Edgar Filing: INTERSECTIONS INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



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

For the quarterly period ended June 30, 2018



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

Commission file number: 000-50580

(Exact name of registrant as specified in the charter)



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

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

(703) 488-6100

(Registrant’s telephone number including area code)

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

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

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



Large accelerated filer	☐	Accelerated filer	☐

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

		Emerging growth company	☐

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

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

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

As of August 13, 2018 there were 28,463,763 shares of common stock, $0.01 par value, issued and 24,356,507 shares outstanding, with 4,107,256 shares of treasury stock.

Form 10-Q

June 30, 2018

Table of Contents



		Page

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017	2
	Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	4
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 4.	Controls and Procedures	52

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	53
Item 6.	Exhibits	53

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
REVENUE	$	38,619		39,935			$	77,698		80,384
OPERATING EXPENSES:
Marketing	911			3,163			1,823			6,613
Commission	8,901			9,756			18,206			19,504
Cost of revenue	12,421			13,569			24,803			26,568
General and administrative	14,510			17,962			27,638			34,343
Loss on disposition of Captira Analytical	—			(24		)	—			106
Impairment of intangibles and other assets	—			(86		)	—			—
Depreciation	1,564			1,288			3,017			2,588
Amortization	49			47			98			93
Total operating expenses	38,356			45,675			75,585			89,815
INCOME (LOSS) FROM OPERATIONS	263			(5,740		)	2,113			(9,431		)
Interest expense, net	(823		)	(603		)	(1,354		)	(1,195		)
Loss on extinguishment of debt	—			(1,525		)	—			(1,525		)
Other (expense) income, net	(37		)	103			(85		)	137
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(597		)	(7,765		)	674			(12,014		)
Income tax benefit	—			18			523			28
(LOSS) INCOME FROM CONTINUING OPERATIONS	(597		)	(7,747		)	1,197			(11,986		)
Loss from discontinued operations, net of tax	—			(856		)	—			(1,419		)
NET (LOSS) INCOME	$	(597	)	$	(8,603	)	$	1,197		$	(13,405	)
Basic (loss) earnings per common share:
(Loss) income from continuing operations	$	(0.02	)	$	(0.33	)	$	0.05		$	(0.50	)
Loss from discontinued operations	—			(0.03		)	—			(0.06		)
Basic net (loss) income per common share	$	(0.02	)	$	(0.36	)	$	0.05		$	(0.56	)
Diluted (loss) earnings per common share:
(Loss) income from continuing operations	$	(0.02	)	$	(0.33	)	$	0.05		$	(0.50	)
Loss from discontinued operations	—			(0.03		)	—			(0.06		)
Diluted net (loss) income per common share	$	(0.02	)	$	(0.36	)	$	0.05		$	(0.56	)
Weighted average common shares outstanding—basic	24,317			23,823			24,260			23,750
Weighted average common shares outstanding—diluted	24,317			23,823			24,595			23,750

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)



	June 30, 2018			December 31, 2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	7,665		$	8,502
Accounts receivable, net of allowance for doubtful accounts of $50 (2018) and $34 (2017)	6,321			8,225
Contract assets	529			—
Prepaid expenses and other current assets	3,959			3,232
Income tax receivable	1,308			2,545
Deferred subscription solicitation and commission costs	—			1,655
Total current assets	19,782			24,159
PROPERTY AND EQUIPMENT, net	9,594			11,040
GOODWILL	9,763			9,763
INTANGIBLE ASSETS, net	200			58
CONTRACT COSTS	401			—
OTHER ASSETS	1,323			1,459
TOTAL ASSETS	$	41,063		$	46,479
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,366		$	3,498
Accrued expenses and other current liabilities	9,150			8,533
Accrued payroll and employee benefits	1,029			1,501
Commissions payable	353			141
Current portion of long-term debt, net	19,929			—
Capital leases, current portion	345			423
Contract liabilities, current	4,770			7,759
Total current liabilities	37,942			21,855
LONG-TERM DEBT, net	—			20,736
OBLIGATIONS UNDER CAPITAL LEASES, non-current	214			392
OTHER LONG-TERM LIABILITIES	1,891			2,895
DEFERRED TAX LIABILITY, net	7			7
TOTAL LIABILITIES	40,054			45,885
COMMITMENTS AND CONTINGENCIES (see Notes 14 and 16)
STOCKHOLDERS’ EQUITY:
Common stock at $0.01 par value, shares authorized 50,000; shares issued 28,438 (2018) and 28,194 (2017); shares outstanding 24,331 (2018) and 24,102 (2017)	284			282
Additional paid-in capital	151,108			150,305
Warrants	2,840			2,840
Treasury stock, shares at cost; 4,107 (2018) and 4,092 (2017)	(35,781		)	(35,745		)
Accumulated deficit	(117,442		)	(117,088		)
TOTAL STOCKHOLDERS’ EQUITY	1,009			594
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	41,063		$	46,479

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands; unaudited)



	Six Months Ended June 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,197		$	(13,405	)
Less: loss from discontinued operations, net of tax	—			(1,419		)
Income (loss) from continuing operations	1,197			(11,986		)
Adjustments to reconcile net income (loss) to cash flows from operating activities:
Depreciation and amortization	3,115			2,681
Amortization of debt issuance costs	63			168
Accretion of debt discount	148			29
Provision for doubtful accounts	16			(4		)
Share based compensation	1,019			4,772
Amortization of deferred subscription solicitation costs	—			6,053
Amortization of contract costs	424			—
Loss on disposition of Captira Analytical	—			130
Gain on disposition of Habits at Work	—			(24		)
Loss on extinguishment of debt	—			1,525
Changes in assets and liabilities:
Accounts receivable	1,426			808
Contract assets	(1,429		)	—
Prepaid expenses, other current assets and other assets	(779		)	(672		)
Income tax receivable, net	1,237			760
Deferred subscription solicitation and commission costs	—			(5,316		)
Contract costs	(503		)	—
Accounts payable and accrued liabilities	(872		)	638
Commissions payable	(5		)	46
Contract liabilities, current	(1,628		)	(1,290		)
Other long-term liabilities	(1,004		)	(218		)
Cash flows provided by (used in) continuing operations	2,425			(1,900		)
Cash flows used in discontinued operations	—			(1,623		)
Net cash provided by (used in) operating activities	2,425			(3,523		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for the disposition of Captira Analytical	—			(315		)
Decrease (increase) in restricted cash	—			25
Acquisition of property and equipment	(1,760		)	(2,748		)
Cash flows used in continuing operations	(1,760		)	(3,038		)
Cash flows provided by discontinued operations	—			94
Net cash used in investing activities	(1,760		)	(2,944		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt	3,000			—
Repayments of debt (including fees of $45 thousand)	(4,045		)	(13,920		)
Repurchase of common stock	—			(1,510		)
Proceeds from issuance of warrants	—			21,500
Cash paid for debt and equity issuance costs	(22		)	(323		)
Capital lease payments	(256		)	(286		)
Withholding tax payment on vesting of restricted stock units	(179		)	(667		)
Cash flows (used in) provided by financing activities	(1,502		)	4,794
DECREASE IN CASH AND CASH EQUIVALENTS	(837		)	(1,673		)
CASH AND CASH EQUIVALENTS — beginning of period	8,502			10,797
Cash reclassified to assets held for sale at beginning of period	—			381
CASH AND CASH EQUIVALENTS — end of period	$	7,665		$	9,505



SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Equipment additions accrued but not paid	$	36		$	133
Withholding tax payments accrued on vesting of restricted stock units and stock option exercises	$	71	—	$	185
Intangible asset placed in service but paid in prior year	$	240		$	—
Shares withheld in lieu of withholding taxes on vesting of restricted stock awards	$	—		$	163
Debt issuance costs accrued but not paid	$	48		$	—

See Notes to Condensed Consolidated Financial Statements

INTERSECTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Business

We provide innovative software and data monitoring and analytics solutions that help consumers manage financial and personal risks associated with the proliferation of their personal data in the virtual and financial world. Under our Identity Guard^® brand and other brands that comprise our Personal Information Services segment, we have helped consumers monitor, manage and protect against the risks associated with their identities and personal information for more than twenty years. We offer identity theft and privacy protection as well as credit monitoring services for consumers to understand, monitor, manage and protect their personal information and privacy. Under our Identity Guard^® and Identity Guard^® with Watson™ suite of services (collectively, "Identity Guard^® Services"), we help protect consumers against the risks associated with the inappropriate exposure of their personal information that can result in fraudulent use or reputation damage. Identity Guard^® with Watson™ offers robust early detection of potential risks, stretching beyond credit-centric risks to include online privacy risks, and provides personalized threat alerts with actionable steps to help keep our customers’ information private from the earliest stage possible. Identity Guard^® Services are offered through large and small organizations as an embedded service for either its employees or consumers, as well as directly to consumers through our direct marketing efforts. We believe that our suite of services offers consumers the most proactive and comprehensive identity theft monitoring and online privacy services available on the market today.

Our Insurance and Other Consumer Services segment includes insurance and membership services for consumers, delivered on a subscription basis. We are not planning to develop new business in this segment and are experiencing normal subscriber attrition due to ceased marketing and retention efforts. Some of our legacy subscriber portfolios have been cancelled, and our continued servicing of other subscribers may be cancelled as a result of actions taken by one or more financial institutions. Corporate headquarter office transactions including, but not limited to, payroll, share based compensation and other expenses related to our Chairman and non-employee Board of Directors are reported in our Corporate business unit.

2. Basis of Presentation, Significant Accounting Policies and Liquidity

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and applicable rules and regulations of the Securities and Exchange Commission, and in management’s opinion reflect all normal and recurring adjustments necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. They include the accounts of the Company and our subsidiaries.

The information in our condensed consolidated financial statements is presented for the six months ended June 30, 2017 giving effect to the disposal of i4c Innovations LLC (“i4c” or “Voyce”), with the historical financial results of the Voyce business recast as discontinued operations. In accordance with U.S. GAAP, we did not allocate corporate overhead expenses to discontinued operations in the year ended December 31, 2017. Additionally, we considered, and made the necessary adjustments to the historical financial results for, the allocation of other costs to either discontinued or continuing operations, including, but not limited to, rent expense, severance expense and other wind-down costs. The result of these adjustments changed the historical operating results for certain segments as well as the presentation of the condensed consolidated financial statements to include discontinued operations for the year ended December 31, 2017. Unless otherwise indicated, the information in the notes to the condensed consolidated financial statements refer only to our continuing operations and do not include discussion of balances or activity of i4c. For additional information, please see Note 5.

All intercompany transactions have been eliminated from the condensed consolidated statements of operations. The condensed consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.

These condensed consolidated financial statements do not include all the information or notes necessary for a complete presentation and, accordingly, should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2017, as filed in our Annual Report on Form 10-K.

Liquidity

On June 8, 2018, we entered into Amendment No. 4 to the Credit Agreement (as defined in Note 16), which set forth required monthly principal payments beginning June 30, 2018, and shortened the maturity date of the secured indebtedness evidenced by the Credit Agreement (the “Secured Debt”) to December 31, 2018. On June 27, 2018, we entered into the Bridge Notes (as defined in Note 16) in the aggregate amount of $3.0 million, the proceeds of which were used to prepay a portion of the principal amounts due under the Credit Agreement. The Bridge Notes are convertible into a qualified future financing and have a maturity date of June 30, 2019. As of June 30, 2018, the outstanding balance of the Secured Debt was $17.5 million, the outstanding balances of the Bridge Notes totaled $3.0 million, and our cash on hand was approximately $7.7 million. As a result, we had a working capital deficit of $18.2 million as of June 30, 2018 compared to a surplus of $2.3 million as of December 31, 2017. We evaluated this condition and determined it is probable that, without consideration of our remediation plan to refinance the Secured Debt, we would be unable to meet the full repayment obligations within the timeframe required by the Credit Agreement.

In response to Amendment No. 4, on August 16, 2018, we reached agreement with an institutional investor to the material terms of a proposed preferred equity investment, which would provide us $29.0 million to $35.0 million of liquidity, including the conversion of the Bridge Notes (the “Transaction”). We expect to use the proceeds of the Transaction to fully satisfy the Secured Debt, prepayment penalties and transaction costs and also provide liquidity to continue to execute our business plan. In addition, the Executive Committee of our Board of Directors authorized management to take the actions necessary to complete definitive Transaction documents. We expect the Transaction to be subject to shareholder approval and to be funded in two or more closings. In accordance with U.S. GAAP, we evaluated our remediation plan to refinance the Secured Debt and concluded that it is probable our plan will be timely executed and will provide the liquidity required to meet our repayment obligations within the required timeframes. We considered several conditions and events in the aggregate, including without limitation the quantitative impact on our liquidity; approval by the Executive Committee of our Board of Directors for management to proceed toward definitive documentation; the magnitude and likelihood of the Transaction closing; the amount, if any, of subjective contingencies to funding of the Transaction; the probability of receipt of the required approval by the majority of our shareholders; and internal analysis that illustrates that the funding would provide adequate liquidity to fully satisfy the Secured Debt, provide for conversion of the Bridge Notes and provide sufficient liquidity to execute our business plan.

The consummation and actual terms of the Transaction (or any other alternative refinancing transaction) are subject to a number of factors, including without limitation market conditions, negotiation and execution of definitive agreements, receipt of additional funding commitments and satisfaction of customary closing conditions, including any required shareholder approval. There can be no assurance that we will be able to consummate the Transaction (or any other alternative refinancing transaction) on the terms described above or at all. If the Transaction (or any other alternative refinancing transaction) is not funded in amounts sufficient to meet the repayment obligations of Amendment No. 4 to the Credit Agreement through December 31, 2018, we will not be able to meet all of the repayment obligations of the Secured Debt.

Revision to Previously Issued Financial Statements

The results of operations for the three and six months ended June 30, 2017 have been updated to reflect an adjustment to our share based compensation expense, which is recorded in general and administrative expenses on our condensed consolidated statements of operations. The change in share based compensation from the amount as reported to the amount as revised was a $2.4 million increase for the three and six months ended June 30, 2017. These changes are reflected in the loss from operations, loss from continuing operations before income taxes, net loss and basic and diluted net loss per common share figures in these condensed consolidated financial statements. For additional information, please see Note 21 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at th

e date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Restricted Cash

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

Revenue Recognition

For a full description of our revenue recognition policy, please see Note 4.

Goodwill, Identifiable Intangibles and Other Long-Lived Assets

We record, as goodwill, the excess of the purchase price over the fair value of the identifiable net assets acquired in purchase transactions. We review our goodwill for impairment annually, as of October 31, or more frequently if indicators of impairment exist. Goodwill is reflected as an asset in our Personal Information Services and Insurance and Other Consumer Services segments’ balance sheets, resulting from our acquisitions of Health at Work Wellness Actuaries LLC ("Habits at Work") and White Sky, Inc. ("White Sky") in 2015 as well as our prior acquisition of IISI Insurance Services Inc. ("IISI"), formerly known as Intersections Insurance Services Inc., in 2006.

We continuously evaluate whether indicators of impairment exist and perform an initial assessment of qualitative factors to determine whether it is necessary to perform the goodwill impairment test (commonly referred to as the step zero approach). For reporting units in which the qualitative assessment concludes it is more likely than not that the fair value is more than its carrying value, U.S. GAAP eliminates the requirement to perform further goodwill impairment testing. In addition, we are not required to perform a qualitative assessment for our reporting units with zero or negative carrying amounts. For those reporting units where a significant change or event occurs, and where potential impairment indicators exist, we perform the quantitative assessment to test goodwill for impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others (a) a significant decline in our expected future cash flows; (b) a sustained, significant decline in our stock price and market capitalization; (c) a significant adverse change in legal factors or in the business climate; (d) unanticipated competition; (e) the testing for recoverability of a significant asset group within a reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact in our condensed consolidated financial statements.

The quantitative assessment is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value using the best information available, using a combined income approach (discounted cash flow) and market based approach. The income approach measures the value of the reporting units by the present values of its economic benefits. These benefits can include revenue and cost savings. The market based approach measures the value of an entity through an analysis of recent sales or offerings of comparable companies and using revenue and other multiples of comparable companies as a reasonable basis to estimate our implied multiples. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for use of funds, trends within the industry, and risks associated with particular investments of similar type and quality as of the valuation date. In addition, we consider the uncertainty of realizing the projected cash flows in the analysis.

The estimated fair values of our reporting units are dependent on several significant assumptions, including our earnings projections, and cost of capital (discount rate). The projections use management’s best estimates of economic and market conditions over the projected period including business plans, growth rates in sales, costs, and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, estimates of future capital expenditures, changes in future working capital requirements and overhead cost allocation, based on each reporting unit’s relative benefit received from the functions that reside in our Corporate business unit. We perform a detailed analysis of our Corporate overhead costs for purposes of establishing the overhead allocation baseline for the projection period. Overhead allocation methods include, but are not limited to, the percentage of the payroll within each reporting unit, allocation of existing support function costs based on estimated usage by the reporting units, and vendor specific costs incurred by Corporate that can be reasonably attributed to a particular reporting unit. These allocations are adjusted over the projected period in our discounted cash flow analysis based on the forecasted changing relative needs of the reporting units. Throughout the forecast period, the majority of Corporate’s total

overhead expenses are allocated to our Personal Information Services reporting unit. We believe this overhead allocation method fairly allocates costs to each reporting unit, and we will continue to review, and possibly refine, these allocation methods as our businesses grow and mature. There are inherent uncertainties related to these factors and management’s judgment in applying each to the analysis of the recoverability of goodwill.

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

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

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

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

Debt Issuance Costs

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

Share Based Compensation

We currently issue equity and equity-based awards under the 2014 Stock Incentive Plan (the "Plan"), and we have three inactive stock incentive plans: the 1999 Stock Option Plan, the 2004 Stock Option Plan and the 2006 Stock Incentive Plan. Individual awards under the 2014 Stock Incentive Plan may take the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards and/or restricted stock units.

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

We use the Black-Scholes option-pricing model to value all options and the straight-line method to amortize this fair value as compensation cost over the requisite service period. The fair value of each option granted has been estimated as of the date of grant with the following weighted-average assumptions for the six months ended June 30, 2018 and 2017:

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

Expected Volatility. The expected volatility of options granted was estimated based upon our historical share price volatility based on the expected term of the underlying grants, or approximately 52% and 49% for 2018 and 2017, respectively.

Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants, or approximately 2.7% and 1.8% for 2018 and 2017, respectively.

Expected Term. The expected term of options granted was determined by considering employees’ historical exercise patterns, or approximately 5.0 years for both 2018 and 2017. We will continue to review our estimate in the future and adjust it, if necessary, due to changes in our historical exercises.

Income Taxes

We account for income taxes under the applicable provisions of U.S. GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and future reversal of existing deferred tax assets and liabilities, sufficient sources of taxable income in available carryback periods, tax-planning strategies, and historical results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three trailing years of cumulative operating income (loss). Valuation allowances are provided, if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in the future.

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

In addition to the amount of tax resulting from applying the estimated annual effective tax rate to income from operations before income taxes, we may include certain items treated as discrete events to arrive at an estimated overall tax amount.

We believe that our tax positions comply with applicable tax law. As a matter of course, we may be audited by various taxing authorities and these audits may result in proposed assessments where the ultimate resolution may result in us owing additional taxes. U.S. GAAP addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We have elected to include principal and penalties expense related to uncertain tax positions as part of income tax expense and include interest expense related to uncertain tax positions as part of interest expense in our condensed consolidated financial statements. The accrued interest is included as a component of other long-term liabilities in our condensed consolidated balance sheets. U.S. GAAP provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

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

Contingent Liabilities

a range of possible loss when we believe that sufficient and appropriate information is available. We accrue a liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. If a loss is probable and a range of amounts can be reasonably estimated but no amount within the range is a better estimate than any other amount in the range, then the minimum of the range is accrued. We do not accrue a liability when the likelihood that the liability has been incurred is believed to be probable but the amount cannot be reasonably estimated or when the likelihood that a liability has been incurred is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is reasonably possible and the impact could potentially be material, we disclose the nature of the contingency and, where feasible, an estimate of the possible loss or range of loss.

Variable Interest Entities

Our decision to consolidate an entity is based on our assessment that we have a controlling financial interest in such entity. We continuously evaluate our related party relationships and any ownership interests, including controlling or financial interests of our executive management team such as our Executive Chairman and President's non-controlling interest in One Health Group, LLC ("OHG"). In accordance with U.S. GAAP, since the total equity investment at risk is not sufficient for OHG to finance its activities without additional subordinated financial support, as well as economic interests of the holders of OHG that are disproportionate to their voting interests, we concluded OHG is a variable interest entity ("VIE"). We further analyzed which related party would be the primary beneficiary in a tiebreaker test. Given that neither we nor our de facto agent have the power to direct the activities of OHG that most significantly impact its economic performance, we determined that we are not the primary beneficiary of the VIE and therefore are not required to consolidate the results of OHG. We do not have any assets or liabilities in our condensed consolidated balance sheets that relate to our variable interest in OHG. Other than the potential participation in future revenue if and when earned, we have no material, continuing economic or other involvement in OHG, including no exposure to loss as a result of our involvement with OHG. Please see Note 5 for additional information related to the divestiture.

Internally Developed Capitalized Software

We develop software for our internal use and capitalize the estimated software development costs incurred during the application development stage in accordance with U.S. GAAP. Costs incurred prior to and after the application development stage are charged to expense. When the software is ready for its intended use, capitalization ceases and such costs are amortized on a straight-line basis over the estimated life, which is generally three years. We record depreciation for internally developed capitalized software in depreciation expense in our condensed consolidated statements of operations. Significant judgments and estimates are required in measuring capitalized software. We regularly review our capitalized software projects for impairment.

Contract Costs

In accordance with ASU 2014-09, "Revenue from Contracts with Customers" ("Topic 606"), which was adopted January 1, 2018, we recognize certain commission costs, which are included in commission expenses in our condensed consolidated statements of operations, and certain fulfillment costs, which are included in cost of revenue.

Our commissions are generally monthly commissions paid to partners, affiliates and our internal sales team, most of which have commensurate renewal terms or useful lives of one year or less. Therefore, we apply the practical expedient on a portfolio basis and recognize those incremental costs of obtaining contracts as an expense when incurred. We also have a minority population of commission fees that we believe meet the capitalization guidance in U.S. GAAP and are amortized based on the systematic transfer of the underlying contractual service terms, which includes our estimate of subscriber renewal behavior based on acquisition channel from historical data, if available, which is typically on a straight-line basis for one to two years. If we determine that our incremental costs to fulfill a contract are capitalizable under Topic 606, the costs are amortized based on the systematic transfer of the underlying contractual service terms.

Contract Assets and Contract Liabilities

separately state unbilled contract assets in our condensed consolidated balance sheet as of June 30, 2018, which we previously included in accounts receivable. For additional information, please see Notes 3 and 4.

We receive payments from subscribers based on a billing schedule as established in the terms of our monthly and annual contract service agreements. Contract assets relate to our conditional right to consideration for our unbilled completed performance under the contract. Accounts receivable are recorded when the right to consideration for our completed performance is billed and is therefore, no longer unconditional. Contract liabilities (that is, deferred revenue) relate to payments received in advance of performance under the contract. Contract liabilities that are payable in greater than one year are included in other long-term liabilities in our condensed consolidated balance sheets.

3. Accounting Standards Updates

We consider the applicability and impact of all Accounting Standards Updates ("ASUs"). Recently issued ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.



Standard	Description	Date of Adoption	Application	Effect on the Consolidated Financial Statements (or Other Significant Matters)
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)	This update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, by creating a new Topic 606, Revenue from Contracts with Customers. The guidance in this update affects most entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the trade of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, various updates have been issued during 2015 and 2016 to clarify the guidance in Topic 606.	January 1, 2018	Modified retrospective with the cumulative effect of initially applying these updates recognized at the date of initial application.	See "Topic 606" below.
ASU 2016-02, Leases (Topic 842)	The primary amendments in this update require the recognition of lease assets and lease liabilities on the balance sheet, as well as certain qualitative disclosures regarding leasing arrangements.	January 1, 2019	Modified retrospective with the cumulative effect of initially applying these updates recognized at the date of initial application.	See "Topic 842" below.
ASU 2016-15, Statement of Cash Flows (Topic 230)	This update clarifies the guidance regarding the classification of operating, investing, and financing activities for certain types of cash receipts and payments.	January 1, 2018	Retrospective	We adopted this update as of January 1, 2018, and there was no material impact to our condensed consolidated financial statements.
ASU 2017-09, Compensation—Stock Compensation (Topic 718)	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.	January 1, 2018	Prospective	Upon adoption, there was no material impact to our condensed consolidated financial statements.

Topic 606

We adopted the provisions of Topic 606 as of January 1, 2018 on a modified retrospective basis to open contracts at the date of adoption only. Our assessment of the impact included review of a significant majority of our revenue streams, contracts and contract costs incremental to obtaining the contract. We evaluated our service offerings and determined that the service offerings' obligations are not distinct within the context of the contracts and, as such, are considered to be a series of promised services treated as a single performance obligation. Therefore, we concluded the impact to the way we recognize revenue is immaterial because our revenue is primarily generated from monthly subscriptions of a single performance obligation and longer-term breach contracts, which will continue to be recognized ratably over the service delivery periods.

We also concluded that direct-response advertising costs previously included in deferred subscription solicitation and advertising costs must be expensed as incurred under the new standard. Since we previously deferred and amortized these costs over the period during which benefits were expected to be received not to exceed twelve months, we believe this is a

significant change that impacts our results of operations in each reportable period after adoption. Any other costs previously included in deferred subscription solicitation and advertising costs, such as annual renewal commission costs, that could continue to be capitalized and amortized over the transfer of the underlying service period under Topic 606 were reclassified to contract costs in our condensed consolidated balance sheet as of June 30, 2018.

In addition, we elected a practical expedient to immediately expense the majority of our incremental one-time commission costs, which is not expected to have a material impact to our future results of operations.

As a result of our comprehensive assessment, we recorded a cumulative adjustment of approximately $1.6 million to reduce the opening balance of retained earnings, which is primarily due to expensing direct-response advertising costs as well as immediately expensing certain incremental one-time commission costs. Given the continued valuation allowance on our net deferred taxes, the tax effect of these cumulative adjustments at adoption is also immaterial to the consolidated financial statements.

The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The following tables summarize the impacts of adopting Topic 606 on select lines of our unaudited condensed consolidated financial statements (all tables in thousands of dollars):

Statements of Operations



(select lines)	As Reported		Adjustments		Balances without Adoption of 606
Three Months Ended June 30, 2018
Revenue	38,619		—		38,619
Marketing expenses	911		121		1,032
Commission expenses	8,901		(43	)	8,858
Income from operations	263		(78	)	185
Net loss	(597	)	(78	)	(675	)
Six Months Ended June 30, 2018
Revenue	77,698		—		77,698
Marketing expenses	1,823		540		2,363
Commission expenses	18,206		(7	)	18,199
Income from operations	2,113		(533	)	1,580
Net income	1,197		(533	)	664

Balance Sheet



	As of June 30, 2018
(select lines)	As Reported		Adjustments		Balances without Adoption of 606
ASSETS:
Accounts receivable	6,321		1,775		8,096
Contract assets	529		(529	)	—
Prepaid expenses and other current assets	3,959		52		4,011
Deferred subscription solicitation and commission costs	—		1,103		1,103
Contract costs	401		(401	)	—
Total assets	41,063		2,000		43,063
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Commissions payable	353		(263	)	90
Contract liabilities, current	4,770		1,246		6,016
Other long-term liabilities	1,891		—		1,891
Accumulated deficit	(117,442	)	1,017		(116,425	)
Total liabilities and stockholders' equity	41,063		2,000		43,063

Statement of Cash Flows



	Six Months Ended June 30, 2018
(select lines)	As Reported		Adjustments		Balances without Adoption of 606
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	1,197		(533	)	664
Adjustments to reconcile net income to cash flows from operating activities:
Amortization of deferred subscription solicitation costs	—		1,766		1,766
Amortization of contract costs	424		(424	)	—
Changes in assets and liabilities:
Accounts receivable	1,426		(1,312	)	114
Contract assets	(1,429	)	1,429		—
Prepaid expenses, other current assets and other assets	(779	)	(52	)	(831	)
Deferred subscription solicitation and commission costs	—		(1,214	)	(1,214	)
Contract costs	(503	)	503		—
Commissions payable	(5	)	(46	)	(51	)
Contract liabilities, current	(1,628	)	(117	)	(1,745	)
Net cash provided by operating activities	2,425		—		2,425

Topic 842

We plan to adopt the provisions of ASU 2016-02 ("Topic 842"), as amended, as of January 1, 2019. We are evaluating the standard in accordance with our adoption plan, which includes controls for performing a completeness assessment over the lease population, reviewing and measuring all forms of leases and analyzing the practical expedients. In accordance with ASU 2018-11 "Targeted Improvements," issued in July 2018, we expect to apply the new lease requirements as of January 1, 2019 and recognize a cumulative-effect adjustment, if any, at the date of initial application, rather than restate comparative periods under the modified retrospective approach. We will then begin to finalize the impact of adoption on our condensed consolidated financial statements, as well as disclosures, accounting policies, business processes and internal controls.

We have not identified any embedded leases in our existing contracts that require bifurcation under Topic 842. As a result, we expect the adoption of Topic 842 will have a material impact to our consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases. As of June 30, 2018, we had an estimated $5.1 million in undiscounted future minimum lease commitments, as reported in Note 14.

4. Revenue Recognition

We account for revenue in accordance with Topic 606, which was adopted January 1, 2018. For additional information about the adoption impact, please see Note 3.

We recognize revenue on identity theft protection services, as well as insurance services and other monthly membership and transaction services. The following is a description of principal activities, separated by reportable segments, from which we generate revenues. For additional information about reportable segments, please see Note 20.

Accounting Policy, Nature of Services and Timing of Satisfaction of Performance Obligations

Personal Information Services segment

We offer identity theft and privacy protection services to subscribers through multiple marketing channels including, but not limited to, direct-to-consumer, affiliates and partners, and as an embedded service for either its employees or consumers. We also offer breach-response services to large and small organizations by providing affected individuals with identity theft recovery and credit monitoring services.

With the exception of breach-response services, revenue is measured based on the stated consideration specified in the monthly renewable individual subscription contract. Subscription fees billed by our clients are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts. Subscription fees billed by us are generally billed directly to the subscriber’s credit card except for arrangements under which subscription fees are paid to us by our clients on behalf of the subscriber. These payment mechanisms significantly reduce the risk of uncertain cash flows and a significant portion of our subscribers are billed in advance of fulfillment, which also mitigates uncertainty of cash flows. The prices to subscribers of various configurations of our non-breach services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, our subscriptions periodically may be offered with trial, delayed billing or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed. We are the principal in almost all of our transactions and therefore, revenue is recorded on a gross basis in the amount that we bill subscribers from the sale of subscriptions and is recognized ratably on a straight-line basis over the contractual term of the service agreement, ranging from one month to one year. In a minority of transactions, we also provide services to certain legacy partners in which we are the agent in the transactions and therefore, we record revenue on a net basis in the amount that we bill certain partners. Revenue from these arrangements is also recognized ratably on a straight-line basis over the contractual term of the service agreement. Based on the short-term nature of our monthly subscription services and the service terms, we do not have any unsatisfied, or partially unsatisfied, future performance obligations, in addition to the amounts included in contract liabilities. In addition, and for the same reasons noted above, we do not have any contracts that have a significant financing component. Revenues are presented net of the taxes that are collected from members and remitted to governmental authorities.

Revenue for annual subscription fees and breach-response services, which the contract term is one year or greater, are deferred and recognized ratably on a straight-line basis over the contractual term of the service agreement, which is as the services are systematically transferred to the subscriber.

Our monthly contractual subscription terms do not have stated refund provisions, however, we considered our refund history as variable consideration in determining the estimated transaction price. Discretionary refunds for our monthly subscriptions are generally consistent, processed within the service term and are appropriately reflected as reductions to revenue. Discretionary refunds in excess of one month of service are insignificant. Annual subscriptions include subscribers with pro-rata refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro-rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our historical experience. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year.

We also generate revenue through a collaborative arrangement, which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement in our condensed consolidated financial statements and account for third-party revenue and contract costs in accordance with U.S. GAAP.

Insurance and Other Consumer Services Segment

We offer insurance and other membership services to subscribers on a monthly basis. We are not planning to develop new business in this segment and are experiencing normal attrition due to ceased marketing and retention efforts. We provide these insurance services to certain legacy partners in which we are the agent in the transactions and therefore, we record revenue on a net basis in the amount that we bill certain partners. Revenue from these arrangements is also recognized ratably on a straight-line basis over the contractual term of the service agreements. Revenues are presented net of the taxes that are collected from members and remitted to governmental authorities.

Disaggregation of Revenue

The following table disaggregates our revenue by major source for the three and six months ended June 30, 2018 (in thousands):



	Personal Information Services		Insurance and Other Consumer Services		Total
Three months ended June 30, 2018
Primary geographical markets:
United States	$	33,928	$	1,525	$	35,453
Canada	3,166		—		3,166
Total revenue	$	37,094	$	1,525	$	38,619
Major service lines:
Identity Guard^® Services	$	13,393	$	—	$	13,393
Canadian business	3,166		—		3,166
U.S. financial institutions	18,855		—		18,855
Breach services & other	1,680		1,525		3,205
Total revenue	$	37,094	$	1,525	$	38,619
Timing of revenue recognition:
Products and services transferred over time	$	37,094	$	1,525	$	38,619
Products transferred at a point in time	—		—		—
Total revenue	$	37,094	$	1,525	$	38,619

Six months ended June 30, 2018
Primary geographical markets:
United States	$	68,271	$	3,030	$	71,301
Canada	6,397		—		6,397
Total revenue	$	74,668	$	3,030	$	77,698
Major service lines:
Identity Guard^® Services	$	26,908	$	—	$	26,908
Canadian business	6,397		—		6,397
U.S. financial institutions	38,414		—		38,414
Breach services & other	2,949		3,030		5,979
Total revenue	$	74,668	$	3,030	$	77,698
Timing of revenue recognition:
Products and services transferred over time	$	74,668	$	3,030	$	77,698
Products transferred at a point in time	—		—		—
Total revenue	$	74,668	$	3,030	$	77,698

Contract Balances

The opening and closing balances of our accounts receivable, contract assets and contract liabilities are as follows (in thousands):



	Accounts Receivable			Contract Assets		Contract Liabilities, Current			Contract Liabilities, Non-Current
Opening Balance as of December 31, 2017	$	8,225		$	—	$	7,759		$	—
Increase (decrease), net	(1,904		)	529		(2,989		)	25
Ending Balance as of June 30, 2018	$	6,321		$	529	$	4,770		$	25

We recognized $1.5 million and $6.5 million of revenue in the three and six months ended June 30, 2018, respectively, that was included in the contract liability balance as of December 31, 2017. The decreasing trend of this revenue

recognized in the three months ended June 30, 2018 as compared to the three months ended March 31, 2018 is consistent with the pro-rata recognition of revenue earned from our monthly subscriptions. Our longer-term breach contracts have performance obligations that will continue to be satisfied in future periods and reduce the December 31, 2017 contract liability balance.

5. Discontinued Operations and Assets and Liabilities Held for Sale

On July 31, 2017, we divested i4c to One Health Group, LLC (the "Purchaser"), pursuant to the terms and conditions of a membership interest purchase agreement (the "Purchase Agreement"). i4c conducted our Pet Health Monitoring business known as Voyce. The purchase price for the assets was equal to (i) the sum of $100, plus (ii) a revenue participation of up to $20.0 million, payable pursuant to the terms and conditions of the Purchase Agreement. We have determined that the revenue participation is a gain contingency and therefore will be recognized if and when it is earned.

The total value of the consideration paid pursuant to the Purchase Agreement was determined through negotiations that took into account a number of factors of the Pet Health Monitoring business, including historical revenues, operating history, business contracts, obligations and commitments and other factors. The terms of the transaction were approved by our independent directors of the Board of Directors and required the consent of our lender.

The Purchaser is a newly-formed entity of which Michael R. Stanfield, our Executive Chairman and President, is a minority investor, and certain former members of the i4c management team are the managing member and investors. Except as described above, there are no material relationships between the Purchaser, on the one hand, and us or any of our affiliates, directors, officers, or any associate of such directors or officers, on the other hand. For our policy on identifying a controlling financial interest, please see "—Variable Interest Entities" in Note 2.

These condensed consolidated financial statements present our results of operations for the three and six months ended June 30, 2018 and 2017 and our financial position as of June 30, 2018 and December 31, 2017 giving effect to the disposal of i4c, with the historical financial results of the Pet Health Monitoring segment reflected as discontinued operations, since the disposal constituted a strategic business shift. We made adjustments to our historical financial results for certain costs and overhead allocations to either discontinued or continuing operations for the three and six months ended June 30, 2017; for additional information, please see "—Variable Interest Entities" in Note 2.

The following table summarizes the components of loss from discontinued operations, net of income taxes included in the condensed consolidated statements of operations (in thousands):



	Three Months Ended June 30, 2017			Six Months Ended June 30, 2017
Major classes of line items constituting loss from discontinued operations:
Marketing expenses	$	(2	)	$	(17	)
Cost of revenue	—			(4		)
General and administrative expenses	(604		)	(1,218		)
Impairment	(250		)	(180		)
Total loss from discontinued operations, net of tax	$	(856	)	$	(1,419	)

In 2016, our Board of Directors approved a plan to sell Captira, which comprised our Bail Bonds Industry Solutions segment. Effective January 31, 2017, we completed the sale of Captira for a nominal amount, which resulted in a loss on sale of $130 thousand in the six months ended June 30, 2017 and marked the conclusion of our operations in the Bail Bonds Industry Solutions segment. The disposal did not represent a strategic shift that would have a major effect on operations and financial results, and therefore, it is not classified as discontinued operations. For information on the operating results of the Bail Bonds Industry Solutions segment, please see "Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations."

In March 2017, we executed an agreement to dispose of our Habits at Work business, the results of which are recorded in our Personal Information Services segment. Habits at Work met all the criteria under U.S. GAAP to classify its assets and liabilities as held for sale in our consolidated balance sheets as of March 31, 2017. Effective June 1, 2017, we completed the sale of Habits at Work for a nominal amount, which resulted in a gain on sale of $24 thousand in the three and six months ended June 30, 2017. The disposal did not represent a strategic shift that would have a major effect on operations and financial results, and therefore, it is not classified as discontinued operations.

6. Earnings (Loss) Per Common Share

Basic and diluted earnings (loss) per common share is determined in accordance with the applicable provisions of U.S. GAAP. Basic earnings (loss) per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method, includes the potential exercise of outstanding stock options and warrants and vesting of restricted stock units. Diluted loss per common share is equivalent to basic loss per common share, as the effect of potential common stock would be anti-dilutive.

For the three months ended June 30, 2018, options to purchase common stock, unvested restricted stock units and outstanding warrants totaling approximately 6.1 million shares were excluded from the computation of diluted loss per common share, as their effect would be anti-dilutive. For the six months ended June 30, 2018, options to purchase common stock, unvested restricted stock units and outstanding warrants totaling approximately 5.8 million shares were excluded from the computation of diluted income per common share, as their effect would be anti-dilutive. For the three and six months ended June 30, 2017, options to purchase common stock, unvested restricted stock units and outstanding warrants totaling approximately 7.2 million shares were excluded from the computation of diluted loss per common share, as their effect would be anti-dilutive. These shares could dilute earnings per common share in the future.

A reconciliation of basic earnings (loss) per common share to diluted earnings (loss) per common share is as follows (in thousands, except per share data):



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018		2017
Net (loss) income—basic and diluted:
(Loss) income from continuing operations	$	(597	)	$	(7,747	)	$	1,197	$	(11,986	)
Loss from discontinued operations	—			(856		)	$	—	$	(1,419	)
Net (loss) income—basic and diluted	$	(597	)	$	(8,603	)	$	1,197	$	(13,405	)
Weighted average common shares outstanding:
Weighted average common shares outstanding—basic	24,317			23,823			24,260		23,750
Dilutive effect of common stock equivalents	—			—			335		—
Weighted average common shares outstanding—diluted	24,317			23,823			24,595		23,750
Basic (loss) earnings per common share:
(Loss) income from continuing operations	$	(0.02	)	$	(0.33	)	$	0.05	$	(0.50	)
Loss from discontinued operations	—			(0.03		)	$	—	$	(0.06	)
Basic net (loss) income per common share	$	(0.02	)	$	(0.36	)	$	0.05	$	(0.56	)
Diluted (loss) earnings per common share:
(Loss) income from continuing operations	$	(0.02	)	$	(0.33	)	$	0.05	$	(0.50	)
Loss from discontinued operations	—			(0.03		)	—		(0.06		)
Diluted net (loss) income per common share	$	(0.02	)	$	(0.36	)	$	0.05	$	(0.56	)

7. Fair Value Measurement

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

As of June 30, 2018, 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 six months ended June 30, 2018 or in the year ended December 31, 2017. We did not hold any significant instruments that are measured at fair value on a recurring basis as of June 30, 2018 or December 31, 2017.

The fair value of our instruments measured on a non-recurring basis as of June 30, 2018 and December 31, 2017 were as follows (in thousands):



	Fair Value Measurements Using:
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Warrant	$	2,840	$	—	$	—	$	2,840	$	—

The following is quantitative information about our significant unobservable inputs used in our Level 3 fair value measurements (dollars in thousands):



	Fair Value at June 30, 2018		Valuation Technique	Unobservable Inputs	Quantitative Inputs Used for Original Warrant		Quantitative Inputs Used for Replacement Warrant (1)
Warrant	$	2,840	Monte Carlo	Volatility of underlying	50.0	%	55.0	%
				Risk-free rate	1.78	%	2.02	%
				Dividend yield	—	%	—	%
				Probability of Designated Event (2)	0% - 50%		0% - 50%
				Timing of Designated Event (2)	3-5 years from issuance		3-5 years from issuance

____________________

(1)

In connection with the Replacement Warrant (as defined in Note 16), we received an additional payment of $700 thousand from PEAK6 Investments. In accordance with U.S. GAAP, we performed valuations immediately before and after the equity modification and concluded that the additional payment approximately represented the incremental fair value provided by the Replacement Warrant. For additional information, please see Note 16.


(2)	Refers to certain change of control transactions, defined as a "Designated Event" as in the Warrant Agreement.

8. Prepaid Expenses and Other Current Assets

The components of our prepaid expenses and other current assets are as follows (in thousands):



	June 30, 2018		December 31, 2017
Prepaid services	$	457	$	533
Other prepaid contracts	3,003		2,132
Restricted cash	240		240
Other	259		327
Total	$	3,959	$	3,232

9. Contract Costs

In conjunction with the adoption of Topic 606, certain capitalized contract costs that were previously classified as deferred subscription solicitation and commission costs in our condensed consolidated balance sheets as of December 31, 2017 were reclassified to contract costs as of June 30, 2018. For additional information, please see Note 3.

The following table is summary of our incremental contract cost balances, which are included in contract costs in our condensed consolidated balance sheets as of June 30, 2018 (in thousands):



	June 30, 2018
Costs to obtain (commissions)	$	349
Costs to fulfill	52
Total contract costs	$	401

In the three and six months ended June 30, 2018, we amortized $196 thousand and $391 thousand, respectively, related to costs to obtain, and there were no adverse changes which would cause the need for an impairment analysis.

In the three and six months ended June 30, 2018, we amortized $25 thousand and $33 thousand, respectively, related to costs to fulfill, and there were no adverse changes which would cause the need for an impairment analysis.

10. Internally Developed Capitalized Software

We record internally developed capitalized software as a component of software in property and equipment in our condensed consolidated balance sheets. We regularly review our capitalized software projects for impairment. We had no impairments of internally developed capitalized software in the six months ended June 30, 2018 or 2017. Activity in our internally developed capitalized software during the six months ended June 30, 2018 and 2017 was as follows (in thousands):



	Gross Carrying Amount		Accumulated Depreciation			Net Carrying Amount
Balance at December 31, 2017	$	18,603	$	(11,829	)	$	6,774
Additions	2,307		—			2,307
Depreciation expense	—		(2,206		)	(2,206		)
Balance at June 30, 2018	$	20,910	$	(14,035	)	$	6,875

Balance at December 31, 2016	$	15,015	$	(7,931	)	$	7,084
Additions	1,606		—			1,606
Depreciation expense	—		(1,869		)	(1,869		)
Balance at June 30, 2017	$	16,621	$	(9,800	)	$	6,821

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 six months ending December 31, 2018	$	2,099
For the years ending December 31:
2019	3,346
2020	1,313
2021	117
Total	$	6,875

11. Goodwill and Intangibles

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



	Personal Information Services Reporting Unit			Insurance and Other Consumer Services Reporting Unit			Totals
Balance as of June 30, 2018
Gross carrying amount	$	35,253		$	10,665		$	45,918
Accumulated impairment losses	(25,837		)	(10,318		)	(36,155		)
Net carrying value of goodwill	$	9,416		$	347		$	9,763

Balance as of December 31, 2017
Gross carrying amount	$	35,253		$	10,665		$	45,918
Accumulated impairment losses	(25,837		)	(10,318		)	(36,155		)
Net carrying value of goodwill	$	9,416		$	347		$	9,763

During the six months ended June 30, 2018, we did not identify any triggering events related to our goodwill and therefore were not required to test our goodwill for impairment. To the extent our Personal Information Services or Insurance and Other Consumer Services reporting units realize unfavorable actual results compared to forecasted results, or decrease forecasted results compared to previous forecasts, or in the event the estimated fair value of those reporting units decrease (as a result, among other things, of changes in market capitalization, including further declines in our stock price), we may incur additional goodwill impairment charges in the future. Future impairment charges on our Personal Information Services reporting unit will be recognized in the operating results of our Personal Information Services segment and our Insurance and Other Consumer Services segment, based on a pro-rata allocation of goodwill.

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



	Gross Carrying Amount		Accumulated Amortization			Impairment		Net Carrying Amount
As of June 30, 2018:
Customer related	$	38,831	$	(38,831	)	$	—	$	—
Marketing related	2,727		(2,727		)	—		—
Technology related	1,979		(1,779		)	—		200
Total amortizable intangible assets at June 30, 2018	$	43,537	$	(43,337	)	$	—	$	200
As of December 31, 2017:
Customer related	$	38,831	$	(38,831	)	$	—	$	—
Marketing related	2,727		(2,709		)	—		18
Technology related	1,739		(1,699		)	—		40
Total amortizable intangible assets at December 31, 2017	$	43,297	$	(43,239	)	$	—	$	58

During the six months ended June 30, 2018, there were no adverse changes in our long-lived assets, which would cause a need for an impairment analysis.

Intangible assets are amortized over a period of two to ten years. For the three months ended June 30, 2018 and 2017, we had an aggregate amortization expense of $49 thousand and $47 thousand, respectively, which was included in amortization expense in our condensed consolidated statements of operations. For the six months ended June 30, 2018 and 2017, we had an aggregate amortization expense of $98 thousand and $93 thousand, respectively. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):



For the remaining six months ending December 31, 2018	$	40
For the years ending December 31:
2019	80
2020	80
Total	$	200

12. Accrued Expenses and Other Current Liabilities

The components of our accrued expenses and other current liabilities are as follows (in thousands):



	June 30, 2018		December 31, 2017
Accrued marketing	$	147	$	155
Accrued cost of sales, including credit bureau costs	5,456		5,044
Accrued general and administrative expense and professional fees	1,531		570
Insurance premiums	332		340
Estimated liability for non-income business taxes	891		783
Other	793		1,641
Total	$	9,150	$	8,533

13. Accrued Payroll and Employee Benefits

The components of our accrued payroll and employee benefits are as follows (in thousands):



	June 30, 2018		December 31, 2017
Accrued payroll	$	794	$	808
Accrued benefits	197		408
Accrued severance	38		285
Total accrued payroll and employee benefits	$	1,029	$	1,501

The following table summarizes our accrued severance activity (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Balance, beginning of period	$	113		$	1,632		$	285		$	1,440
Adjustments to expense	36			304			171			1,494
Payments	(111		)	(639		)	(418		)	(1,637		)
Balance, end of period	$	38		$	1,297		$	38		$	1,297

14. Commitments and Contingencies

Leases

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



	Operating Leases		Capital Leases
For the remaining six months ending December 31, 2018	$	1,508	$	195
For the years ending December 31:
2019	1,977		400
2020	608		20
2021	403		7
2022	314		—
Thereafter	317		—
Total minimum lease payments	$	5,127	622
Less: amount representing interest			(63		)
Present value of minimum lease payments			559
Less: current obligation			(345		)
Long-term obligations under capital lease			$	214

We did not enter into any new capital lease arrangements during the three or six months ended June 30, 2018 or 2017. Rental expenses included in general and administrative expenses for the three months ended June 30, 2018 and 2017 were $688 thousand and $727 thousand, respectively. Rental expenses for the six months ended June 30, 2018 and 2017 were $1.4 million and $1.5 million, respectively.

Legal Proceedings

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

In January 2013, the Office of the West Virginia Attorney General ("WVAG") served Intersections Insurance Services Inc. ("IISI") with a complaint filed in the Circuit Court of Mason County, West Virginia on October 2, 2012. The complaint alleges violations of West Virginia consumer protection laws based on the marketing of unspecified products. On April 21, 2017, the Court granted a motion of the WVAG to add Intersections Inc. as a defendant. The parties are currently engaged in discovery. No trial has been scheduled. We continue to believe that the claims in the complaint are without merit and intend to continue to vigorously defend this matter.

On March 22, 2018, Johan Roets, the Company’s former Chief Executive Officer, filed a civil Complaint against the Company in the Circuit Court of Fairfax County Virginia. The Complaint alleges that the Company’s termination of Mr. Roets’ employment on February 22, 2018 violated his Employment Agreement and seeks monetary damages. The Company believes that the Complaint is without merit and plans to vigorously defend this litigation.

For information regarding our policy for analyzing legal proceedings, please see "—Contingent Liabilities" in Note 2. As of June 30, 2018, we do not have any significant liabilities accrued for any of the legal proceedings mentioned above. We believe based on information currently available that the amount, if any, accrued for the above contingencies is adequate. However, legal proceedings are inherently unpredictable and, although we believe that accruals are adequate and we intend to vigorously defend ourselves against such matters, unfavorable resolutions could occur, which could have a material adverse effect on our condensed consolidated financial statements, taken as a whole.

Other

Our products and services are subject to indirect tax obligations, including sales and use taxes, in certain states with which we are currently compliant, and taxability is generally determined by statutory state laws and regulations as well as an assessment of nexus. Whether sales of our services are subject to additional states’ indirect taxes is uncertain, due in part to the unique nature of our services and the relationships through which our services are offered, as well as changing state laws and interpretations of those laws. Therefore, we periodically analyze our facts and circumstances related to potential indirect tax obligations in state and other jurisdictions. The following table summarizes our non-income business tax liability activity (in thousands):



	Six Months Ended June 30,
	2018		2017
Balance at beginning of period	$	783	$	94
Adjustments to existing liabilities	108		995
Payments	—		(94		)
Balance at end of period	$	891	$	995

We have been audited in the past and continue to analyze what obligations we have, if any, to state taxing authorities. We analyzed all the information available to us in order to estimate a liability for potential obligations in other jurisdictions including, but not limited to: the delivery nature of our services; the relationship through which our services are offered; the probability of obtaining resale or exemption certificates; limited, if any, nexus-creating activity; and our historical success in settling or abating liabilities under audit. We continue to correspond with the applicable authorities in an effort toward resolution of our potential liabilities using a variety of settlement options including, but not limited to, voluntary disclosures, negotiation and standard appeals process, and we may adjust the liability as a result of such correspondence. Proceedings with jurisdictions are inherently unpredictable, but we believe it is reasonably possible that other states may approach us or that the scope of the taxable base in any state may also increase. For additional information, please see Note 16 to the consolidated financial statements contained in our most recent Annual Report on Form 10-K.

In June 2018, the Supreme Court heard the appeal from the South Dakota Supreme Court on the matter of South Dakota v. Wayfair, Inc. and ruled in favor of the state, perhaps giving states more authority to require online retailers and remote sellers to collect sales tax. We have the appropriate internal processes, capabilities and are compliant in the collection of sales and use tax across a broad tax footprint throughout the U.S. We place a significant amount of emphasis on the taxability of our products and services, rather than on nexus or physical presence. Therefore, we do not believe there is a material impact to our business. We will continue to monitor for further regulatory actions by states, and perhaps the federal government. Further actions, including any retrospective state requirements or actions impacting state income

tax obligations, would likely increase our cost of doing business and could reduce demand for our services and create additional administrative and compliance burdens, all of which could adversely affect our results of operations.

We have entered into various software licenses and operational commitments totaling approximately $59.4 million as of June 30, 2018, payable in monthly and yearly installments through December 31, 2021. These amounts will be expensed on a pro-rata basis and recorded in cost of revenue and general and administrative expenses in our condensed consolidated statements of operations.

15. Other Long-Term Liabilities

The components of our other long-term liabilities are as follows (in thousands):



	June 30, 2018		December 31, 2017
Deferred rent	$	863	$	1,223
Uncertain tax positions, interest and penalties not recognized	1,001		1,669
Contract liabilities, non-current	25		—
Accrued general and administrative expenses	2		3
Total other long-term liabilities	$	1,891	$	2,895

For additional information regarding the change in uncertain tax positions, see Note 17.

16. Debt and Other Financing

Debt

In March 2016, we and our subsidiaries entered into a credit agreement with Crystal Financial SPV LLC ("Prior Credit Agreement"). The Prior Credit Agreement provided for a $20.0 million senior secured term loan, which was fully funded at closing, with a maturity date of March 21, 2019 and interest at the greater of LIBOR plus 10% per annum or 10.5% per annum.

In April 2017, we refinanced our indebtedness under the Prior Credit Agreement with a new term loan facility with PEAK6 Investments, L.P. ("PEAK6 Investments"). We also executed amendments to the new term loan facility in July 2017, November 2017, April 2018, and June 2018 (together with the amendments, the "Credit Agreement" and described in further detail below), which had a principal outstanding amount of $17.5 million as of June 30, 2018 and an interest rate of 10.91% per annum. The amended maturity date of the Credit Agreement is December 31, 2018 with monthly principal payments until the remaining $17.5 million is repaid. The Credit Agreement is secured by substantially all our assets and a pledge by us of stock and membership interests we hold in any domestic and first-tier foreign subsidiaries.

We used approximately $13.9 million of the net proceeds from the Credit Agreement to repay in full the aggregate principal amount outstanding under the Prior Credit Agreement and to pay interest, prepayment penalties, transaction fees and expenses as a result of the termination. We used the remainder of the proceeds from the Credit Agreement for general corporate purposes, including to increase subscriber acquisitions and continue our innovative product development. As a result of the refinancing, we recorded a loss on extinguishment of debt of $1.5 million in the year ended December 31, 2017, including interest, prepayment penalties, transaction fees and expenses totaling approximately $487 thousand as a result of the termination of the Prior Credit Agreement.

Certain events defined in the Credit Agreement require prepayment of the aggregate principal amount of the term loan, including all or a portion of proceeds received from asset dispositions, casualty events, extraordinary receipts, and certain equity issuances. Once amounts borrowed have been paid or prepaid, they may not be reborrowed.

On April 3, 2018, we entered into Amendment No. 3 with PEAK6 Investments (“Amendment No. 3”), amending the Credit Agreement. Amendment No. 3 provided for a voluntary, partial prepayment of the outstanding principal balance of the term loans in the amount of $1.0 million, which we paid in April 2018, and amended one of the financial covenants in the Credit Agreement. The amended covenant reduced our requirement to maintain at all times a minimum amount of cash on hand, as defined in the Credit Agreement, to (i) the lesser of 20% of the total amount outstanding under the term loans and $2.5 million for the period commencing on the Third Amendment Date through and including May 31, 2018, and (ii)

the lesser of 20% of the total amount outstanding under the term loans and $3.0 million for the fiscal quarter ending June 1, 2018 and each fiscal quarter thereafter.

On June 8, 2018, we entered into Amendment No. 4 with PEAK6 Investments (“Amendment No. 4”), amending the Credit Agreement. Amendment No. 4 (i) requires that $1.5 million principal prepayments be made on the last day of June through November, each of which is to be accompanied by a 1.5% prepayment fee; (ii) shortens the maturity date to December 31, 2018; (iii) relieves the obligation to pay a 3% prepayment fee upon full prepayment of the term loan and on required partial prepayments resulting from equity or subordinate debt proceeds; (iv) increases the allowable principal amount of subordinate debt from $2 million to $15 million; and (v) confirms that debt and equity issued to affiliates is permitted if the proceeds are used to pay the term loan. The relief with respect to the 3% prepayment fee applies only if no event of default exists. Amendment No. 4 also confirms that no default currently exists with respect to the Credit Agreement.

On June 27, 2018, we entered into two promissory notes, (as amended, the “Bridge Notes”) to borrow a total of $3.0 million from Loeb Holding Corporation ($2.0 million) and David A. McGough ($1.0 million) (for related party information, please see Note 19). The Bridge Notes provide (a) for a maturity date of June 30, 2019, (b) for an interest rate equivalent to the interest rate pursuant to the Credit Agreement, and (c) that the Company or the holder may convert or exchange the principal and interest of such Bridge Note into securities to be sold by the Company in a “qualified financing” (an offering of debt and/or equity securities with net proceeds of at least $10 million (inclusive of the Bridge Notes) to the Company). All our obligations under the Bridge Notes are subordinated to the extent provided for in the subordination agreements dated as of June 27, 2018 (the “Subordination Agreements”) among the Borrower, the Lender and Peak6 Strategic Capital LLC. We used the net proceeds of the Bridge Notes to make required prepayments under the Credit Agreement. On August 1, 2018, we entered into an amendment to provide that the Bridge Notes shall not be convertible or exchangeable into any securities of the Company, with certain exceptions, if the issuance of such securities would require stockholder approval under the applicable NASDAQ Listing Rules.

Under the Credit Agreement and Bridge Notes, minimum required maturities are as follows (in thousands):



For the remaining six months ending December 31, 2018	$	17,500
For the year ending December 31, 2019	3,000
Total outstanding	$	20,500

As of June 30, 2018, $20.5 million was outstanding under both agreements, which is presented net of unamortized debt issuance costs and debt discount totaling $571 thousand in our condensed consolidated balance sheets in accordance with U.S. GAAP. As of December 31, 2017, $21.5 million was outstanding under the Credit Agreement, which is presented net of unamortized debt issuance costs and debt discount totaling $764 thousand in our condensed consolidated balance sheets.

On August 16, 2018, we reached agreement with an institutional investor to the material terms of a proposed preferred equity investment, which would provide us $29.0 million to $35.0 million of liquidity, including the conversion of the Bridge Notes (the “Transaction”). We expect to use the proceeds of the Transaction to fully satisfy the Secured Debt, prepayment penalties and transaction costs and also provide liquidity to continue to execute our business plan. The Executive Committee of our Board of Directors authorized management to take the actions necessary to complete definitive Transaction documents. We expect the Transaction to be subject to shareholder approval and to be funded in two or more closings. For additional information, please see “—Liquidity” in Note 2.

The Credit Agreement contains certain customary covenants, including a requirement to maintain at all times a minimum cash on hand amount of the lesser of 20% or certain stated amounts of the total amount outstanding under the term loan, as set forth in the Credit Agreement, and minimum EBITDA requirements. As of June 30, 2018, we were in compliance with all such covenants. The 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. For additional information, please see "—Liquidity and Capital Resources" in Item 2.

Warrant

In connection with the Credit Agreement, PEAK6 Investments purchased, for an aggregate purchase price of $1.5 million in cash, a warrant to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $5.00 per share ("Original Warrant”). In connection with a later amendment to the Credit Agreement, we issued a warrant to PEAK6 Investments for an additional purchase price of $700 thousand in cash ("Replacement Warrant"), and PEAK6 Investments surrendered the Original Warrant previously issued by us on April 20, 2017. The Replacement Warrant provides PEAK6 with the right to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $2.50 per share. The Replacement Warrant is immediately exercisable, has a five-year term and shall be exercised solely by a “net share settlement” feature that requires the holder to exercise the Replacement Warrant without a cash payment upon the terms set forth therein. Warrants were valued on our condensed consolidated balance sheets at $2.8 million as of June 30, 2018 and December 31, 2017. For additional information related to the fair value of the warrants, please see Note 7.

Stock Redemption

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

The repurchase was made pursuant to our previously announced share repurchase program. Following the repurchase, we have approximately $15.3 million remaining under our repurchase program. The repurchases may be made on the open market, in block trades, through privately negotiated transactions or otherwise, and the program may be suspended or discontinued at any time. However, we are currently prohibited from repurchasing any shares of common stock under the Credit Agreement.

17. Income Taxes

Our consolidated effective tax rate from continuing operations for the three months ended June 30, 2018 and 2017 was 0.0% and 0.2%, respectively. Our consolidated effective tax rate from continuing operations for the six months ended June 30, 2018 and 2017 was (77.6)% and 0.2%, respectively. The decrease in the rate is primarily due to the discrete resolution of uncertain tax positions related to claimed general business credits under audit that were deemed effectively settled in the six months ended June 30, 2018.

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 six months ended June 30, 2018, as there has been no change to the conclusion from the year ended December 31, 2017 that it was more likely than not that we would not generate sufficient taxable income in the foreseeable future to realize our net deferred tax assets.

The amount of deferred tax assets considered realizable as of June 30, 2018 could be adjusted if facts and circumstances in future reporting periods change, including, but not limited to, generating sufficient future taxable income in the carryforward periods. If certain substantial changes in the entity’s ownership were to occur, there would be an annual limitation on the amount of the carryforwards that can be utilized in the future.

We continue to evaluate the effects of the Tax Cuts and Jobs Act of 2017 (“Tax Act”) and we are applying the guidance in Staff Accounting Bulletin No. 118. We may make adjustments that differ from our initial assumptions based on new interpretations and regulatory changes from the Internal Revenue Service and state tax jurisdictions, the SEC and the Financial Accounting Standards Board. As of December 31, 2017, we made a reasonable estimate of the effects on our existing deferred tax balances, including the impact of our valuation allowance due to the indefinite life of certain deferred tax assets and the state adoption of the federal tax law changes. As of June 30, 2018, we made no adjustments to these estimates. We will complete our analysis no later than December 31, 2018. It is possible that future adjustments may have a material adverse effect on our cash tax liabilities, results of operations, or financial condition.

During the six months ended June 30, 2018, we decreased our gross unrecognized tax benefits primarily related to a portion of tax credits that were settled in conjunction with the federal examination for tax years 2010 and 2011. There were no material changes to our uncertain tax positions during the six months ended June 30, 2017.

18. Stockholders’ Equity

As of June 30, 2018, we have 4.0 million shares of common stock available for future grants of awards under the Plan, and awards for approximately 4.6 million shares are outstanding under all of our active and inactive plans.

Stock Options

Total share based compensation expense recognized for stock options, which is included in general and administrative expenses in our condensed consolidated statements of operations, for the three months ended June 30, 2018 and 2017 was $62 thousand and $2.5 million, respectively. Total share based compensation (benefit) expense recognized for stock options for the six months ended June 30, 2018 and 2017 was $(208) thousand and $2.5 million, respectively. The decrease is primarily due to options granted in June 2017 that were fully expensed on each grant date due to a retirement-age specific provision in our Executive Chairman and President's employment and award agreements.

The following table summarizes our stock option activity during the six months ended June 30, 2018:



	Number of Shares	Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term

				(In thousands)		(In years)
Outstanding at December 31, 2017	2,933,232	$	3.82
Granted	464,000	$	2.09
Canceled	(675,595)	$	3.67
Outstanding at June 30, 2018	2,721,637	$	3.56	$	—	7.41
Exercisable at June 30, 2018	420,542	$	4.71	$	—	1.64

The weighted average grant date fair value of options granted, based on the Black Scholes method, during the six months ended June 30, 2018 was $0.98. The weighted average grant date fair value of options granted, based on the Black Scholes method, during the six months ended June 30, 2017 was $1.94.

There were no options exercised during the six months ended June 30, 2018 or 2017.

As of June 30, 2018, there was $385 thousand of total unrecognized compensation cost related to unvested stock option arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.19 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 June 30, 2018 and 2017 was $953 thousand and $1.2 million, respectively. Total share based compensation expense recognized for RSUs for the six months ended June 30, 2018 and 2017 was $1.2 million and $2.3 million, respectively. The decrease in the year-to-date period is due to reversing the cumulative expense on 535 thousand unvested RSUs granted to a former employee that were forfeited in the three months ended June 30, 2018.

The following table summarizes the activity of our RSUs during the six months ended June 30, 2018:



	Number of RSUs	Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2017	2,737,353	$	3.83
Granted	120,000	$	2.32
Canceled (1)	(700,821)	$	3.70
Vested	(252,196)	$	4.01
Outstanding at June 30, 2018	1,904,336	$	3.75

____________________


(1)	Includes shares net-settled to cover statutory employee taxes related to the vesting of restricted stock awards, which increased treasury shares by 15 thousand and 33 thousand in the six months ended June 30, 2018 and 2017, respectively.

As of June 30, 2018, there was $3.9 million of total unrecognized compensation cost related to unvested RSUs granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.26 years.

Other

As of June 30, 2018, we have an outstanding Warrant held by our lender, PEAK6 Investments, to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $2.50 per share. For additional information, please see Note 16.

As a result of shares withheld for tax purposes on the vesting of a restricted stock award, we increased our treasury shares by 15 thousand and 33 thousand in the six months ended June 30, 2018 and 2017, respectively. There are no remaining unvested restricted stock awards outstanding. Under the Credit Agreement, we are currently prohibited from declaring and paying ordinary cash or stock dividends or repurchasing any shares of common stock.

19. Related Party Transactions

Digital Matrix Systems, Inc. – The Chief Executive Officer and President of Digital Matrix Systems, Inc. ("DMS"), David A. McGough, serves as one of our board members. We have service agreements with DMS for monitoring updates on a daily and quarterly basis, along with occasional contracts for certain credit analysis and application development services. In connection with these agreements, we paid monthly installments totaling $560 thousand and $757 thousand in the three months ended June 30, 2018 and 2017, respectively. In the six months ended June 30, 2018 and 2017, we paid $1.3 million and $1.4 million, respectively. These amounts are included within cost of revenue and general and administrative expenses in our condensed consolidated statements of operations. As of June 30, 2018 and December 31, 2017, we owed $108 thousand and $178 thousand, respectively, to DMS under these agreements.

On June 27, 2018, we entered into the Bridge Notes (which were amended and restated in August 2018) to borrow a total of $3.0 million, of which $1.0 million was funded by Mr. McGough. The Bridge Notes have a maturity date of June 30, 2019. As of June 30, 2018, we owed $1.0 million under this Bridge Note.

PEAK6 Investments, L.P. – During 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with the Credit Agreement with PEAK6 Investments. In connection with the Credit Agreement, we paid PEAK6 Investments $1.5 million for the repurchase of common stock, and we received a total of $2.2 million for the issuance of the Warrant. In the three months ended June 30, 2018 and 2017, we paid interest of $611 thousand and $379 thousand, respectively. In the six months ended June 30, 2018 and 2017, we paid interest and other fees of $1.1 million and $379 thousand, respectively. As of June 30, 2018 and December 31, 2017, our outstanding principal balance was $17.5 million and $21.5 million, respectively. PEAK6 Investments owned approximately 419 thousand shares of our common stock immediately prior to the closing of the Credit Agreement. For additional information, please see Note 16.

Loeb Holding Corporation – On June 27, 2018, we entered into the Bridge Notes (which were amended and restated in August 2018) to borrow a total of $3.0 million, of which $2.0 million was funded by Loeb Holding Corporation ("Loeb"). Loeb beneficially owns approximately 40% of our outstanding shares of common stock and is our largest stockholder. Thomas L. Kempner, one of our Board members, is the Chairman and Chief Executive Officer and the beneficial owner of a majority of the voting stock of Loeb. Bruce L. Lev, one of our Board members, is a Managing

Director of Loeb. The Bridge Notes have a maturity date of June 30, 2019. As of June 30, 2018, we owed $2.0 million under this Bridge Note.

One Health Group, LLC – On July 31, 2017, we entered into and consummated the divestiture of Voyce to One Health Group, LLC (the "Purchaser"), pursuant to the terms and conditions of a membership interest purchase agreement (the "Purchase Agreement") between our wholly owned subsidiary and the Purchaser. The purchase price for the Interests (the "Purchase Price") is equal to (i) the sum of one hundred dollars ($100), paid in cash at closing, plus (ii) a revenue participation of up to $20.0 million (the "Maximum Amount"), payable pursuant to the terms and conditions of the Purchase Agreement.

The Purchaser is a newly-formed entity of which Michael R. Stanfield, our Executive Chairman and President, is a significant minority investor, and certain former members of the Voyce management team are the managing member and investors.

Monde of Events – The Chief Executive Officer of Monde of Events is the spouse of our Chief Operating Officer. We have retained Monde of Events to provide event planning services for our corporate events. In the three months ended June 30, 2018 and 2017, we paid Monde of Events $14 thousand and $13 thousand, respectively, for these services. In the six months ended June 30, 2018 and 2017, we paid Monde of Events $24 thousand and $50 thousand, respectively, for these services. As of June 30, 2018, there were no amounts due to Monde of Events.

20. Segment and Geographic Information

We have ongoing operations in two segments: 1) Personal Information Services and 2) Insurance and Other Consumer Services. In January 2017 we sold the business comprising our Bail Bonds Industry Solutions segment, and in July 2017 we sold the business comprising our Pet Health Monitoring segment. For additional information, please see Note 5. Corporate headquarter office transactions including, but not limited to, payroll, share based compensation and other expenses related to our Chairman and non-employee Board of Directors are reported in our Corporate business unit.

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

The following table sets forth segment information for the three and six months ended June 30, 2018 and 2017 (in thousands):



	Personal Information Services			Insurance and Other Consumer Services		Bail Bonds Industry Solutions			Corporate			Consolidated
Three months ended June 30, 2018
Revenue	$	37,094		$	1,525	$	—		$	—		$	38,619
Depreciation	1,559			5		—			—			1,564
Amortization	49			—		—			—			49
Income (loss) from operations	499			542		—			(778		)	263
(Loss) income from continuing operations before income taxes	(361		)	542		—			(778		)	(597		)
Three months ended June 30, 2017
Revenue	$	38,378		$	1,557	$	—		$	—		$	39,935
Depreciation	1,267			31		—			(10		)	1,288
Amortization	47			—		—			—			47
(Loss) income from operations	(2,526		)	462		—			(3,676		)	(5,740		)
(Loss) income from continuing operations before income taxes	(4,551		)	462		—			(3,676		)	(7,765		)

Six months ended June 30, 2018
Revenue	$	74,668		$	3,030	$	—		$	—		$	77,698
Depreciation	3,003			14		—			—			3,017
Amortization	98			—		—			—			98
Income (loss) from operations	2,596			1,097		—			(1,580		)	2,113
Income (loss) from continuing operations before income taxes	1,157			1,097		—			(1,580		)	674
Six months ended June 30, 2017
Revenue	$	76,988		$	3,214	$	182		$	—		$	80,384
Depreciation	2,525			63		—			—			2,588
Amortization	93			—		—			—			93
(Loss) income from operations	(5,357		)	839		(46		)	(4,867		)	(9,431		)
(Loss) income from continuing operations before income taxes	(7,940		)	839		(46		)	(4,867		)	(12,014		)

The following table sets forth segment information as of June 30, 2018 and December 31, 2017 (in thousands):



	June 30, 2018				December 31, 2017
	Property and Equipment, net		Total Assets		Property and Equipment, net		Total Assets
Segment:
Personal Information Services	$	9,586	$	30,785	$	11,017	$	35,517
Insurance and Other Consumer Services	8		9,712		23		10,159
Corporate	—		566		—		803
Consolidated	$	9,594	$	41,063	$	11,040	$	46,479

For revenue by geographic area, please see "—Disaggregation of Revenue" in Note 4.

21. Subsequent Events

prepayment penalties and transaction costs and also provide liquidity to continue to execute our business plan. The Executive Committee of our Board of Directors authorized management to take the actions necessary to complete definitive Transaction documents. We expect the Transaction to be subject to shareholder approval and to be funded in two or more closings. For additional information, please see “—Liquidity” in Note 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2017 and 2016, and as of December 31, 2017 and 2016, included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the "Form 10-K"), and with the unaudited condensed consolidated financial statements and related notes thereto presented in this Form 10-Q.

Forward-Looking Statements

Statements in this discussion and analysis relating to future plans, results, performance, expectations, achievements and the like are considered "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project,'' "plan," "intend," "believe," "may," "should," "can have," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Those forward-looking statements involve known and unknown risks and uncertainties and are subject to change based on various factors and uncertainties that may cause actual results to differ materially from those expressed or implied by those statements, including our ability to consummate a refinancing transaction; our ability to maintain sufficient liquidity and produce sufficient cash flow to pay our debt service obligations and fund our business and growth strategy; our needs for additional capital to grow our business, including our ability to maintain compliance with the covenants under our term loan or seek additional sources of debt and/or equity financing; the success of our strategic objectives; our ability to meet the targets disclosed by management with respect to costs and revenue, and that these targets do not represent historical performance, projected results or guidance; our ability to generate revenue from our partner sales strategy and business development pipeline with our distribution partners; the timing and success of new product launches and other growth initiatives, including our Identity Guard^® with Watson^™ service; the continuing impact of the regulatory environment on our business; the continued dependence on a small number of financial institutions for a majority of our revenue and to service our U.S. financial institution customer base; our ability to execute our strategy and previously announced transformation plan; our incurring additional restructuring charges; our incurring additional charges for non-income business taxes or otherwise, or impairment costs or charges on goodwill and/or other assets; our ability to control costs; and our failure to protect private data due to a security breach or other unauthorized access. Factors and uncertainties that may cause actual results to differ include but are not limited to the risks disclosed under "Forward-Looking Statements," "Item 1. Business—Government Regulation" and "Item 1A. Risk Factors" in the Company’s most recent Annual Report on Form 10-K and herein and in its recent other filings with the U.S. Securities and Exchange Commission. The Company undertakes no obligation to revise or update any forward-looking statements unless required by applicable law.

Overview

Personal Information Services

Our Personal Information Services segment includes privacy, personal information security and identity theft monitoring and remediation services to help consumers understand, monitor, manage and protect against the risks associated with the inappropriate and sometimes criminal exposure of their personal information. Our current services include: providing credit reports, performing credit monitoring and providing educational credit scores and credit education; reports, monitoring and education about other personal information and risks, such as public records, identity validation, new account opening, social media footprint and Internet data risks; identity theft recovery services; identity theft cost reimbursement insurance of up to $1.0 million underwritten by a prominent insurance company; and software and other technology tools and services. Our resolution team applies its expertise to assist consumers with the remediation of confirmed identity theft events by providing pertinent documentation, communicating directly with creditors and placing fraud alerts on their behalf. We also offer breach response services to large and small organizations responding to compromises of sensitive personal information and other customer and employee data, mitigating potential damage to the customers and the corporate brand. We help these organizations notify the affected individuals and we provide the affected individuals with identity theft recovery and credit monitoring services. In February 2018, we also launched Data Breach Readiness, a comprehensive data breach preparedness solution for small and medium sized businesses. We continue to develop innovative new services and tools to add to our Identity Guard^® portfolio and address the increasing awareness by consumers of the risks associated with their personal information.

We believe the threat to consumers’ personal information goes beyond traditional credit monitoring. The proliferation of data breaches, the pervasive use of social media and the increased sophistication of cyber criminals requires a solution for consumers’ needs in the identity protection space. To effectively identify, manage and remediate these new threats to consumers, we expanded Identity Guard^® with Watson^™. Identity Guard^® with Watson^™ is an identity theft monitoring and privacy advisory solution that can be personalized to each individual’s specific needs and is designed to protect the entire family. Identity Guard^® with Watson^™ maximizes the power of IBM Watson^™ cognitive computing to offer consumers the traditional credit monitoring services as well as non-credit related preventative alert services, using previously unmonitored unstructured data sources and processes and safe web browsing tools. Identity Guard^® with Watson^™ also equips users to reduce their risk of identity theft by educating individuals on existing risks to their personal information and recommending personalized remediation actions. Identity Guard^® with Watson^™ also offers social insights that help consumers and their families understand and responsibly manage their social media presence, including assistance to strengthen a consumer’s online privacy settings and remediation of potentially damaging posts. We believe it is the first service of its kind in our industry that uses natural language processing and machine learning to reveal insights from large amounts of unstructured data, delivered through the IBM Watson^™ technology platform. This platform is more scalable and adaptable than our legacy platform, which we believe will enable us to develop innovative new products and features for consumers and organizations more readily than in the past. As we focus on making Identity Guard^® with Watson^™ our leading offering to consumers and their families, we significantly invested in our product and business development group in 2017 and plan to continue this investment in 2018, as the pipeline of engagement leads grow and we continue to seek to convert the market opportunities into sustainable revenue.

We continue to expand our business relationships with new partners including retail, communication and other industrial partners, as well as partnering with employers to offer Identity Guard^® with Watson^™ as an employee benefit option. After increasing our internal business development capability in various channels more than 100% in 2017, we are appropriately positioned to continue to pursue and contract with partners to bring our suite of differentiated and comprehensive services to their customers. We also continued to make significant investments in our internal systems, member platforms and IT security compliance in order to build, enhance and prioritize security in our partner distribution channels and generate subscriber growth. We continue to develop, improve and expand upon all of these important initiatives.

We derive the majority of our revenue from historical agreements with U.S. financial institutions, which constituted approximately 51% and 56% of our Personal Information Services segment revenue in the six months ended June 30, 2018 and 2017, respectively. Revenue from our largest client, Bank of America, constituted approximately 42% and 45% of our Personal Information Services segment revenue in the six months ended June 30, 2018 and 2017, respectively. Bank of America ceased marketing of our services to new customers in 2011. Under our agreements with Bank of America, we continue to provide our services to the subscribers we acquired through Bank of America before December 31, 2011, subject to normal attrition and other ongoing adjustments by us or Bank of America, which may result in cancellation of certain subscribers or groups of subscribers.

Recently, there has been an increase in the number of major consumer data breaches, including a breach of one of the largest consumer reporting agencies. We continue to review those incidents for insights into how we can reduce our risk of a breach and incorporate those observations into our continuous monitoring of our cybersecurity controls, which we believe meet or exceed industry best practices. In addition, we believe the recent breaches have not had an adverse effect on our business, subscriber base, or vendor relationships; however, there can be no assurances that they will not have an adverse effect in the future. We will continue to evaluate our business and the financial or other impact, if any, of the consumer reporting agency breach and the response of that organization.

Other

Critical Accounting Policies

Management Estimates

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

Revision to Previously Issued Financial Statements

Revenue Recognition

For a full description of our revenue recognition policy, please see Note 4 to our condensed consolidated financial statements.

Goodwill, Identifiable Intangibles and Other Long-Lived Assets

zero approach). For reporting units in which the qualitative assessment concludes it is more likely than not that the fair value is more than its carrying value, U.S. GAAP eliminates the requirement to perform further goodwill impairment testing. In addition, we are not required to perform a qualitative assessment for our reporting units with zero or negative carrying amounts. For those reporting units where a significant change or event occurs, and where potential impairment indicators exist, we perform the quantitative assessment to test goodwill for impairment. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others (a) a significant decline in our expected future cash flows; (b) a sustained, significant decline in our stock price and market capitalization; (c) a significant adverse change in legal factors or in the business climate; (d) unanticipated competition; (e) the testing for recoverability of a significant asset group within a reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact in our condensed consolidated financial statements.

As of June 30, 2018, goodwill of $347 thousand resided in our Insurance and Other Consumer Services reporting unit and goodwill of $9.4 million resided in our Personal Information Services reporting unit. For additional information, please see Note 11 to our condensed consolidated financial statements.

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.

Debt Issuance Costs

Share Based Compensation

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

Income Taxes

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.

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

no material, continuing economic or other involvement in OHG, including no exposure to loss as a result of our involvement with OHG. Please see Note 5 for additional information related to the divestiture.

Internally Developed Capitalized Software

Contract Costs

Contract Assets and Contract Liabilities

In accordance with Topic 606 and the practical expedient to apply the guidance on a portfolio of contracts, which effectively treats contracts with similar characteristics as a single contract, we presented a net contract asset or contract liability for the majority of our subscribers. This presentation effectively reduced our total accounts receivable as of March 31, 2018 from December 31, 2017 and was offset by a comparable decrease in contract liabilities. In addition, we separately state unbilled contract assets in our condensed consolidated balance sheet as of June 30, 2018, which we previously included in accounts receivable. For additional information, please see Notes 3 and 4 to our condensed consolidated financial statements.

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

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

Results of Operations

Three Months Ended June 30, 2018 and 2017 (all tables are in thousands, except percentages):

The condensed consolidated results of operations are as follows:



	Three Months Ended June 30,										Change
	2018			Percent of Revenue		2017			Percent of Revenue		Dollars			Percent
Revenue	$	38,619		100.0	%	$	39,935		100.0	%	$	(1,316	)	(3.3	)%
Operating expenses:
Marketing	911			2.4	%	3,163			7.9	%	(2,252		)	(71.2	)%
Commission	8,901			23.0	%	9,756			24.4	%	(855		)	(8.8	)%
Cost of revenue	12,421			32.2	%	13,569			34.0	%	(1,148		)	(8.5	)%
General and administrative	14,510			37.6	%	17,962			45.1	%	(3,452		)	(19.2	)%
Loss on disposition of Captira Analytical	—			—	%	(24		)	(0.1	)%	24			(100.0	)%
Impairment of intangibles and other assets	—			—	%	(86		)	(0.2	)%	86			(100.0	)%
Depreciation	1,564			4.0	%	1,288			3.2	%	276			21.4	%
Amortization	49			0.1	%	47			0.1	%	2			4.3	%
Total operating expenses	38,356			99.3	%	45,675			114.4	%	(7,319		)	(16.0	)%
Income (loss) from operations	263			0.7	%	(5,740		)	(14.4	)%	6,003			(104.6	)%
Interest expense, net	(823		)	(2.1	)%	(603		)	(1.5	)%	(220		)	36.5	%
Loss on extinguishment of debt	—			—	%	(1,525		)	(3.8	)%	1,525			(100.0	)%
Other (expense) income, net	(37		)	(0.1	)%	103			0.3	%	(140		)	(135.9	)%
Loss from continuing operations before income taxes	(597		)	(1.5	)%	(7,765		)	(19.4	)%	7,168			(92.3	)%
Income tax benefit	—			—	%	18			—	%	(18		)	(100.0	)%
Loss from continuing operations	(597		)	(1.5	)%	(7,747		)	(19.4	)%	7,150			(92.3	)%
Loss from discontinued operations, net of tax	—			—	%	(856		)	(2.1	)%	856			(100.0	)%
Net loss	$	(597	)	(1.5	)%	$	(8,603	)	(21.5	)%	$	8,006		(93.1	)%

Revenue and Subscribers

The following tables provide details of our revenue and subscriber information for the three months ended June 30, 2018 and 2017:



	Three Months Ended June 30,
	2018		2017		2018		2017

	(In thousands)				(Percent of total)
Bank of America	$	15,230	$	17,279	39.4	%	43.3	%
All other financial institution clients	3,625		4,086		9.4	%	10.2	%
Subtotal: financial institutions	18,855		21,365		48.8	%	53.5	%
Identity Guard^® Services (1)	13,393		12,482		34.7	%	31.2	%
Canadian business lines	3,166		3,220		8.2	%	8.1	%
Breach services & other (1)	1,680		1,311		4.4	%	3.3	%
Subtotal: ongoing business lines	18,239		17,013		47.3	%	42.6	%
Total Personal Information Services revenue	37,094		38,378		96.1	%	96.1	%
Revenue from other segments	1,525		1,557		3.9	%	3.9	%
Consolidated revenue	$	38,619	$	39,935	100.0	%	100.0	%

Personal Information Services Segment Subscribers



	Financial Institution		Identity Guard^® Services (1)		Canadian Business Lines		Total
Balance at March 31, 2018	602		357		150		1,109
Additions	—		18		33		51
Cancellations	(22	)	(18	)	(24	)	(64	)
Balance at June 30, 2018	580		357		159		1,096

Balance at March 31, 2017	682		333		160		1,175
Additions	—		30		28		58
Cancellations	(19	)	(34	)	(27	)	(80	)
Balance at June 30, 2017	663		329		161		1,153

____________________


(1)	We periodically refine the criteria used to calculate and report our subscriber data. In 2017,

Personal Information Services Revenue

Revenue from our actively marketed, ongoing business lines, Identity Guard^®, Canada, and Breach services and other, increased $1.2 million, or 7.2%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The Identity Guard^® Services revenue increased 7.3% for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, as revenue gains from subscriber increases in several of our Identity Guard^® channels were partially offset by decreases in revenue from subscribers acquired through one of our partners, Costco, that is no longer marketing our services. The Identity Guard^® Services subscriber base increased 8.5% from June 30, 2017 as a result of new subscribers acquired in the later part of 2017 primarily through one of our employee benefit partners. In mid-2017, we reduced marketing spending in certain direct-to-consumer channels and expect to continue a reduced level of spending through the remainder of 2018, which may result in reduced subscriber additions in those channels. We continue to focus on improving and expanding our affiliate marketing channels for direct-to-consumer subscriber acquisitions, partner relationships, and business relationships with employers to offer Identity Guard^® Services as an employee benefit option, which, if successful, could increase our revenue and subscriber counts over the next twelve months.

The revenue increase in the ongoing business lines was more than offset by a $2.5 million decline in revenue from our Bank of America and other financial institution clients, which is primarily the result of normal subscriber attrition within the portfolios we continue to service. Due to our ceased marketing and retention efforts, we expect revenue and related earnings from our financial institution client base to continue to decrease.

Revenue from Other Segments

The decrease in revenue continues to be due to subscriber attrition and portfolio cancellations in our Insurance and Other Consumer Services segment, which consists of purchasers of both insurance and membership services that have recurring subscription benefits, and minimal new subscription sales due to substantially ceased marketing efforts by most of our clients for these services. We had approximately 35 thousand subscribers in our Insurance and Other Consumer Services segment as of June 30, 2018, which is a 20% decrease from our subscriber base of 44 thousand subscribers as of June 30, 2017.

Marketing Expenses

Marketing expenses consist of subscriber acquisition costs, including affiliate marketing payments, search engine marketing, web-based marketing and direct mail expenses such as printing and postage. In connection with the adoption of Topic 606, as of January 1, 2018, we no longer defer and amortize direct-response advertising costs, and all marketing costs are now expensed as incurred. Additionally, we recorded a cumulative adjustment to the opening balance of retained earnings, which consisted of $1.3 million of previously capitalized direct-response advertising costs. As such, we expect our marketing expenses in 2018 to be lower than in prior years. For additional information, please see Notes 3 and 4 to our condensed consolidated financial statements.

In the three months ended June 30, 2018 and 2017, our marketing expenses resulted primarily from marketing activity for direct-to-consumer and Canadian subscriber acquisitions, which decreased in the three months ended June 30, 2018 compared to the three months ended June 30, 2017. We did not amortize deferred subscription solicitation costs related to marketing for the three months ended June 30, 2018 due to the adoption of Topic 606, as described above. Amortization of deferred subscription solicitation costs for the three months ended June 30, 2017 was $2.8 million.

Marketing costs of $911 thousand were expensed as incurred for the three months ended June 30, 2018. Marketing costs that did not meet the criteria for capitalization and were expensed as incurred for the three months ended June 30, 2017 were $391 thousand. We continue to expect our limited direct-to-consumer marketing spend to focus on our historically most productive channels or programs, which may result in less marketing costs, reduced subscriber acquisitions and revenue.

Commission Expenses

Commission expenses consist of commissions paid to our clients and other partners, as well as amortization of incremental contract costs due to the adoption of Topic 606. The decrease is related to a decrease in subscribers for which contractually high commission percentages are paid, which is largely from our financial institution subscriber base. We expect commission expenses related to our financial institution subscriber base to continue to decline due to normal attrition of subscribers in client portfolios with no new marketing activity. However, the decline may be partially or completely offset by increased commission expenses paid to affiliates, partners and internal incentive plans related to increased sales of our new service offerings. We expect commission expenses as a percentage of revenue to remain relatively flat for the remainder of 2018.

Cost of Revenue

Cost of revenue consists of the costs of operating our customer service and information processing centers, data costs, and billing costs for subscribers and one-time transactional sales. The decrease is primarily due to lower volumes of data fulfillment and service costs for subscribers, partially offset by an increase in the effective rates for data. We incur fixed fee long term pricing for a significant portion of the supply of credit bureau data and certain alternative data sources for our services. To the extent our volume increases, we expect our effective rates (that is, the variable rate of tiered and fixed subscriber fulfillment costs) to decrease. For additional information, please see "Liquidity and Capital Resources — Other" below.

General and Administrative Expenses

General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, marketing, information technology, legal, human resources and finance functions, as well as internal audit, payroll, share based compensation and other corporate overhead costs. The decrease in general and administrative expenses is primarily due to lower payroll-related costs, including $2.7 million lower share based compensation expense as well as executive management bonuses of $1.0 million in 2017 that did not reoccur in 2018. The decrease in share based compensation expense is primarily due to options granted in June 2017 that were fully expensed on each grant date due to a retirement-age specific provision in our Executive Chairman and President's employment and award agreements.

Depreciation

Depreciation consists primarily of depreciation of our fixed assets and capitalized software. The increase is primarily due to internally developed capitalized software related to the continuous innovative development of Identity Guard^® with Watson^™.

Goodwill

During the three months ended June 30, 2018, we did not identify any triggering events related to our goodwill and therefore were not required to test our goodwill for impairment. To the extent our Personal Information Services or Insurance and Other Consumer Services reporting units realize unfavorable actual results compared to forecasted results, or decrease forecasted results compared to previous forecasts, or in the event the estimated fair value of the reporting units decrease, we may incur additional impairment charges in the future.

Results of Operations

Six Months Ended June 30, 2018 and 2017 (all tables are in thousands, except percentages):

The condensed consolidated results of operations are as follows:



	Six Months Ended June 30,										Change
	2018			Percent of Revenue		2017			Percent of Revenue		Dollars			Percent
Revenue	$	77,698		100.0	%	$	80,384		100.0	%	$	(2,686	)	(3.3	)%
Operating expenses:
Marketing	1,823			2.3	%	6,613			8.2	%	(4,790		)	(72.4	)%
Commission	18,206			23.4	%	19,504			24.3	%	(1,298		)	(6.7	)%
Cost of revenue	24,803			31.9	%	26,568			33.1	%	(1,765		)	(6.6	)%
General and administrative	27,638			35.7	%	34,343			42.7	%	(6,705		)	(19.5	)%
Gain on disposition of Habits at Work	—			—	%	106			0.1	%	(106		)	(100.0	)%
Depreciation	3,017			3.9	%	2,588			3.2	%	429			16.6	%
Amortization	98			0.1	%	93			0.1	%	5			5.4	%
Total operating expenses	75,585			97.3	%	89,815			111.7	%	(14,230		)	(15.8	)%
Income (loss) from operations	2,113			2.7	%	(9,431		)	(11.7	)%	11,544			(122	)%
Interest expense, net	(1,354		)	(1.7	)%	(1,195		)	(1.5	)%	(159		)	13.3	%
Loss on extinguishment of debt	—			—	%	(1,525		)	(1.9	)%	1,525			(100.0	)%
Other (expense) income, net	(85		)	(0.1	)%	137			0.2	%	(222		)	(162.0	)%
Income (loss) from continuing operations before income taxes	674			0.9	%	(12,014		)	(14.9	)%	12,688			(105.6	)%
Income tax benefit (expense)	523			0.6	%	28			—	%	495			1,767.9	%
Income (loss) from continuing operations	1,197			1.5	%	(11,986		)	(14.9	)%	13,183			(110.0	)%
Loss from discontinued operations, net of tax	—			—	%	(1,419		)	(1.8	)%	1,419			(100.0	)%
Net income (loss)	$	1,197		1.5	%	$	(13,405	)	(16.7	)%	$	14,602		(108.9	)%

Revenue

The following tables provide details of our revenue and subscriber information for the six months ended June 30, 2018 and 2017:



	Six Months Ended June 30,
	2018		2017		2018		2017
	(In thousands)				(Percent of total)
Bank of America	$	31,078	$	34,987	40.0	%	43.5	%
All other financial institution clients	7,336		8,281		9.4	%	10.3	%
Subtotal: financial institutions	38,414		43,268		49.4	%	53.8	%
Identity Guard^® Services (1)	26,908		24,494		34.6	%	30.5	%
Canadian business lines	6,397		6,279		8.3	%	7.8	%
Breach services & other (1)	2,949		2,947		3.8	%	3.7	%
Subtotal: ongoing business lines	36,254		33,720		46.7	%	42.0	%
Total Personal Information Services revenue	74,668		76,988		96.1	%	95.8	%
Revenue from other segments	3,030		3,396		3.9	%	4.2	%
Consolidated revenue	$	77,698	$	80,384	100.0	%	100.0	%

Personal Information Services Segment Subscribers



	Financial Institution		Identity Guard® (1)		Canadian Business Lines		Total
	(in thousands)
Balance at December 31, 2017	620		359		161		1,140
Additions	—		37		50		87
Cancellations	(40	)	(39	)	(52	)	(131	)
Balance at June 30, 2018	580		357		159		1,096

Balance at December 31, 2016	705		317		162		1,184
Additions	2		78		58		138
Cancellations	(44	)	(66	)	(59	)	(169	)
Balance at June 30, 2017	663		329		161		1,153

____________________


(1)	We periodically refine the criteria used to calculate and report our subscriber data. In 2017,

Personal Information Services Revenue

Revenue from our actively marketed, ongoing business lines, Identity Guard^®, Canada, and Breach services and other, increased $2.5 million, or 7.5%, for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The Identity Guard^® Services revenue increased 9.9% for the six months ended June 30, 2018 compared to the six months ended June 30, 2017, as revenue gains from subscriber increases in several of our Identity Guard^® channels were partially offset by decreases in revenue from subscribers acquired through one of our partners, Costco, that is no longer marketing our services. The Identity Guard^® Services subscriber base increased 8.5% from June 30, 2017 as a result of new subscribers acquired in the later part of 2017 primarily through one of our employee benefit partners. In mid-2017, we reduced marketing spending in certain direct-to-consumer channels and expect to continue a reduced level of spending through the remainder of 2018, which may result in reduced subscriber additions in those channels. We continue to focus on improving and expanding our affiliate marketing channels for direct-to-consumer subscriber acquisitions, partner relationships, and business relationships with employers to offer Identity Guard^® Services as an employee benefit option, which, if successful, could increase our revenue and subscriber counts over the next twelve months.

The revenue increase in the ongoing business lines was more than offset by a $4.9 million decline in revenue from our Bank of America and other financial institution clients, which is primarily the result of normal subscriber attrition within the portfolios we continue to service. Due to our ceased marketing and retention efforts, we expect revenue and related earnings from our financial institution client base to continue to decrease.

Revenue from Other Segments

The decrease in revenue continues to be due to subscriber attrition and portfolio cancellations in our Insurance and Other Consumer Services segment, which consists of purchasers of both insurance and membership services that have recurring subscription benefits, and minimal new subscription sales due to substantially ceased marketing efforts by most of our clients for these services. We had approximately 35 thousand subscribers in our Insurance and Other Consumer Services segment as of June 30, 2018, which is a 20.1% decrease from our subscriber base of 44 thousand subscribers as of June 30, 2017.

Marketing Expenses

In the six months ended June 30, 2018 and 2017, our marketing expenses resulted primarily from marketing activity for direct-to-consumer and Canadian subscriber acquisitions, which decreased in the six months ended June 30, 2018 compared to the six months ended June 30, 2017. We did not amortize deferred subscription solicitation costs related to marketing for the six months ended June 30, 2018 due to the adoption of Topic 606, as described in Notes 3 and 4 to our condensed consolidated financial statements. Amortization of deferred subscription solicitation costs for the six months ended June 30, 2017 was $5.7 million.

Marketing costs of $1.8 million were expensed as incurred for the six months ended June 30, 2018. Marketing costs that did not meet the criteria for capitalization and were expensed as incurred for the six months ended June 30, 2017 were $948 thousand. We continue to expect our limited direct-to-consumer marketing spend to focus on our historically most productive channels or programs, which may result in less marketing costs, reduced subscriber acquisitions and revenue.

Commission Expenses

The decrease is related to a decrease in subscribers for which contractually high commission percentages are paid, which is largely from our financial institution subscriber base. We expect commission expenses related to our financial institution subscriber base to continue to decline due to normal attrition of subscribers in client portfolios with no new marketing activity. However, the decline may be partially or completely offset by increased commission expenses paid to affiliates, partners and internal incentive plans related to increased sales of our new service offerings. We expect commission expenses as a percentage of revenue to remain relatively flat for the remainder of 2018.

Cost of Revenue

The decrease is primarily due to lower volumes of data fulfillment and service costs for subscribers, partially offset by an increase in the effective rates for data. We incur fixed fee long term pricing for a significant portion of the supply of credit bureau data and certain alternative data sources for our services. To the extent our volume increases, we expect our effective rates (that is, the variable rate of tiered and fixed subscriber fulfillment costs) to decrease. For additional information, please see "Liquidity and Capital Resources — Other" below.

General and Administrative Expenses

The decrease in general and administrative expenses is primarily due to lower payroll-related costs, including $3.8 million lower share based compensation expense as well as severance expense of $1.3 million in 2017 that did not reoccur in 2018. The decrease in share based compensation expense is primarily due to options granted in June 2017 that were fully expensed on each grant date due to a retirement-age specific provision in our Executive Chairman and President's employment and award agreements, as well as a reversal of the cumulative expense on unvested options and RSUs granted to a former employee that were forfeited in the first quarter of 2018.

Depreciation

The increase is primarily due to internally developed capitalized software related to the continuous innovative development of Identity Guard^® with Watson^™.

Goodwill

Interest Expense

Interest expense increased to $823 thousand for the three months ended June 30, 2018 from $603 thousand for the three months ended June 30, 2017. Interest expense increased to $1.4 million for the six months ended June 30, 2018 from $1.2 million for the six months ended June 30, 2017. As a result of the outstanding debt under the Credit Agreement, we expect to continue to incur significant interest expense until maturity. For additional information, please see Note 16 to our condensed consolidated financial statements.

Other (Expense) Income, net

Other (expense) was $(37) thousand for the three months ended June 30, 2018 compared to other income of $103 thousand for the three months ended June 30, 2017. Other (expense) was $(85) thousand for the six months ended June 30, 2018 compared to other income of $137 thousand for the six months ended June 30, 2017. The increase in other expense is primarily due to unrealized foreign exchange losses from our Canadian business lines.

Income Taxes

Discontinued Operations

Prior to July 31, 2017, our Pet Health Monitoring segment included the health and wellness monitoring products and services for veterinarians and pet owners through our former subsidiary, i4c. Effective July 31, 2017, we divested our ownership in i4c. This segment is classified as a discontinued operation in the three and six months ended June 30, 2017. For additional information, please see Note 5 to our condensed consolidated financial statements.

The Purchaser is a newly-formed entity of which Michael R. Stanfield, our Executive Chairman and President, is a minority investor, and certain former members of the i4c management team are the managing member and investors. Except as described in Note 5, 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 to our condensed consolidated financial statements.

Liquidity and Capital Resources

Cash Flow

Cash and cash equivalents as of June 30, 2018 were $7.7 million compared to $8.5 million as of December 31, 2017. Our cash and cash equivalents are highly liquid investments and may include short-term U.S. Treasury securities with original maturity dates of less than or equal to 90 days.

Our accounts receivable balance as of June 30, 2018 was $6.3 million compared to $8.2 million as of December 31, 2017. The decrease is primarily due to the adoption of Topic 606 and was offset by a comparable decrease to contract liabilities. For additional information, please see Notes 3 and 4 to our condensed consolidated financial statements. The likelihood of non-payment of billings has historically been remote with respect to our Identity Guard^® Services, financial institution and insurance services clients, however, we do provide for an allowance for doubtful accounts with respect to breach response services.

Our short-term and long-term liquidity depends primarily upon our level of income from operations, cash balances and working capital management. Pursuant to the Credit Agreement (as described below), we are required to maintain at all times minimum cash on hand amount of the lesser of 20% or certain stated amounts of the total amount outstanding under the term loan, as set forth in the Credit Agreement.

We expect to continue to fund sales, marketing, business development, and product development activities from anticipated cash provided by operations. The initiative to limit cash spend for certain historically productive direct-to-consumer marketing that began in the second quarter of 2017 is expected to continue and have a positive impact on our cash flows provided by operations. We also expect our Identity Guard^® Services subscriber base and related revenue to continue to increase as a result of new client relationships as well as the expansion of existing client relationships. If there is a material change in our anticipated cash provided by operations or working capital needs, as a result of not achieving these revenue objectives, not maintaining or reducing our costs, or for other reasons, at a time when we are not in

compliance with all of the covenants in the Credit Agreement or otherwise do not have access to other sources of capital, our liquidity could be negatively affected.

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



	Six Months Ended June 30,
	2018			2017			Difference

	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash flows provided by (used in) continuing operations	$	2,425		$	(1,900	)	$	4,325
Cash flows used in discontinued operations	—			(1,623		)	1,623
Net cash provided by (used in) operating activities	2,425			(3,523		)	5,948
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash flows used in continuing operations	(1,760		)	(3,038		)	1,278
Cash flows provided by discontinued operations	—			94			(94		)
Net cash used in investing activities	(1,760		)	(2,944		)	1,184
Cash flows (used in) provided by financing activities	(1,502		)	4,794			(6,296		)
DECREASE IN CASH AND CASH EQUIVALENTS	(837		)	(1,673		)	836
CASH AND CASH EQUIVALENTS — beginning of period	8,502			10,797			(2,295		)
Cash reclassified to assets held for sale at beginning of period	—			381			(381		)
CASH AND CASH EQUIVALENTS — end of period	$	7,665		$	9,505		$	(1,840	)

The increase in operating cash flows from continuing operations is primarily due to decreased marketing spend in the six months ended June 30, 2018 compared to the prior year period. We continue to expect our limited direct-to-consumer marketing spend to focus on our historically most productive channels or programs. However, we incurred incremental internal payroll costs to grow our business development and sales departments in 2017, and continue to incur similar costs in 2018 as we continue our efforts to support our growth initiatives in various marketing channels. These incremental costs have been offset by normal reductions in headcount in other departments, which were not replaced.

We continue to correspond with the applicable authorities in an effort toward resolution of our potential remaining indirect tax obligations in the remainder of 2018. For additional information, please see "—Other" below. Payment of these liabilities have and may continue to decrease our cash from operations for the next twelve months. In addition, in the six months ended June 30, 2018, we effectively settled a portion of our income tax refund claims, which were under federal income tax audit, and we received approximately $1.3 million. We do not expect to receive the remaining income tax refund receivable of approximately $1.0 million in 2018. We continue our efforts to advance the remaining income tax audit to closure within the next twelve months.

The increase in investing cash flows from continuing operations is primarily due to a decrease in acquisition costs for property and equipment. We continue to fund the acquisition of property and equipment, which includes the internally developed capitalized software, as we add innovative new services and tools to our Identity Guard^®portfolio.

The decrease in cash flows from financing activities is primarily due to principal repayments on the term loan, partially offset by the closing of the Bridge Notes. For additional information, please see "—Debt" below.

Credit Facility and Borrowing Capacity

Debt

In April 2017, we refinanced our indebtedness under the Prior Credit Agreement with a new term loan facility with PEAK6 Investments, L.P. ("PEAK6 Investments"). We also executed amendments to the new term loan facility in July 2017, November 2017, April 2018, and June 2018 (together with the amendments, the "Credit Agreement" and described in further detail below), which had a principal outstanding amount of $21.5 million as of June 30, 2018 and an initial interest rate of 9.99% per annum, to be adjusted annually on March 31 to 8.25% plus 1 year LIBOR. The maturity date of the Credit Agreement is April 20, 2021 with quarterly principal payments of $1.3 million commencing on September 30, 2019. The Credit Agreement is secured by substantially all our assets and a pledge by us of stock and membership interests we hold in any domestic and first-tier foreign subsidiaries.

On April 3, 2018, we entered into Amendment No. 3, amending the Credit Agreement. Amendment No. 3 provided for a voluntary, partial prepayment of the outstanding principal balance of the term loans in the amount of $1.0 million, which we paid in April 2018, and amended one of the financial covenants in the Credit Agreement. The amended covenant reduced our requirement to maintain at all times a minimum amount of cash on hand, as defined in the Credit Agreement, to (i) the lesser of 20% of the total amount outstanding under the term loans and $2.5 million for the period commencing on the Third Amendment Date through and including May 31, 2018, and (ii) the lesser of 20% of the total amount outstanding under the term loans and $3.0 million for the fiscal quarter ending June 1, 2018 and each fiscal quarter thereafter.

On June 8, 2018, we entered into Amendment No. 4, amending the Credit Agreement. Amendment No. 4 (i) requires that $1.5 million principal prepayments be made on the last day of June through November, each of which is to be accompanied by a 1.5% prepayment fee; (ii) shortens the maturity date to December 31, 2018; (iii) relieves the obligation to pay a 3% prepayment fee upon full prepayment of the term loan and on required partial prepayments resulting from equity or subordinate debt proceeds; (iv) increases the allowable principal amount of subordinate debt from $2 million to $15 million; and (v) confirms that debt and equity issued to affiliates is permitted if the proceeds are used to pay the term loan. The relief with respect to the 3% prepayment fee applies only if no event of default exists. Amendment No. 4 also confirms that no default currently exists with respect to the Credit Agreement.

On June 27, 2018, we entered into the Bridge Notes to borrow a total of $3.0 million from Loeb Holding Corporation ($2.0 million) and David A. McGough ($1.0 million) (for related party information, please see Note 19). The Bridge Notes provide (a) for a maturity date of June 30, 2019, (b) for an interest rate equivalent to the interest rate pursuant to the Credit Agreement, and (c) that the Company or the holder may convert or exchange the principal and interest of such Bridge Note into securities to be sold by the Company in a “qualified financing” (an offering of debt and/or equity securities with net proceeds of at least $10 million (inclusive of the Bridge Notes) to the Company). We used the net proceeds of the Bridge Notes to make required prepayments under the Credit Agreement. For additional information, please see Note 16 to our condensed consolidated financial statements.

As of June 30, 2018, $20.5 million was outstanding under the Credit Agreement and Bridge Notes, which is presented net of unamortized debt issuance costs and debt discount totaling $571 thousand in our consolidated balance sheets in accordance with U.S. GAAP. As of December 31, 2017, $21.5 million was outstanding under the Credit Agreement, which is presented net of unamortized debt issuance costs and debt discount totaling $764 thousand in our consolidated balance sheets. The amendment executed on April 3, 2018 included provision for a voluntary, partial prepayment of the outstanding principal balance of the term loan in the amount of $1.0 million, which was paid on the same date.

The 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 business, 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 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 Credit Agreement requires us to maintain at all times a minimum cash on hand amount of the lesser of 20% or certain stated amounts of the total amount outstanding under the term loan, as set forth in the Credit Agreement. 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 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 June 30, 2018, we were in compliance with all such covenants.

Minimum Consolidated EBITDA By Quarter



Fiscal Quarters Ending		Amount
Each fiscal quarter ending on or after June 30, 2018 but on or before December 31, 2018		$1,000,000
Fiscal quarter ending on March 31, 2019		$1,500,000
Each fiscal quarter ending on or after June 30, 2019		$2,000,000

The 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.

Failure to comply with any of the covenants under the Credit Agreement could result in a default under the facility, which could cause the lender to declare all obligations immediately due and payable and exercise their lien on substantially all of our assets. Although we have historically received waivers and executed amendments when necessary, there can be no assurances that we would be able to obtain a waiver or amendment in the future.

Warrant

In connection with the Credit Agreement, as amended, PEAK6 Investments purchased, for an aggregate purchase price of $2.2 million in cash, a warrant to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $2.50 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 (as defined therein), with the number of increased shares based upon the time elapsed from issuance of the Warrant and the difference between the exercise price of the Warrant and the transaction price in the change of control, all as more fully set forth in the Warrant. The Warrant also provides for adjustments in the underlying number of shares and exercise price in the event of recapitalizations, stock splits or dividends and other corporate events. The Warrant was valued at $2.8 million on our condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017. For additional information related to the fair value of the Warrant, please see Note 7 to our condensed consolidated financial statements.

Stock Redemption

In connection with the Credit Agreement, we used the proceeds from the sale of the Original 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. The repurchases may be made on the open market, in block trades, through privately negotiated transactions or otherwise, and the program may be suspended or discontinued at any time. However, we are currently prohibited from repurchasing any shares of common stock under the Credit Agreement.

Share Repurchase

As of June 30, 2018, we had approximately $15.3 million remaining under our share repurchase program. During the six months ended June 30, 2018, we did not directly repurchase any shares of common stock for cash. During the six months ended June 30, 2017, we repurchased 419 thousand shares of our common stock as described above. As a result of shares withheld for tax purposes on the vesting of a restricted stock award, we increased our treasury shares by 15 thousand and 33 thousand in the six months ended June 30, 2018 and 2017, respectively.

Other



	Six Months Ended June 30,
	2018		2017
Balance at beginning of period	$	783	$	94
Adjustments to existing liabilities	108		995
Payments	—		(94		)
Balance at end of period	$	891	$	995

In June 2018, the Supreme Court ruled on the appeal from the South Dakota Supreme Court in the matter of South Dakota v. Wayfair, Inc. The court held in favor of the state, which could give states more authority to require online retailers and remote sellers to collect sales tax. We have the appropriate internal processes, capabilities and are compliant in the collection of sales and use tax across a broad tax footprint throughout the U.S. We place a significant amount of emphasis on the taxability of our products and services, rather than on nexus or physical presence. Therefore, we do not believe that the court’s ruling will have an immediate material impact to our business. We will continue to monitor for further regulatory actions by states, and perhaps the federal government. Further actions, including any retrospective state requirements or actions impacting state income tax obligations, would likely increase our cost of doing business and could reduce demand for our services and create additional administrative and compliance burdens, all of which could adversely affect our results of operations.

expensed on a pro-rata basis and recorded in cost of revenue and general and administrative expenses in our condensed consolidated statements of operations.

Off-Balance Sheet Arrangements

As of June 30, 2018, we did not have any off-balance sheet arrangements other than the revenue participation rights as discussed in Note 5 to our condensed consolidated financial statements.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the principal executive officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “34 Act”)) as of the end of the period covered by this report to ensure that information required to be disclosed in reports that we file under the 34 Act is accumulated and communicated to our management, including our principal executive officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to give reasonable assurance that information required to be disclosed by us in reports that we file under the 34 Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission. As a result of the material weaknesses in our internal control over financial reporting identified and described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2017, our officers have concluded that our disclosure controls and procedures were not effective. Notwithstanding the identified material weaknesses, the Company has concluded that the consolidated financial statements included in this Form 10-Q present fairly, in all material respects, our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.

Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting

The Company is in the process of improving its policies and procedures relating to the recognition and measurement of share based compensation and revenue recognition, including: a) enhancing the design of existing controls over share based compensation to ensure proper review of new share based grants and the application of relevant accounting standards; b) added controls and procedures for revenue recognition and contract costs to properly apply the provisions of ASU 2014-09, "Revenue from Contracts with Customers" ("Topic 606"), which we adopted as of January 1, 2018, including training for the Company’s personnel and modifying the existing information technology systems to provide efficiencies and reduce potential risks of manual calculation errors; and c) strengthening the review and approval of the existing and new controls over revenue recognition.

The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We believe the remediation will be completed prior to the end of 2018.

Changes in Internal Control over Financial Reporting

Except for the actions taken under “Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting” discussed above, and the implementation of certain internal controls related to the adoption of Topic 606 and Topic 842, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2018, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company implemented new controls as part of its effort to adopt Topic 606 and Topic 842. The adoption of Topic 606 required the implementation of new accounting processes, which changed the Company's internal controls over revenue recognition and financial reporting. We implemented these internal controls to ensure we adequately evaluated our contracts and properly assessed the impact of Topic 606 on our financial statements to facilitate its adoption in 2018.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, we may become involved in various legal proceedings. Based upon our experience, we do not believe that these proceedings and claims will result in a material adverse change in our business or financial condition, and as of June 30, 2018, we do not have any significant liabilities accrued. Please refer to "—Legal Proceedings" in Note 14 to our condensed consolidated financial statements for information regarding certain judicial, regulatory and legal proceedings.

Item 6. Exhibits



10.1		Amendment No. 3, dated as of April 3, 2018, to Credit Agreement dated as of April 20, 2017 (as amended by Amendment No. 1 and Amendment No. 2) among Intersections Inc., the Other Credit Parties party thereto, and PEAK6 Investments, L.P., and PEAK6 Capital LLC (formerly known as PEAK6 Ventures LLC) (Incorporated by reference to Exhibit 10.1, filed with the Registrant’s Form 8-K filed on April 4, 2018).

10.2		Fourth Amendment, dated as of June 8, 2018, 2018, to Credit Agreement dated as of April 20, 2017 (as amended) among Intersections Inc., the Other Credit Parties party thereto, and PEAK6 Investments, L.P. (Incorporated by reference to Exhibit 10.1, filed with the Registrant’s Form 8-K filed on June 11, 2018).

10.3*		Amended and Restated Promissory Note issued to Loeb Holding Corporation in the principal amount of $2,000,000.

10.4*		Amended and Restated Promissory Note issued to David A. McGough in the principal amount of $1,000,000.

31.1*		Certification of Michael R. Stanfield, Executive Chairman and President (principal executive officer), pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

32.1*		Certification of Michael R. Stanfield, Executive Chairman and President (principal executive officer), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

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101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

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____________________



*	Filed herewith.

SIGNATURE

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



		INTERSECTIONS INC.

Date:	August 20, 2018	By:	/s/ Ronald L. Barden
			Ronald L. Barden
			Chief Financial Officer