base of 107 thousand subscribers as of September 30, 2014. This segment includes the operating results of the business we acquired in March 2015 from Health at Work of designing wellness-driven health plans and engagement programs. We are in the process of developing new insurance and other products and expanding into new marketing channels to generate revenue.

Marketing Expenses. The decrease is due to a cessation of marketing by us for the legacy insurance subscription services in the nine months ended September 30, 2015.

As a percentage of revenue, marketing expenses significantly decreased to 0.7% for the nine months ended September 30, 2015 from 5.1% for the nine months ended September 30, 2014.

Commission Expenses. The decrease is related to a decrease in overall subscribers for which commissions are paid. We expect our commission expenses to continue to decline in future periods primarily due to normal attrition of subscribers in our existing portfolios with no new marketing activity.

As a percentage of revenue, commission expenses decreased to 31.2% for the nine months ended September 30, 2015 from 33.8% for the nine months ended September 30, 2014.

47

---

 

Cost of Services Revenue. The decrease is due to decreased network fees and headcount, partially offset by increased severance and severance-related benefits in our customer services function. Severance and severance-related benefits allocated to our customer services function in the nine months ended September 30, 2015, unrelated to the restructuring plan approved in 2014, were $258 thousand. We did not have severance and severance-related benefits in this segment in the nine months ended September 30, 2014.

As a percentage of revenue, cost of revenue decreased slightly to 10.9% for the nine months ended September 30, 2015 from 11.1% for the nine months ended September 30, 2014.

General and Administrative Expenses. The significant increase is primarily due to increased payroll related costs, primarily share based compensation and additional headcount from the acquisition, partially offset by a decrease in legal fees.

We determined the majority of the earn-out provisions in the business we acquired from Health at Work in the nine months ended September 30, 2015 to be share based compensation expense. In the nine months ended September 30, 2015, we recorded $561 thousand of share based compensation expense, which is included in general and administrative expenses in our condensed consolidated financial statements, and we estimate the remaining unrecognized compensation cost for the first one-year measurement period to be approximately $274 thousand. However, due to the variability of the inputs for the performance and market conditions, we are unable to reasonably estimate the unrecognized compensation costs for the remaining two one-year measurements periods from March 1, 2016 through February 28, 2018. The variability of the inputs in the remaining two one-year measurement periods may have a material impact on the future operating results of our Insurance and Other Consumer Services segment.

As a percentage of revenue, general and administrative expenses increased significantly to 45.8% for the nine months ended September 30, 2015 from 18.7% for the nine months ended September 30, 2014.

Impairment of Goodwill. As required by U.S. GAAP, goodwill is reflected as an asset in our Personal Information Services and Insurance and Other Consumer Services segments’ balance sheets, resulting from our prior acquisition of Intersections Insurance Services Inc. and our more recent acquisitions of Health at Work and White Sky.

The fair value of the Insurance and Other Consumer Services reporting unit, which was tested in 2014, was significantly in excess of its carrying value. During the three months ended September 30, 2015 and 2014, we did not have any impairment of goodwill in our Personal Information Services reporting unit. The fair value of the Personal Information Services reporting unit was in excess of its carrying value by approximately 211% as of September 30, 2015. Subsequent to the goodwill impairment charge incurred in the year ended December 31, 2014, the percentage by which the fair value exceeds the carrying value of our Personal Information Services reporting unit continues to increase, primarily due to the establishment of a valuation allowance on our existing deferred tax assets which significantly reduced the reporting unit’s carrying value.  As a result of the significantly increased percentage in the nine months ended September 30, 2015 and the other-than-temporary reduced carrying value, we no longer consider the Personal Information Services reporting unit to be at risk of failing step one of the impairment test. To the extent our Personal Information Services or Insurance and Other Consumer Services reporting units realize actual operating results in the future below forecasted results, or realize decreases in forecasted results as compared to previous forecasts, or in the event the estimated fair value of those reporting units decrease (as a result, among other things, of changes in market capitalization, including further declines in our stock price), we may incur goodwill impairment charges in the future. Future impairment charges on our Personal Information Services reporting unit will be recognized in the operating results of our Personal Information Services segment and our Insurance and Other Consumer Services segment, based on a pro-rata allocation of goodwill.

Depreciation. The increase is from depreciation on new assets placed into service in the nine months ended September 30, 2015.

As a percentage of revenue, depreciation increased slightly to 1.7% for the nine months ended September 30, 2015 from 1.2% for the nine months ended September 30, 2014.

Amortization. Amortization expense increased in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

As a percentage of revenue, amortization increased to 3.9% for the nine months ended September 30, 2015 from 2.7% for the nine months ended September 30, 2014.

Pet Health Monitoring Segment

Loss from operations in our Pet Health Monitoring segment increased in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. In early 2015, we launched the VOYCE™ consumer offering, a new pet health monitoring platform and service, and began fulfilling customer orders. In the three months ended September 30, 2015, we

48

---

 

substantially reduced marketing of the consumer offering and launched VOYCE PRO™, our service provided through veterinarians. We began contracting with veterinarian hospitals and offering the service and expect to incur training and other onboarding costs as we develop the sales market. The increase in loss from operations is due to increased marketing for the launch of VOYCE PRO™ and depreciation on assets placed into service for the launch.

 

 

Services and Hardware Revenue. In the nine months ended September 30, 2015, we recognized revenue on the sale of services and hardware, including the fixed portion of shipping and handling receipts. We defer revenue on the sale of the hardware and subscription service until return and cancellation rights have substantially lapsed, and our deferred revenue balance was $9 thousand as of September 30, 2015. We expect revenue from the VOYCE PRO™ offering to increase in 2015 and into 2016 as we onboard and train veterinarian hospitals.

Marketing Expenses. We incurred a significant amount of marketing and advertising costs, primarily associated with the launch of VOYCE™. We expect to continue to incur marketing expenses for our service in the future.

Cost of Services and Hardware Revenue. The increase is due to our product launches. We defer the cost of hardware revenue and recognize the expense in the same period as the associated revenue, and our deferred cost of revenue balance was $7 thousand as of September 30, 2015. In addition, we incurred, and expect to continue to incur, cost of services and hardware revenues in the future.

General and Administrative Expenses. The increase is primarily due to a decrease in the capitalization of internal use software and an increase in payroll related costs, partially offset by decreases in legal and professional fees. During the nine months ended September 30, 2015, we incurred expenses for severance and severance-related benefits of $60 thousand. There were no expenses for severance and severance-related benefits for the nine months ended September 30, 2014.

Depreciation. Depreciation increased in the nine months ended September 30, 2015 as new assets were placed into service related to our product launches.

Amortization. Amortization increased in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

49

---

 

Bail Bonds Industry Solutions Segment

Loss from operations in our Bail Bonds Industry Solutions Segment increased for nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase in loss from operations is primarily due to increased general and administrative expenses.

 

 

Services Revenue. The slight increase in revenue is the result of revenue from new clients as we leverage our existing software platform and expand our services to other related industries. We expect to expand our services and acquire additional clients, and as a result, we expect revenue to continue to increase in 2015 and 2016.

Marketing Expenses. Marketing expenses increased for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

As a percentage of revenue, marketing expenses increased to 1.3% for the nine months ended September 30, 2015 from 0.6% for the nine months ended September 30, 2014.

Commission Expenses. Commission expenses decreased for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

As a percentage of revenue, commission expenses decreased to 1.4% for the nine months ended September 30, 2015 from 4.1% for the nine months ended September 30, 2014.

Cost of Services Revenue. Cost of revenue increased for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

As a percentage of revenue, cost of revenue increased to 10.1% for the nine months ended September 30, 2015 from 8.3% for the nine months ended September 30, 2014.

General and Administrative Expenses. General and administrative expenses increased in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, primarily due to an increase in payroll related costs.

As a percentage of revenue, general and administrative expenses increased to 114.6% for the nine months ended September 30, 2015 from 93.0% for the nine months ended September 30, 2014.

Depreciation. Depreciation decreased in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

As a percentage of revenue, depreciation expenses decreased to 4.7% for the nine months ended September 30, 2015 from 7.9% for the nine months ended September 30, 2014.

50

---

 

Corporate

In the nine months ended September 30, 2015, our loss from operations of $27.6 million primarily consisted of general and administrative expenses and an impairment charge related to our acquisition of White Sky. General and administrative expenses primarily consisted of legal, compliance, human resources, finance, internal audit and shared information technology expenses that have not been attributed to a particular reportable segment. General and administrative expenses for the nine months ended September 30, 2015 and 2014 were $20.1 million and $21.8 million, respectively. The decrease is primarily due to decreased payroll expenses and professional fees, partially offset by increased legal fees.

In accordance with U.S. GAAP, we were required to remeasure our long-term investment in White Sky to fair value immediately prior to the acquisition. We remeasured the fair value of White Sky using the stock and cash consideration paid to acquire substantially all the assets, less the estimated liquidating shareholder distributions to us, which resulted in an acquisition-date fair value of our investment of approximately $1.0 million. Since the carrying value of $8.4 million was in excess of the acquisition-date fair value, we recorded an impairment charge of $7.4 million in the nine months ended September 30, 2015.

In the year ended December 31, 2014, our Board of Directors approved and we initiated a cost restructuring plan, which resulted in severance and severance-related benefits. Severance and severance-related benefits expenses, both related and unrelated to the restructuring plan approved in 2014, for the nine months ended September 30, 2015 and 2014 were $1.4 million and $1.8 million, respectively. For additional information, please see Note 14 to our condensed consolidated financial statements.

Total share based compensation expense for the nine months ended September 30, 2015 and 2014 was $3.9 million and $2.6 million, respectively. For the nine months ended September 30, 2015, we did not incur any compensation expense for dividend equivalent payments to restricted stock unit holders. For the nine months ended September 30, 2014, we incurred compensation expense of $320 thousand for dividend equivalent payments to restricted stock unit holders.

Interest Expense

Interest expense was $59 thousand in the three months ended September 30, 2015 compared to $257 thousand in the three months ended September 30, 2014. Interest expense was $141 thousand in the nine months ended September 30, 2015 compared to $518 thousand in the nine months ended September 30, 2014. The decrease is primarily due to a decrease in interest accrued on a reduced underpayment of non-income business taxes as compared to the nine months ended September 30, 2014 and a non-cash reduction of unamortized debt financing costs recorded in the nine months ended September 30, 2014, which did not occur in the nine months ended September 30, 2015.

Other Expense/Income, net

Other expense was $65 thousand in the three months ended September 30, 2015 compared to $239 thousand in the three months ended September 30, 2014. Other expense was $138 thousand in the nine months ended September 30, 2015 compared $377 thousand in the nine months ended September 30, 2014. The decrease in other expense is primarily due to an increase in foreign currency gains resulting from exchange rate fluctuations over the period.

Income Taxes

Our consolidated effective tax rate from continuing operations for the three months ended September 30, 2015 and 2014 was 35.5% and 60.0%, respectively. The decrease from the comparable period is primarily due to the increase in loss from operations before income taxes as a ratio of book expenses that are not deductible for income tax purposes. Our consolidated effective tax rate from continuing operations for the nine months ended September 30, 2015 and 2014 was (56.3)% and 48.2%, respectively. The significant decrease in the nine months ended September 30, 2015 from the comparable period is primarily due to the establishment of a valuation allowance on our existing definite-lived net deferred tax assets, as well as an impairment loss on our investment in White Sky, which is not deductible for income tax purposes.

We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We assess the available positive and negative evidence using a consistent approach to determine if, on a more likely than not basis, that some or all of our deferred tax assets will not be realized and therefore, establish a valuation allowance. We continued to evaluate all significant positive and negative evidence including, but not limited to, triggering a three-year cumulative loss, as adjusted for permanent items; insufficient sources of taxable income in prior carryback periods in order to utilize all of the existing definite-lived net deferred tax assets; unavailability of prudent and feasible tax-planning strategies; negative adjustments to our projected taxable income; and scheduling of the future reversals of existing temporary differences. Our conclusion was based on our consideration of the relative weight of the available

51

---

 

evidence, and for purposes of establishing a valuation allowance, the three-year cumulative loss position, as adjusted for permanent items, is considered a significant piece of negative objective evidence. As a result of the negative evidence outweighing the positive evidence as of June 30, 2015, we recorded a non-cash discrete expense in the six months ended June 30, 2015 of $16.0 million in our condensed consolidated statements of operations related to the establishment of a valuation allowance on our net deferred tax assets for the portion of the future tax benefit that, more likely than not, will not be realized. This was partially offset by the pro-rata portion of the income tax benefit related to the current year projected net operating loss that is realizable via carryback.

The amount of deferred tax assets considered realizable as of September 30, 2015 could be adjusted if facts and circumstances in future reporting periods change, including, but not limited to, the reduction of actual and projected taxable income in the carryforward periods.

Liquidity and Capital Resources

Cash Flow

Cash and cash equivalents were $8.2 million as of September 30, 2015 as compared to $11.3 million as of December 31, 2014. 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 was $8.6 million as of September 30, 2015 as compared to $15.5 million as of December 31, 2014. 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 financial institution clients. The likelihood of non-payment has historically been remote with respect to our personal information services and insurance services clients billed, however, we do provide for an allowance for doubtful accounts with respect to bail bonds clients. For our Pet Health Monitoring segment, we provide the hardware or service subsequent to collection, therefore, there is a limited risk of non-collection. We are continuing to monitor our allowance for doubtful accounts with respect to our financial institution clients. In addition, we provide for a refund allowance for our Personal Information Services and Insurance and Other Consumer Services segments, 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 continuing operations, amounts available, if any, under our Loan Agreement and other external sources of funds. Our short-term and long-term liquidity depends primarily upon our level of net income, cash balances, working capital management and bank borrowing capacity. We had a working capital surplus of $12.7 million as of September 30, 2015 as compared to $16.2 million as of December 31, 2014.

On November 13, 2015, we entered into irrevocable subscription agreements with certain affiliates pursuant to which such affiliates agreed to purchase up to 3.0 million shares of our common stock at a price of $2.50 per share for aggregate gross proceeds of up to $7.5 million. The closing of the subscription is expected to take place in the three months ending December 31, 2015. We intend to use the proceeds from the sale for working capital and general corporate purposes.  The shares will be issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended. We believe that our cash on hand, anticipated cash provided by operations and proceeds from the subscribed sale of equity will be sufficient to fund our anticipated working capital requirements for the next twelve months. We continue to evaluate liquidity needs to fund our growth including additional cost reduction programs and seeking additional sources of debt and/or equity financing. If there is a material change in our anticipated cash provided by operations or working capital needs at a time when we are not in compliance with all of the covenants in our Loan Agreement or otherwise do not have borrowing availability, our liquidity could be negatively affected.

 

 

The slight decrease in cash flows provided by operations continues to reflect the increase in net loss for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, and was primarily due to decreased revenue, partially offset by decreased expenses as a result of the restructuring plan. In addition, our cash flows provided by operations decreased due to

52

---

 

our continued cash investment in our Pet Health Monitoring segment. We expect to continue to fund the growth and development of our Pet Health Monitoring segment from cash flows provided by operating activities. In the nine months ended September 30, 2015, we remitted $1.8 million on our non-income tax liability and expect to resolve some, or all, of the remaining potential obligations for non-income business taxes in the remainder of the year ending December 31, 2015 using cash provided by operations.

In 2014, our Board of Directors approved the restructuring plan to streamline operations and reduce the cost structure in our Corporate business unit and Personal Information Services segment. We have completed the majority of the reductions and expect the remaining restructuring costs of approximately $272 thousand to decrease our cash flows provided by operations in the remainder of the year ending December 31, 2015. Actions taken in 2014 and 2015 represent an expected reduction in our cost base of over $15.0 million, on an annualized basis, and we will continue to review and adjust our cost base for the remainder of 2015. Costs in our Pet Health Monitoring segment have and will continue to increase, partially offsetting the cost savings. See “— Cost Restructuring” for further discussion.

The decrease in cash flows used in investing activities was primarily due to the decrease in capitalized engineering costs and acquisitions of property and equipment primarily for our Pet Health Monitoring segment. This was partially offset by the net cash paid in the acquisition of White Sky in the nine months ended September 30, 2015. For additional information regarding the acquisition of White Sky, please see Note 4 to our condensed consolidated financial statements.

Under our Loan Agreement, we are currently prohibited from declaring and paying ordinary cash dividends, and we have not paid cash dividends since the three months ended March 31, 2014. In the nine months ended September 30, 2014, we declared and paid cash dividends of $0.20 per share for a total of $3.7 million, which contributed to the decrease in cash flows used in financing activities.

Credit Facility and Borrowing Capacity

In 2014, we entered into a new loan and security agreement (“Loan Agreement”) with Silicon Valley Bank. In connection with the Loan Agreement, we and certain subsidiaries also entered into a secured guaranty and pledge agreement, an intellectual property security agreement and other related documents. The maturity date is October 7, 2016, unless the facility is otherwise terminated pursuant to the terms of the Loan Agreement.

In the nine months ended September 30, 2015, we entered into an amendment to our Loan Agreement, pursuant to which the maximum aggregate principal amount of any loans under the Loan Agreement was reduced from $15.0 million to $5.0 million. In addition, the interest rates payable under the Loan Agreement were modified so that amounts borrowed would bear interest, at our option, at either the LIBOR rate plus a margin of 3.5%, or the Prime rate plus a margin of 2.5%. Further, the interest rate payable in the event of a default was increased by 2.5% and is equal to the Prime rate plus a margin of 4.5%.

The Loan 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 Loan Agreement) other than on fair and reasonable terms; and the formation or acquisition of any direct or indirect domestic or first-tier foreign subsidiary unless such subsidiary becomes a co-borrower or guarantor.

We are required to maintain compliance under the Loan Agreement on a monthly basis with a minimum liquidity ratio (defined as (a) the sum of (i) our consolidated cash and cash equivalents plus (ii) our consolidated net billed accounts receivable divided by (b) our consolidated obligations to the lender) measured as of the end of each month of at least 2.25:1.00. We are also required to maintain compliance on a quarterly basis with a specified minimum consolidated EBITDA (as defined in the Loan Agreement and adjusted for certain non-cash, non-recurring and other items), as follows:

 

 

53

---

 

The Loan Agreement also contains customary events of default, including among other things non-payment defaults, covenant defaults, inaccuracy of representations and warranties, cross-defaults to other indebtedness, bankruptcy and insolvency defaults, material judgment defaults, attachment defaults, ERISA defaults and change of control defaults. In July 2015, we received a waiver to the Loan Agreement, which allowed us to remit $1.2 million in accordance with the payment terms set forth in the CFPB consent order without it being a default event, so long as we satisfy the applicable conditions, as set forth in the Loan Agreement.

As of September 30, 2015, we did not have any amounts outstanding under the Loan Agreement, and we are in compliance with all of the covenants and able to borrow the full $5.0 million available under the Loan Agreement. Failure to comply with any of the covenants under our Loan Agreement could result in a default under the facility, which could cause the lender to terminate its commitment and, to the extent we have outstanding borrowings, declare all obligations immediately due and payable and exercise their lien on substantially all of our assets. We cannot provide assurance that we will maintain compliance with such covenants for future periods, or, if necessary, be able to amend the financial or restrictive covenants contained therein or enter into new credit arrangements to maintain borrowing capacity in the future. We may take actions including but not limited to delaying or forgoing capital investments, reducing marketing or other expenditures compared to current plans, and/or renegotiating or seeking a waiver of the terms of our credit agreement as means of maintaining compliance with these covenants. Even if we do not have any outstanding borrowings under the Loan Agreement, our ability meet our future capital requirements and grow our business by investing in new products and services could be materially adversely affected if we are unable to borrow under our Loan Agreement.

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 September 30, 2015, we had approximately $16.9 million remaining under our share repurchase program. 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. However, we are currently prohibited from repurchasing any shares of common stock under our Loan Agreement. During the nine months ended September 30, 2015 and 2014, we did not repurchase any shares of common stock. As a result of shares withheld for tax purposes on the vesting of a restricted stock award, in the nine months ended September 30, 2015 we increased our treasury shares by 74 thousand. Additionally, in the three months ended September 30, 2015, we received 210 thousand shares of our common stock related to the liquidating distribution of WS Delaware, Inc. For additional information please see Notes 4 and 20 to our condensed consolidated financial statements.

Other

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 voluntary production of information received in January 2014. In July 2015, a consent order was entered in the U.S. District Court for the Eastern District of Virginia. Under the consent order we agreed to pay a penalty of $1.2 million in the three months ended September 30, 2015, and we expect to pay approximately $63 thousand of refunds to certain subscribers. We also agreed under the consent order to be subject to certain ongoing injunctive relief and other compliance requirements, which we do not believe substantially change our existing practices or business.

In 2014, we analyzed our facts and circumstances related to potential obligations in state jurisdictions, including the delivery nature of our services, the relationship through which our services are offered, and changing state laws and interpretations of those laws, and determined it was probable that we have obligations in some jurisdictions. As a result, we recorded a liability for non-income business taxes of $4.5 million as of December 31, 2014, which included the underpayment of taxes, penalties and interest, which we believed was probable under U.S. GAAP. The following table summarizes the non-income tax liability activity during the nine months ended September 30, 2015 (in thousands): 

 

 

We expect to resolve a majority of the remaining obligations and significantly reduce the liability in the remainder of the year ending December 31, 2015 by any variety of settlement options including, but not limited to, voluntary disclosures, negotiation, and standard appeals process, and may adjust the liability at such time. We formally appealed the remaining portion of the liability for one

54

---

 

state based on the applicability of the specific state tax laws to our services, and we continue to accrue the estimable amount that we believe is probable under U.S. GAAP. Additionally, we continue to analyze what other obligations, if any, we have to other state taxing authorities. We believe it is reasonably possible that other states may approach us or that the scope of the taxable base in any state may increase. However, it is not possible to predict the potential amount of future payments due to the unique facts and circumstances involved.

In 2014, we entered into a new contract with a credit reporting agency, to which we agreed to pay non-refundable minimum payments of $5.4 million in the year ending December 31, 2015. This amount is expensed on a pro-rata basis for the nine months ended September 30, 2015 and is included in cost of revenue in our condensed consolidated statements of operations.

Due to the variability of the inputs for the earn-out provisions in the business we acquired from Health at Work, future share based compensation expense may have a material impact on the operating results of our Insurance and Other Consumer Services segment. For additional information, see Notes 4 and 19.

Orders we place for the production of our Voyce hardware product by our third party manufacturer may result in unconditional purchase obligations and may require us to make some payment at the time the order is placed. Unconditional purchase obligations do not include agreements that are cancelable by us without penalty. In the nine months ended September 30, 2015, we did not record a liability for any unconditional purchase obligations.

Off-Balance Sheet Arrangements

As of September 30, 2015, we did not have any off-balance sheet arrangements.

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 not been any changes in our internal control over financial reporting during the three months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

55

---

 

PART II. OTHER INFORMATION

In the normal course of business, we may become involved in various legal proceedings. Except, as stated below, we know of no pending or threatened legal proceedings to which we are or will be a party that, if successful, might result in a material adverse change in our business or financial condition.

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. Discovery in this case is pending.

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 voluntary production of information received in January 2014. In July 2015, a consent order was entered in the U.S. District Court for the Eastern District of Virginia. Under the consent order we agreed to pay a penalty of $1.2 million in the three months ended September 30, 2015, and we expect to pay approximately $63 thousand of refunds to certain subscribers. We also agreed under the consent order to be subject to certain ongoing injunctive relief and other compliance requirements, which we do not believe substantially change our existing practices or business. Based on the entry of the consent order, we increased our estimated liability by $600 thousand in the nine months ended September 30, 2015 to a total amount of $1.3 million, which represented estimated subscriber refunds and the $1.2 million civil monetary penalty, which was paid to the CFPB in the three months ended September 30, 2015.

The Company may become involved in other 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 September 30, 2015, we continued to have no significant liabilities accrued for any of the legal proceedings mentioned above.

We believe based on information currently available that the amount, if any, accrued for the above contingencies, including the CFPB matter, is adequate. However, legal proceedings are inherently unpredictable and, although we believe that accruals are adequate and we intend to vigorously defend ourselves against such matters, unfavorable resolution could occur, which could have a material effect on our condensed consolidated financial statements, taken as a whole.

(c) Purchase of equity securities by the Issuer and Affiliated Purchasers.

 

 

56

---

 

 

 

57

---

 

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.

 

 

58