Intersections 10Q 2017 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



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

For the quarterly period ended March 31, 2017



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

Commission file number: 000-50580

(Exact name of registrant as specified in the charter)



DELAWARE	54-1956515
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

3901 Stonecroft Boulevard, Chantilly, Virginia	20151
(Address of principal executive office)	(Zip Code)

(703) 488-6100

(Registrant’s telephone number including area code)

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

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

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



Large accelerated filer	☐	Accelerated filer	☐

Non accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒

		Emerging growth company	☐

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

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

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

As of May 5, 2017 there were 27,896,187 shares of common stock, $0.01 par value, issued and 23,873,853 shares outstanding, with 4,022,334 shares of treasury stock.

Form 10-Q

March 31, 2017

Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three Months Ended March 31,
	2017			2016
REVENUE	$	40,449		45,648
OPERATING EXPENSES:
Marketing	3,465			4,565
Commission	9,748			11,221
Cost of revenue	13,003			14,798
General and administrative	16,994			17,146
Loss on disposition of Captira Analytical	130			—
Impairment of intangibles and other assets	16			—
Depreciation	1,300			1,657
Amortization	47			192
Total operating expenses	44,703			49,579
LOSS FROM OPERATIONS	(4,254		)	(3,931		)
Interest expense, net	(592		)	(242		)
Other income (expense), net	34			(86		)
LOSS BEFORE INCOME TAXES	(4,812		)	(4,259		)
Income tax benefit (expense)	10			(7		)
NET LOSS	$	(4,802	)	$	(4,266	)
Net loss per common share—basic and diluted	$	(0.20	)	$	(0.19	)
Weighted average common shares outstanding—basic and diluted	23,675			22,887

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)



	March 31, 2017			December 31, 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,230		$	10,857
Accounts receivable, net of allowance for doubtful accounts of $9 (2017) and $15 (2016)	7,953			7,972
Prepaid expenses and other current assets	3,659			3,864
Inventory	250			250
Income tax receivable	2,665			3,314
Deferred subscription solicitation and commission costs	5,974			5,050
Assets held for sale	—			104
Total current assets	25,731			31,411
PROPERTY AND EQUIPMENT, net	10,453			10,611
GOODWILL	9,763			9,763
INTANGIBLE ASSETS, net	163			210
OTHER ASSETS	1,114			862
TOTAL ASSETS	$	47,224		$	52,857
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,204		$	2,536
Accrued expenses and other current liabilities	9,844			11,068
Accrued payroll and employee benefits	3,460			4,256
Commissions payable	299			316
Current portion of long-term debt, net	3,561			2,146
Capital leases, current portion	450			471
Deferred revenue	7,350			8,295
Liabilities held for sale	—			104
Total current liabilities	29,168			29,192
LONG-TERM DEBT, net	8,833			10,092
OBLIGATIONS UNDER CAPITAL LEASES, less current portion	751			865
OTHER LONG-TERM LIABILITIES	3,352			3,436
DEFERRED TAX LIABILITY, net	1,905			1,905
TOTAL LIABILITIES	44,009			45,490
COMMITMENTS AND CONTINGENCIES (see Notes 14 and 16)
STOCKHOLDERS’ EQUITY:
Common stock at $0.01 par value, shares authorized 50,000; shares issued 27,592 (2017) and 27,303 (2016); shares outstanding 24,014 (2017) and 23,733 (2016)	276			273
Additional paid-in capital	142,927			142,247
Treasury stock, shares at cost; 3,578 (2017) and 3,570 (2016)	(33,855		)	(33,822		)
Accumulated deficit	(106,133		)	(101,331		)
TOTAL STOCKHOLDERS’ EQUITY	3,215			7,367
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	47,224		$	52,857

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Three Months Ended March 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(4,802	)	$	(4,266	)
Adjustments to reconcile net loss to cash flows used in operating activities:
Depreciation and amortization	1,347			1,849
Amortization of debt issuance cost	156			120
Provision for doubtful accounts	(9		)	19
Loss on disposal of fixed assets	(4		)	—
Share based compensation	1,130			1,155
Amortization of deferred subscription solicitation costs	3,087			3,930
Loss on disposition of Captira Analytical	130			—
Impairment of intangibles and other long-lived assets	86			—
Changes in assets and liabilities:
Accounts receivable	20			(958		)
Prepaid expenses, other current assets and other assets	(184		)	(750		)
Income tax receivable, net	649			825
Deferred subscription solicitation and commission costs	(4,011		)	(2,437		)
Accounts payable and accrued liabilities	(324		)	(1,811		)
Commissions payable	(16		)	7
Deferred revenue	(945		)	1,961
Other long-term liabilities	(83		)	(123		)
Cash flows used in operating activities	(3,773		)	(479		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for the disposition of Captira Analytical	(315		)	—
Increase in restricted cash	115			(375		)
Proceeds from sale of property and equipment	4			—
Acquisition of property and equipment	(1,432		)	(1,503		)
Cash flows used in investing activities	(1,628		)	(1,878		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt	—			20,000
Cash paid for debt issuance costs	—			(1,835		)
Capital lease payments	(166		)	(174		)
Withholding tax payment on vesting of restricted stock units	(381		)	(156		)
Cash flows (used in) provided by financing activities	(547		)	17,835
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(5,948		)	15,478
CASH AND CASH EQUIVALENTS — Beginning of period	10,857			11,471
Cash reclassified to assets held for sale at beginning of period	321			—
CASH AND CASH EQUIVALENTS — End of period	$	5,230		$	26,949
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment obtained under capital lease, including acquisition costs	$	—		$	137
Equipment additions accrued but not paid	$	164		$	141
Withholding tax payments accrued on vesting of restricted stock units and stock option exercises	$	100		$	73
Shares withheld in lieu of withholding taxes on vesting of restricted stock awards	$	—		$	83

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Business

We provide innovative, information based solutions that help consumers manage risks and make better informed life decisions. Under our Identity Guard^® brand and other brands that comprise our Personal Information Services segment, we help consumers monitor, manage and protect against the risks associated with their identities and personal information. We offer identity theft and privacy protection as well as credit monitoring services for consumers to understand, monitor, manage and protect their personal information and privacy. Under our Identity Guard^® and recently launched Identity Guard^® with Watson^™ products, we help protect consumers against the risks associated with the inappropriate exposure of their personal information that can result in fraudulent use or reputation damage. Identity Guard^® is offered to consumers through direct marketing or through organizations as an embedded product for employees or consumers. In late 2016, we expanded our suite of Identity Guard^® products and launched Identity Guard^® with Watson^™. Identity Guard^® with Watson^™ offers robust early detection of potential risks and provides personalized threat alerts with actionable steps to help keep our customers’ information private from the earliest stage possible. We believe that our suite of products and services offer consumers the most proactive and comprehensive identity theft monitoring service available on the market today.

We have ongoing operations in one other segment, Insurance and Other Consumer Services, and we have sold or ceased primary operations in two other segments, Pet Health Monitoring and Bail Bonds Industry Solutions. As part of our strategy to have a singular focus on our Personal Information Services segment, we sold the business comprising the Bail Bonds Industry Solutions segment in January 2017, and in late 2016, we ceased primary operations and are actively exiting the Pet Health Monitoring segment. Corporate headquarter office transactions including, but not limited to, payroll, share based compensation and other expenses related to our Chairman and non-employee Board of Directors are reported in our Corporate business unit.

Our Insurance and Other Consumer Services segment includes insurance and membership products for consumers, delivered on a subscription basis. We are not planning to develop new business in this segment and are experiencing normal subscriber attrition due to ceased marketing and retention efforts. Some of our legacy subscriber portfolios have been cancelled, and our continued servicing of other subscribers may be cancelled as a result of actions taken by one or more financial institutions.

Our Pet Health Monitoring segment includes the health and wellness monitoring products and services for veterinarians and pet owners through our subsidiary, i4c, which does business as Voyce. Voyce generated substantial losses from formation to 2016 and, after concentrated efforts, was unable to generate an acceptable level of revenue. As a result of actions taken by our Board of Directors to refocus on our principal marketplace of identity and privacy protection, this business ceased primary operations in the fourth quarter of 2016 and is expected to be wound down in an orderly manner in the first half of 2017. Following the completed disposition of the business, we expect the results of this segment will be reported as a discontinued operation in accordance with U.S. GAAP.

Prior to January 31, 2017, our Bail Bonds Industry Solutions segment included the automated service solutions for the bail bonds industry provided by Captira Analytical (“Captira”). Effective January 31, 2017, we divested our ownership in Captira. This segment’s operating results have not had a major effect on our consolidated financial results and are not classified as a discontinued operation. For additional information, please see Note 4.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared by us in accordance with 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.

In conjunction with our singular refocus on our identity and privacy protection services, we changed our policy of allocating general and administrative expenses from our Corporate business unit into our other segments, which resulted in a change in our measurement of segment profit and loss. Beginning in 2017, we directly charge our Personal Information Services segment for the majority of general and administrative expenses including executive, legal, human resources, finance and internal audit expenses. We have elected not to recast our condensed consolidated financial statements for the three months ended March 31, 2016. For information on the effects of the change in measurement, please see "Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations."

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 from the condensed consolidated statements of operations. 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, 2016, 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.

Restricted Cash

We classify cash as restricted when the cash is unavailable for withdrawal or usage for general operations. Our restricted cash represents cash collateral to one commercial bank for corporate credit cards. Restricted cash is included in prepaid expenses and other current assets in our condensed consolidated balance sheets.

Revenue Recognition

We recognize revenue on 1) identity theft protection services, 2) insurance services and 3) other monthly membership products and transaction services.

Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees billed by our clients are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts. Subscription fees billed by us are generally billed directly to the subscriber’s credit card except for arrangements under which subscription fees are paid to us by our clients on behalf of the subscriber. 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 periodically may be offered with trial, delayed billing or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed.

Identity Theft Protection Services

We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain signed contracts with all of our clients 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 organizations 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 and the service is earned over the year. 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 clients are the primary obligors directly to their customers. We record revenue in the amount that we bill certain clients, and not the amount billed to their customers, when our client is the primary obligor, establishes the 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.

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.

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 March 31, 2017 and December 31, 2016 totaled $367 thousand and $360 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.

Consulting services are offered to customers primarily on a fixed fee, retainer or commission basis. We recognize revenue from our consulting services when: a) persuasive evidence of an arrangement exists as we maintain contracts or electronic communication documenting the agreement, b) performance has occurred, c) the seller’s price to the buyer is fixed as the price of the services 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 through a strong history of payment by our customers with no significant write-offs. We record revenue on a gross basis in the amount that we bill the customer when our arrangements provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear credit risk for the amount billed to the customer. We record the net amount as commissions earned if we do not serve as the primary obligor and do not have latitude in establishing prices.

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 Health at Work Wellness Actuaries LLC (“Habits at Work”) and White Sky, Inc. (“White Sky”) in 2015 as well as our prior acquisition of IISI Insurance Services Inc. (“IISI”), formerly known as Intersections Insurance Services Inc., in 2006.

On January 1, 2017, we prospectively adopted ASU 2017-04, "Intangibles—Goodwill and Other." 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 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 perform the 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 consolidated financial statements.

The quantitative assessment 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.

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.

If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its estimated fair value, then a goodwill impairment loss is recognized for the amount that the carrying value of the reporting unit (including goodwill) exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.

As of March 31, 2017, goodwill of $347 thousand resided in our Insurance and Other Consumer Services reporting unit and goodwill of $9.4 million resided in our Personal Information Services reporting unit. There is no goodwill remaining in our other reporting units. For additional information, please see Note 11.

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.

Debt Issuance Costs

Debt issuance costs are capitalized and amortized to interest expense using the effective interest method over the life of the related debt agreements. The effective interest rate applied to the amortization is reviewed periodically and may change if actual principal repayments of the term loan differ from estimates. In accordance with U.S. GAAP, short-term and long-term debt are presented net of the unamortized debt issuance costs in our condensed consolidated balance sheets.

Classification of Debt

In March 2016, we and our subsidiaries entered into a credit agreement with Crystal Financial SPV LLC, which was amended in December 2016 and February 2017 ("Prior Credit Agreement"). Pursuant to the Prior Credit Agreement, we were required to make certain prepayments on our term loan with Crystal Financial SPV LLC in addition to scheduled quarterly repayments, including but not limited to proceeds received from certain tax refunds, asset dispositions, extraordinary receipts, excess cash flows (as defined in the Prior Credit Agreement) and equity issuances. Scheduled quarterly repayments and estimated prepayments that we expect to remit in the next twelve months are classified as the current portion of long-term debt in our consolidated financial statements, net of unamortized debt issuance costs to be amortized in the next twelve months based on the current effective interest rate applied. Subsequent to March 31, 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with a new $20.0 million term loan facility, which was fully funded at closing, with PEAK6 Investments, L.P. For additional information, please see Note 21.

Share Based Compensation

We currently issue equity and equity-based awards under the 2014 Stock Incentive Plan (the “Plan”). 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.

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

We use the Black-Scholes option-pricing model to value all options and the straight-line method to amortize this fair value as compensation cost over the requisite service period. During the three months ended March 31, 2017, we did not grant stock options. The fair value of each option granted has been estimated as of the date of grant with the following weighted-average assumptions for the three months ended March 31, 2016.

Expected Dividend Yield. Under the Prior Credit Agreement, we were prohibited from declaring and paying dividends and therefore, the dividend yield was zero.

Expected Volatility. The expected volatility of options granted was estimated based upon our historical share price volatility based on the expected term of the underlying grants, or approximately 45%.

Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants, or approximately 1.1%.

Expected Term. The expected term of options granted was determined by considering employees’ historical exercise patterns, or approximately 4.8 years. We will continue to review our estimate in the future and adjust it, if necessary, due to changes in our historical exercises.

In accordance with U.S. GAAP, we assess the probability that the performance conditions of any performance-based restricted stock units (“PBRSUs”) will be achieved and record share based compensation expense based on the probable outcome of that performance condition. Vesting of PBRSUs is dependent upon continued employment and achievement of defined performance goals for the year, which is based upon Adjusted EBITDA as defined and determined by the Compensation Committee of the Board of Directors. We recognize the share based compensation expense ratably over the implied service period. PBRSUs will vest no later than March 15 of the year after they are granted. We may make changes to our assessment of probability and therefore, adjust share based compensation expense accordingly throughout the vesting period. During the three months ended March 31, 2017, we did not grant PBRSUs.

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 may include certain items treated as discrete events to arrive at an estimated overall tax amount.

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.

Contingent Liabilities

We may become involved in litigation or other financial claims 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.

3. Accounting Standards Updates



Standard	Description	Date of Adoption	Application	Effect on the Consolidated Financial Statements (or Other Significant Matters)
ASU 2017-04, Intangibles— Goodwill and Other (Topic 350)	The primary amendments in this update simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.	January 1, 2017	Prospective	We early adopted this update to reduce the cost and complexity of our annual and interim goodwill impairment analyses. There was no material impact on our condensed consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)	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. Additionally, various updates have been issued during 2015 and 2016 to clarify the guidance in Topic 606.	January 1, 2018	1) Retrospec-tively to each prior reporting period presented or 2) retrospectively with the cumulative effect of initially applying these updates recognized at the date of initial application.	We are currently in the planning stage and have not yet begun implementation of the new standard. We have not yet determined the potential impact on our consolidated financial statements or the method by which we will adopt the standard.
ASU 2016-02, Leases (Topic 842)	The primary amendments in this update require the recognition of lease assets and lease liabilities on the balance sheet, as well as certain qualitative disclosures regarding leasing arrangements.	January 1, 2019	Modified retrospective	We are currently in the planning stage and have not yet begun implementation of the new standard. We have not yet determined the potential impact on our consolidated financial statements.
ASU 2016-15, Statement of Cash Flows (Topic 230)	This update clarifies the guidance regarding the classification of operating, investing, and financing activities for certain types of cash receipts and payments.	January 1, 2018	Retrospective	We are currently in the process of evaluating the impact of adoption, if any, on our consolidated financial statements.

4. Assets and Liabilities Held for Sale

In March 2017, we executed an agreement to dispose of our Habits at Work business, the results of which are recorded in our Personal Information Services segment. The disposition will be effective June 1, 2017. Habits at Work met all the criteria under U.S. GAAP to classify its assets and liabilities as held for sale in our condensed consolidated balance sheets as of March 31, 2017. The

disposal does not represent a strategic shift that will have a major effect on operations and financial results, and therefore, it is not expected to qualify as a discontinued operation.

In late 2016, our Board of Directors approved a plan to sell Captira, which comprises our Bail Bonds Industry Solutions segment. Captira met all the criteria under U.S. GAAP to classify its assets and liabilities as held for sale in our consolidated balance sheets as of December 31, 2016. Effective January 31, 2017, we completed the sale of Captira for a nominal amount, which marks the conclusion of our operations in the Bail Bonds Industry Solutions segment. The disposal does not represent a strategic shift that will have a major effect on operations and financial results, and therefore, it is does not qualify as a discontinued operation. For information on the operating results of the Bail Bonds Industry Solutions segment, please see "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations."

The major classes of assets and liabilities held for sale related to Habits at Work and Captira in the condensed consolidated balance sheets consisted of the following:



	March 31, 2017			December 31, 2016
Assets of disposal group held for sale:
Cash and cash equivalents	$	—		$	321
Accounts receivable, net	—			177
Prepaid expenses and other current assets	10			97
Property and equipment, net	67			247
Other assets	9			6
Write-down to fair value	(86		)	(744		)
Total assets of disposal group held for sale	$	—		$	104

Liabilities of disposal group held for sale:
Accounts payable	$	—		$	9
Accrued expenses and other current liabilities	—			15
Accrued payroll and employee benefits	—			80
Total liabilities of disposal group held for sale	$	—		$	104

As part of the required evaluation under U.S. GAAP, we determined that the approximate fair value less costs to sell the businesses were significantly lower than the carrying value of the net assets. As a result, we recorded an impairment charge of $86 thousand related to Habits at Work for the three months ended March 31, 2017, which is included in impairment of intangibles and other assets in our condensed consolidated statements of operations.

5. Loss Per Common Share

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 months ended March 31, 2017 and 2016, options to purchase common stock and unvested restricted stock units estimated to be 3.4 million and 3.0 million shares, respectively, 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):



	Three Months Ended March 31,
	2017			2016
Net loss—basic and diluted	$	(4,802	)	$	(4,266	)

Weighted average common shares outstanding—basic	23,675			22,887
Dilutive effect of common stock equivalents	—			—
Weighted average common shares outstanding—diluted	23,675			22,887

Net loss per common share—basic and diluted	$	(0.20	)	$	(0.19	)

6. Fair Value Measurement

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

For financial instruments such as cash and cash equivalents, trade accounts receivables, inventory, leases payable, accounts payable and short-term debt, we consider the recorded value of the financial instruments to approximate the fair value based on the liquidity of these financial instruments. As of March 31, 2017, the carrying value of our long-term debt approximated its fair value due to the variable interest rate. We did not have any transfers in or out of Level 1 and Level 2 in the three months ended March 31, 2017 or in the year ended December 31, 2016. We did not hold any significant instruments that are measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016. For additional information related to our valuation technique and inputs used in the fair value measurement, please see Note 11.

7. Prepaid Expenses and Other Current Assets

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



	March 31, 2017		December 31, 2016
	(In thousands)
Prepaid services	$	726	$	873
Other prepaid contracts	2,456		2,300
Restricted cash	260		375
Other	217		316
Total	$	3,659	$	3,864

8. Inventory

We had an inventory balance of $250 thousand as of March 31, 2017 and December 31, 2016, which was equal to the estimated salvage value of raw materials for our Pet Health Monitoring segment. We did not record a charge for excess or obsolete inventory in the three months ended March 31, 2017 or 2016.

9. Deferred Subscription Solicitation and Commission Costs

Total deferred subscription solicitation and commission costs included in the accompanying condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016 were $6.0 million and $5.1 million, respectively. Amortization of deferred subscription solicitation and commission costs, which is included in either marketing or commission expense in our condensed consolidated statements of operations, for the three months ended March 31, 2017 and 2016 was $3.1 million and $3.9 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 March 31, 2017 and 2016 were $576 thousand and $953 thousand, respectively.

10. Internally Developed Capitalized Software

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 months ended March 31, 2017 or 2016. We record depreciation for internally developed capitalized software in depreciation expense in our condensed consolidated statements of operations. Activity in our internally developed capitalized software during the three months ended March 31, 2017 and 2016 was as follows (in thousands):



	Gross Carrying Amount		Accumulated Depreciation			Net Carrying Amount
Balance at December 31, 2016	$	15,015	$	(7,931	)	$	7,084
Additions	729		—			729
Depreciation expense	—		(932		)	(932		)
Balance at March 31, 2017	$	15,744	$	(8,863	)	$	6,881
						$	—
Balance at December 31, 2015	$	14,582	$	(6,880	)	$	7,702
Depreciation expense	—		(919		)	(919		)
Balance at March 31, 2016	$	14,582	$	(7,799	)	$	6,783

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



For the remaining nine months ending December 31, 2017	$	2,569
For the years ending December 31:
2018	2,643
2019	1,649
2020	20
Total	$	6,881

11. Goodwill and Intangible Assets

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



	Personal Information Services Reporting Unit			Insurance and Other Consumer Services Reporting Unit			Bail Bonds Industry Solutions Reporting Unit			Totals
Balance as of March 31, 2017
Gross carrying amount	$	35,253		$	10,665		$	—		$	45,918
Accumulated impairment losses	(25,837		)	(10,318		)	—			(36,155		)
Net carrying value of goodwill	$	9,416		$	347		$	—		$	9,763

Balance as of December 31, 2016
Gross carrying amount	$	35,253		$	10,665		$	1,390		$	47,308
Accumulated impairment losses	(25,837		)	(10,318		)	(1,390		)	(37,545		)
Net carrying value of goodwill	$	9,416		$	347		$	—		$	9,763

During the three months ended March 31, 2017, we did not identify any triggering events related to our goodwill and therefore were not required to test our goodwill for impairment. To the extent our Personal Information Services or Insurance and Other Consumer Services reporting units realize unfavorable actual results compared to forecasted results, or decrease forecasted results 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.

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



	Gross Carrying Amount			Accumulated Amortization			Impairment			Net Carrying Amount
As of March 31, 2017:
Amortizable intangible assets:
Customer related	$	38,874		$	(38,857	)	$	—		$	17
Marketing related	2,929			(2,883		)	—			46
Technology related	2,771			(2,671		)	—			100
Subtotal	44,574			(44,411		)	—			163
Less: held for sale	(925		)	925			—			—
Total amortizable intangible assets at March 31, 2017	$	43,649		$	(43,486	)	$	—		$	163
As of December 31, 2016:
Amortizable intangible assets:
Customer related	$	38,874		$	(38,822	)	$	(17	)	$	35
Marketing related	3,336			(3,143		)	(138		)	55
Technology related	4,068			(3,197		)	(751		)	120
Subtotal	46,278			(45,162		)	(906		)	210
Less: held for sale	(1,704		)	1,704			—			—
Total amortizable intangible assets at December 31, 2016	$	44,574		$	(43,458	)	$	(906	)	$	210

During the three months ended March 31, 2017, there were no adverse changes in our long-lived assets, which would cause a need for an impairment analysis. Intangible assets decreased in the year ended December 31, 2016 primarily due to the full impairment of assets associated with the decision to wind down our Pet Health Monitoring segment and exit the Habits at Work business. We believe there is a remote possibility of recoverability of these intangible assets as we do not forecast positive cash flows for these businesses.

Intangible assets are amortized over a period of two to ten years. For the three months ended March 31, 2017 and 2016, we had an aggregate amortization expense of $47 thousand and $192 thousand, respectively, which was included in amortization expense in our condensed consolidated statements of operations. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):



For the remaining nine months ending December 31, 2017	$	105
For the year ending December 31, 2018	58
Total	$	163

12. Accrued Expenses and Other Current Liabilities

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



	March 31, 2017		December 31, 2016
	(In thousands)
Accrued marketing	$	1,096	$	1,121
Accrued cost of sales, including credit bureau costs	4,876		5,480
Accrued general and administrative expense and professional fees	1,613		2,190
Insurance premiums	367		360
Estimated liability for non-income business taxes	—		94
Other	1,892		1,823
Total	$	9,844	$	11,068

13. Accrued Payroll and Employee Benefits

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



	March 31,		December 31,
	2017		2016
	(In thousands)
Accrued payroll	$	156	$	1,131
Accrued benefits	1,672		1,685
Accrued severance	1,632		1,440
Total accrued payroll and employee benefits	$	3,460	$	4,256

In the three months ended March 31, 2017, we recorded $1.2 million of expense for severance and severance-related benefits for involuntary terminations, and we paid severance and severance-related benefits of $1.0 million. In the three months ended March 31, 2016, we reduced severance expense by $176 thousand, and we paid severance and severance-related benefits of $1.6 million.

14. Commitments and Contingencies

Leases

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



	Operating Leases		Capital Leases
	(In thousands)
For the remaining nine months ending December 31, 2017	$	2,303	$	416
For the years ending December 31:
2018	3,394		550
2019	1,472		401
2020	109		21
2021	93		7
2022	—		—
Total minimum lease payments	$	7,371	1,395
Less: amount representing interest			(194		)
Present value of minimum lease payments			1,201
Less: current obligation			(450		)
Long-term obligations under capital lease			$	751

During the three months ended March 31, 2017, we did not enter into any new capital lease arrangements. During the three months ended March 31, 2016, we entered into additional capital lease agreements for approximately $137 thousand. We recorded the lease liability at the fair market value of the underlying assets in our condensed consolidated balance sheets. Rental expenses included in general and administrative expenses for the three months ended March 31, 2017 and 2016 were $743 thousand and $712 thousand, respectively.

Legal Proceedings

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, would result in a material adverse change in our business or financial condition.

In July 2012, the Consumer Financial Protection Bureau (“CFPB”) served a Civil Investigative Demand on Intersections Inc. with respect to its billing practices for identity protection and credit monitoring products sold and enrolled through depositary customers. An action was filed on July 1, 2015 in the United States District Court for the Eastern District of Virginia, Alexandria Division, and a Stipulated Final Judgment and Order (the “Order”) concurrently entered, entitled Consumer Financial Protection Bureau v. Intersections Inc. Without admitting or denying the allegations in the complaint, we agreed to implement a satisfactory compliance plan to comply with the Order and to provide a progress update. We paid a civil monetary penalty of $1.2 million in 2015, and in the year ended December 31, 2016, we paid $63 thousand to 661 customers who had not previously received refunds for periods where the full benefit of the service was not delivered. Intersections also submitted an amended compliance plan to the CFPB, to which it responded with no objections on February 1, 2017.

In January 2013, the Office of the West Virginia Attorney General (“WVAG”) served Intersections Insurance Services Inc. (“IISI”) with a complaint that the WVAG had filed in the Circuit Court of Mason County, West Virginia on October 2, 2012. The complaint alleges violations of West Virginia consumer protection laws based on the marketing of unspecified products. IISI filed a motion for a more definite statement, which was denied by the court in December, 2013. On January 21, 2014, IISI filed an answer to the complaint. An administrative conference occurred on May 26, 2016, for the purpose of development of scheduling order to manage the case through the beginning of a trial. A scheduling order is anticipated to be forthcoming within the three months ending June 30, 2017. On April 21, 2017, the West Virginia Court granted motion of the WVAG to add Intersections Inc. as a defendant in the complaint and issued an order denying our motion for summary judgment.

On March 27, 2017, Jeff Noce, a former employee of our i4c subsidiary, served a Complaint, filed in the Circuit Court of Fairfax County, Virginia against i4c Innovations LLC and Intersections Inc. The Complaint alleges a dispute regarding the employment and termination of Mr. Noce. We believe the allegations in the Complaint are without merit and intend to vigorously defend this matter.

For information regarding our policy for analyzing legal proceedings, please see “Contingent Liabilities” in Note 2. As of March 31, 2017, we do not have any 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 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 in our condensed consolidated financial statements, taken as a whole.

Other

We may have indirect tax obligations in state and other jurisdictions. The following table summarizes the non-income business tax liability activity during the three months ended March 31, 2017 and 2016 (in thousands):



	Non-Income Business Tax Liability
	2017			2016
Balance at December 31	$	94		$	3,427
Adjustments to existing liabilities	—			54
Payments	(94		)	(21		)
Balance at March 31	$	—		$	3,460

We continue to correspond with the applicable authorities in an effort toward resolution of our ongoing audits using a variety of settlement options including, but not limited to, voluntary disclosures, negotiation and standard appeals process, and we may adjust the liability at such time. Additionally, we continue to analyze what other obligations, if any, we have to other state taxing authorities. We are currently under audit by a state for indirect taxes. The audit is ongoing and no assessment has been received by the Company, however, we estimate there is more than a remote possibility that the audit may result in a liability. Due to the unique facts and circumstances of this matter, we are unable to provide a reasonable estimate of the liability, if any, that may result from this audit. We believe it is reasonably possible that other states may approach us or that the scope of the taxable base in any state may also increase. However, it is not possible to predict the potential amount of future payments due to the unique facts and circumstances involved.

In the three months ended March 31, 2017, we entered into contracts, pursuant to which we agreed to minimum, non-refundable installment payments totaling approximately $886 thousand, payable in monthly and yearly installments through December 31, 2018. These amounts are expensed on a pro-rata basis and are recorded in cost of revenue and general and administrative expenses in our condensed consolidated statements of operations. For additional information on other minimum, non-refundable contracts, please see Note 19 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K.

15. Other Long-Term Liabilities

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



	March 31, 2017		December 31, 2016
	(In thousands)
Deferred rent	$	1,750	$	1,850
Uncertain tax positions, interest and penalties not recognized	1,602		1,582
Accrued general and administrative expenses	—		4
Total other long-term liabilities	$	3,352	$	3,436

16. Debt and Other Financing

On March 21, 2016, we and our subsidiaries entered into the Prior Credit Agreement with Crystal Financial SPV LLC. In connection with the Prior Credit Agreement, we and our subsidiaries also entered into a security agreement, a pledge and security agreement, an intellectual property security agreement and other related documents. The Prior Credit Agreement provided for a $20.0 million term loan, which was fully funded at closing, with a maturity date of March 21, 2019 unless the facility is otherwise terminated pursuant to the terms of the Prior Credit Agreement. We invested $15.0 million of the net proceeds at closing in our i4c subsidiary and for general corporate purposes. The remaining net proceeds were used for general corporate purposes of our other businesses. The Prior Credit Agreement allowed for the orderly wind down of our Pet Health Monitoring segment and the exit of our Bail Bonds Industry Solutions segment and the Habits at Work businesses.

Amounts borrowed under the Prior Credit Agreement bear interest at the greater of LIBOR plus 10% per annum or 10.5% per annum. Interest is payable monthly. The aggregate principal amount of the term loans outstanding must be repaid quarterly starting September 30, 2017 and on the last day of each fiscal quarter thereafter in the quarterly amount of $1.4 million. Certain income tax refunds specified in the Prior Credit Agreement, if agreed upon subsequent to June 30, 2017, must be used to repay principal in the quarter in which we receive them and will be applied to the scheduled quarterly principal payment for that quarter. The Prior Credit Agreement also requires the prepayment of the aggregate principal amount outstanding in an amount equal to 50% of our excess cash flow (as defined in the Prior Credit Agreement) for each fiscal year commencing with the fiscal year ending December 31, 2017 and continuing thereafter. Certain other events defined in the Prior Credit Agreement require prepayment of the aggregate principal amount of the term loan, including all or a portion of proceeds received from asset dispositions (except for proceeds from the sale of assets in our i4c subsidiary of up to $2.2 million), casualty events, extraordinary receipts, and equity issuances. In addition, we are permitted to invest up to an additional $2.2 million in our i4c subsidiary to complete the wind-down, which is expected to be completed by June 30, 2017 (or such later date as the Administrative Agent may permit). Once amounts borrowed have been paid or prepaid, they may not be reborrowed.

The Prior Credit Agreement contains certain customary covenants, including among other things covenants that limit or restrict the following: the incurrence of liens; the making of investments including a prohibition of any capital contributions to our subsidiary i4c other than from the proceeds of the term loan made on the closing date and fair and reasonable allocation of overhead and administrative expenses; 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, except for the exiting of the aforementioned businesses; the declaration of certain dividends or distributions; transactions with affiliates (other than parties to the Prior Credit 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 guarantor and enter into certain security documents.

The Prior Credit Agreement requires us to maintain at all times a minimum cash on hand amount, as defined in the Prior Credit Agreement, of at least 25% of the total amount outstanding under the term loan until June 30, 2017 and 40% of the total amount outstanding under the term loan subsequent to June 30, 2017. The Prior Credit Agreement also requires us to maintain on a quarterly basis a maximum churn (defined as (i) the sum of subscribers who have discontinued the provision of services provided under certain of our customer’s agreements as of the end of any fiscal month divided by (ii) the aggregate total number of all active subscribers under that certain customer agreement as of the first day of such fiscal month, expressed as a percentage) of 1.875%. Further, if our rights to provide services to subscribers under our agreements with Bank of America cease as a result of Bank of America transferring the provision of such services or using a different service provider and such cessation results in greater than a 20% decline in our consolidated revenue, a covenant violation exists under the Prior Credit Agreement. We are also required to maintain compliance on a quarterly basis with specified minimum consolidated EBITDA (as defined in the Prior Credit Agreement and adjusted for certain non-cash, non-recurring and other items, and up to $4.3 million of non-recurring charges incurred in the wind-down events). As of March 31, 2017, we were in compliance with all such covenants.

As of March 31, 2017, $13.4 million was outstanding under the Prior Credit Agreement, which was presented net of unamortized debt issuance costs of $1.0 million in our condensed consolidated balance sheets in accordance with U.S. GAAP. As of March 31, 2017, $3.6 million, net, was classified as short-term, which included the minimum maturities as well as our estimated required prepayments, as described above.

Subsequent to March 31, 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with a new $20.0 million term loan facility, which was fully funded at closing, with PEAK6 Investments, L.P. ("New Credit Agreement"). Under the New Credit Agreement, minimum required maturities are as follows (in thousands):



For the remaining nine months ending December 31, 2017	$	—
For the years ending December 31:
2018	—
2019	1,250
2020	5,000
2021	13,750
Total outstanding	$	20,000

For additional information on the New Credit Agreement, please see Note 21.

17. Income Taxes

Our consolidated effective tax rate for the three months ended March 31, 2017 and 2016 was 0.2% and (0.2)%, respectively. The rates remained relatively flat due to the continued valuation allowance.

We continued to evaluate all significant available positive and negative evidence including, but not limited to, our 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. As a result, we were not able to recognize a net tax benefit associated with our pre-tax loss in the three months ended March 31, 2017, as there has been no change to the conclusion from the year ended December 31, 2016 that it was more likely than not that we would not generate sufficient taxable income in the foreseeable future to realize our net deferred tax assets.

The amount of deferred tax assets considered realizable as of March 31, 2017 could be adjusted if facts and circumstances in future reporting periods change, including, but not limited to, generating sufficient future taxable income in the carryforward periods. If certain substantial changes in the entity’s ownership were to occur, there would be an annual limitation on the amount of the carryforwards that can be utilized in the future. The remaining deferred tax liability as of March 31, 2017 relates to an indefinite-lived intangible.

There were no material changes to our uncertain tax positions during the three months ended March 31, 2017 or 2016.

18. Stockholders’ Equity

Share Based Compensation

We currently issue equity and equity-based awards under the 2014 Stock Incentive Plan (the “Plan”), and we have three inactive stock incentive plans: the 1999 Stock Option Plan, the 2004 Stock Option Plan and the 2006 Stock Incentive Plan. As of March 31, 2017, we have 2.5 million shares of common stock available for future grants of awards under the Plan, and awards for approximately 3.2 million shares are outstanding under all of our active and inactive plans. In April 2017, our Board of Directors approved, and recommended that our stockholders approve, a second amendment to the 2014 Plan to increase the number of shares authorized and reserved for issuance thereunder by 4.0 million shares, from 5.5 million shares to 9.5 million shares. We are seeking stockholder approval of this amendment at our Annual Meeting of Stockholders scheduled to be held on May 31, 2017. If approved by our stockholders, the proposed amendment will automatically become effective upon approval. 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.

Stock Options

Total share based compensation expense recognized for stock options, which is included in general and administrative expenses in our condensed consolidated statements of operations, for the three months ended March 31, 2017 was $34 thousand. There was no share based compensation expense recognized for stock options in the three months ended March 31, 2016.

The following table summarizes our stock option activity during the three months ended March 31, 2017:



	Number of Shares	Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term
				(In thousands)		(In years)
Outstanding at December 31, 2016	861,366	$	3.99
Granted	—	$	—
Canceled	(8,000)	$	9.90
Outstanding at March 31, 2017	853,366	$	3.94	$	815	5.32
Exercisable at March 31, 2017	474,366	$	5.25	$	163	2.21

There were no options granted or exercised during the three months ended March 31, 2017 or 2016.

As of March 31, 2017, there was $241 thousand of total unrecognized compensation cost related to unvested stock option arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.8 years.

Restricted Stock Units and Restricted Stock Awards

Total share based compensation expense recognized for restricted stock units and restricted stock awards (together, “RSUs”), which is included in general and administrative expense in our condensed consolidated statements of operations, for the three months ended March 31, 2017 and 2016 was $1.2 million and $850 thousand, respectively.

The following table summarizes the activity of our RSUs during the three months ended March 31, 2017:



	Number of RSUs	Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2016	3,363,946	$	2.78
Granted	761,642	$	3.99
Canceled (1)	(1,532,278)	$	2.45
Vested	(256,106)	$	3.28
Outstanding at March 31, 2017	2,337,204	$	3.33

____________________


(1)	Includes shares net-settled to cover statutory employee taxes related to the vesting of restricted stock awards, which increased treasury shares by 8 thousand in the three months ended March 31, 2017.

As of March 31, 2017, there was $6.1 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 2.4 years.

Other

In addition to the stock options and RSUs, we determined the majority of the earn-out provisions in the business we acquired in March 2015 from Habits at Work to be share based compensation expense. In the three months ended March 31, 2017, we reduced share based compensation expense by $57 thousand due to actual Habits at Work performance being lower than forecasted. In the three months ended March 31, 2016, we recorded share based compensation expense of $305 thousand, which is included in general and administrative expenses in our condensed consolidated financial statements. Due to the exit of the Habits at Work business, there is no remaining unrecognized compensation expense.

As a result of shares withheld for tax purposes on the vesting of a restricted stock award, we increased our treasury shares by 8 thousand in the three months ended March 31, 2017. Under the Prior Credit Agreement, we were prohibited from declaring and paying ordinary cash or stock dividends or repurchasing any shares of common stock. For additional information, please see Note 21.

19. Related Party Transactions

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 and application development. In connection with these agreements, we paid monthly installments totaling $216 thousand in each of the three month periods ended March 31, 2017 and 2016. These amounts are included within cost of revenue and general and administrative expenses in our condensed consolidated statements of operations. As of March 31, 2017 and December 31, 2016, we owed $70 thousand to DMS under this agreement.

In September 2016 and February 2017, we entered into data services agreements with DMS, under which DMS will provide us application development services. In the three months ended March 31, 2017, we paid $430 thousand for the development, implementation, and monthly service fees related to the current agreements. As of March 31, 2017 and December 31, 2016, we owed $185 thousand and $92 thousand, respectively, to DMS under the current agreements.

Loeb Partners Corporation – In connection with the closing of the Prior Credit Agreement, we paid $553 thousand in advisory fees in the three months ended March 31, 2016 to Loeb Partners Corporation. Loeb Partners Corporation is an affiliate of Loeb Holding Corporation. One of the members of our Board of Directors is the beneficial owner of a majority of the voting stock of Loeb Holding Corporation, and is the Chairman and Chief Executive Officer of Loeb Partners Corporation.

20. Segment and Geographic Information

Our products and services were grouped into four reportable segments during the three months ended March 31, 2017 and 2016: Personal Information Services, Insurance and Other Consumer Services, Pet Health Monitoring and Bail Bonds Industry Solutions. In December 2016, we ceased primary operations in the Pet Health Monitoring segment, and in January 2017, we sold the business comprising the Bail Bonds Industry Solutions segment. Corporate headquarter office transactions including, but not limited to, payroll, share based compensation and other expenses related to our Chairman and non-employee Board of Directors are reported in our Corporate business unit.

Our Personal Information Services segment offers identity theft and privacy protection as well as credit monitoring services for consumers to understand, monitor, manage and protect their personal information and privacy. Our Insurance and Other Consumer Services segment includes our insurance and other membership products and services.

The following table sets forth segment information for the three months ended March 31, 2017 and 2016:



	Personal Information Services			Insurance and Other Consumer Services			Pet Health Monitoring			Bail Bonds Industry Solutions			Corporate			Consolidated
	(in thousands)
Three months ended March 31, 2017
Revenue	$	38,610		$	1,657		$	—		$	182		$	—		$	40,449
Depreciation	1,255			32			3			—			10			1,300
Amortization	47			—			—			—			—			47
(Loss) income from operations	(2,738		)	378			(598		)	(46		)	(1,250		)	(4,254		)
(Loss) income before income taxes	(3,296		)	378			(598		)	(46		)	(1,250		)	(4,812		)
Three months ended March 31, 2016
Revenue	$	42,479		$	2,661		$	15		$	493		$	—		$	45,648
Depreciation	1,154			53			407			20			23			1,657
Amortization	46			128			18			—			—			192
Income (loss) from operations	4,075			(258		)	(5,132		)	(98		)	(2,518		)	(3,931		)
Income (loss) before income taxes	3,859			(258		)	(5,129		)	(98		)	(2,633		)	(4,259		)

In conjunction with our singular refocus on our identity and privacy protection services, we changed our policy of allocating general and administrative expenses from our Corporate business unit into our other segments, which resulted in a change in our measurement of segment profit and loss. Beginning in 2017, we directly charge our Personal Information Services segment for the majority of general and administrative expenses including executive, legal, human resources, finance and internal audit expenses. We have elected not to recast our condensed consolidated financial statements for the three months ended March 31, 2016. The change in measurement would have had the approximate effects of a $2.0 million increase in loss from operations in our Personal Information Services segment, a $1.5 million decrease in loss from operations in our Corporate business unit and insignificant changes in our other segments for the three months ended March 31, 2016.

The following table sets forth segment information as of March 31, 2017 and December 31, 2016:



	As of March 31, 2017				As of December 31, 2016
	Property and Equipment, net		Total Assets		Property and Equipment, net			Total Assets
	(in thousands)
Segment:
Personal Information Services	$	10,344	$	35,147	$	10,391		$	36,123
Insurance and Other Consumer Services	92		10,827		123			11,092
Pet Health Monitoring	17		396		21			492
Bail Bonds Industry Solutions	—		—		247			137
Corporate	—		854		76			5,013
Subtotal	10,453		47,224		10,858			52,857
Less: held for sale	—		—		(247		)	—
Consolidated	$	10,453	$	47,224	$	10,611		$	52,857

For additional information on assets held for sale, please see Note 4.

We generated revenue in the following geographic areas:



	United States		Canada		Consolidated
	(in thousands)
Revenue:
For the three months ended March 31, 2017	$	37,390	$	3,059	$	40,449
For the three months ended March 31, 2016	$	42,627	$	3,021	$	45,648

21. Subsequent Events

On April 20, 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with a new $20.0 million term loan facility ("New Credit Agreement"), which was fully funded at closing, with PEAK6 Investments, L.P. ("PEAK6 Investments"). The New Credit Agreement extends the maturity date, reduces and defers mandatory quarterly principal payments, and carries a lower interest rate compared to the Prior Credit Agreement. The maturity date of the New Credit Agreement is April 20, 2021 with quarterly principal payments of $1.3 million commencing on September 30, 2019. The initial interest rate is 9.486% per annum, to be adjusted annually on March 31 to 7.75% plus 1 year LIBOR.

We used approximately $13.9 million of the net proceeds from the New Credit Agreement to repay in full the aggregate principal amount outstanding under the Prior Credit Agreement and to pay related interest and prepayment penalties, transaction fees and expenses. We expect to use the remainder of the proceeds from the New Credit Agreement for general corporate purposes, including to accelerate both subscriber acquisition and product development.

In connection with the New Credit Agreement, PEAK6 Investments purchased, for an aggregate purchase price of $1.5 million in cash, a warrant (the "Warrant") to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $5.00 per share. Additionally, in connection with the New Credit Agreement, we used the proceeds from the sale of the Warrant to repurchase approximately 419 thousand shares of our common stock, pursuant to a redemption agreement from PEAK6 Capital Management LLC at a price of $3.60 per share, for an aggregate repurchase price of approximately $1.5 million. PEAK6 Capital Management LLC is an affiliate of PEAK6 Investments. For additional information on the New Credit Agreement, please see "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" below.


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2016 and 2015, and as of December 31, 2016 and 2015, included in our Annual Report on Form 10-K for the year ended December 31, 2016 (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 success of our strategic objectives, our ability to generate revenue from our partner sales strategy and business development pipeline with our distribution partners; the impact of shutting down our Pet Health Monitoring segment; the timing and success of new product launches and other growth initiatives, including our new Identity Guard^® with Watson^™ product; the continuing impact of the regulatory environment on our business; the continued dependence on a small number of financial institutions for a majority of our revenue and to service our U.S. financial institution customer base; our ability to execute our strategy and previously announced transformation plan; our incurring additional restructuring charges; our incurring additional impairment costs or charges on goodwill and/or assets; our ability to control costs; our ability to maintain sufficient liquidity and produce sufficient cash flow to fund our business, growth strategy and debt service obligations; and our needs for additional capital to grow our business, including our ability to maintain compliance with the covenants under our term loan 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 “Forward-Looking Statements,” “Item 1. Business—Government Regulation” and “Item 1A. Risk Factors” in the Company’s most recent Annual Report on Form 10-K and herein and in its recent 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

Recent Developments

On April 20, 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement (as defined below) with a new $20.0 million term loan facility ("New Credit Agreement"), which was fully funded at closing, with PEAK6 Investments, L.P. ("PEAK6 Investments"). The New Credit Agreement extends the maturity date, reduces and defers mandatory quarterly principal payments, and carries a lower interest rate compared to the Prior Credit Agreement. The maturity date of the New Credit Agreement is

April 20, 2021 with quarterly principal payments of $1.3 million commencing on September 30, 2019. The initial interest rate is 9.486% per annum, to be adjusted annually on March 31 to 7.75% plus 1 year LIBOR.

We used approximately $13.9 million of the net proceeds from the New Credit Agreement to repay in full the aggregate principal amount outstanding under the credit agreement dated as of March 21, 2016, as amended from time to time, among us, the other Credit Parties party thereto, Crystal Financial SPV LLC as term lender, and Crystal Financial LLC as administrative agent for the secured parties ("Prior Credit Agreement"), and to pay related interest and prepayment penalties, transaction fees and expenses. We expect to use the remainder of the proceeds from the New Credit Agreement for general corporate purposes, including to accelerate both subscriber acquisition and product development.

In connection with the New Credit Agreement, PEAK6 Investments purchased, for an aggregate purchase price of $1.5 million in cash, a warrant (the "Warrant") to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $5.00 per share. The Warrant is immediately exercisable and has a five year term. Additionally, in connection with the New Credit Agreement, we used the proceeds from the sale of the Warrant to repurchase approximately 419 thousand shares of our common stock, pursuant to a redemption agreement from PEAK6 Capital Management LLC at a price of $3.60 per share, for an aggregate repurchase price of approximately $1.5 million. PEAK6 Capital Management LLC is an affiliate of PEAK6 Investments. For additional information on the New Credit Agreement, please see "—Liquidity and Capital Resources" below.

Personal Information Services

Our Personal Information Services segment includes privacy, personal information security and identity theft monitoring and remediation services to help consumers understand, monitor, manage and protect against the risks associated with the inappropriate and sometimes criminal exposure of their personal information. Our current services include: providing credit reports, performing credit monitoring and providing educational credit scores and credit education; reports, monitoring and education about other personal information and risks, such as public records, identity validation, new account opening and Internet data risks; identity theft recovery services; identity theft cost reimbursement insurance of up to $1.0 million underwritten by a prominent insurance company; and software and other technology tools and services. Our resolution team applies its expertise to assist consumers with the remediation of confirmed identity theft events by providing pertinent documentation, communicating directly with creditors and placing fraud alerts on their behalf. We also offer breach response services to large and small organizations responding to compromises of sensitive personal information and other customer and employee data. We help these organizations notify the affected individuals and we provide the affected individuals with identity theft recovery and credit monitoring services. We continue to develop innovative new services and tools to add to our Identity Guard^® portfolio and address the increasing awareness by consumers of the risks associated with their personal information.

We believe the threat to consumers’ personal information goes beyond traditional credit monitoring. The proliferation of data breaches, the pervasive use of social media and the increased sophistication of cyber criminals requires a solution for consumers’ needs in the identity protection space. To effectively identify, manage and remediate these new threats to consumers, we launched Identity Guard^® with Watson^™ in 2016. Identity Guard^® with Watson^™ is an identity theft monitoring and privacy advisory solution that can be personalized to each individual’s specific needs and is designed to protect the entire family. Identity Guard^® with Watson^™ maximizes the power of IBM Watson^™ cognitive computing to offer consumers the traditional credit monitoring services as well as non-credit related preventative alert services, using previously unmonitored unstructured data sources and processes and safer web browsing tools. Identity Guard^® with Watson^™ also equips users to reduce their risk of identity theft by educating individuals on existing risks to their personal information and recommending personalized remediation actions. We believe it is the first product of its kind that uses natural language processing and machine learning to reveal insights from large amounts of unstructured data, delivered through the IBM Watson^™ technology platform. This platform is more scalable and adaptable than our legacy platform, which we believe will enable us to develop innovative new products and features for consumers and organizations more readily than in the past. We plan to focus on making Identity Guard^® with Watson^™ our leading offering to consumers in the U.S. and Canada.

We derive the majority of our revenue from historical agreements with U.S. financial institutions, which constituted approximately 57% and 60% of our Personal Information Services segment revenue in the three months ended March 31, 2017 and 2016, respectively. Revenue from our largest client, Bank of America, constituted approximately 46% and 48% of our Personal Information Services segment revenue in the three months ended March 31, 2017 and 2016, respectively. Bank of America ceased marketing of our services in 2011. Under our agreements with Bank of America, 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. Bank of America, however, has the right to require us to cease providing services to its customers under existing subscriptions if the contract is terminated due to material breach by us or based on various events such as certain legal or regulatory changes, a party’s bankruptcy or insolvency, or other events. Furthermore, we are dependent on Bank of America to cooperate in continued servicing, including subscriber billing. We did not generate any new subscribers from Bank of America or other U.S. financial institution clients in 2017 or 2016, as all marketing of our products by our financial institution clients in the U.S. was terminated in both our Personal Information Services and Insurance and Other Consumer Services segments.

In 2016 and so far in 2017, we have continued to expand our business relationships with new partners including retail, communication and other industrial partners, as well as partnering with employers to offer Identity Guard^® as an employee benefit option. We also expanded our internal business development and client relationship divisions to ensure wider coverage across the U.S., and we made investments in our internal systems and member platforms in order to build and enhance our partner distribution channels and generate subscriber growth. We continue to develop, improve and expand upon all of these initiatives.

Insurance and Other Consumer Services

Other

Critical Accounting Policies

Management Estimates

In preparing our condensed consolidated financial statements, we make estimates and assumptions that can have a significant impact on our 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 protection services, 2) insurance services and 3) other monthly membership products and transaction services.

Identity Theft Protection Services

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.

Insurance Services

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

Other Membership Products and Transaction Services

Goodwill, Identifiable Intangibles and Other Long-Lived Assets

could have a significant impact on the recoverability of these assets and could have a material impact in our consolidated financial statements.

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 our Corporate business unit. 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.

Debt Issuance Costs

Classification of Debt

In March 2016, we and our subsidiaries entered into the Prior Credit Agreement. Pursuant to the Prior Credit Agreement, we were required to make certain prepayments on our term loan with Crystal Financial SPV LLC in addition to scheduled quarterly repayments, including but not limited to proceeds received from certain tax refunds, asset dispositions, extraordinary receipts, excess cash flows (as defined in the Prior Credit Agreement) and equity issuances. Scheduled quarterly repayments and estimated prepayments that we expect to remit in the next twelve months are classified as the current portion of long-term debt in our consolidated financial statements, net of unamortized debt issuance costs to be amortized in the next twelve months based on the current effective interest rate applied. Subsequent to March 31, 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with a new $20.0 million term loan facility, which was fully funded at closing, with PEAK6 Investments. For additional information, please see "—Liquidity and Capital Resources" below.

Share Based Compensation

The Compensation Committee administers the Plan, and the grants are approved by either the Compensation Committee or by appropriate members of Management in accordance with authority delegated by the Compensation Committee. Restricted stock units in the Plan that have expired, terminated, or been canceled or forfeited are available for issuance or use in connection with future awards.

Expected Dividend Yield. Under the Prior Credit Agreement, we were prohibited from declaring and paying dividends and therefore, the dividend yield was zero.

Income Taxes

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.

Contingent Liabilities

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.

Results of Operations

Three Months Ended March 31, 2017 and 2016 (all tables are in thousands, except percentages):

The condensed consolidated results of operations are as follows:



	Personal Information Services			Insurance and Other Consumer Services			Pet Health Monitoring			Bail Bonds Industry Solutions			Corporate			Consolidated
Three months ended March 31, 2017
Revenue	$	38,610		$	1,657		$	—		$	182		$	—		$	40,449
Operating expenses:
Marketing	3,448			—			15			2			—			3,465
Commission	9,110			636			—			2			—			9,748
Cost of revenue	12,821			153			4			25			—			13,003
General and administrative	14,451			458			646			199			1,240			16,994
Impairment of intangibles and other assets	86			—			(70		)	—			—			16
Depreciation	1,255			32			3			—			10			1,300
Amortization	47			—			—			—			—			47
Total operating expenses	41,348			1,279			598			228			1,250			44,703
(Loss) income from operations	$	(2,738	)	$	378		$	(598	)	$	(46	)	$	(1,250	)	$	(4,254	)

Three months ended March 31, 2016
Revenue	$	42,479		$	2,661		$	15		$	493		$	—		$	45,648
Operating expenses:
Marketing	3,767			8			776			14			—			4,565
Commission	10,344			872			—			5			—			11,221
Cost of revenue	14,418			130			205			45			—			14,798
General and administrative	8,675			1,728			3,741			507			2,495			17,146
Depreciation	1,154			53			407			20			23			1,657
Amortization	46			128			18			—			—			192
Total operating expenses	38,404			2,919			5,147			591			2,518			49,579
Income (loss) from operations	$	4,075		$	(258	)	$	(5,132	)	$	(98	)	$	(2,518	)	$	(3,931	)

Personal Information Services Segment

Loss from operations for this segment for the three months ended March 31, 2017, compared to income from operations for the three months ended March 31, 2016, is primarily due to increased general and administrative expenses and decreased revenue, partially offset by decreased cost of revenue and commission expenses.



	Three Months Ended March 31,
	2017			2016		Difference			%
Revenue	$	38,610		$	42,479	$	(3,869	)	(9.1	)%
Operating expenses:
Marketing	3,448			3,767		(319		)	(8.5	)%
Commission	9,110			10,344		(1,234		)	(11.9	)%
Cost of revenue	12,821			14,418		(1,597		)	(11.1	)%
General and administrative	14,451			8,675		5,776			66.6	%
Depreciation	1,255			1,154		101			8.8	%
Amortization	47			46		1			2.2	%
Total operating expenses	41,348			38,404		2,944			7.7	%
(Loss) income from operations	$	(2,738	)	$	4,075	$	(6,813	)	(167.2	)%

Revenue. The decrease in revenue is primarily due to a $3.4 million decline in revenue from our Bank of America and other financial institution clients, which is primarily the result of normal subscriber attrition within the portfolios we continue to service.

Due to our ceased marketing and retention efforts, we expect revenue and related earnings from our financial institution client base to continue to decrease.

The decrease in revenue and subscribers in our Identity Guard^® business line compared to the three months ended March 31, 2016 is primarily due to a decrease in subscribers acquired through one of our partners that is no longer marketing our products. Additionally, revenue for the three months ended March 31, 2017 from subscribers acquired through our direct-to-consumer marketing channels was lower than the prior year quarter primarily due to reduced marketing spending since late 2016, which has resulted in fewer subscriber acquisitions. We expect to continue a reduced level of direct-to-consumer marketing spending in the second quarter of 2017, which may result in reduced subscriber acquisitions and revenue from that channel. The revenue decline of our partner and direct-to-consumer channels were partially offset by increased revenue from breach response services. We expect revenue and subscribers acquired through our primary subscriber acquisition channels of partners and breach response services to grow in 2017.

We expect revenue and subscribers in our Canadian business lines to increase slightly in 2017. In August 2016, our Canadian joint marketing agreement began transitioning to a new partner, which was successfully completed in early 2017. We believe our new partner, who has previous experience in the identity theft monitoring business and has existing relationships with Canadian businesses, will be successful in growing our Canadian market share.

The following tables provide details of our Personal Information Services segment revenue and subscriber information for the three months ended March 31, 2017 and 2016:

Personal Information Services Segment Revenue



	Three Months Ended March 31,
	2017		2016		2017		2016
	(In thousands)				(Percent of total)
Bank of America	$	17,708	$	20,476	45.9	%	48.2	%
All other financial institution clients	4,195		4,859		10.9	%	11.5	%
Identity Guard^®	13,286		14,123		34.4	%	33.2	%
Canadian business lines	3,059		3,021		7.9	%	7.1	%
Other	362		—		0.9	%	0.0	%
Total Personal Information Services revenue	$	38,610	$	42,479	100.0	%	100.0	%

Personal Information Services Segment Subscribers



	Financial Institution		Identity Guard^®		Canadian Business Lines		Total
	(in thousands)
Balance at December 31, 2016	705		380		162		1,247
Additions	1		55		30		86
Cancellations	(24	)	(68	)	(32	)	(124	)
Balance at March 31, 2017	682		367		160		1,209

Balance at December 31, 2015	829		363		165		1,357
Reclassification (1)	(11	)	11		—		—
Additions	1		81		35		117
Cancellations	(33	)	(57	)	(36	)	(126	)
Balance at March 31, 2016	786		398		164		1,348

——————————————————


(1)	We periodically refine the criteria used to calculate and report our subscriber data. In the year ended December 31, 2016, we reclassified certain subscribers that receive our breach response services, and the associated revenue, from the Financial Institution category to the Identity Guard^® category.

Personal Information Services Operating Expenses

Marketing Expenses. Marketing expenses consisted of subscriber acquisition costs, including affiliate marketing payments, search engine marketing, web-based marketing and direct mail expenses such as printing and postage. In the three months ended March 31, 2017 and 2016, our marketing expenses resulted primarily from marketing activity for direct-to-consumer and Canadian subscriber acquisitions, which decreased in the three months ended March 31, 2017 compared to the three months ended March 31, 2016. Amortization of deferred subscription solicitation costs related to marketing of our products for the three months ended March

31, 2017 and 2016 was $2.9 million and $3.6 million, respectively. Marketing costs that do not meet the criteria for capitalization and are expensed as incurred for the three months ended March 31, 2017 and 2016 were $559 thousand and $162 thousand, respectively. We expect to focus our direct-to-consumer marketing spending on our most productive marketing programs which is expected to lower spending beginning in the second quarter of 2017 and may result in reduced subscriber acquisitions and revenue from that channel.

As a percentage of revenue, marketing expenses were 8.9% for each of the three months ended March 31, 2017 and 2016.

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, which is largely from our financial institution subscriber base. We expect our commission expenses to continue to decline in future quarters primarily due to normal attrition of subscribers in client portfolios with no new marketing activity.

As a percentage of revenue, commission expenses decreased to 23.6% for the three months ended March 31, 2017 from 24.4% for the three months ended March 31, 2016.

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

As a percentage of revenue, cost of revenue decreased slightly to 33.2% for three months ended March 31, 2017 from 33.9% for the three months ended March 31, 2016.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, marketing, information technology, legal, human resources and finance functions, as well as the majority of internal audit and other corporate overhead costs. Beginning in January 2017, we changed our overhead allocation measurement as a result of decisions to exit the Pet Health Monitoring and Bail Bonds Industry Solutions businesses. This change resulted in an increase of at least $2.0 million in general and administrative expenses in the three months ended March 31, 2017 compared to the prior year quarter, including share based compensation expense of $520 thousand. The increase was also a result of increased payroll-related expenses due to severance charges of approximately $1.3 million as well as increased headcount in our sales department and partner sales channel. As a result of the change in corporate overhead allocation, we expect unfavorable variances compared to the prior year quarters in general and administrative expenses for the remainder of 2017. For additional information, please see "Corporate" below.

As a percentage of revenue, general and administrative expenses increased significantly to 37.4% for the three months ended March 31, 2017 from 20.4% for the three months ended March 31, 2016.

Depreciation. Depreciation consists primarily of depreciation of our fixed assets and capitalized software. The increase is due to internally developed capitalized software related to the development of Identity Guard^® with Watson^™, the majority of which was placed into service in late 2016.

As a percentage of revenue, depreciation increased slightly to 3.3% for the three months ended March 31, 2017 from 2.7% for the three months ended March 31, 2016.

Goodwill. During the three months ended March 31, 2017, we did not identify any triggering events related to our goodwill and therefore were not required to test our goodwill for impairment. To the extent our Personal Information Services reporting unit realizes unfavorable actual results compared to forecasted results, or decreases forecasted results compared to previous forecasts, or in the event the estimated fair value of the reporting unit decreases, we may incur additional impairment charges in the future. Future impairment charges in this reporting unit will be recognized in the operating results of our Personal Information Services segment and our Insurance and Other Consumer Service segment, based on a pro-rata allocation.

Insurance and Other Consumer Services Segment

Income from operations for this segment for three months ended March 31, 2017, compared to loss from operations for the three months ended March 31, 2016, is primarily due to decreased general and administrative and commission expenses, partially offset by decreased revenue.



	Three Months Ended March 31,
	2017		2016			Difference			%
Revenue	$	1,657	$	2,661		$	(1,004	)	(37.7	)%
Operating expenses:
Marketing	—		8			(8		)	(100.0	)%
Commission	636		872			(236		)	(27.1	)%
Cost of revenue	153		130			23			17.7	%
General and administrative	458		1,728			(1,270		)	(73.5	)%
Depreciation	32		53			(21		)	(39.6	)%
Amortization	—		128			(128		)	(100.0	)%
Total operating expenses	1,279		2,919			(1,640		)	(56.2	)%
Income (loss) from operations	$	378	$	(258	)	$	636		246.5	%

Revenue. The decrease in revenue continues to be due to the attrition in our existing subscriber base as well as portfolio cancellations, 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 47 thousand subscribers as of March 31, 2017, which is a 25.4% decrease from our subscriber base of 63 thousand subscribers as of March 31, 2016.

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.

As a percentage of revenue, commission expenses increased to 38.4% for the three months ended March 31, 2017 from 32.8% for the three months ended March 31, 2016.

Cost of Revenue. Cost of revenue consists of the costs of operating our customer service center and network costs for subscribers.

As a percentage of revenue, cost of revenue increased to 9.2% for three months ended March 31, 2017 from 4.9% for the three months ended March 31, 2016.

General and Administrative Expenses. General and administrative expenses consist of personnel and facilities expenses associated with our sales, marketing, information technology and program and account management functions. The significant decrease is primarily due to decreased payroll-related costs as a result of the change in our policy of allocating general and administrative expenses from our Corporate business unit into our other segments. For additional information, please see "Corporate" below.

As a percentage of revenue, general and administrative expenses decreased significantly to 27.6% for the three months ended March 31, 2017 from 64.9% for the three months ended March 31, 2016.

Goodwill. During the three months ended March 31, 2017, we did not identify any triggering events related to our goodwill and therefore were not required to test our goodwill for impairment. To the extent our Insurance and Other Consumer Services reporting unit realizes unfavorable actual results compared to forecasted results, or decreases forecasted results compared to previous forecasts, or in the event the estimated fair value of the reporting unit decreases, we may incur additional impairment charges in the future.

Pet Health Monitoring Segment



	Three Months Ended March 31,
	2017			2016			Difference			%
Revenue	$	—		$	15		$	(15	)	(100.0	)%
Operating expenses:
Marketing	15			776			(761		)	(98.1	)%
Cost of revenue	4			205			(201		)	(98.0	)%
General and administrative	646			3,741			(3,095		)	(82.7	)%
Impairment of intangibles and other assets	(70		)	—			(70		)	N/M
Depreciation	3			407			(404		)	(99.3	)%
Amortization	—			18			(18		)	(100.0	)%
Total operating expenses	598			5,147			(4,549		)	(88.4	)%
Loss from operations	$	(598	)	$	(5,132	)	$	4,534		88.3	%

Loss from operations in our Pet Health Monitoring segment decreased significantly for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This segment generated substantial losses from formation through the end of 2016 and, after concentrated efforts, was unable to generate an acceptable level of revenue. As a result of actions taken by our Board of Directors to refocus on our principal marketplace of identity and privacy protection, this business ceased primary operations in the fourth quarter of 2016 and is expected to be wound down in an orderly manner in the first half of 2017. During our wind-down efforts, there may be additional gains and/or losses due to subsequent fair value adjustments. Following the completed disposition of the business, we expect the results of the Pet Health Monitoring segment will be reported as a discontinued operation in accordance with U.S. GAAP.

Bail Bonds Industry Solutions Segment



	Three Months Ended March 31,
	2017			2016			Difference			%
Revenue	$	182		$	493		$	(311	)	(63.1	)%
Operating expenses:
Marketing	2			14			(12		)	(85.7	)%
Commission	2			5			(3		)	(60.0	)%
Cost of revenue	25			45			(20		)	(44.4	)%
General and administrative	199			507			(308		)	(60.7	)%
Depreciation	—			20			(20		)	(100.0	)%
Total operating expenses	228			591			(363		)	(61.4	)%
Loss from operations	$	(46	)	$	(98	)	$	52		53.1	%

In 2016, in connection with our strategy to focus on identity and privacy protection services, we initiated a plan to divest the business. Effective January 31, 2017, we divested our ownership in Captira, which marked the conclusion of our operations in our Bail Bonds Industry Solutions segment. This segment’s operating results have not had a significant impact on our consolidated financial results and are not classified as a discontinued operation.

Corporate

In the three months ended March 31, 2017 and 2016, our loss from operations of $1.2 million and $2.5 million, respectively, primarily consisted of general and administrative expenses. In conjunction with our singular refocus on our identity and privacy protection services, we changed our policy of allocating general and administrative expenses from our Corporate business unit into our other segments, which resulted in a change in our measurement of segment profit and loss. Beginning in 2017, we directly charge our Personal Information Services segment for the majority of general and administrative expenses including executive, legal, human resources, finance and internal audit expenses. General and administrative expenses in our Corporate business unit primarily consist of payroll, share based compensation and other expenses related to our Chairman and non-employee Board of Directors. As a result, general and administrative expenses decreased by $1.3 million in the three months ended March 31, 2017 compared to the three months ended March 31, 2016, of which approximately $1.1 million was the effect of the change in measurement of segment profit and loss, and we expect that decrease to continue for the remainder of 2017.

Total share based compensation expense in our Corporate business unit for the three months ended March 31, 2017 and 2016 was $582 thousand and $850 thousand, respectively.

Interest Expense

Interest expense increased to $592 thousand for the three months ended March 31, 2017 from $242 thousand for the three months ended March 31, 2016. The increase is primarily due to interest related to the Prior Credit Agreement, which was funded in March 2016. As a result of the outstanding debt under the New Credit Agreement, we expect to continue to incur significant interest expense until maturity. For additional information, please see Note 16 to our condensed consolidated financial statements.

Other Income (Expense), net

Other income was $34 thousand for the three months ended March 31, 2017 compared to other (expense) of $(86) thousand for the three months ended March 31, 2016. The increase in other income is primarily due to unrealized foreign exchange gains.

Income Taxes

Our consolidated effective tax rate for the three months ended March 31, 2017 and 2016 was 0.2% and (0.2)%, respectively. The rates remained relatively flat due to the continued valuation allowance.

There were no material changes to our uncertain tax positions during the three months ended March 31, 2017 or 2016.

Liquidity and Capital Resources

Cash Flow

Cash and cash equivalents as of March 31, 2017 were $5.2 million compared to $10.9 million as of December 31, 2016. 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 $8.0 million as of March 31, 2017 and December 31, 2016. The likelihood of non-payment has historically been remote with respect to our Identity Guard^®, financial institution and insurance services clients billed, however, we do provide for an allowance for doubtful accounts with respect to breach response services and health and wellness consulting clients. In addition, we provide for a refund allowance, which is included in liabilities in our condensed consolidated balance sheets, against transactions that may be refunded in subsequent months. This allowance is based on historical results.

As a result of lower cash and cash equivalents, we had a working capital deficit of $(3.4) million as of March 31, 2017 compared to a surplus of $2.2 million as of December 31, 2016. The decrease is primarily due to the loss from operations in the three months ended March 31, 2017. Our short-term and long-term liquidity depends primarily upon our level of income from operations, cash balances, working capital management and the amount of wind down costs associated with the planned exit of certain of our businesses.

Pursuant to the Prior Credit Agreement, we were required to maintain at all times minimum cash on hand, as defined in the Prior Credit Agreement, of at least 25% of the total amount outstanding under the term loan until June 30, 2017 and 40% of the total amount outstanding under the term loan thereafter. The New Credit Agreement (as described below) requires us to maintain at all times a minimum cash on hand amount, as defined in the New Credit Agreement, of at least 20% of the total amount outstanding under the term loan.

Subsequent to receiving proceeds from the New Credit Agreement, we believe that the cash and cash equivalents on hand and anticipated cash provided by operations will be sufficient to fund our anticipated working capital requirements of those business segments for the next twelve months. 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 the New Credit Agreement or otherwise do not have access to other sources of capital, our liquidity could be negatively affected.

We may explore additional financing sources to fund expansion, to respond to competitive pressures, to invest in or acquire complementary products, businesses or technologies, or to lower our cost of capital, which could include equity and debt financings. There can be no guarantee that any additional financing will be available on acceptable terms, if at all. If additional funds are raised through the issuance of equity or equity-like securities, existing stockholders could suffer significant dilution, and if we raise additional funds through the issuance of debt securities or other borrowings, these securities or borrowings could have rights senior to common stock, could result in increased interest expense and other costs, and could contain additional covenants that could restrict operations.



	Three Months Ended March 31,
	2017			2016			Difference
	(In thousands)
Cash flows provided by (used in):
Operating activities	$	(3,773	)	$	(479	)	$	(3,294	)
Investing activities	(1,628		)	(1,878		)	250
Financing activities	(547		)	17,835			(18,382		)
(Decrease) increase in cash and cash equivalents	(5,948		)	15,478			(21,426		)
Cash and cash equivalents — Beginning of period	10,857			11,471			(614		)
Cash reclassified to assets held for sale at beginning of period	321			—			321
Cash and cash equivalents — End of period	$	5,230		$	26,949		$	(21,719	)

The decrease in cash flows from operations is primarily due to decreases in revenue from reduced subscribers from the comparable quarter and an increase in cash paid for marketing to our direct-to-consumer portfolio, partially offset by significant decreases in operating expenses for our Pet Health Monitoring segment as a result of the cessation of the primary operations from the comparable quarter.

We expect the costs associated with exiting certain of our businesses, including severance and other wind down costs, to be funded by cash provided by operations in the remainder of 2017. Any unforeseen increase in these costs, or others, may negatively impact our results of operations. Additionally, we continue our efforts to resolve a federal income tax refund claim in 2017, which, if successful, would increase our cash from operations.

The increase in cash flows from investing activities is primarily due to a decrease in restricted cash balances for cash collateral to a commercial bank for corporate credit cards, partially offset by payments related to the sale of Captira. For additional information, please see Note 4 to our condensed consolidated financial statements.

The decrease in cash flows from financing activities is due to proceeds of $20.0 million from the closing of the Prior Credit Agreement in the three months ended March 31, 2016, described below.

Credit Facility and Borrowing Capacity

New Credit Agreement

On April 20, 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with a new $20.0 million term loan facility (which was fully funded at closing) with PEAK6 Investments.

In order to consummate the refinancing, we and our subsidiaries entered into the New Credit Agreement with PEAK6 Investments as Term Lender and as Administrative Agent, and also entered into a security agreement, a pledge and security agreement, an intellectual property security agreement and other related documents. The New Credit Agreement extends the maturity date, reduces and defers mandatory quarterly principal payments, and carries a lower interest rate compared to the Prior Credit Agreement. The maturity date of the New Credit Agreement is April 20, 2021 with quarterly principal payments of $1.3 million commencing on September 30, 2019. The initial interest rate is 9.486% per annum, to be adjusted annually on March 31 to 7.75% plus 1 year LIBOR, and interest is payable monthly. The New Credit Agreement is secured by substantially all of the assets of Intersections and its subsidiaries and a pledge by Intersections of stock and membership interests it holds in any domestic and first-tier foreign subsidiaries.

We used approximately $13.9 million of the net proceeds from the New Credit Agreement to repay in full the aggregate principal amount outstanding under the Prior Credit Agreement and to pay related interest, prepayment penalties, transaction fees and expenses totaling approximately $487 thousand. We expect to use the remainder of the proceeds from the New Credit Agreement for general corporate purposes, including to accelerate both subscriber acquisition and product development.

The New Credit Agreement also requires the prepayment of the aggregate principal amount outstanding in an amount equal to 25% of our excess cash flow (as defined in the New Credit Agreement) for each fiscal year commencing with the fiscal year ending December 31, 2018 and continuing thereafter. Certain other events defined in the New Credit Agreement require prepayment of the aggregate principal amount of the term loan, including all or a portion of proceeds received from asset dispositions (except for

proceeds from the sale of assets in our i4c subsidiary of up to $2.2 million), casualty events, extraordinary receipts, and equity issuances. In addition, we are permitted to invest up to $2.2 million, in the aggregate inclusive of amounts already invested, in our i4c subsidiary to complete the wind-down, which is expected to be completed by June 30, 2017 (or such later date as the Administrative Agent may permit). Once amounts borrowed have been paid or prepaid, they may not be reborrowed.

The New Credit Agreement contains certain customary covenants, including among other things covenants that limit or restrict the following: the incurrence of liens; the making of investments including a prohibition of any capital contributions to our subsidiary i4c other than to complete the wind-down as noted above and fair and reasonable allocation of overhead and administrative expenses; 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, except for the orderly wind down of the Pet Health Monitoring, and the exits of our Bail Bonds Industry Solutions and Habits at Work businesses; the declaration of certain dividends or distributions; transactions with affiliates (other than parties to the New Credit 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 guarantor and enters into certain security documents.

The New Credit Agreement requires us to maintain at all times a minimum cash on hand amount, as defined in the New Credit Agreement, of at least 20% of the total amount outstanding under the term loan. We are also required to maintain compliance on a quarterly basis commencing with the quarter ending December 31, 2017 with minimum consolidated EBITDA (as defined in the New Credit Agreement and adjusted for certain non-cash, non-recurring and other items, and up to $4.3 million of non-recurring charges incurred in the wind-down events) of $2.0 million; provided consolidated EBITDA from the immediately preceding quarter in excess of $2.0 million may be added to a current quarter to make up any shortfall and provided further that when we have not met the minimum consolidated EBITDA test for any quarter (even after including excess consolidated EBITDA for the prior quarter) the test for compliance is deferred until the end of the next quarter and we shall be deemed to be in compliance if, taking into account consolidated EBITDA in excess of $2.0 million from the prior quarter, consolidated EBITDA from the test quarter, and consolidated EBITDA in excess of $2.0 million from the subsequent quarter, we pass the minimum compliance test. Excess consolidated EBITDA in any quarter can be counted only once for determining compliance with this covenant.

The New Credit Agreement also contains customary events of default, including among other things non-payment defaults, covenant defaults, inaccuracy of representations and warranties, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults, cross-defaults to other indebtedness, invalidity of loan documents defaults, change in control defaults, conduct of business defaults, and criminal and regulatory action defaults.

Warrant

In connection with the New Credit Agreement, PEAK6 Investments purchased, for an aggregate purchase price of $1.5 million in cash, a Warrant to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $5.00 per share. The Warrant is immediately exercisable, has a five-year term and shall be exercised solely by a "net share settlement" feature that requires the holder to exercise the Warrant without a cash payment upon the terms set forth therein. The Warrant includes a feature to provide for increases in the number of shares issuable upon exercise in the event of a future change of control transaction (as defined therein), with the number of increased shares based upon the time elapsed from issuance of the Warrant and the difference between the exercise price of the Warrant and the transaction price in the change of control, all as more fully set forth in the Warrant. The Warrant also provides for adjustments in the underlying number of shares and exercise price in the event of recapitalizations, stock splits or dividends and other corporate events.

Stock Redemption

In connection with the New Credit Agreement, we used the proceeds from the sale of the Warrant to repurchase approximately 419 thousand shares of our common stock, pursuant to a redemption agreement from PEAK6 Capital Management LLC at a price of $3.60 per share, for an aggregate repurchase price of approximately $1.5 million. PEAK6 Capital Management LLC is an affiliate of PEAK6 Investments.

The repurchase was made pursuant to our previously announced share repurchase program. Following the repurchase, we have approximately $15.3 million remaining under our 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 the New Credit Agreement.

Prior Credit Agreement

In March 2016, we and our subsidiaries entered into the Prior Credit Agreement with Crystal Financial SPV LLC. The Prior Credit Agreement provided for a $20.0 million term loan, which was fully funded at closing. For additional information related to the terms of the Prior Credit Agreement, please see Note 16 to our condensed consolidated financial statements.

compliance with all covenants under the Prior Credit Agreement. As a result of the refinancing, we expect to recognize a non-cash loss on debt extinguishment in the three months ending June 30, 2017.

Share Repurchase

As of March 31, 2017, prior to the repurchase in connection with the New Credit Agreement, we had approximately $16.9 million remaining under our share repurchase program. During the three months ended March 31, 2017 and 2016, we did not directly repurchase any shares of common stock for cash. As a result of shares withheld for tax purposes on the vesting of a restricted stock award, we increased our treasury shares by 8 thousand in the three months ended three months ended March 31, 2017.

Other

In April 2017, our Board of Directors approved, and recommended that our stockholders approve, a second amendment to the 2014 Plan to increase the number of shares authorized and reserved for issuance thereunder by 4.0 million shares, from 5.5 million shares to 9.5 million shares. We are seeking stockholder approval of this amendment at our Annual Meeting of Stockholders scheduled to be held on May 31, 2017. If approved by our stockholders, the proposed amendment will automatically become effective upon approval.



	Non-Income Business Tax Liability
	2017			2016
Balance at December 31	$	94		$	3,427
Adjustments to existing liabilities	—			54
Payments	(94		)	(21		)
Balance at March 31	$	—		$	3,460

Off-Balance Sheet Arrangements

As of March 31, 2017, we did not have any off-balance sheet arrangements.


Item 4.	Controls and Procedures

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

There have not been any changes in our internal control over financial reporting during the three months ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

In the normal course of business, we may become involved in various legal proceedings. Based upon our experience, we do not believe that these proceedings and claims will result in a material adverse change in our business or financial condition, and as of March 31, 2017, we do not have any significant liabilities accrued. Please refer to “Legal Proceedings” in Note 14 to our condensed consolidated financial statements for information regarding certain judicial, regulatory and legal proceedings.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

The common share purchases described in the table below represent the withholding of shares to satisfy tax withholding obligations upon the vesting of the related restricted stock during the three months ended March 31, 2017:



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan
	(In thousands, except average price paid per share)
January 1, 2017 to January 31, 2017	8	$	3.99	—	$	—
February 1, 2017 to February 28, 2017	—	$	—	—	$	—
March 1, 2017 to March 31, 2017	—	$	—	—	$	—


Item 6.	Exhibits



10.1		Credit Agreement dated as of April 20, 2017 among Intersections Inc., the Other Credit Parties party thereto, and PEAK6 Investments, L.P. (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Form 8-K filed April 25, 2017)

10.2		Warrant dated April 20, 2017 between Intersections Inc. and PEAK6 Investments, L.P. (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Form 8-K filed April 25, 2017)

10.3		Redemption Agreement dated as of April 20, 2017 by and between Intersections Inc. and PEAK6 Capital Management LLC (Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Form 8-K filed April 25, 2017)

10.4		Amended and Restated Employment Agreement dated as of January 10, 2017 between the Company and Johannes Jurgens Roets (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Form 8-K filed January 12, 2017)

10.5		Amended and Restated Employment Agreement dated as of January 10, 2017 between the Company and Michael R. Stanfield (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Form 8-K filed January 12, 2017)

10.6		Amended and Restated Employment Agreement dated as of February 17, 2017 between the Company and Ronald L. Barden (Incorporated by reference to Exhibit 10.10 filed with the Registrant’s Form 10-K for the year ended December 31, 2016)

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

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

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

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

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.



*	Filed herewith.
†	Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		INTERSECTIONS INC.

Date:	May 11, 2017	By:	/s/ Ronald L. Barden
			Ronald L. Barden
			Chief Financial Officer

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Intersections (INTX) Inactive 10-Q2017 Q1 Quarterly report

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