NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Business
We provide innovative, information based solutions that help consumers manage risks and make better informed life decisions. Under our Identity Guard
®
brand and other brands that comprise our Personal Information Services segment, we 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 recently launched Identity Guard
®
with Watson
™
products, we help protect consumers against the risks associated with the inappropriate exposure of their personal information that can result in fraudulent use or reputation damage. Identity Guard
®
is offered through large and small organizations as an embedded product for either its employees or consumers, as well as directly to consumers through our direct marketing efforts. In late 2016, we expanded our suite of Identity Guard
®
products and launched Identity Guard
®
with Watson
™
. Identity Guard
®
with Watson
™
offers robust early detection of potential risks, 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. We believe that our suite of products and services offer consumers the most proactive and comprehensive identity theft monitoring and online privacy services available on the market today.
We have ongoing operations in one other segment, Insurance and Other Consumer Services. As part of our strategy to have a singular focus on our Personal Information Services segment, we recently sold: 1) the business comprising our Bail Bonds Industry Solutions segment in January 2017; 2) our Habits at Work business, the results of which are recorded in our Personal Information Services segment, in June 2017; and 3) the business comprising our Pet Health Monitoring segment in July 2017. Corporate headquarter office transactions including, but not limited to, payroll, share based compensation and other expenses related to our Chairman and non-employee Board of Directors are reported in our Corporate business unit.
Our Insurance and Other Consumer Services segment includes insurance and membership products for consumers, delivered on a subscription basis. We are not planning to develop new business in this segment and are experiencing normal subscriber attrition due to ceased marketing and retention efforts. Some of our legacy subscriber portfolios have been cancelled, and our continued servicing of other subscribers may be cancelled as a result of actions taken by one or more financial institutions.
Our Pet Health Monitoring segment included the health and wellness monitoring products and services for veterinarians and pet owners through our former subsidiary, i4c Innovations, which did business as Voyce ("i4c" or "Voyce"). Voyce generated substantial losses from formation to 2016 and, after concentrated efforts, was unable to generate an acceptable level of revenue. Effective July 31, 2017, we sold Voyce to a newly-formed entity of which Michael R. Stanfield, our Chairman and Founder, will be a minority investor.
The results of this segment are reported as discontinued operations in accordance with U.S. GAAP beginning in the three months ended September 30, 2017. For additional information, please see Note 4.
Prior to January 31, 2017, our Bail Bonds Industry Solutions segment included the automated service solutions for the bail bonds industry provided by Captira Analytical ("Captira"). Effective January 31, 2017, we divested our ownership in Captira. This segment’s operating results, along with the operating results of Habits at Work, have not had a major effect on our condensed consolidated financial results and are not classified as a discontinued operation. For additional information, please see Note 4
.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission, and in management’s opinion reflect all normal and recurring adjustments necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. They include the accounts of the Company and our subsidiaries.
In conjunction with our singular refocus on our identity and privacy protection services, we changed our policy of allocating general and administrative expenses from our Corporate business unit into our other segments, which resulted in a change in our measurement of segment profit and loss. Beginning in 2017, we directly charge our Personal Information Services segment for the majority of general and administrative expenses including executive, legal, human resources, finance and internal audit expenses.
We have elected not to recast our condensed consolidated financial statements to reflect this change for the
three and nine months ended September 30, 2016
. For information on the effects of the change in measurement, please see Note 19.
The information in our condensed consolidated financial statements is presented for the
three and nine months ended September 30, 2017
and
2016
giving effect to the disposal of i4c, with the historical financial results of the Voyce business reflected as
discontinued operations. In accordance with U.S. GAAP, we did not allocate corporate overhead expenses to discontinued operations for the year ended December 31, 2016 or nine months ended September 30, 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, 2016 and the nine months ended September 30, 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 4.
All intercompany transactions have been eliminated from the condensed consolidated statements of operations. The condensed consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.
These condensed consolidated financial statements do not include all the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended
December 31, 2016
, as filed in our Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Restricted Cash
We classify cash as restricted when the cash is unavailable for withdrawal or usage for general operations. Our restricted cash represents cash collateral to
one
commercial bank for corporate credit cards. Restricted cash is included in prepaid expenses and other current assets in our condensed consolidated balance sheets.
Revenue Recognition
We recognize revenue on 1) identity theft protection services, 2) insurance services and 3) other monthly membership products and transaction services.
Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees billed by our clients are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts. Subscription fees billed by us are generally billed directly to the subscriber’s credit card except for arrangements under which subscription fees are paid to us by our clients on behalf of the subscriber. The prices to subscribers of various configurations of our products and services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, our subscriptions periodically may be offered with trial, delayed billing or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed.
Identity Theft Protection Services
We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain signed contracts with all of our clients and paper and electronic confirmations with individual purchasers, b) delivery has occurred, c) the seller’s price to the buyer is fixed as sales are generally based on contract or list prices and payments from organizations are collected within 30 days with no significant write-offs, and d) collectability is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection. Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. We also generate revenue through a collaborative arrangement, which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement.
Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service and the service is earned over the year. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscriptions with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro-rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our historical experience. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year.
We record revenue on a gross basis in the amount that we bill the subscriber when our arrangements provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the credit risk for the amount billed to the subscriber. We also provide services for which certain clients are the primary obligors directly to their customers. We record revenue in the amount that we bill certain clients, and not the amount billed to their customers, when our client is the primary obligor,
establishes the price to the customer and bears the credit risk. Revenue from these arrangements is recognized on a monthly basis when earned, which is at the time we provide the service.
Insurance Services
We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain paper and electronic confirmations with individual purchasers, b) delivery has occurred, c) the seller’s price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectability is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized when earned.
For insurance products, we record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products.
We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance carriers are excluded from our revenues and operating expenses.
Insurance premiums collected but not remitted to insurance carriers as of
September 30, 2017
and
December 31, 2016
totaled
$353 thousand
and
$360 thousand
, respectively, and are included in accrued expenses and other current liabilities in our condensed consolidated balance sheets.
Other Membership Products and Transaction Services
For other membership products, we record revenue on a gross basis as we serve as the primary obligor in the transactions, have latitude in establishing price and bear credit risk for the amount billed to the subscriber.
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.
On January 1, 2017, we prospectively adopted ASU 2017-04, "
Intangibles—Goodwill and Other
." In evaluating whether indicators of impairment exist, an initial assessment of qualitative factors to determine whether it is necessary to perform the goodwill impairment test can be utilized (commonly referred to as the step zero approach). For reporting units in which the qualitative assessment concludes it is more likely than not that the fair value is more than its carrying value, the guidance eliminates the requirement to perform further goodwill impairment testing. For those reporting units where a significant change or event occurs, and where potential impairment indicators exist, we perform the quantitative assessment to test goodwill for impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others (a) a significant decline in our expected future cash flows; (b) a sustained, significant decline in our stock price and market capitalization; (c) a significant adverse change in legal factors or in the business climate; (d) unanticipated competition; (e) the testing for recoverability of a significant asset group within a reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact in our 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, 2017
, goodwill of
$347 thousand
resided in our Insurance and Other Consumer Services reporting unit and goodwill of
$9.4 million
resided in our Personal Information Services reporting unit.
We review long-lived assets, including finite-lived intangible assets, property and equipment and other long-term assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Significant judgments in this area involve determining whether a triggering event has occurred and determining the future cash flows for assets involved. In conducting our analysis, we would compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be impaired. If the net book value exceeds the undiscounted cash flows, an impairment charge is measured and recognized. An impairment charge is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated by discounting the future cash flows associated with these assets.
Intangible assets subject to amortization may include customer, marketing and technology related intangibles, as well as trademarks. Such intangible assets, excluding customer related intangibles, are amortized on a straight-line basis over their estimated useful lives, which are generally two to ten years. Customer related intangible assets are amortized on either a straight-line or accelerated basis, depending upon the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized to interest expense using the effective interest method over the life of the related debt agreements. The effective interest rate applied to the amortization is reviewed periodically and may change if actual principal repayments of the term loan differ from estimates. In accordance with U.S. GAAP, short-term and long-term debt are presented net of the unamortized debt issuance costs in our condensed consolidated balance sheets.
Classification of Debt
On April 20, 2017, we refinanced our existing credit agreement dated as of March 21, 2016, as amended from time to time ("Prior Credit Agreement"), with a new $20.0 million term loan facility (as amended to date, the "New Credit Agreement"). Pursuant to the New Credit Agreement, as amended, we are required to make certain prepayments on our term loans in addition to scheduled quarterly repayments, including but not limited to asset dispositions, extraordinary receipts, excess cash flows (as defined in the New Credit Agreement) and certain equity issuances. Scheduled quarterly repayments and estimated prepayments that we expect to remit in the next twelve months, if any, are classified as the current portion of long-term debt in our condensed consolidated financial statements, net of unamortized debt issuance costs and debt discount to be amortized in the next twelve months based on the current effective interest rate applied.
Share Based Compensation
We currently issue equity and equity-based awards under the 2014 Stock Incentive Plan (the "Plan"). Individual awards under the 2014 Stock Incentive Plan may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and/or restricted stock units.
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, 2017 and 2016.
Expected Dividend Yield.
Under the Prior Credit Agreement, we were prohibited from declaring and paying dividends and therefore, the dividend yield was zero for 2017 and 2016.
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 49% and 45% for 2017 and 2016, 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 1.8% and 1.1% for 2017 and 2016, respectively.
Expected Term.
The expected term of options granted was determined by considering employees’ historical exercise patterns, or approximately 5.0 years and 4.8 years for 2017 and 2016, respectively. We will continue to review our estimate in the future and adjust it, if necessary, due to changes in our historical exercises.
In accordance with U.S. GAAP, we assess the probability that the performance conditions of any performance-based restricted stock units ("PBRSUs") will be achieved and record share based compensation expense based on the probable outcome of that performance condition. Vesting of PBRSUs is dependent upon continued employment and achievement of defined performance goals for the year, which is based upon Adjusted EBITDA as defined and determined by the Compensation Committee of the Board of Directors. We recognize the share based compensation expense ratably over the implied service period. PBRSUs will vest no later than March 15 of the year after they are granted. We may make changes to our assessment of probability and therefore, adjust share based compensation expense accordingly throughout the vesting period. During the nine months ended September 30, 2017, we did not grant PBRSUs.
Income Taxes
We account for income taxes under the applicable provisions of U.S. GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and future reversal of existing deferred tax assets and liabilities, sufficient sources of taxable income in available carryback periods, tax-planning strategies, and historical results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three trailing years of cumulative operating income (loss). Valuation allowances are provided, if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.
Accounting for income taxes in interim periods provides that at the end of each interim period we are required to make our best estimate of the consolidated effective tax rate expected to be applicable for our full calendar year. The rate so determined shall be used in providing for income taxes on a consolidated current year-to-date basis. Further, the rate is reviewed, if necessary, as of the end of each successive interim period during the year to our best estimate of our annual effective tax rate.
In addition to the amount of tax resulting from applying the estimated annual effective tax rate to income from operations before income taxes, we may include certain items treated as discrete events to arrive at an estimated overall tax amount.
We believe that our tax positions comply with applicable tax law. As a matter of course, we may be audited by various taxing authorities and these audits may result in proposed assessments where the ultimate resolution may result in us owing additional taxes. U.S. GAAP addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. U.S. GAAP provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.
Our income tax expense and liability and/or receivable, deferred tax assets and liabilities, and liabilities for uncertain tax benefits reflect management’s best assessment of estimated current and future taxes to be paid or received. Significant judgments and estimates are required in determining the consolidated income tax expense.
Contingent Liabilities
We may become involved in litigation or other financial claims as a result of our normal business operations. We periodically analyze currently available information and make a determination of the probability of loss and provide a range of possible loss when
we believe that sufficient and appropriate information is available. We accrue a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. If a loss is probable and a range of amounts can be reasonably estimated but no amount within the range is a better estimate than any other amount in the range, then the minimum of the range is accrued. We do not accrue a liability when the likelihood that the liability has been incurred is believed to be probable but the amount cannot be reasonably estimated or when the likelihood that a liability has been incurred is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is reasonably possible and the impact could potentially be material, we disclose the nature of the contingency and, where feasible, an estimate of the possible loss or range of loss.
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 Chairman and Founder'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 on our consolidated balance sheet 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 4 for additional information related to the divestiture.
3. Accounting Standards Updates
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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 2017-04,
Intangibles—
Goodwill and Other
(Topic 350)
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The primary amendments in this update simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments of this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.
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January 1, 2017
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Prospective
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We early adopted this update to reduce the cost and complexity of our annual and interim goodwill impairment analyses. There was no material impact on our condensed consolidated financial statements.
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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 any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the trade of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, various updates have been issued during 2015 and 2016 to clarify the guidance in Topic 606.
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January 1, 2018
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1) Retrospectively to each prior reporting period presented, or
2) retrospectively with the cumulative effect of initially applying these updates recognized at the date of initial application.
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We will adopt the provisions of the new standard as of January 1, 2018. For additional information, see below. (1)
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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
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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 on our condensed consolidated financial statements.
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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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Upon adoption, approximately $400 thousand of our loss on extinguishment of debt that occurred in 2017 will be retrospectively reclassified from operating to financing cash flows. We are currently unaware of any other material impacts of adoption on our condensed consolidated financial statements.
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ASU 2016-17,
Consolidation
(Topic 810)
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This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE.
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January 1, 2017
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Retrospective
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We adopted this update as of January 1, 2017, 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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We will adopt this update as of January 1, 2018, and do not anticipate any material impact to our condensed consolidated financial statements.
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____________________________
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(1)
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We will adopt the provisions of ASU 2014-09 as of January 1, 2018. We have not completed our final review of the impact of the new standard and all significant revenue streams and identified contracts with customers. Our implementation process has not currently met our previously established internal submission dates for key analyses; however, we expect to complete this process in a timely manner. We expect to adopt the new standard on a modified retrospective basis with the cumulative effect of applying the new standard recognized at the date of initial application. We are continuing to measure
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the amount of the impact at the date of initial application. Based on our preliminary analysis of costs to obtain a contract, we currently expect certain subscription solicitation costs, which are deferred in accordance with current U.S. GAAP, to be recognized immediately. We currently anticipate that the immediate recognition of certain deferred subscription solicitation costs may have a material impact on our stockholders’ deficit. The amount of such impact will depend on the amount of unamortized deferred subscription solicitation costs as of the initial adoption date. We continue to analyze all of the implementation matters, including the effect of the new footnote disclosure requirements, and may have additional adjustments and disclosures upon adoption.
4. 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 Chairman and Founder, 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, 2017
and
2016
and our financial position as of
September 30, 2017
and
December 31, 2016
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 year ended December 31, 2016 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
$516 thousand
of transaction costs), which is included in loss from discontinued operations, net of tax in our condensed consolidated statements of operations. The following table summarizes the components of loss from discontinued operations, net of income taxes included in the condensed consolidated statements of operations (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2017
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2016
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2017
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2016
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Major classes of line items constituting loss from discontinued operations:
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Revenue
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$
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—
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35
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$
|
—
|
|
|
69
|
|
Marketing expenses
|
|
(1
|
)
|
|
(387
|
)
|
|
(18
|
)
|
|
(1,392
|
)
|
Cost of revenue
|
|
—
|
|
|
(1,000
|
)
|
|
(4
|
)
|
|
(1,379
|
)
|
General and administrative expenses
|
|
(500
|
)
|
|
(4,294
|
)
|
|
(1,718
|
)
|
|
(11,632
|
)
|
Impairment
|
|
—
|
|
|
—
|
|
|
(180
|
)
|
|
—
|
|
Depreciation and amortization
|
|
(1
|
)
|
|
(418
|
)
|
|
(1
|
)
|
|
(1,263
|
)
|
Interest expense
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
Other income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Loss from discontinued operations before income taxes
|
|
(502
|
)
|
|
(6,065
|
)
|
|
(1,921
|
)
|
|
(15,595
|
)
|
Loss on disposal of discontinued operations
|
|
(528
|
)
|
|
—
|
|
|
(528
|
)
|
|
—
|
|
Income tax benefit
|
|
—
|
|
|
57
|
|
|
—
|
|
|
57
|
|
Total loss from discontinued operations, net of tax
|
|
$
|
(1,030
|
)
|
|
$
|
(6,008
|
)
|
|
$
|
(2,449
|
)
|
|
$
|
(15,538
|
)
|
In late 2016, our Board of Directors approved a plan to sell Captira, which comprises our Bail Bonds Industry Solutions segment. Captira met all the criteria under U.S. GAAP to classify its assets and liabilities as held for sale in our consolidated balance sheets as of December 31, 2016. Effective January 31, 2017, we completed the sale of Captira for a nominal amount, which marks the conclusion of our operations in the Bail Bonds Industry Solutions segment. The disposal does not represent a strategic shift that will have a major effect on operations and financial results, and therefore, it does not qualify 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."
The major classes of assets and liabilities in the condensed consolidated balance sheets that were included in discontinued operations related to the sale of Voyce (which comprised our Pet Health Monitoring segment), as well as the major classes of assets and liabilities held for sale related to Captira (which comprised our Bail Bonds Industry Solutions segment), consisted of the following (in thousands):
|
|
|
|
|
|
|
|
December 31, 2016
|
Carrying amounts of the major classes of assets included in discontinued operations:
|
|
|
Cash and cash equivalents
|
|
$
|
60
|
|
Accounts receivable, net
|
|
8
|
|
Prepaid expenses and other current assets
|
|
153
|
|
Inventory
|
|
250
|
|
Total major classes of assets of the discontinued operations
|
|
471
|
|
Other assets in the disposal group classified as held for sale:
|
|
|
Cash and cash equivalents
|
|
321
|
|
Accounts receivable, net
|
|
177
|
|
Prepaid expenses and other current assets
|
|
97
|
|
Property and equipment, net
|
|
247
|
|
Other assets
|
|
6
|
|
Write-down to fair value
|
|
(744
|
)
|
Total other assets in the disposal group classified as held for sale:
|
|
104
|
|
Current assets of discontinued operations and assets held for sale
|
|
$
|
575
|
|
|
|
|
Carrying amounts of the major classes of liabilities included in discontinued operations:
|
|
|
Accounts payable
|
|
$
|
536
|
|
Accrued expenses and other current liabilities
|
|
90
|
|
Accrued payroll and employee benefits
|
|
128
|
|
Total major classes of liabilities of the discontinued operations
|
|
754
|
|
Other liabilities in the disposal group classified as held for sale:
|
|
|
Accounts payable
|
|
9
|
|
Accrued expenses and other current liabilities
|
|
15
|
|
Accrued payroll and employee benefits
|
|
80
|
|
Total other liabilities in the disposal group classified as held for sale:
|
|
104
|
|
Current liabilities of discontinued operations and liabilities held for sale
|
|
$
|
858
|
|
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 condensed 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
. The disposal does not represent a strategic shift that will have a major effect on operations and financial results, and therefore, it is not classified as discontinued operations.
5. Loss Per Common Share
Basic and diluted loss per common share is determined in accordance with the applicable provisions of U.S. GAAP. Basic loss per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted loss per common share is equivalent to basic loss per common share, as U.S. GAAP provides that a loss cannot be diluted by potential
common stock, which includes the potential exercise of stock options under our share based employee compensation plans and vesting of our restricted stock/restricted stock units.
For the
three and nine months ended September 30, 2017
, options to purchase common stock and unvested restricted stock units estimated to be
6.9 million
shares were excluded from the computation of diluted loss per common share as their effect would be anti-dilutive. For the
three and nine months ended September 30, 2016
, options to purchase common stock and unvested restricted stock units estimated to be
5.1 million
shares were excluded from the computation of diluted loss per common share as their effect would be anti-dilutive. The significant increase compared to the prior period is due to the issuance of warrants to purchase an aggregate of
1.5 million
shares in connection with the New Credit Agreement. These shares could dilute earnings per common share in the future.
A reconciliation of basic loss per common share to diluted loss per common share is as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net loss—basic and diluted:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(3,369
|
)
|
|
$
|
(2,100
|
)
|
|
$
|
(12,933
|
)
|
|
$
|
(2,144
|
)
|
Loss from discontinued operations
|
|
(1,030
|
)
|
|
(6,008
|
)
|
|
(2,449
|
)
|
|
(15,538
|
)
|
Net loss—basic and diluted
|
|
$
|
(4,399
|
)
|
|
$
|
(8,108
|
)
|
|
$
|
(15,382
|
)
|
|
$
|
(17,682
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic
|
|
23,953
|
|
|
23,378
|
|
|
23,818
|
|
|
23,178
|
|
Dilutive effect of common stock equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
|
23,953
|
|
|
23,378
|
|
|
23,818
|
|
|
23,178
|
|
Net loss per common share—basic and diluted:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.14
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.55
|
)
|
|
$
|
(0.09
|
)
|
Loss from discontinued operations
|
|
(0.04
|
)
|
|
(0.26
|
)
|
|
(0.10
|
)
|
|
(0.67
|
)
|
Net loss per common share—basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.65
|
)
|
|
$
|
(0.76
|
)
|
6. Fair Value Measurement
Our cash and any investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy as they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued are based on quoted market prices in active markets and are primarily U.S. government and agency securities and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.
For financial instruments such as cash and cash equivalents, trade accounts receivables, inventory, leases payable, accounts payable and short-term debt, we consider the recorded value of the financial instruments to approximate the fair value based on the liquidity of these financial instruments. As of
September 30, 2017
, the carrying value of our long-term debt approximated its fair value due to the variable interest rate. We did
not
have any transfers in or out of Level 1 and Level 2 in the
nine months ended September 30, 2017
or in the year ended
December 31, 2016
. We did not hold any significant instruments that are measured at fair value on a recurring basis as of
September 30, 2017
or
December 31, 2016
.
The fair value of our instruments measured on a non-recurring basis during the
nine months ended September 30, 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
|
$
|
2,140
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,140
|
|
|
$
|
—
|
|
The following is quantitative information about our significant unobservable inputs used in our Level 3 fair value measurements (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
September 30, 2017
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Quantitative Inputs Used
|
Warrant
|
$
|
2,140
|
|
|
Monte Carlo
|
|
Volatility of underlying
|
|
50.0
|
%
|
|
|
|
|
|
Risk-free rate
|
|
1.78
|
%
|
|
|
|
|
|
Dividend yield
|
|
—
|
%
|
|
|
|
|
|
Probability of Designated Event (1)
|
|
0% - 15%
|
|
|
|
|
|
|
Timing of Designated Event (1)
|
|
2-5 years from issuance
|
|
____________________
(1) Refers to certain change of control transactions, defined as a "Designated Event" as in the Warrant Agreement.
7. Prepaid Expenses and Other Current Assets
The components of our prepaid expenses and other current assets are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Prepaid services
|
$
|
377
|
|
|
$
|
837
|
|
Other prepaid contracts
|
2,882
|
|
|
2,293
|
|
Restricted cash
|
260
|
|
|
265
|
|
Other
|
342
|
|
|
316
|
|
Total
|
$
|
3,861
|
|
|
$
|
3,711
|
|
In the
nine months ended September 30, 2017
, we entered into several software services development contracts as we continue to integrate new tools and services into our products.
8. Deferred Subscription Solicitation and Commission Costs
Total deferred subscription solicitation and commission costs included in the accompanying condensed consolidated balance sheets as of
September 30, 2017
and
December 31, 2016
were
$2.9 million
and
$5.1 million
, respectively. Amortization of deferred subscription solicitation and commission costs, which is included in either marketing or commission expense in our condensed consolidated statements of operations, for the
three months ended September 30, 2017
and
2016
was
$2.4 million
and
$2.8 million
, respectively. Amortization of deferred subscription solicitation and commission costs for the
nine months ended September 30, 2017
and
2016
was
$8.5 million
and
$9.9 million
, respectively. Marketing costs expensed as incurred, which are included in marketing expenses in our condensed consolidated statements of operations as they did not meet the criteria for deferral, for the
three months ended September 30, 2017
and
2016
were
$441 thousand
and
$603 thousand
, respectively. Marketing costs expensed as incurred for the
nine months ended September 30, 2017
and
2016
were
$1.4 million
and
$1.1 million
, respectively.
9. Internally Developed Capitalized Software
We record internally developed capitalized software as a component of software in property and equipment in our condensed consolidated balance sheets. We regularly review our capitalized software projects for impairment. We had
no
impairments of internally developed capitalized software in the
nine months ended September 30, 2017
or
2016
. We record depreciation for internally developed capitalized software in depreciation expense in our condensed consolidated statements of operations. Activity in our internally developed capitalized software during the
nine months ended September 30, 2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Depreciation
|
|
Net Carrying
Amount
|
Balance at December 31, 2016
|
$
|
15,015
|
|
|
$
|
(7,931
|
)
|
|
$
|
7,084
|
|
Additions
|
2,703
|
|
|
—
|
|
|
2,703
|
|
Depreciation expense
|
—
|
|
|
(2,864
|
)
|
|
(2,864
|
)
|
Balance at September 30, 2017
|
$
|
17,718
|
|
|
$
|
(10,795
|
)
|
|
$
|
6,923
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
10,441
|
|
|
$
|
(5,888
|
)
|
|
$
|
4,553
|
|
Additions
|
240
|
|
|
—
|
|
|
240
|
|
Disposals
|
(560
|
)
|
|
388
|
|
|
(172
|
)
|
Depreciation expense
|
—
|
|
|
(1,680
|
)
|
|
(1,680
|
)
|
Balance at September 30, 2016
|
$
|
10,121
|
|
|
$
|
(7,180
|
)
|
|
$
|
2,941
|
|
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, 2017
|
$
|
986
|
|
For the years ending December 31:
|
|
|
2018
|
3,301
|
|
2019
|
2,307
|
|
2020
|
329
|
|
Total
|
$
|
6,923
|
|
10. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal
Information
Services
Reporting Unit
|
|
Insurance and
Other Consumer
Services
Reporting Unit
|
|
Bail Bonds
Industry
Solutions
Reporting Unit
|
|
Totals
|
Balance as of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
35,253
|
|
|
$
|
10,665
|
|
|
$
|
—
|
|
|
$
|
45,918
|
|
Accumulated impairment losses
|
(25,837
|
)
|
|
(10,318
|
)
|
|
—
|
|
|
(36,155
|
)
|
Net carrying value of goodwill
|
$
|
9,416
|
|
|
$
|
347
|
|
|
$
|
—
|
|
|
$
|
9,763
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
35,253
|
|
|
$
|
10,665
|
|
|
$
|
1,390
|
|
|
$
|
47,308
|
|
Accumulated impairment losses
|
(25,837
|
)
|
|
(10,318
|
)
|
|
(1,390
|
)
|
|
(37,545
|
)
|
Net carrying value of goodwill
|
$
|
9,416
|
|
|
$
|
347
|
|
|
$
|
—
|
|
|
$
|
9,763
|
|
During the
nine months ended September 30, 2017
, we did not identify any triggering events related to our goodwill and therefore were not required to test our goodwill for impairment. As of September 30, 2017, both our Personal Information Services and Insurance and Other Consumer Services reporting units had negative carrying amounts of net assets. 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, 2017:
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
$
|
38,831
|
|
|
$
|
(38,831
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Marketing related
|
2,929
|
|
|
(2,901
|
)
|
|
—
|
|
|
28
|
|
Technology related
|
1,889
|
|
|
(1,829
|
)
|
|
—
|
|
|
60
|
|
Total amortizable intangible assets at September 30, 2017
|
$
|
43,649
|
|
|
$
|
(43,561
|
)
|
|
$
|
—
|
|
|
$
|
88
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
$
|
38,874
|
|
|
$
|
(38,822
|
)
|
|
$
|
(17
|
)
|
|
$
|
35
|
|
Marketing related
|
3,336
|
|
|
(3,143
|
)
|
|
(138
|
)
|
|
55
|
|
Technology related
|
4,068
|
|
|
(3,197
|
)
|
|
(751
|
)
|
|
120
|
|
Subtotal
|
46,278
|
|
|
(45,162
|
)
|
|
(906
|
)
|
|
210
|
|
Less: held for sale
|
(1,704
|
)
|
|
1,704
|
|
|
—
|
|
|
—
|
|
Total amortizable intangible assets at December 31, 2016
|
$
|
44,574
|
|
|
$
|
(43,458
|
)
|
|
$
|
(906
|
)
|
|
$
|
210
|
|
During the
nine months ended September 30, 2017
, there were
no
adverse changes in our long-lived assets, which would cause a need for an impairment analysis. Intangible assets decreased in the year ended December 31, 2016 primarily due to the full impairment of assets associated with our Pet Health Monitoring segment and Habits at Work business.
Intangible assets are amortized over a period of
two
to
ten years
. For the
three months ended September 30, 2017
and
2016
, we had an aggregate amortization expense of
$29 thousand
and
$82 thousand
, respectively, which was included in amortization expense in our condensed consolidated statements of operations. For the
nine months ended September 30, 2017
and
2016
, we had an aggregate amortization expense of
$123 thousand
and
$431 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, 2017
|
$
|
29
|
|
For the year ending December 31, 2018
|
59
|
|
Total
|
$
|
88
|
|
11. Accrued Expenses and Other Current Liabilities
The components of our accrued expenses and other current liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Accrued marketing
|
$
|
478
|
|
|
$
|
1,121
|
|
Accrued cost of sales, including credit bureau costs
|
5,151
|
|
|
5,451
|
|
Accrued general and administrative expense and professional fees
|
1,290
|
|
|
2,137
|
|
Insurance premiums
|
353
|
|
|
360
|
|
Estimated liability for non-income business taxes
|
1,461
|
|
|
94
|
|
Other
|
2,276
|
|
|
1,815
|
|
Total
|
$
|
11,009
|
|
|
$
|
10,978
|
|
We may have non-income business tax obligations in certain states and other jurisdictions. In the
nine months ended September 30, 2017
, we increased our liability by
$1.4 million
. For additional information, please see "—Other" in Note 13.
12. Accrued Payroll and Employee Benefits
The components of our accrued payroll and employee benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Accrued payroll
|
|
$
|
461
|
|
|
$
|
1,075
|
|
Accrued benefits
|
|
1,658
|
|
|
1,613
|
|
Accrued severance
|
|
462
|
|
|
1,440
|
|
Total accrued payroll and employee benefits
|
|
$
|
2,581
|
|
|
$
|
4,128
|
|
In the nine months ended September 30, 2017, we recorded and paid the majority of executive management bonuses of
$1.0 million
, which were approved by the Compensation Committee.
The following table summarizes our accrued severance activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Balance, beginning of period
|
|
$
|
1,297
|
|
|
$
|
1,001
|
|
|
$
|
1,440
|
|
|
$
|
4,148
|
|
Adjustments to expense
|
|
6
|
|
|
8
|
|
|
1,500
|
|
|
(189
|
)
|
Payments
|
|
(841
|
)
|
|
(479
|
)
|
|
(2,478
|
)
|
|
(3,429
|
)
|
Balance, end of period
|
|
$
|
462
|
|
|
$
|
530
|
|
|
$
|
462
|
|
|
$
|
530
|
|
We expect to pay the remaining severance liability within the next 6 months.
13. Commitments and Contingencies
Leases
We have entered into long-term operating lease agreements for office space and capital leases for fixed assets. The minimum fixed commitments related to all non-cancellable leases are as follows:
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Capital
Leases
|
|
(In thousands)
|
For the remaining three months ending December 31, 2017
|
$
|
648
|
|
|
$
|
118
|
|
For the years ending December 31:
|
|
|
|
|
|
2018
|
3,407
|
|
|
539
|
|
2019
|
1,466
|
|
|
400
|
|
2020
|
110
|
|
|
20
|
|
2021
|
93
|
|
|
7
|
|
Total minimum lease payments
|
$
|
5,724
|
|
|
1,084
|
|
Less: amount representing interest
|
|
|
|
(133
|
)
|
Present value of minimum lease payments
|
|
|
|
951
|
|
Less: current obligation
|
|
|
|
(467
|
)
|
Long-term obligations under capital lease
|
|
|
|
$
|
484
|
|
During the
three months ended September 30, 2017
and
2016
, we did not enter into any new capital lease arrangements. During the
nine months ended September 30, 2017
, we did not enter into any new capital lease arrangements. During the
nine months ended September 30, 2016
, we entered into additional capital lease agreements for approximately
$69 thousand
. We recorded the lease liability at the fair market value of the underlying assets in our condensed consolidated balance sheets. Rental expenses included in general and administrative expenses for the
three months ended September 30, 2017
and
2016
were
$1.0 million
and
$818 thousand
, respectively. Rental expenses for the
nine months ended September 30, 2017
and
2016
were
$2.5 million
and
$2.2 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 July 2012, the Consumer Financial Protection Bureau ("CFPB") served a Civil Investigative Demand on Intersections Inc. with respect to its billing practices for identity protection and credit monitoring products sold and enrolled through depositary customers. An action was filed on July 1, 2015 in the United States District Court for the Eastern District of Virginia, Alexandria Division, and a Stipulated Final Judgment and Order (the "Order") concurrently entered, entitled Consumer Financial Protection Bureau v. Intersections Inc. Without admitting or denying the allegations in the complaint, we agreed to implement a satisfactory compliance plan to comply with the Order and to provide a progress update. We paid a civil monetary penalty of
$1.2 million
in 2015, and in the year ended December 31, 2016, we paid
$63 thousand
to
661
customers who had not previously received refunds for periods in which we could not demonstrate that we had delivered the full benefit of the service. Intersections also submitted an amended compliance plan to the CFPB in early 2017.
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 to the lawsuit. On May 10, 2017, the Company retained the firm of Steptoe & Johnson as its counsel in this matter in lieu of the previous counsel. 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 27, 2017, Jeff Noce, a former employee of our i4c subsidiary, served a Complaint, filed in the Circuit Court of Fairfax County, Virginia against i4c Innovations LLC and Intersections Inc. The Complaint alleges a dispute regarding the employment and termination of Mr. Noce. We believe the allegations in the Complaint are without merit and intend to continue to vigorously defend this matter. The court has scheduled a trial in this matter for February 2018.
For information regarding our policy for analyzing legal proceedings, please see "—Contingent Liabilities" in Note 2. As of
September 30, 2017
, we do not have any significant liabilities accrued for any of the legal proceedings mentioned above. We believe based on information currently available that the amount, if any, accrued for the above contingencies is adequate. However, legal proceedings are inherently unpredictable and, although we believe that accruals are adequate and we intend to continue 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
We may have indirect tax obligations in state and other jurisdictions.
The following table summarizes the non-income business tax liability activity during the
nine months ended September 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Non-Income Business Tax Liability
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
94
|
|
|
$
|
3,427
|
|
Adjustments to existing liabilities
|
1,461
|
|
|
(1,038
|
)
|
Payments
|
(94
|
)
|
|
(21
|
)
|
Balance at September 30
|
$
|
1,461
|
|
|
$
|
2,368
|
|
We continue to analyze what obligations we have, if any, to state taxing authorities. As a result of an audit by a state for non-income business taxes, for which an assessment was received in the nine months ended September 30, 2017, we recorded a liability of $913 thousand in the same period for the underpayment of taxes and related interest, which was recorded primarily in cost of revenue in our condensed consolidated statements of operations. Additionally, we recorded an estimated liability of $548 thousand for the potential underpayment in other jurisdictions. 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. However, we cannot reasonably estimate the potential amount of future payments due to the unique facts and circumstances involved.
In the
nine months ended September 30, 2017
,
we entered into contracts, primarily for fulfillment and application development services, pursuant to which we agreed to minimum, non-refundable installment payments totaling approximately
$1.2 million
, payable
in monthly and yearly installments through
June 30, 2020
.
These amounts are expensed on a pro-rata basis and are recorded in cost of revenue and general and administrative expenses in our condensed consolidated statements of operations. For additional information on other minimum, non-refundable contracts, please see Note 19 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K.
14. Other Long-Term Liabilities
The components of our other long-term liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
|
(In thousands)
|
Deferred rent
|
$
|
1,407
|
|
|
$
|
1,850
|
|
Uncertain tax positions, interest and penalties not recognized
|
1,646
|
|
|
1,582
|
|
Accrued general and administrative expenses
|
54
|
|
|
4
|
|
Total other long-term liabilities
|
$
|
3,107
|
|
|
$
|
3,436
|
|
15. Debt and Other Financing
New Credit Agreement
On April 20, 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with a new
$20.0 million
term loan facility (which was fully funded at closing) with PEAK6 Investments, L.P. ("PEAK6 Investments").
In order to consummate the refinancing, we and our subsidiaries entered into the New Credit Agreement with PEAK6 Investments as Term Lender and as Administrative Agent, and also entered into a security agreement, a pledge and security agreement, an intellectual property security agreement and other related documents. The New Credit Agreement extends the maturity date, reduces and defers mandatory quarterly principal payments, and carries a lower interest rate compared to the Prior Credit Agreement. The maturity date of the New Credit Agreement is April 20, 2021 with quarterly principal payments of
$1.3 million
commencing on September 30, 2019. The initial interest rate is
9.486%
per annum, to be adjusted annually on March 31 to
7.75%
plus 1 year LIBOR, and interest is payable monthly. The New Credit Agreement is secured by substantially all our assets and our pledge 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 New 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 expect to use the remainder of the proceeds from the New Credit Agreement for general corporate purposes, including to increase subscriber acquisitions and continue our innovative product development.
In order to consummate the divestiture of i4c Innovations LLC ("i4c" or "Voyce") (see Note 4), on July 31, 2017, we entered into Amendment No. 1 (the "Amendment") to the New Credit Agreement among us, the other credit parties party thereto, and PEAK6 Investments. The Amendment removes i4c as a party to the New Credit Agreement and amends the New Credit Agreement to permit the transactions entered into by us and our subsidiaries in connection with the divestiture of i4c.
The New Credit Agreement, as amended, also requires the prepayment of the aggregate principal amount outstanding in an amount equal to
25%
of our excess cash flow (as defined in the New Credit Agreement) for each fiscal year commencing with the fiscal year ending December 31, 2018 and continuing thereafter. Certain other events defined in the New Credit Agreement require prepayment of the aggregate principal amount of the term loan, including all or a portion of proceeds received from asset dispositions (except for proceeds from the sale of assets in our i4c subsidiary), casualty events, extraordinary receipts, and certain equity issuances. Once amounts borrowed have been paid or prepaid, they may not be reborrowed.
Under the New Credit Agreement, minimum required maturities are as follows (in thousands):
|
|
|
|
|
For the remaining three months ending December 31, 2017
|
$
|
—
|
|
For the years ending December 31:
|
|
|
2018
|
—
|
|
2019
|
1,250
|
|
2020
|
5,000
|
|
2021
|
13,750
|
|
Total outstanding
|
$
|
20,000
|
|
As of
September 30, 2017
,
$20.0 million
was outstanding under the New Credit Agreement, which was presented net of unamortized debt issuance costs and debt discount totaling
$818 thousand
in our condensed consolidated balance sheets in accordance with U.S. GAAP. As of
September 30, 2017
,
none
of the outstanding balance was classified as short-term.
The New Credit Agreement contains certain customary covenants, including among other things covenants that limit or restrict the following: the incurrence of liens; the making of investments including a prohibition of any capital contributions to our subsidiary i4c other than to complete the wind-down as noted above and fair and reasonable allocation of overhead and administrative expenses; the incurrence of certain indebtedness; mergers, dissolutions, liquidations, or consolidations; acquisitions (other than certain permitted acquisitions); sales of substantially all of our or any of our subsidiaries' assets, except for the orderly wind down of the Pet Health Monitoring, and the exits of our Bail Bonds Industry Solutions and Habits at Work businesses; the declaration of certain dividends or distributions; transactions with affiliates (other than parties to the New Credit Agreement) other than on fair and reasonable terms; and the formation or acquisition of any direct or indirect domestic or first-tier foreign subsidiary unless such subsidiary becomes a guarantor and enters into certain security documents.
The New Credit Agreement requires us to maintain at all times a minimum cash on hand amount, as defined in the New Credit Agreement, of at least
20%
of the total amount outstanding under the term loan. We are also required to maintain compliance on a quarterly basis commencing with the quarter ending December 31, 2017 with minimum consolidated EBITDA (as defined in the New Credit Agreement and adjusted for certain non-cash, non-recurring and other items, and up to
$4.3 million
of non-recurring charges incurred in the wind-down events) of
$2.0 million
; provided consolidated EBITDA from the immediately preceding quarter in excess of
$2.0 million
may be added to a current quarter to make up any shortfall and provided further that when we have not met the minimum consolidated EBITDA test for any quarter (even after including excess consolidated EBITDA for the prior quarter) the test for compliance is deferred until the end of the next quarter and we shall be deemed to be in compliance if, taking into account consolidated EBITDA in excess of
$2.0 million
from the prior quarter, consolidated EBITDA from the test quarter, and consolidated EBITDA in excess of
$2.0 million
from the subsequent quarter, we pass the minimum compliance test. Excess consolidated EBITDA in any quarter can be counted only once for determining compliance with this covenant. As of
September 30, 2017
, we were in compliance with all such covenants.
The New Credit Agreement also contains customary events of default, including among other things non-payment defaults, covenant defaults, inaccuracy of representations and warranties, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults, cross-defaults to other indebtedness, invalidity of loan documents defaults, change in control defaults, conduct of business defaults, and criminal and regulatory action defaults.
Warrant
In connection with the New Credit Agreement, PEAK6 Investments purchased, for an aggregate purchase price of
$1.5 million
in cash, a warrant to purchase an aggregate of
1.5 million
shares of our common stock at an exercise price of
$5.00
per share ("Warrant"). The Warrant is immediately exercisable, has a
five
-year term and shall be exercised solely by a "net share settlement" feature that requires the holder to exercise the Warrant without a cash payment upon the terms set forth therein. The Warrant includes a feature to provide for increases in the number of shares issuable upon exercise in the event of a future change of control transaction (defined therein as a "Designated Event"), with the number of increased shares based upon the time elapsed from issuance of the Warrant and the difference between the exercise price of the Warrant and the transaction price in the change of control, all as more fully set forth in the Warrant. The Warrant also provides for adjustments in the underlying number of shares and exercise price in the event of recapitalizations, stock splits or dividends and other corporate events.
We reviewed the provisions of the warrant contract, and in accordance with U.S. GAAP classified the warrant as a financial equity instrument at its fair value of $2.1 million using the Monte Carlo pricing model. The difference between the fair value and stated value of the warrants resulted in a debt discount of $640 thousand, which is presented net of the long-term debt in our condensed consolidated balance sheets. For additional information related to the fair value of the warrants, please see Note 6
.
Stock Redemption
In connection with the New Credit Agreement, we used the proceeds from the sale of the Warrant to repurchase approximately
419 thousand
shares of our common stock, pursuant to a redemption agreement from PEAK6 Capital Management LLC at a price of
$3.60
per share, for an aggregate repurchase price of approximately
$1.5 million
. PEAK6 Capital Management LLC is an affiliate of PEAK6 Investments.
The repurchase was made pursuant to our previously announced share repurchase program. Following the repurchase, we have approximately
$15.3 million
remaining under our repurchase program. The repurchases may be made on the open market, in block trades, through privately negotiated transactions or otherwise, and the program may be suspended or discontinued at any time. However, we are currently prohibited from repurchasing any shares of common stock under the New Credit Agreement.
Prior Credit Agreement
In March 2016, we and our subsidiaries entered into the Prior Credit Agreement with Crystal Financial SPV LLC. The Prior Credit Agreement provided for a $20.0 million term loan, which was fully funded at closing.
In connection with the entry into the New Credit Agreement described above, effective April 20, 2017, we and our applicable subsidiaries satisfied and discharged all obligations under, and terminated, the Prior Credit Agreement, except for obligations that pursuant to the express terms of the Prior Credit Agreement survive payment of the obligations. As of April 20, 2017, $13.4 million was outstanding under the Prior Credit Agreement. As a result of the refinancing, we recorded a loss on extinguishment of debt of $1.5 million in the nine months ending September 30, 2017, including interest, prepayment penalties, transaction fees and expenses totaling approximately $487 thousand as a result of the termination.
16. Income Taxes
Our consolidated effective tax rate from continuing operations for the
three months ended September 30, 2017
and
2016
was
(0.2)%
and
3.5%
, respectively. Our consolidated effective tax rate from continuing operations for the
nine months ended September 30, 2017
and
2016
was
0.2%
and
3.1%
, respectively.
The rates remained relatively flat due to the continued valuation allowance.
We continued to evaluate all significant available positive and negative evidence including, but not limited to, our three-year cumulative loss, as adjusted for permanent items; insufficient sources of taxable income in prior carryback periods in order to utilize all of the existing definite-lived net deferred tax assets; unavailability of prudent and feasible tax-planning strategies; negative adjustments to our projected taxable income; and scheduling of the future reversals of existing temporary differences. As a result, we were not able to recognize a net tax benefit associated with our pre-tax loss in the nine months ended September 30, 2017, as there has been no change to the conclusion from the year ended December 31, 2016 that it was more likely than not that we would not generate sufficient taxable income in the foreseeable future to realize our net deferred tax assets.
The amount of deferred tax assets considered realizable as of September 30, 2017 could be adjusted if facts and circumstances in future reporting periods change, including, but not limited to, generating sufficient future taxable income in the carryforward periods. If certain substantial changes in the entity’s ownership were to occur, there would be an annual limitation on the amount of the carryforwards that can be utilized in the future. The remaining deferred tax liability as of September 30, 2017 relates to an indefinite-lived intangible.
There were no material changes to our uncertain tax positions during the
three or nine months ended
September 30, 2017
or
2016
.
17. Stockholders’ Equity
Share Based Compensation
We currently issue equity and equity-based awards under the 2014 Stock Incentive Plan (the "Plan"), and we have three inactive stock incentive plans: the 1999 Stock Option Plan, the 2004 Stock Option Plan and the 2006 Stock Incentive Plan. As of
September 30, 2017
, we have
3.8 million
shares of common stock available for future grants of awards under the Plan, and awards for approximately
5.4 million
shares are outstanding under all of our active and inactive plans.
In April 2017, our Board of Directors approved a second amendment to the 2014 Plan to increase the number of shares authorized and reserved for issuance thereunder by 4.0 million shares, from 5.5 million shares to 9.5 million shares. The amendment was effective immediately upon our stockholders' approval in May 2017.
Individual awards under these plans may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and/or restricted stock units.
Stock Options
Total share based compensation expense recognized for stock options, which is included in general and administrative expenses in our condensed consolidated statements of operations, for the
three months ended September 30, 2017
and
2016
was
$574 thousand
and
$34 thousand
, respectively. Total share based compensation expense recognized for stock options for the
nine months ended September 30, 2017
and
2016
was
$642 thousand
and
$46 thousand
, respectively. The increase is due to a grant of
1.7 million
options in June 2017.
The following table summarizes our stock option activity during the
nine months ended September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Exercise Price
|
|
Aggregate Intrinsic Value
|
|
Weighted-Average
Remaining Contractual Term
|
|
|
|
|
|
|
(In thousands)
|
|
(In years)
|
Outstanding at December 31, 2016
|
|
861,366
|
|
$
|
3.99
|
|
|
|
|
|
|
Granted
|
|
1,670,000
|
|
$
|
4.35
|
|
|
|
|
|
|
Canceled
|
|
(51,824)
|
|
$
|
6.03
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
2,479,542
|
|
$
|
4.21
|
|
|
$
|
452
|
|
|
8.18
|
Exercisable at September 30, 2017
|
|
430,542
|
|
$
|
5.24
|
|
|
$
|
46
|
|
|
1.71
|
There were
no
options granted in the
three months ended September 30, 2017
or
2016
. The weighted average grant date fair value of options granted, based on the Black Scholes method, during the
nine months ended September 30, 2017
and
2016
was
$1.94
and
$0.94
, respectively.
There were
no
options exercised during the
nine months ended September 30, 2017
or
2016
.
As of
September 30, 2017
, there was
$2.9 million
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
1.3
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, 2017
and
2016
was
$1.6 million
and
$1.9 million
, respectively. Total share based compensation expense recognized for RSUs for the
nine months ended September 30, 2017
and
2016
was
$4.0 million
and
$3.7 million
, respectively.
The following table summarizes the activity of our RSUs during the
nine months ended September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
Number of
RSUs
|
|
Weighted-Average
Grant Date
Fair Value
|
Outstanding at December 31, 2016
|
|
3,363,946
|
|
$
|
2.78
|
|
Granted
|
|
2,001,642
|
|
$
|
4.35
|
|
Canceled
(1)
|
|
(1,772,885)
|
|
$
|
2.67
|
|
Vested
|
|
(664,885)
|
|
$
|
3.73
|
|
Outstanding at September 30, 2017
|
|
2,927,818
|
|
$
|
3.70
|
|
____________________
|
|
(1)
|
Includes shares net-settled to cover statutory employee taxes related to the vesting of restricted stock awards, which increased treasury shares by
68 thousand
in the
nine months ended September 30, 2017
.
|
As of
September 30, 2017
, there was
$8.5 million
of total unrecognized compensation cost related to unvested RSUs granted under the plans. That cost is expected to be recognized over a weighted-average period of
1.8
years.
Other
In addition to the stock options and RSUs, we determined the majority of the earn-out provisions in the business we acquired in March 2015 from Habits at Work to be share based compensation expense. In the
three months ended September 30, 2017
, we did not record share based compensation expense related to the earn-out, as the Habits at Work business was sold effective June 1, 2017. In the
three months ended September 30, 2016
, we recorded share based compensation expense of
$313 thousand
, which is included in general and administrative expenses in our condensed consolidated financial statements. In the
nine months ended September 30, 2017
, we reduced share based compensation expense by
$57 thousand
due to actual Habits at Work performance being lower than forecasted. In the
nine months ended September 30, 2016
, we recorded share based compensation expense of
$930 thousand
. Due to the exit of the Habits at Work business, there is no remaining unrecognized compensation expense.
As a result of shares withheld for tax purposes on the vesting of a restricted stock award, we increased our treasury shares by
68 thousand
in the
nine months ended September 30, 2017
. Under the New Credit Agreement, we are currently prohibited from declaring and paying ordinary cash or stock dividends or repurchasing any shares of common stock.
In connection with the New Credit Agreement, PEAK6 Investments purchased, for an aggregate purchase price of
$1.5 million
in cash, a Warrant to purchase an aggregate of
1.5 million
shares of our common stock at an exercise price of
$5.00
per share. Additionally, 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
. For additional information, please see Note 15.
18. Related Party Transactions
Digital Matrix Systems, Inc
. – The chief executive officer and president of Digital Matrix Systems, Inc. ("DMS") serves as one of our board members. We have service agreements with DMS for monitoring credit on a daily and quarterly basis, along with occasional contracts for certain credit analysis and application development services. In connection with these agreements, we paid monthly installments totaling
$491 thousand
and
$216 thousand
in the
three months ended September 30, 2017
and
2016
, respectively. In the
nine months ended September 30, 2017
and
2016
, we paid
$1.9 million
and
$772 thousand
, 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, 2017
and
December 31, 2016
, we owed
$92 thousand
and
$162 thousand
, respectively, to DMS under these agreements.
Loeb Partners Corporation –
In connection with the closing of the Prior Credit Agreement, we paid
$553 thousand
in advisory fees in the nine months ended September 30, 2016 to Loeb Partners Corporation. Loeb Partners Corporation is an affiliate of Loeb Holding Corporation. One of the members of our Board of Directors is the beneficial owner of a majority of the voting stock of Loeb Holding Corporation, and is the Chairman and Chief Executive Officer of Loeb Partners Corporation.
PEAK6 Investments, L.P.
–
On April 20, 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with a new
$20.0 million
term loan facility with PEAK6 Investments. In connection with the New Credit Agreement, we paid PEAK6 Investments
$1.5 million
for the repurchase of common stock, and we received
$1.5 million
for the issuance of warrants. In the
three and nine months ended September 30, 2017
, we paid interest of
$485 thousand
and
$864 thousand
, respectively. As of
September 30, 2017
, our outstanding balance on the debt was
$20.0 million
. PEAK6 Investments owned approximately
419 thousand
shares of our common stock immediately prior to the closing of the New Credit Agreement. For additional information, please see Note 15.
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. As of
September 30, 2017
, the Purchaser owes us
$30 thousand
under the Purchase Agreement, which is for operating expenses of Voyce incurred after July 8, 2017, billed in accordance with the Purchase Agreement.
The Purchaser is a newly-formed entity of which Michael R. Stanfield, our Chairman and Founder, is a significant minority investor, and certain former members of the Voyce management team are the managing member and investors.
19. 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 4. Corporate headquarter office transactions including, but not limited to, payroll, share based compensation and other expenses related to our Chairman and non-employee Board of Directors are reported in our Corporate business unit.
Our Personal Information Services segment offers identity theft and privacy protection as well as credit monitoring services for consumers to understand, monitor, manage and protect their personal information and privacy. Our Insurance and Other Consumer Services segment includes our insurance and other membership products and services.
The following table sets forth segment information for the
three and nine months ended September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Information Services
|
|
Insurance and Other Consumer Services
|
|
Bail Bonds Industry Solutions
|
|
Corporate
|
|
Consolidated
|
|
(in thousands)
|
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
|
|
|
—
|
|
|
(1,890
|
)
|
|
(2,659
|
)
|
(Loss) income from continuing operations before income taxes
|
(1,859
|
)
|
|
386
|
|
|
—
|
|
|
(1,890
|
)
|
|
(3,363
|
)
|
Three months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
40,071
|
|
|
$
|
2,440
|
|
|
$
|
516
|
|
|
$
|
—
|
|
|
$
|
43,027
|
|
Depreciation
|
1,009
|
|
|
36
|
|
|
30
|
|
|
10
|
|
|
1,085
|
|
Amortization
|
47
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
82
|
|
Income (loss) from operations
|
2,791
|
|
|
3
|
|
|
(190
|
)
|
|
(3,925
|
)
|
|
(1,321
|
)
|
Income (loss) from continuing operations before income taxes
|
1,957
|
|
|
3
|
|
|
(190
|
)
|
|
(3,946
|
)
|
|
(2,176
|
)
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
(4,335
|
)
|
|
(9,669
|
)
|
(Loss) income from continuing operations before income taxes
|
(9,800
|
)
|
|
1,225
|
|
|
(46
|
)
|
|
(4,335
|
)
|
|
(12,956
|
)
|
Nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
124,118
|
|
|
$
|
7,726
|
|
|
$
|
1,548
|
|
|
$
|
—
|
|
|
$
|
133,392
|
|
Depreciation
|
3,283
|
|
|
110
|
|
|
79
|
|
|
49
|
|
|
3,521
|
|
Amortization
|
140
|
|
|
291
|
|
|
—
|
|
|
—
|
|
|
431
|
|
Income (loss) from operations
|
11,000
|
|
|
(694
|
)
|
|
(386
|
)
|
|
(10,012
|
)
|
|
(92
|
)
|
Income (loss) from continuing operations before income taxes
|
9,030
|
|
|
(694
|
)
|
|
(386
|
)
|
|
(10,163
|
)
|
|
(2,213
|
)
|
In conjunction with our singular refocus on our identity and privacy protection services, we changed our policy of allocating general and administrative expenses from our Corporate business unit into our other segments, which resulted in a change in our measurement of segment profit and loss. Beginning in 2017, we directly charge our Personal Information Services segment for the majority of general and administrative expenses including executive, legal, human resources, finance and internal audit expenses.
We have elected not to recast our condensed consolidated financial statements for the three or
nine months ended September 30, 2016
. For the
three months ended September 30, 2016
the change in measurement would have had the approximate effects of a
$2.3 million
decrease in income from operations in our Personal Information Services segment, a
$2.1 million
decrease in loss from operations in our Corporate business unit and insignificant changes in our other segments. For the
nine months ended September 30, 2016
the change in measurement would have had the approximate effects of a
$6.7 million
decrease in income from operations in our Personal Information Services segment, a
$6.0 million
decrease in loss from operations in our Corporate business unit and insignificant changes in our other segments.
The following table sets forth segment information as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Property and Equipment, net
|
|
Total Assets
|
|
Property and Equipment, net
|
|
Total Assets
|
|
(in thousands)
|
Segment:
|
|
|
|
|
|
|
|
Personal Information Services
|
$
|
10,393
|
|
|
$
|
33,300
|
|
|
$
|
10,412
|
|
|
$
|
36,144
|
|
Insurance and Other Consumer Services
|
37
|
|
|
10,386
|
|
|
123
|
|
|
11,092
|
|
Bail Bonds Industry Solutions
|
—
|
|
|
—
|
|
|
247
|
|
|
137
|
|
Corporate
|
—
|
|
|
544
|
|
|
76
|
|
|
5,013
|
|
Subtotal
|
10,430
|
|
|
44,230
|
|
|
10,858
|
|
|
52,386
|
|
Adjustment for assets of discontinued operations and assets held for sale
|
—
|
|
|
—
|
|
|
(247
|
)
|
|
471
|
|
Consolidated
|
$
|
10,430
|
|
|
$
|
44,230
|
|
|
$
|
10,611
|
|
|
$
|
52,857
|
|
For additional information on discontinued operations and assets held for sale, please see Note 4.
We generated revenue in the following geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Consolidated
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
For the three months ended September 30, 2017
|
$
|
35,843
|
|
|
$
|
3,405
|
|
|
$
|
39,248
|
|
For the three months ended September 30, 2016
|
$
|
39,870
|
|
|
$
|
3,157
|
|
|
$
|
43,027
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2017
|
$
|
109,947
|
|
|
$
|
9,684
|
|
|
$
|
119,631
|
|
For the nine months ended September 30, 2016
|
$
|
123,988
|
|
|
$
|
9,404
|
|
|
$
|
133,392
|
|