NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Business
We provide innovative software and data monitoring and analytics solutions that help consumers manage financial and personal risks associated with the proliferation of their personal data in the virtual and financial world. Under our Identity Guard® brand and other brands that comprise our Personal Information Services segment, we have helped consumers monitor, manage and protect against the risks associated with their identities and personal information for more than twenty years. 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 Identity Guard® with Watson™ suite of services (collectively, "Identity Guard® Services"), 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® with Watson™ offers robust early detection of potential risks, stretching beyond credit-centric risks to include online privacy risks, and provides personalized threat alerts with actionable steps to help keep our customers’ information private from the earliest stage possible. Identity Guard® Services are offered through large and small organizations as an embedded service for either its employees or consumers, as well as directly to consumers through our direct marketing efforts. We believe that our suite of services offers consumers the most proactive and comprehensive identity theft monitoring and online privacy services available on the market today.
Our Insurance and Other Consumer Services segment includes insurance and membership services 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. 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.
2. Basis of Presentation, Significant Accounting Policies and Liquidity
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.
The information in our condensed consolidated financial statements is presented for the nine months ended September 30, 2017 giving effect to the disposal of i4c Innovations LLC (“i4c” or “Voyce”), with the historical financial results of the Voyce business recast as discontinued operations. In accordance with U.S. GAAP, we did not allocate corporate overhead expenses to discontinued operations in the year ended December 31, 2017. Additionally, we considered, and made the necessary adjustments to the historical financial results for, the allocation of other costs to either discontinued or continuing operations, including, but not limited to, rent expense, severance expense and other wind-down costs. The result of these adjustments changed the historical operating results for certain segments as well as the presentation of the condensed consolidated financial statements to include discontinued operations for the year ended December 31, 2017. Unless otherwise indicated, the information in the notes to the condensed consolidated financial statements refer only to our continuing operations and do not include discussion of balances or activity of i4c. For additional information, please see Note 5.
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, 2017, as filed in our Annual Report on Form 10-K.
Liquidity
On June 8, 2018, we entered into Amendment No. 4 to the Credit Agreement (as defined in Note 16), which set forth required monthly principal payments beginning June 30, 2018, and shortened the maturity date of the secured indebtedness evidenced by the Credit Agreement to December 31, 2018. In June and September 2018, we entered into the Bridge Notes (as defined in Note 16) in the aggregate amount of $4.0 million ($3.0 million on June 27, 2018 and $1.0 million on September 24, 2018), which were convertible into a qualified future financing and had a maturity date of June 30, 2019. As of September 30, 2018, the outstanding balance of the Credit Agreement was $14.5 million, the outstanding balances of the Bridge Notes totaled $4.0 million, and our cash on hand was approximately $5.8 million.
On October 31, 2018, we entered into a note purchase and exchange agreement (the “Note Purchase Agreement”), pursuant to which we sold to WC SACD One Parent, Inc. (“Parent”) Senior Secured Convertible Notes (the “Notes”) in the aggregate principal amount of $30.0 million for a purchase price in cash of $30.0 million, and issued to Loeb Holding Corporation and David A. McGough (together with Parent, the “Purchasers” and each a “Purchaser”) additional Notes in the aggregate principal amount of $4.0 million in exchange for the Bridge Notes previously issued by us to such Purchasers (who received payment in cash of the accrued and unpaid interest on the Bridge Notes). We used approximately $14.6 million of the net proceeds from the sale of the Notes to repay in full the principal outstanding under the Credit Agreement and to pay related interest thereon. We intend to use the balance of the net proceeds for general corporate purposes. The Notes mature on October 31, 2021 and are convertible in whole or in part, together with accrued and unpaid interest with respect to the principal amount converted, into shares of the Company’s common stock and preferred stock. For additional information on the Note Purchase Agreement as well as the Agreement and Plan of Merger, which we also entered into on October 31, 2018, please see Note 21.
We evaluated these conditions and determined it is probable that we will be able to meet all our obligations over the next twelve months. In accordance with U.S. GAAP, we reclassified the indebtedness in the Credit Agreement and Bridge Notes from short-term to long-term in our condensed consolidated balance sheets as of September 30, 2018.
Revision to Previously Issued Financial Statements
The results of operations for the three and nine months ended September 30, 2017 have been updated to reflect an adjustment to our share based compensation expense, which is recorded in general and administrative expenses in our condensed consolidated statements of operations. The change in share based compensation from the amount as reported to the amount as revised was a $404 thousand decrease and a $2.0 million increase for the three and nine months ended September 30, 2017, respectively. These changes are reflected in the loss from operations, loss from continuing operations before income taxes, net loss and basic and diluted net loss per common share figures in these condensed consolidated financial statements. For additional information, please see Note 21 to the consolidated financial statements contained in our most recent 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 and electronic payments. Restricted cash is included in prepaid expenses and other current assets in our condensed consolidated balance sheets.
Revenue Recognition
For a full description of our revenue recognition policy, please see Note 4.
Goodwill, Identifiable Intangibles and Other Long-Lived Assets
We record, as goodwill, the excess of the purchase price over the fair value of the identifiable net assets acquired in purchase transactions. We review our goodwill for impairment annually, as of October 31, or more frequently if indicators of impairment exist. Goodwill 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.
We continuously evaluate whether indicators of impairment exist and perform an initial assessment of qualitative factors to determine whether it is necessary to perform the goodwill impairment test (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, U.S. GAAP eliminates the requirement to perform further goodwill impairment testing. In addition, we are not required to perform a qualitative assessment for our reporting units with zero or negative carrying amounts. 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 condensed 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.
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.
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 September 30, 2018, 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.
We review long-lived assets, including finite-lived intangible assets, property and equipment, non-current contract costs 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.
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. 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.
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.
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. The fair value of each option granted has been estimated as of the date of grant with the following weighted-average assumptions for the nine months ended September 30, 2018 and 2017:
Expected Dividend Yield.
Under the Credit Agreement, we are currently prohibited from declaring and paying dividends and therefore, the expected 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 52% and 49% for 2018 and 2017, respectively.
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 2.7% and 1.8% for 2018 and 2017, respectively.
Expected Term.
The expected term of options granted was determined by considering employees’ historical exercise patterns or homogeneous management pools, which we determined is approximately 5.0 years for both 2018 and 2017. We will continue to review our estimate in the future and adjust it, if necessary, due to changes in our historical exercises.
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. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. 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. We have elected to include principal and penalties expense related to uncertain tax positions as part of income tax expense and include interest expense related to uncertain tax positions as part of interest expense in our condensed consolidated financial statements. The accrued interest is included as a component of other long-term liabilities in our condensed consolidated balance sheets. 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.
Variable Interest Entities
Our decision to consolidate an entity is based on our assessment that we have a controlling financial interest in such entity. We continuously evaluate our related party relationships and any ownership interests, including controlling or financial interests of our executive management team such as our Executive Chairman and President's non-controlling interest in One Health Group, LLC ("OHG"). In accordance with U.S. GAAP, since the total equity investment at risk is not sufficient for OHG to finance its activities without additional subordinated financial support, as well as economic interests of the holders of OHG that are disproportionate to their voting interests, we concluded OHG is a variable interest entity ("VIE"). We further analyzed which related party would be the primary beneficiary in a tiebreaker test. Given that neither we nor our de facto agent have the power to direct the activities of OHG that most significantly impact its economic performance, we determined that we are not the primary beneficiary of the VIE and therefore are not required to consolidate the results of OHG. We do not have any assets or liabilities in our condensed consolidated balance sheets that relate to our variable interest in OHG. Other than the potential participation in future revenue if and when earned, we have no material, continuing economic or other involvement in OHG, including no exposure to loss as a result of our involvement with OHG. Please see Note 5 for additional information related to the divestiture.
Internally Developed Capitalized Software
We develop software for our internal use and capitalize the estimated software development costs incurred during the application development stage in accordance with U.S. GAAP. Costs incurred prior to and after the application development stage are charged to expense. When the software is ready for its intended use, capitalization ceases and such costs are amortized on a straight-line basis over the estimated life, which is generally three years. We record depreciation for internally developed capitalized software in depreciation expense in our condensed consolidated statements of operations. Significant judgments and estimates are required in measuring capitalized software. We regularly review our capitalized software projects for impairment.
Contract Costs
In accordance with ASU 2014-09, "Revenue from Contracts with Customers" ("Topic 606"), which was adopted January 1, 2018, we recognize certain commission costs, which are included in commission expenses in our condensed consolidated statements of operations, and certain fulfillment costs, which are included in cost of revenue.
Our commissions are generally monthly commissions paid to partners, affiliates and our internal sales team, most of which have commensurate renewal terms or useful lives of one year or less. Therefore, we apply the practical expedient on a portfolio basis and recognize those incremental costs of obtaining contracts as an expense when incurred. We also have a minority population of commission fees that we believe meet the capitalization guidance in U.S. GAAP and are amortized based on the systematic transfer of the underlying contractual service terms, which includes our estimate of subscriber renewal behavior based on acquisition channel from historical data, if available, which is typically on a straight-line basis for one to two years. If we determine that our incremental costs to fulfill a contract are capitalizable under Topic 606, the costs are amortized based on the systematic transfer of the underlying contractual service terms.
Contract Assets and Contract Liabilities
In accordance with Topic 606 and the practical expedient to apply the guidance on a portfolio of contracts, which effectively treats contracts with similar characteristics as a single contract, we presented a net contract asset or contract
liability for the majority of our subscribers. This presentation effectively reduced our total accounts receivable as of September 30, 2018 from December 31, 2017 and was offset by a comparable decrease in contract liabilities. In addition, we separately state unbilled contract assets in our condensed consolidated balance sheet as of September 30, 2018, which we previously included in accounts receivable. For additional information, please see Notes 3 and 4.
We receive payments from subscribers based on a billing schedule as established in the terms of our monthly and annual contract service agreements. Contract assets relate to our conditional right to consideration for our unbilled completed performance under the contract. Accounts receivable are recorded when the right to consideration for our completed performance is billed and is therefore, no longer unconditional. Contract liabilities (that is, deferred revenue) relate to payments received in advance of performance under the contract. Contract liabilities that are payable in greater than one year are included in other long-term liabilities in our condensed consolidated balance sheets.
3. Accounting Standards Updates
We consider the applicability and impact of all Accounting Standards Updates ("ASUs"). Recently issued ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
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Standard
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Description
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Date of Adoption
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Application
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Effect on the Consolidated Financial Statements (or Other Significant Matters)
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ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606)
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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 most entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the trade of nonfinancial assets. 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.
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January 1, 2018
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Modified retrospective with the cumulative effect of initially applying these updates recognized at the date of initial application.
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See "Topic 606" below.
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ASU 2016-02,
Leases
(Topic 842)
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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.
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January 1, 2019
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Modified retrospective with the cumulative effect of initially applying these updates recognized at the date of initial application.
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See "Topic 842" below.
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ASU 2016-15,
Statement of Cash Flows
(Topic 230)
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This update clarifies the guidance regarding the classification of operating, investing, and financing activities for certain types of cash receipts and payments.
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January 1, 2018
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Retrospective
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We adopted this update as of January 1, 2018, and there was no material impact to our condensed consolidated financial statements.
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ASU 2017-09,
Compensation—Stock Compensation
(Topic 718)
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This update clarifies the guidance regarding changes in the terms or conditions of a share based payment award. Under the amendments of this update, an entity should account for the effects of a modification unless certain criteria remain the same immediately before and after the modification.
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January 1, 2018
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Prospective
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Upon adoption, there was no material impact to our condensed consolidated financial statements.
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ASU 2018-15,
Intangibles
(Topic 350)
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The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software. The update requires the entity to determine which implementation costs to capitalize and expense over the term of the hosting arrangement.
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January 1, 2020
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Prospective or Retrospective
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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 to our condensed consolidated financial statements.
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Topic 606
We adopted the provisions of Topic 606 as of January 1, 2018 on a modified retrospective basis to open contracts at the date of adoption only. Our assessment of the impact included review of a significant majority of our revenue streams, contracts and contract costs incremental to obtaining the contract. We evaluated our service offerings and determined that the service offerings' obligations are not distinct within the context of the contracts and, as such, are considered to be a
series of promised services treated as a single performance obligation. Therefore, we concluded the impact to the way we recognize revenue is immaterial because our revenue is primarily generated from monthly subscriptions of a single performance obligation and longer-term breach contracts, which will continue to be recognized ratably over the service delivery periods.
We also concluded that direct-response advertising costs previously included in deferred subscription solicitation and advertising costs must be expensed as incurred under the new standard. Since we previously deferred and amortized these costs over the period during which benefits were expected to be received not to exceed twelve months, we believe this is a significant change that impacts our results of operations in each reportable period after adoption. Any other costs previously included in deferred subscription solicitation and advertising costs, such as annual renewal commission costs, that could continue to be capitalized and amortized over the transfer of the underlying service period under Topic 606 were reclassified to contract costs in our condensed consolidated balance sheet as of September 30, 2018.
In addition, we elected a practical expedient to immediately expense the majority of our incremental one-time commission costs, which is not expected to have a material impact to our future results of operations.
As a result of our comprehensive assessment, we recorded a cumulative adjustment of approximately $1.6 million to reduce the opening balance of retained earnings, which is primarily due to expensing direct-response advertising costs as well as immediately expensing certain incremental one-time commission costs. Given the continued valuation allowance on our net deferred taxes, the tax effect of these cumulative adjustments at adoption is also immaterial to the consolidated financial statements.
The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The following tables summarize the impacts of adopting Topic 606 on select lines of our unaudited condensed consolidated financial statements (all tables in thousands):
Statements of Operations
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(select lines)
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As Reported
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Adjustments
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Balances without Adoption of 606
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Three Months Ended September 30, 2018
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Revenue
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$
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37,485
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$
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—
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$
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37,485
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Marketing expenses
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631
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72
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703
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Commission expenses
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8,743
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5
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8,748
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Loss from operations
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(15)
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(77)
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(92)
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Net loss
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(1,109)
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(77)
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(1,186)
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Nine Months Ended September 30, 2018
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Revenue
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$
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115,182
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$
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—
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$
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115,182
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Marketing expenses
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2,455
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613
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3,068
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Commission expenses
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26,949
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(3)
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26,946
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Income from operations
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2,097
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(610)
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1,487
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Net income (loss)
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87
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(610)
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(523)
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Balance Sheet
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As of September 30, 2018
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(select lines)
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As Reported
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Adjustments
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Balances without Adoption of 606
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ASSETS:
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Accounts receivable
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$
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6,147
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$
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1,850
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$
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7,997
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Contract assets
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638
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(638)
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—
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Prepaid expenses and other current assets
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3,783
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26
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3,809
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Deferred subscription solicitation and commission costs
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—
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1,027
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1,027
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Contact costs
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380
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(380)
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—
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Total assets
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37,736
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1,885
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39,621
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Commissions payable
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$
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356
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$
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(267)
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$
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89
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Contract liabilities, current
|
4,075
|
|
1,212
|
|
5,287
|
|
Other long-term liabilities
|
1,711
|
|
—
|
|
1,711
|
|
Accumulated deficit
|
(118,552)
|
|
940
|
|
(117,612)
|
|
Total liabilities and stockholders' equity
|
37,736
|
|
1,885
|
|
39,621
|
Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
(select lines)
|
As Reported
|
|
Adjustments
|
|
Balances without Adoption of 606
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
87
|
|
$
|
(610)
|
|
$
|
(523)
|
|
Adjustments to reconcile net income to cash flows from operating activities:
|
|
|
|
|
|
|
Amortization of deferred subscription solicitation costs
|
—
|
|
2,432
|
|
2,432
|
|
Amortization of contract costs
|
646
|
|
(646)
|
|
—
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
1,583
|
|
(1,387)
|
|
196
|
|
Contract assets
|
(1,537)
|
|
1,537
|
|
—
|
|
Prepaid expenses, other current assets and other assets
|
(139)
|
|
(26)
|
|
(165)
|
|
Deferred subscription solicitation and commission costs
|
—
|
|
(1,804)
|
|
(1,804)
|
|
Contract costs
|
(704)
|
|
704
|
|
—
|
|
Commissions payable
|
(3)
|
|
(49)
|
|
(52)
|
|
Contract liabilities, current
|
(2,323)
|
|
(151)
|
|
(2,474)
|
|
Net cash provided by operating activities
|
3,520
|
|
—
|
|
3,520
|
Topic 842
We plan to adopt the provisions of ASU 2016-02 ("Topic 842"), as amended, as of January 1, 2019. We are evaluating the standard in accordance with our adoption plan, which includes controls for performing a completeness assessment over the lease population, reviewing and measuring all forms of leases and analyzing the practical expedients. In accordance with ASU 2018-11 "Targeted Improvements," issued in July 2018, we expect to apply the new lease requirements as of January 1, 2019 under the modified retrospective approach and recognize a cumulative-effect adjustment, if any, at the date of initial application, rather than restate comparative periods.
We did not identify any embedded leases in our existing contracts that require bifurcation under Topic 842. However, we expect the adoption of Topic 842 will have a material impact to our condensed consolidated balance sheets due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases. As of September 30, 2018, we had an estimated $4.2 million in undiscounted future minimum lease commitments,
as reported in Note 14, of which $1.6 million has a commencement date of January 1, 2019 and will not be included in the adoption impact but will be evaluated under Topic 842 in the year ended December 31, 2019.
In addition, we evaluated our deferred rent amount in our condensed consolidated balance sheets, which is exclusively for our operating leases, and concluded that the balance of the historical lease incentives would appropriately reduce the right of use asset at adoption. As of September 30, 2018, our deferred rent balance was $657 thousand, as reported in Note 15.
We are continuing to finalize the impact of adoption to our condensed consolidated financial statements, including disclosures, accounting policies, business processes and internal controls, as well as income tax impacts, which we anticipate will not have a financial statement impact due to the valuation allowance.
4. Revenue Recognition
We account for revenue in accordance with Topic 606, which was adopted January 1, 2018. For additional information about the adoption impact, please see Note 3.
We recognize revenue on identity theft protection services, as well as insurance services and other monthly membership and transaction services. The following is a description of principal activities, separated by reportable segments, from which we generate revenues. For additional information about reportable segments, please see Note 20.
Accounting Policy, Nature of Services and Timing of Satisfaction of Performance Obligations
Personal Information Services segment
We offer identity theft and privacy protection services to subscribers through multiple marketing channels including, but not limited to, direct-to-consumer, affiliates and partners, and as an embedded service for either its employees or consumers. We also offer breach-response services to large and small organizations by providing affected individuals with identity theft recovery and credit monitoring services.
With the exception of breach-response services, revenue is measured based on the stated consideration specified in the monthly renewable individual subscription contract. 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. These payment mechanisms significantly reduce the risk of uncertain cash flows and a significant portion of our subscribers are billed in advance of fulfillment, which also mitigates uncertainty of cash flows. The prices to subscribers of various configurations of our non-breach 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. We are the principal in almost all of our transactions and therefore, revenue is recorded on a gross basis in the amount that we bill subscribers from the sale of subscriptions and is recognized ratably on a straight-line basis over the contractual term of the service agreement, ranging from one month to one year. In a minority of transactions, we also provide services to certain legacy partners in which we are the agent in the transactions and therefore, we record revenue on a net basis in the amount that we bill certain partners. Revenue from these arrangements is also recognized ratably on a straight-line basis over the contractual term of the service agreement. Based on the short-term nature of our monthly subscription services and the service terms, we do not have any unsatisfied, or partially unsatisfied, future performance obligations, in addition to the amounts included in contract liabilities. In addition, and for the same reasons noted above, we do not have any contracts that have a significant financing component. Revenues are presented net of the taxes that are collected from members and remitted to governmental authorities.
Revenue for annual subscription fees and breach-response services, which the contract term is one year or greater, are deferred and recognized ratably on a straight-line basis over the contractual term of the service agreement, which is as the services are systematically transferred to the subscriber.
Our monthly contractual subscription terms do not have stated refund provisions, however, we considered whether our refund history would be variable consideration in determining the estimated transaction price. Discretionary refunds for our monthly subscriptions are generally consistent, processed within the service term and are appropriately reflected as reductions to revenue. Discretionary refunds in excess of one month of service are insignificant. Annual subscriptions include subscribers with pro-rata refund provisions. Revenue related to annual subscribers with pro-rata provisions is
recognized based on a pro-rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our historical experience. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year.
We also generate revenue through a collaborative arrangement, which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement in our condensed consolidated financial statements and account for third-party revenue and contract costs in accordance with U.S. GAAP.
Insurance and Other Consumer Services Segment
We offer insurance and other membership services to subscribers on a monthly basis. We are not planning to develop new business in this segment and are experiencing normal attrition due to ceased marketing and retention efforts. We provide these insurance services to certain legacy partners in which we are the agent in the transactions and therefore, we record revenue on a net basis in the amount that we bill certain partners. Revenue from these arrangements is also recognized ratably on a straight-line basis over the contractual term of the service agreements. Revenues are presented net of the taxes that are collected from members and remitted to governmental authorities.
Disaggregation of Revenue
The following table disaggregates our revenue by major source for the three and nine months ended September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Information Services
|
|
Insurance and Other Consumer Services
|
|
Total
|
|
Three months ended September 30, 2018
|
|
|
|
|
|
|
Primary geographical markets:
|
|
|
|
|
|
|
United States
|
$
|
32,723
|
|
$
|
1,501
|
|
$
|
34,224
|
|
Canada
|
3,261
|
|
—
|
|
3,261
|
|
Total revenue
|
$
|
35,984
|
|
$
|
1,501
|
|
$
|
37,485
|
|
Major service lines:
|
|
|
|
|
|
|
Identity Guard® and Identity Guard® with Watson™
|
$
|
13,270
|
|
$
|
—
|
|
$
|
13,270
|
|
Canadian business
|
3,261
|
|
—
|
|
3,261
|
|
U.S. financial institutions
|
18,527
|
|
—
|
|
18,527
|
|
Breach services & other
|
926
|
|
1,501
|
|
2,427
|
|
Total revenue
|
$
|
35,984
|
|
$
|
1,501
|
|
$
|
37,485
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
Products and services transferred over time
|
$
|
35,984
|
|
$
|
1,501
|
|
$
|
37,485
|
|
Products transferred at a point in time
|
—
|
|
—
|
|
—
|
|
Total revenue
|
$
|
35,984
|
|
$
|
1,501
|
|
$
|
37,485
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
Primary geographical markets:
|
|
|
|
|
|
|
United States
|
$
|
100,993
|
|
$
|
4,531
|
|
$
|
105,524
|
|
Canada
|
9,658
|
|
—
|
|
9,658
|
|
Total revenue
|
$
|
110,651
|
|
$
|
4,531
|
|
$
|
115,182
|
|
Major service lines:
|
|
|
|
|
|
|
Identity Guard® and Identity Guard® with Watson™
|
$
|
40,178
|
|
$
|
—
|
|
$
|
40,178
|
|
Canadian business
|
9,658
|
|
—
|
|
9,658
|
|
U.S. financial institutions
|
56,941
|
|
—
|
|
56,941
|
|
Breach services & other
|
3,874
|
|
4,531
|
|
8,405
|
|
Total revenue
|
$
|
110,651
|
|
$
|
4,531
|
|
$
|
115,182
|
|
Timing of revenue recognition:
|
|
|
|
|
|
|
Products and services transferred over time
|
$
|
110,258
|
|
$
|
4,531
|
|
$
|
114,789
|
|
Products transferred at a point in time
|
393
|
|
—
|
|
393
|
|
Total revenue
|
$
|
110,651
|
|
$
|
4,531
|
|
$
|
115,182
|
Contract Balances
The opening and closing balances of our accounts receivable, contract assets and contract liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
Contract Assets
|
|
Contract Liabilities, Current
|
|
Contract Liabilities, Non-Current
|
|
Balance as of December 31, 2017
|
$
|
8,225
|
|
$
|
—
|
|
$
|
7,759
|
|
$
|
—
|
|
Increase (decrease), net
|
(2,078)
|
|
638
|
|
(3,684)
|
|
30
|
|
Balance as of September 30, 2018
|
$
|
6,147
|
|
$
|
638
|
|
$
|
4,075
|
|
$
|
30
|
We recognized $906 thousand and $7.4 million of revenue in the three and nine months ended September 30, 2018, respectively, that was included in the contract liability balance as of December 31, 2017. The decreasing trend of this revenue recognized in the three months ended September 30, 2018 as compared to the three months ended March 31,
2018 is consistent with the pro-rata recognition of revenue earned from our monthly subscriptions. Our longer-term breach contracts have performance obligations that will continue to be satisfied in future periods and reduce the December 31, 2017 contract liability balance.
5. Discontinued Operations and Assets and Liabilities Held for Sale
On July 31, 2017, we divested i4c to One Health Group, LLC (the "Purchaser"), pursuant to the terms and conditions of a membership interest purchase agreement (the "Purchase Agreement"). i4c conducted our Pet Health Monitoring business known as Voyce. The purchase price for the assets was equal to (i) the sum of $100, plus (ii) a revenue participation of up to $20.0 million, payable pursuant to the terms and conditions of the Purchase Agreement. We have determined that the revenue participation is a gain contingency and therefore will be recognized if and when it is earned.
The total value of the consideration paid pursuant to the Purchase Agreement was determined through negotiations that took into account a number of factors of the Pet Health Monitoring business, including historical revenues, operating history, business contracts, obligations and commitments and other factors. The terms of the transaction were approved by our independent directors of the Board of Directors and required the consent of our lender.
The Purchaser is a newly-formed entity of which Michael R. Stanfield, our Executive Chairman and President, is a minority investor, and certain former members of the i4c management team are the managing member and investors. Except as described above, there are no material relationships between the Purchaser, on the one hand, and us or any of our affiliates, directors, officers, or any associate of such directors or officers, on the other hand. For our policy on identifying a controlling financial interest, please see "—Variable Interest Entities" in Note 2.
These condensed consolidated financial statements present our results of operations for the three and nine months ended September 30, 2018 and 2017 and our financial position as of September 30, 2018 and December 31, 2017 giving effect to the disposal of i4c, with the historical financial results of the Pet Health Monitoring segment reflected as discontinued operations, since the disposal constituted a strategic business shift. We made adjustments to our historical financial results for certain costs and overhead allocations to either discontinued or continuing operations for the three and nine months ended September 30, 2017; for additional information, please see "—Variable Interest Entities" in Note 2.
In the three and nine months ended September 30, 2017, we recorded a loss on sale of $528 thousand (including $516 thousand of transaction costs), which is included in loss from discontinued operations, net of tax in our condensed consolidated statements of operations. The following table summarizes the components of loss from discontinued operations, net of income taxes included in the condensed consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Major classes of line items constituting loss from discontinued operations:
|
|
|
|
|
|
|
|
|
Marketing expenses
|
|
|
$
|
(1)
|
|
|
|
$
|
(18)
|
|
Cost of revenue
|
|
|
—
|
|
|
|
(4)
|
|
General and administrative expenses
|
|
|
(500)
|
|
|
|
(1,718)
|
|
Impairment
|
|
|
—
|
|
|
|
(180)
|
|
Depreciation and amortization
|
|
|
(1)
|
|
|
|
(1)
|
|
Loss from discontinued operations before income taxes
|
|
|
(502)
|
|
|
|
(1,921)
|
|
Loss on disposal of discontinued operations
|
|
|
(528)
|
|
|
|
(528)
|
|
Total loss from discontinued operations, net of tax
|
|
|
$
|
(1,030)
|
|
|
|
$
|
(2,449)
|
In 2016, our Board of Directors approved a plan to sell Captira, which comprised our Bail Bonds Industry Solutions segment. Effective January 31, 2017, we completed the sale of Captira for a nominal amount, which resulted in a loss on sale of $130 thousand in the nine months ended September 30, 2017 and marked the conclusion of our operations in the Bail Bonds Industry Solutions segment. The disposal did not represent a strategic shift that would have a major effect on operations and financial results, and therefore, it is not classified as discontinued operations. 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."
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. Habits at Work 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 March 31, 2017. Effective June 1, 2017, we completed the sale of Habits at Work for a nominal amount, which resulted in a gain on sale of $24 thousand in the three and nine months ended September 30, 2017. The disposal did not represent a strategic shift that would have a major effect on operations and financial results, and therefore, it is not classified as discontinued operations.
6. Earnings (Loss) Per Common Share
Basic and diluted earnings (loss) per common share is determined in accordance with the applicable provisions of U.S. GAAP. Basic earnings (loss) per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, includes the potential exercise of outstanding stock options and warrants and vesting of restricted stock units. Diluted loss per common share is equivalent to basic loss per common share, as the effect of potential common stock would be anti-dilutive.
For the three months ended September 30, 2018, options to purchase common stock, unvested restricted stock units and outstanding warrants totaling approximately 6.1 million shares were excluded from the computation of diluted loss per common share, as their effect would be anti-dilutive. For the nine months ended September 30, 2018, options to purchase common stock, unvested restricted stock units and outstanding warrants totaling approximately 5.7 million shares were excluded from the computation of diluted income per common share, as their effect would be anti-dilutive. For the three and nine months ended September 30, 2017, options to purchase common stock, unvested restricted stock units and outstanding warrants totaling approximately 6.9 million shares were excluded from the computation of diluted loss per common share, as their effect would be anti-dilutive. These shares could dilute earnings per common share in the future.
A reconciliation of basic earnings (loss) per common share to diluted earnings (loss) per common share is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Net (loss) income—basic and diluted:
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
$
|
(1,109)
|
|
$
|
(2,966)
|
|
$
|
87
|
|
$
|
(14,951)
|
|
Loss from discontinued operations
|
—
|
|
(1,030)
|
|
—
|
|
(2,449)
|
|
Net (loss) income—basic and diluted
|
$
|
(1,109)
|
|
$
|
(3,996)
|
|
$
|
87
|
|
$
|
(17,400)
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic
|
24,395
|
|
23,953
|
|
24,306
|
|
23,818
|
|
Dilutive effect of common stock equivalents
|
—
|
|
—
|
|
381
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
24,395
|
|
23,953
|
|
24,687
|
|
23,818
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
$
|
(0.05)
|
|
$
|
(0.12)
|
|
$
|
—
|
|
$
|
(0.63)
|
|
Loss from discontinued operations
|
—
|
|
(0.05)
|
|
—
|
|
(0.10)
|
|
Basic net (loss) income per common share
|
$
|
(0.05)
|
|
$
|
(0.17)
|
|
$
|
—
|
|
$
|
(0.73)
|
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
$
|
(0.05)
|
|
$
|
(0.12)
|
|
$
|
—
|
|
$
|
(0.63)
|
|
Loss from discontinued operations
|
—
|
|
(0.05)
|
|
—
|
|
(0.10)
|
|
Diluted net (loss) income per common share
|
$
|
(0.05)
|
|
$
|
(0.17)
|
|
$
|
—
|
|
$
|
(0.73)
|
7. Fair Value Measurement
Our cash, cash equivalents 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.
As of September 30, 2018, the carrying value of our 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 nine months ended September 30, 2018 or in the year ended December 31, 2017. We did not hold any significant instruments that are measured at fair value on a recurring basis as of September 30, 2018 or December 31, 2017.
The fair value of our instruments measured on a non-recurring basis as of September 30, 2018 and December 31, 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total Gains (Losses)
|
|
Warrant
|
$
|
2,840
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,840
|
|
$
|
—
|
The following is quantitative information about our significant unobservable inputs used in our Level 3 fair value measurements (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Quantitative Inputs Used for Original Warrant
|
|
Quantitative Inputs Used for Replacement Warrant (1)
|
|
Warrant
|
$
|
2,840
|
|
Monte Carlo
|
|
Volatility of underlying
|
|
50.0
|
%
|
|
55.0
|
%
|
|
|
|
|
|
|
Risk-free rate
|
|
1.78
|
%
|
|
2.02
|
%
|
|
|
|
|
|
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
Probability of Designated Event (2)
|
|
0% - 50%
|
|
0% - 50%
|
|
|
|
|
|
|
Timing of Designated Event (2)
|
|
3-5 years from issuance
|
|
3-5 years from issuance
|
____________________
1. In connection with the Replacement Warrant (as defined in Note 16), we received an additional payment of $700 thousand from PEAK6 Investments in the year ended December 31, 2017. In accordance with U.S. GAAP, we performed valuations immediately before and after the equity modification and concluded that the additional payment approximately represented the incremental fair value provided by the Replacement Warrant. For additional information, please see Note 16.
2. Refers to certain change of control transactions, defined as a "Designated Event" as in the Warrant Agreement.
8. Prepaid Expenses and Other Current Assets
The components of our prepaid expenses and other current assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Prepaid services
|
$
|
294
|
|
$
|
533
|
|
Other prepaid contracts
|
2,891
|
|
2,132
|
|
Restricted cash
|
240
|
|
240
|
|
Other
|
358
|
|
327
|
|
Total
|
$
|
3,783
|
|
$
|
3,232
|
9. Contract Costs
In conjunction with the adoption of Topic 606, certain capitalized contract costs that were previously classified as deferred subscription solicitation and commission costs in our condensed consolidated balance sheets as of December 31, 2017 were reclassified to contract costs as of September 30, 2018. For additional information, please see Note 3.
The following table is summary of our incremental contract cost balances, which are included in contract costs in our condensed consolidated balance sheets as of September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Costs to obtain (commissions)
|
$
|
354
|
|
Costs to fulfill
|
26
|
|
Total contract costs
|
$
|
380
|
In the three and nine months ended September 30, 2018, we amortized $196 thousand and $587 thousand, respectively, related to costs to obtain, and there were no adverse changes which would cause the need for an impairment analysis.
In the three and nine months ended September 30, 2018, we amortized $26 thousand and $59 thousand, respectively, related to costs to fulfill, and there were no adverse changes which would cause the need for an impairment analysis.
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. In the three and nine months ended September 30, 2018, we recorded a non-cash impairment of $64 thousand, included in general and administrative expenses in our condensed consolidated statements of operations, of software development-in-progress that will not be placed in service. We had no impairments of internally developed capitalized software in the nine months ended September 30, 2017. Activity in our internally developed capitalized software during the nine months ended September 30, 2018 and 2017 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Depreciation
|
|
Net Carrying
Amount
|
|
Balance at December 31, 2017
|
$
|
18,603
|
|
$
|
(11,829)
|
|
$
|
6,774
|
|
Additions
|
2,625
|
|
—
|
|
2,625
|
|
Depreciation expense
|
—
|
|
(3,343)
|
|
(3,343)
|
|
Balance at September 30, 2018
|
$
|
21,228
|
|
$
|
(15,172)
|
|
$
|
6,056
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
$
|
15,015
|
|
$
|
(7,931)
|
|
$
|
7,084
|
|
Additions
|
2,703
|
|
—
|
|
2,703
|
|
Depreciation expense
|
—
|
|
(2,864)
|
|
(2,864)
|
|
Balance at September 30, 2017
|
$
|
17,718
|
|
$
|
(10,795)
|
|
$
|
6,923
|
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 three months ending December 31, 2018
|
$
|
1,007
|
|
For the years ending December 31:
|
|
|
2019
|
3,452
|
|
2020
|
1,419
|
|
2021
|
178
|
|
Total
|
$
|
6,056
|
11. Goodwill and Intangibles
Changes in the carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Information
Services
Reporting Unit
|
|
Insurance and
Other Consumer
Services
Reporting Unit
|
|
Totals
|
|
Balance as of September 30, 2018:
|
|
|
|
|
|
|
|
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, 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
|
During the nine months ended September 30, 2018, 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 September 30, 2018:
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
$
|
38,831
|
|
$
|
(38,831)
|
|
$
|
—
|
|
$
|
—
|
|
Marketing related
|
|
2,727
|
|
(2,727)
|
|
—
|
|
—
|
|
Technology related
|
|
1,979
|
|
(1,799)
|
|
—
|
|
180
|
|
Total amortizable intangible assets at September 30, 2018
|
|
$
|
43,537
|
|
$
|
(43,357)
|
|
$
|
—
|
|
$
|
180
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
$
|
38,831
|
|
$
|
(38,831)
|
|
$
|
—
|
|
$
|
—
|
|
Marketing related
|
|
2,727
|
|
(2,709)
|
|
—
|
|
18
|
|
Technology related
|
|
1,739
|
|
(1,699)
|
|
—
|
|
40
|
|
Total amortizable intangible assets at December 31, 2017
|
|
$
|
43,297
|
|
$
|
(43,239)
|
|
$
|
—
|
|
$
|
58
|
During the nine months ended September 30, 2018, there were no adverse changes in our long-lived assets, which would cause a need for an impairment analysis.
Intangible assets are amortized over a period of two to ten years. For the three months ended September 30, 2018 and 2017, we had an aggregate amortization expense of $20 thousand and $29 thousand, respectively, which was included in amortization expense in our condensed consolidated statements of operations. For the nine months ended September 30, 2018 and 2017, we had an aggregate amortization expense of $118 thousand and $123 thousand, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):
|
|
|
|
|
|
|
|
For the remaining three months ending December 31, 2018
|
$
|
20
|
|
For the years ending December 31:
|
|
|
2019
|
80
|
|
2020
|
80
|
|
Total
|
$
|
180
|
12. Accrued Expenses and Other Current Liabilities
The components of our accrued expenses and other current liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Accrued marketing
|
$
|
129
|
|
$
|
155
|
|
Accrued cost of sales, including credit bureau costs
|
5,146
|
|
5,044
|
|
Accrued general and administrative expense and professional fees
|
1,241
|
|
570
|
|
Insurance premiums
|
338
|
|
340
|
|
Estimated liability for non-income business taxes
|
892
|
|
783
|
|
Other
|
792
|
|
1,641
|
|
Total
|
$
|
8,538
|
|
$
|
8,533
|
As of September 30, 2018, "Other" includes a short-term commitment for software licenses of $208 thousand. Under this agreement, we will make monthly installment payments of $23 thousand, including interest, through July 2019.
13. Accrued Payroll and Employee Benefits
The components of our accrued payroll and employee benefits are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Accrued payroll
|
$
|
193
|
|
$
|
808
|
|
Accrued benefits
|
244
|
|
408
|
|
Accrued severance
|
115
|
|
285
|
|
Total accrued payroll and employee benefits
|
$
|
552
|
|
$
|
1,501
|
The following table summarizes our accrued severance activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Balance, beginning of period
|
$
|
38
|
|
$
|
1,297
|
|
$
|
285
|
|
$
|
1,440
|
|
Adjustments to expense
|
77
|
|
6
|
|
248
|
|
1,500
|
|
Payments
|
—
|
|
(841)
|
|
(418)
|
|
(2,478)
|
|
Balance, end of period
|
$
|
115
|
|
$
|
462
|
|
$
|
115
|
|
$
|
462
|
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Capital Leases
|
|
For the remaining three months ending December 31, 2018
|
$
|
574
|
|
$
|
67
|
|
For the years ending December 31:
|
|
|
|
|
2019
|
1,977
|
|
400
|
|
2020
|
608
|
|
20
|
|
2021
|
403
|
|
7
|
|
2022
|
314
|
|
—
|
|
2023
|
317
|
|
—
|
|
Total minimum lease payments
|
$
|
4,193
|
|
494
|
|
Less: amount representing interest
|
|
|
(45)
|
|
Present value of minimum lease payments
|
|
|
449
|
|
Less: current obligation
|
|
|
(328)
|
|
Long-term obligations under capital lease
|
|
|
$
|
121
|
We did not enter into any new capital lease arrangements during the three or nine months ended September 30, 2018 or 2017. Rental expenses included in general and administrative expenses for the three months ended September 30, 2018 and 2017 were $642 thousand and $1.0 million, respectively. Rental expenses for the nine months ended September 30, 2018 and 2017 were $2.0 million and $2.5 million, 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 January 2013, the Office of the West Virginia Attorney General ("WVAG") served Intersections Insurance Services Inc. ("IISI") with a complaint 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. On April 21, 2017, the Court granted a motion of the WVAG to add Intersections Inc. as a defendant. The parties are currently engaged in discovery. No trial has been scheduled. We continue to believe that the claims in the complaint are without merit and intend to continue to vigorously defend this matter.
On March 22, 2018, Johan Roets, the Company’s former Chief Executive Officer, filed a civil Complaint against the Company in the Circuit Court of Fairfax County Virginia. The Complaint alleges that the Company’s termination of Mr. Roets’ employment on February 22, 2018 violated his Employment Agreement and seeks monetary damages. The Company believes that the Complaint is without merit and plans to vigorously defend this litigation.
For information regarding our policy for analyzing legal proceedings, please see "—Contingent Liabilities" in Note 2. As of September 30, 2018, 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 our accruals are adequate and we intend to vigorously defend ourselves against such matters, unfavorable resolutions could occur, which could have a material adverse effect on our condensed consolidated financial statements, taken as a whole.
Other
Our products and services are subject to indirect tax obligations, including sales and use taxes, in certain states with which we are currently compliant, and taxability is generally determined by statutory state laws and regulations as well as an assessment of nexus, if applicable. Whether sales of our services are subject to additional states’ indirect taxes is uncertain, due in part to the unique nature of our services and the relationships through which our services are offered, as well as changing state laws and interpretations of those laws. Therefore, we periodically analyze our facts and circumstances related to potential indirect tax obligations in state and other jurisdictions. The following table summarizes our non-income business tax liability activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2018
|
|
2017
|
|
Balance at beginning of period
|
$
|
783
|
|
$
|
94
|
|
Adjustments to existing liabilities
|
109
|
|
1,461
|
|
Payments
|
—
|
|
(94)
|
|
Balance at end of period
|
$
|
892
|
|
$
|
1,461
|
We have been audited in the past and continue to analyze what obligations we have, if any, to state taxing authorities. We analyzed all the information available to us in order to estimate a liability for potential obligations in other jurisdictions including, but not limited to: the delivery nature of our services; the relationship through which our services are offered; the probability of obtaining resale or exemption certificates; limited, if any, nexus-creating activity; and our historical success in settling or abating liabilities under audit. We continue to correspond with the applicable authorities in an effort toward resolution of our potential liabilities using a variety of settlement options including, but not limited to, voluntary disclosures, negotiation and standard appeals process, and we may adjust the liability as a result of such correspondence. Proceedings with jurisdictions are inherently unpredictable, but 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. For additional information, please see Note 16 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K.
In June 2018, the Supreme Court heard the appeal from the South Dakota Supreme Court on the matter of
South Dakota v. Wayfair, Inc.
and ruled in favor of the state, perhaps giving states more authority to require online retailers and remote sellers to collect sales tax. We have the appropriate internal processes and capabilities and are compliant in the collection of sales and use tax across a broad tax footprint throughout the U.S. We place a significant amount of emphasis on the taxability of our products and services, rather than on nexus or physical presence. Therefore, we do not believe there is a material impact to our business. We will continue to monitor for further regulatory actions by states, and perhaps the federal government. Further actions, including any retrospective state requirements or actions impacting state income tax obligations, would likely increase our cost of doing business and could reduce demand for our services and create additional administrative and compliance burdens, all of which could adversely affect our results of operations.
We have entered into various software licenses and operational non-refundable commitments totaling approximately $57.2 million as of September 30, 2018, payable in monthly and yearly installments through December 31, 2021. These amounts will be expensed on a pro-rata basis and recorded in cost of revenue and general and administrative expenses in our condensed consolidated statements of operations.
15. Other Long-Term Liabilities
The components of our other long-term liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Deferred rent
|
$
|
657
|
|
$
|
1,223
|
|
Uncertain tax positions, interest and penalties not recognized
|
1,022
|
|
1,669
|
|
Contract liabilities, non-current
|
30
|
|
—
|
|
Accrued general and administrative expenses
|
2
|
|
3
|
|
Total other long-term liabilities
|
$
|
1,711
|
|
$
|
2,895
|
For additional information regarding the change in uncertain tax positions, see Note 17.
16. Debt and Other Financing
Debt
In March 2016, we and our subsidiaries entered into a credit agreement with Crystal Financial SPV LLC ("Prior Credit Agreement"). The Prior Credit Agreement provided for a $20.0 million senior secured term loan, which was fully funded at closing, with a maturity date of March 21, 2019 and interest at the greater of LIBOR plus 10% per annum or 10.5% per annum.
In April 2017, we refinanced our indebtedness under the Prior Credit Agreement with a new term loan facility with PEAK6 Investments, L.P. ("PEAK6 Investments"). We also executed amendments to the new term loan facility in July 2017, November 2017, April 2018, and June 2018 (together with the amendments, the "Credit Agreement"), which had a principal outstanding amount of $14.5 million as of September 30, 2018 and an interest rate of 10.91% per annum. The maturity date of the Credit Agreement is December 31, 2018 with monthly principal payments until the remaining $14.5 million is repaid. The Credit Agreement is secured by substantially all our assets and a pledge by us of stock and membership interests we hold in any domestic and first-tier foreign subsidiaries.
We used approximately $13.9 million of the net proceeds from the Credit Agreement to repay in full the aggregate principal amount outstanding under the Prior Credit Agreement and to pay interest, prepayment penalties, transaction fees and expenses as a result of the termination. We used the remainder of the proceeds from the Credit Agreement for general corporate purposes, including to increase subscriber acquisitions and continue our innovative product development. As a result of the refinancing, we recorded a loss on extinguishment of debt of $1.5 million in the year ended December 31, 2017, including interest, prepayment penalties, transaction fees and expenses totaling approximately $487 thousand as a result of the termination of the Prior Credit Agreement.
Certain events defined in the Credit Agreement require prepayment of the aggregate principal amount of the term loan, including all or a portion of proceeds received from asset dispositions, casualty events, extraordinary receipts, and certain equity issuances. Once amounts borrowed have been paid or prepaid, they may not be reborrowed.
On April 3, 2018, we entered into Amendment No. 3 with PEAK6 Investments (“Amendment No. 3”), amending the Credit Agreement. Amendment No. 3 provided for a voluntary, partial prepayment of the outstanding principal balance of the term loans in the amount of $1.0 million, which we paid in April 2018, and amended one of the financial covenants in the Credit Agreement. The amended covenant reduced our requirement to maintain at all times a minimum amount of cash on hand, as defined in the Credit Agreement, to (i) the lesser of 20% of the total amount outstanding under the term loans and $2.5 million for the period commencing on the Third Amendment Date through and including May 31, 2018, and (ii) the lesser of 20% of the total amount outstanding under the term loans and $3.0 million for the fiscal quarter ending June 1, 2018 and each fiscal quarter thereafter.
On June 8, 2018, we entered into Amendment No. 4 with PEAK6 Investments (“Amendment No. 4”), amending the Credit Agreement. Amendment No. 4 (i) requires that $1.5 million principal prepayments be made on the last day of June through November, each of which is to be accompanied by a 1.5% prepayment fee; (ii) shortens the maturity date to December 31, 2018; (iii) relieves the obligation to pay a 3% prepayment fee upon full prepayment of the term loan and on required partial prepayments resulting from equity or subordinate debt proceeds; (iv) increases the allowable principal amount of subordinate debt from $2 million to $15 million; and (v) confirms that debt and equity issued to affiliates is permitted if the proceeds are used to pay the term loan. The relief with respect to the 3% prepayment fee applies only if no event of default exists. Amendment No. 4 also confirms that no default currently exists with respect to the Credit Agreement.
On June 27, 2018, we entered into two promissory notes to borrow a total of $3.0 million from Loeb Holding Corporation ($2.0 million) and David A. McGough ($1.0 million) (for related party information, please see Note 19). On September 24, 2018, we entered into a promissory note under substantially identical terms to borrow an additional $1.0 million from Loeb Holding Corporation (together, the “Bridge Notes”). As of September 30, 2018, $4.0 million was outstanding under the Bridge Notes, as well as $84 thousand of accrued interest, payable upon maturity, which is included in accrued expenses and other current liabilities in our condensed consolidated balance sheets.
The Bridge Notes provide (a) for a maturity date of June 30, 2019, (b) for an interest rate equivalent to the interest rate pursuant to the Credit Agreement, and (c) that the Company or the holder may convert or exchange the principal and accrued interest of such Bridge Note into securities to be sold by the Company in a “qualified financing” (an offering of debt and/or equity securities with net proceeds of at least $10 million (inclusive of the Bridge Notes) to the Company). All our obligations under the Bridge Notes are subordinated to the extent provided for in the subordination agreements dated as of June 27, 2018 (the “Subordination Agreements”) among the Borrower, the Lender and Peak6 Strategic Capital LLC. We used the net proceeds of the Bridge Notes to make required prepayments under the Credit Agreement. On August 1, 2018, we entered into an amendment to provide that the Bridge Notes shall not be convertible or exchangeable into any securities of the Company, with certain exceptions, if the issuance of such securities would require stockholder approval under the applicable NASDAQ Listing Rules.
Under the Credit Agreement and Bridge Notes, minimum required maturities were as follows (in thousands):
|
|
|
|
|
|
|
|
For the remaining three months ending December 31, 2018
|
$
|
14,500
|
|
For the year ending December 31, 2019
|
4,000
|
|
|
|
|
|
|
|
|
|
|
Total outstanding as of September 30, 2018
|
$
|
18,500
|
As of September 30, 2018, $18.5 million was outstanding under both agreements, which is presented net of unamortized debt issuance costs and debt discount totaling $265 thousand in our condensed consolidated balance sheets in accordance with U.S. GAAP. As of December 31, 2017, $21.5 million was outstanding under the Credit Agreement, which is presented net of unamortized debt issuance costs and debt discount totaling $764 thousand in our condensed consolidated balance sheets.
On October 31, 2018, we entered into the Note Purchase Agreement, pursuant to which we sold the Notes to Parent in the aggregate principal amount of $30.0 million for a purchase price in cash of $30.0 million, and issued to Loeb Holding Corporation and David A. McGough additional Notes in the aggregate principal amount of $4.0 million in exchange for the Bridge Notes previously issued by us to such Purchasers (who received payment in cash of the accrued and unpaid interest on the Bridge Notes). We used approximately $14.6 million of the net proceeds from the sale of the Notes to repay in full the principal outstanding under the Credit Agreement and to pay related interest thereon. We intend to use the balance of the net proceeds for general corporate purposes. The Notes mature on October 31, 2021 and are convertible in whole or in part, together with accrued and unpaid interest with respect to the principal amount converted, into shares of the Company’s common stock and preferred stock. For additional information on the Note Purchase Agreement as well as the Agreement and Plan of Merger, which we also entered into on October 31, 2018, please see Note 21.
The Credit Agreement, which was paid in full on October 31, 2018, contained certain customary covenants, including a requirement to maintain at all times a minimum cash on hand amount of the lesser of 20% or certain stated amounts of the total amount outstanding under the term loan, as set forth in the Credit Agreement, and minimum EBITDA requirements. The Credit Agreement also contained 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 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 ("Original Warrant”). In connection with a later amendment to the Credit Agreement, we issued a warrant to PEAK6 Investments for an additional purchase price of $700 thousand in cash ("Replacement Warrant"), and PEAK6 Investments surrendered the Original Warrant previously issued by us on April 20, 2017. The Replacement Warrant provides PEAK6 with the right to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $2.50 per share. The Replacement 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 Replacement Warrant without a cash payment upon the terms set forth therein. Warrants are included in stockholders' equity in our condensed consolidated balance sheets and were valued at $2.8 million as of September 30, 2018 and December 31, 2017. For additional information related to the fair value of the warrants, please see Note 7.
Stock Redemption
In connection with the 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 Credit Agreement.
17. Income Taxes
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 nine months ended September 30, 2018, as there has been no change to the conclusion from the year ended December 31, 2017 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.
Our consolidated effective tax rate from continuing operations for the three months ended September 30, 2018 and 2017 was (24.7)% and (0.2)%, respectively. Our consolidated effective tax rate from continuing operations for the nine months ended September 30, 2018 and 2017 was 140.3% and 0.2%, respectively. The increase in the rate for the nine months ended September 30, 2018 is primarily due to the discrete resolution of uncertain tax positions related to claimed general business credits under audit that were deemed effectively settled in the period, partially offset by an adjustment to the valuation allowance, which is further described below.
The amount of deferred tax assets considered realizable as of September 30, 2018 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.
We continued to evaluate the effects of the Tax Cuts and Jobs Act of 2017 (“Tax Act”) and are applying the guidance in Staff Accounting Bulletin No. 118. As of December 31, 2017, we made a reasonable estimate of the effects on our existing deferred tax balances, including the impact of our valuation allowance due to the indefinite life of certain deferred tax assets and the state adoption of the federal tax law changes. In the three months ended September 30, 2018, we made an adjustment to our initial assumptions based on new interpretations, which are consistent with the filing of our federal income tax return, by recording additional income tax expense in the amount of $212 thousand. We continue to review our facts and circumstances, including resolution, if any, of uncertainty surrounding conformity of the Tax Act from certain state tax jurisdictions, in the measurement period. We plan to complete our analysis no later than December 31, 2018. It is possible that future adjustments may have a material adverse effect on our cash tax liabilities, results of operations, or financial condition.
During the nine months ended September 30, 2018, we decreased our gross unrecognized tax benefits primarily related to a portion of tax credits that were settled in conjunction with the federal examination for tax years 2010 and 2011. There were no material changes to our uncertain tax positions during the nine months ended September 30, 2017.
18. Stockholders’ Equity
As of September 30, 2018, we have 4.0 million shares of common stock available for future grants of awards under the Plan, and awards for approximately 4.6 million shares are outstanding under all of our active and inactive plans.
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 September 30, 2018 and 2017 was $25 thousand and $170 thousand, respectively. Total share based compensation (benefit) expense recognized for stock options for the nine months ended September 30, 2018 and 2017 was $(183) thousand and $2.7 million, respectively. The decrease is primarily due to options granted in June 2017 that were fully expensed on each grant date due to a retirement-age specific provision in our Executive Chairman and President's employment and award agreements.
The following table summarizes our stock option activity during the nine months ended September 30, 2018:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
|
|
Aggregate Intrinsic Value
|
|
Weighted-Average Remaining Contractual Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
(In years)
|
|
Outstanding at December 31, 2017
|
2,933,232
|
|
$
|
3.82
|
|
|
|
|
|
Granted
|
539,000
|
|
$
|
2.04
|
|
|
|
|
|
Canceled
|
(714,345)
|
|
$
|
3.63
|
|
|
|
|
|
Outstanding at September 30, 2018
|
2,757,887
|
|
$
|
3.52
|
|
$
|
5
|
|
7.22
|
|
Exercisable at September 30, 2018
|
416,792
|
|
$
|
4.66
|
|
$
|
—
|
|
1.40
|
The weighted average grant date fair value of options granted, based on the Black Scholes method, during the three months ended September 30, 2018 was $0.84. There were no options granted in the three months ended September 30, 2017. The weighted average grant date fair value of options granted during the nine months ended September 30, 2018 and 2017 was $0.96 and $1.94, respectively.
There were no options exercised during the three or nine months ended September 30, 2018 or 2017.
As of September 30, 2018, there was $390 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 1.0 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 September 30, 2018 and 2017 was $935 thousand and $1.6 million, respectively. Total share based compensation expense recognized for RSUs for the nine months ended September 30, 2018 and 2017 was $2.2 million and $4.0 million, respectively. The decrease in the year-to-date period is due to reversing the cumulative expense on 535 thousand unvested RSUs granted to a former employee that were forfeited in the nine months ended September 30, 2018.
The following table summarizes the activity of our RSUs during the nine months ended September 30, 2018:
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|
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|
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Number of RSUs
|
|
Weighted-Average Grant Date Fair Value
|
|
Outstanding at December 31, 2017
|
2,737,353
|
|
$
|
3.83
|
|
Granted
|
120,000
|
|
$
|
2.32
|
|
Canceled (1)
|
(719,775)
|
|
$
|
3.72
|
|
Vested
|
(293,492)
|
|
$
|
3.94
|
|
Outstanding at September 30, 2018
|
1,844,086
|
|
$
|
3.75
|
____________________
1. Includes shares net-settled to cover statutory employee taxes related to the vesting of restricted stock awards, which increased treasury shares by 15 thousand and 68 thousand in the nine months ended September 30, 2018 and 2017, respectively.
As of September 30, 2018, there was $2.9 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 1.02 years.
Other
As of September 30, 2018, we have an outstanding Warrant held by our lender, PEAK6 Investments, to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $2.50 per share. For additional information, please see Note 16.
As a result of shares withheld for tax purposes on the vesting of a restricted stock award, we increased our treasury shares by 15 thousand and 68 thousand in the nine months ended September 30, 2018 and 2017, respectively. There are no remaining unvested restricted stock awards outstanding. Under the Credit Agreement, we are currently prohibited from declaring and paying ordinary cash or stock dividends or repurchasing any shares of common stock.
19. Related Party Transactions
Digital Matrix Systems, Inc.
– The Chief Executive Officer and President of Digital Matrix Systems, Inc. ("DMS"), David A. McGough, serves as one of our board members. We have service agreements with DMS for monitoring updates on a daily and quarterly basis, along with occasional contracts for certain credit analysis and application development services. In connection with these agreements, we paid monthly installments totaling $541 thousand and $491 thousand in the three months ended September 30, 2018 and 2017, respectively. In the nine months ended September 30, 2018 and 2017, we paid $1.8 million and $1.9 million, respectively. These amounts are included within cost of revenue and general and administrative expenses in our condensed consolidated statements of operations. As of September 30, 2018 and December 31, 2017, we owed $108 thousand and $178 thousand, respectively, to DMS under these agreements.
On June 27, 2018, we entered into the Bridge Notes (which were amended and restated in August 2018) to borrow a total of $3.0 million, of which $1.0 million was funded by Mr. McGough. The Bridge Notes have a maturity date of June 30, 2019. As of September 30, 2018, we owed $1.0 million under this agreement.
PEAK6 Investments, L.P.
– During 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with the Credit Agreement with PEAK6 Investments. In connection with the Credit Agreement, we paid PEAK6 Investments $1.5 million for the repurchase of common stock, and we received a total of $2.2 million for the issuance of the Warrant. In the three months ended September 30, 2018 and 2017, we paid interest of $527 thousand and $485 thousand, respectively. In the nine months ended September 30, 2018 and 2017, we paid interest and other fees of $1.7 million and $864 thousand, respectively. As of September 30, 2018 and December 31, 2017, our outstanding principal balance was $14.5 million and $21.5 million, respectively. PEAK6 Investments owned approximately 419 thousand shares of our common stock immediately prior to the closing of the Credit Agreement. For additional information, please see Note 16.
Loeb Holding Corporation
– On June 27, 2018, we entered into the Bridge Notes (which were amended and restated in August 2018) to borrow a total of $3.0 million, of which $2.0 million was funded by Loeb Holding Corporation ("Loeb"). On September 24, 2018 we entered into a promissory note to borrow an additional $1.0 million from Loeb Holding Corporation. The terms of the new promissory note are substantially identical to the prior Bridge Notes. Loeb beneficially owns approximately 40% of our outstanding shares of common stock and is our largest stockholder. Thomas L. Kempner, our Board member until October 2018, was the Chairman and Chief Executive Officer and the beneficial owner of a majority of the voting stock of Loeb. Bruce L. Lev, one of our Board members, is a Managing Director of Loeb. The Bridge Notes have a maturity date of June 30, 2019. As of September 30, 2018, we owed $3.1 million under this agreement, which includes accrued interest.
One Health Group, LLC
– On July 31, 2017, we entered into and consummated the divestiture of Voyce to One Health Group, LLC (the "Purchaser"), pursuant to the terms and conditions of a membership interest purchase agreement (the "Purchase Agreement") between our wholly owned subsidiary and the Purchaser. The purchase price for the Interests (the "Purchase Price") is equal to (i) the sum of one hundred dollars ($100), paid in cash at closing, plus (ii) a revenue participation of up to $20.0 million (the "Maximum Amount"), payable pursuant to the terms and conditions of the Purchase Agreement.
The Purchaser is a newly-formed entity of which Michael R. Stanfield, our Executive Chairman and President, is a significant minority investor, and certain former members of the Voyce management team are the managing member and investors.
Monde of Events
– The Chief Executive Officer of Monde of Events is the spouse of our Chief Operating Officer. We have retained Monde of Events to provide event planning services for our corporate events. In the three months ended September 30, 2018 and 2017, we paid Monde of Events $3 thousand and $13 thousand, respectively, for these services. In the nine months ended September 30, 2018 and 2017, we paid Monde of Events $13 thousand and $63 thousand, respectively, for these services. As of September 30, 2018, there were no amounts due to Monde of Events.
20. Segment and Geographic Information
We have ongoing operations in two segments: 1) Personal Information Services and 2) Insurance and Other Consumer Services. In January 2017 we sold the business comprising our Bail Bonds Industry Solutions segment, and in July 2017 we sold the business comprising our Pet Health Monitoring segment. For additional information, please see Note 5. 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 services.
The following table sets forth segment information for the three and nine months ended September 30, 2018 and 2017 (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Information Services
|
|
Insurance and Other Consumer Services
|
|
Bail Bonds Industry Solutions
|
|
Corporate
|
|
Consolidated
|
|
Three months ended September 30, 2018
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|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
35,984
|
|
$
|
1,501
|
|
$
|
—
|
|
$
|
—
|
|
$
|
37,485
|
|
Depreciation
|
1,584
|
|
3
|
|
—
|
|
—
|
|
1,587
|
|
Amortization
|
20
|
|
—
|
|
—
|
|
—
|
|
20
|
|
Income (loss) from operations
|
246
|
|
574
|
|
—
|
|
(835)
|
|
(15)
|
|
(Loss) income from continuing operations before income taxes
|
(628)
|
|
574
|
|
—
|
|
(835)
|
|
(889)
|
|
Three months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
37,845
|
|
$
|
1,403
|
|
$
|
—
|
|
$
|
—
|
|
$
|
39,248
|
|
Depreciation
|
1,355
|
|
23
|
|
—
|
|
—
|
|
1,378
|
|
Amortization
|
29
|
|
—
|
|
—
|
|
—
|
|
29
|
|
(Loss) income from operations
|
(1,155)
|
|
386
|
|
—
|
|
(1,487)
|
|
(2,256)
|
|
(Loss) income from continuing operations before income taxes
|
(1,859)
|
|
386
|
|
—
|
|
(1,487)
|
|
(2,960)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
110,651
|
|
$
|
4,531
|
|
$
|
—
|
|
$
|
—
|
|
$
|
115,182
|
|
Depreciation
|
4,587
|
|
17
|
|
—
|
|
—
|
|
4,604
|
|
Amortization
|
118
|
|
—
|
|
—
|
|
—
|
|
118
|
|
Income (loss) from operations
|
2,841
|
|
1,671
|
|
—
|
|
(2,415)
|
|
2,097
|
|
Income (loss) from continuing operations before income taxes
|
528
|
|
1,671
|
|
—
|
|
(2,415)
|
|
(216)
|
|
Nine months ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
114,832
|
|
$
|
4,617
|
|
$
|
182
|
|
$
|
—
|
|
$
|
119,631
|
|
Depreciation
|
3,880
|
|
86
|
|
—
|
|
—
|
|
3,966
|
|
Amortization
|
123
|
|
—
|
|
—
|
|
—
|
|
123
|
|
(Loss) income from operations
|
(6,514)
|
|
1,226
|
|
(46)
|
|
(6,353)
|
|
(11,687)
|
|
(Loss) income from continuing operations before income taxes
|
(9,800)
|
|
1,225
|
|
(46)
|
|
(6,353)
|
|
(14,974)
|
The following table sets forth segment information as of September 30, 2018 and December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
December 31, 2017
|
|
|
|
|
Property and Equipment, net
|
|
Total Assets
|
|
Property and Equipment, net
|
|
Total Assets
|
|
Segment:
|
|
|
|
|
|
|
|
|
Personal Information Services
|
$
|
8,503
|
|
$
|
27,436
|
|
$
|
11,017
|
|
$
|
35,517
|
|
Insurance and Other Consumer Services
|
6
|
|
9,796
|
|
23
|
|
10,159
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
—
|
|
504
|
|
—
|
|
803
|
|
Consolidated
|
$
|
8,509
|
|
$
|
37,736
|
|
$
|
11,040
|
|
$
|
46,479
|
For revenue by geographic area, please see "—Disaggregation of Revenue" in Note 4.
21. Subsequent Events
On October 31, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Parent and WC SACD One Merger Sub, Inc. (“Merger Sub”), a wholly-owned subsidiary of Parent, pursuant to which, among other things, subject to the terms and conditions of the Merger Agreement, Merger Sub has agreed to make a cash tender offer (the “Offer”) to purchase all of the outstanding shares of our common stock (the “Shares”), at a purchase price of $3.68
per Share in cash (the “Offer Price”). Parent and Merger Sub are affiliates of WC SACD One, Inc., (“WC SACD”), a joint venture formed by iSubscribed, WndrCo Holdings, LLC and certain General Catalyst funds (collectively, the “Investors”).
The transaction has been unanimously approved by a Special Committee of the Board of Directors of the Company comprised of independent and disinterested directors. Certain affiliates of Intersections have agreed, subject to customary conditions, not to tender a majority of their shares into the tender offer, but to roll over such shares in the transaction into WC SACD. Such affiliates have also entered into tender and support agreements with Parent pursuant to which they have, among other things, agreed to tender to Parent in the offer the shares of common stock that they are not rolling over in the transaction. The transaction is subject to customary closing conditions, including the expiration of the applicable period under the Hart-Scott-Rodino Act and a minimum tender condition that requires the tender of both more than 50% of the our outstanding shares and more than 50% of our outstanding shares held by stockholders other than directors, executive officers, and rollover participants. The transaction is not subject to any financing contingency. The transaction is expected to close during the first quarter of 2019.
If the Merger is consummated, our shares of Common Stock will be delisted from the NASDAQ Stock Market and deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
On October 31, 2018, in connection with the Merger Agreement, we also entered into the Note Purchase Agreement, pursuant to which we sold the Notes to Parent in the aggregate principal amount of $30.0 million for a purchase price in cash of $30.0 million, and issued to Loeb Holding Corporation and David A. McGough additional Notes in the aggregate principal amount of $4.0 million in exchange for the Bridge Notes previously issued by us to such Purchasers (who received payment from the Company in cash of approximately $87 thousand for the accrued and unpaid interest on the Bridge Notes). We used approximately $14.6 million of the net proceeds from the sale of the Notes to repay in full the principal outstanding under the Credit Agreement and to pay related interest thereon. We intend to use the balance of the net proceeds for general corporate purposes.
The Notes mature on October 31, 2021, subject to potential acceleration in the event of certain specified events of default, and bear interest, payable quarterly in cash, at the rate of 6% per annum through October 31, 2019, and at the rate of 8% per annum thereafter, in each case subject to an increase of 2% per annum if any event of default has occurred and is continuing. The Notes are guaranteed by our subsidiaries and are secured by a first-priority security interest in substantially all the assets of the Company and such subsidiaries. The Notes are convertible in whole or in part, together with accrued and unpaid interest with respect to the principal amount converted, into shares of our common stock at a conversion price of $2.27 per share, subject to adjustment. To the extent the Company remains listed on NASDAQ and conversion occurs prior to the date on which approval of the Company’s stockholders to permit conversion of all the Notes into shares of common stock under the rules of NASDAQ becomes effective, we shall not be required to issue more shares of common stock than the converting Note holder’s pro rata share of 19.9% of the shares of common stock outstanding following conversion, and the remainder of the Notes to be converted shall be convertible into shares of non-voting convertible preferred stock of the Company (the “Preferred Stock”). Prior to the date on which such approval of the Company’s stockholders becomes effective, the issuance of common stock upon conversion of the Notes to officers or directors of the Company or their affiliates may be further limited to the extent they are subject to applicable NASDAQ rules. The Notes will automatically convert into common stock and (if applicable) Preferred Stock immediately prior to either the completion of the Merger or the consummation of a “Superior Transaction” (as defined in the Notes). Each Note may also be converted, at the option of the Purchaser, upon (i) the consummation of certain “Alternative Transactions” (as defined in the Notes), (ii) a determination by the Company’s Board of Directors that the Company is no longer pursuing a process to sell the Company, or (iii) on or after April 30, 2019.