Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-50580
 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12161372&doc=18
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, $.01 par value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    Yes  ☐    No  ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒
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 Rule 12b-2 of the Act).    Yes  ☐    No   ☒
As of June 30, 2017, the aggregate market value of the common stock held by nonaffiliates of the registrant was approximately $36.6 million based on the last sales price quoted on The NASDAQ Global Market.
As of March 16, 2018, the registrant had 28,327,784 shares of common stock, $0.01 par value per share, issued and 24,220,528 shares outstanding, with 4,107,256 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated herein by reference from Registrant’s definitive proxy statement to be filed within 120 days of December 31, 2017, pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 2018 annual meeting of stockholders to be held on or about May 30, 2018.




INTERSECTIONS INC.
Form 10-K

December 31, 2017
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1



FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to the safe harbor provisions of this legislation and are contained principally in the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. These forward-looking statements reflect current views about our plans, strategies and prospects, which are based upon the information currently available and on current assumptions. Even though we believe our expectations regarding future events are based on reasonable assumptions, forward-looking statements are not guarantees of future performance. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including, among others, those discussed under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K, as well as in our consolidated financial statements and accompanying notes and the other information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission.

You should read these factors and other cautionary statements as being applicable to all related forward-looking statements wherever they appear. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. All forward-looking statements included in this document are based on information available to us on the date hereof. We have no intention and undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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PART I
ITEM 1.    BUSINESS
Explanatory Note
Unless indicated otherwise, throughout this Annual Report on Form 10-K, we may refer to Intersections Inc. and its consolidated subsidiaries as “we,” “us,” “our” and "the Company."
Overview
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 products, we help protect consumers against the risks associated with the inappropriate exposure of their personal information that can result in fraudulent use or reputation damage. Identity Guard® is offered through large and small organizations as an embedded product for either its employees or consumers, as well as directly to consumers through our direct marketing efforts. In 2017, we expanded our suite of Identity Guard® and Identity Guard® with Watson products. Identity Guard® with Watson offers robust early detection of potential risks, stretching beyond credit-centric risks to include online privacy risks, and provides personalized threat alerts with actionable steps to help keep our customers’ information private from the earliest stage possible. We believe that our suite of products and services offer consumers the most proactive and comprehensive identity theft monitoring and online privacy services available on the market today.
We have ongoing operations in one other segment, Insurance and Other Consumer Services. As part of our strategy to have a singular focus on our Personal Information Services segment, we recently sold: 1) the business comprising our Bail Bonds Industry Solutions segment in January 2017; 2) our Habits at Work business, the results of which are recorded in our Personal Information Services segment, in June 2017; and 3) the business comprising our Pet Health Monitoring segment in July 2017. For additional information, please see Note 4 to our consolidated financial statements. 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.
During 2017, we refinanced our existing senior secured indebtedness with Crystal Financial SPV LLC ("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 (together with the amendments, the "New Credit Agreement"), which had a principal outstanding amount of $21.5 million as of December 31, 2017. In connection with the New 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 a warrant to purchase 1.5 million shares of our common stock. The proceeds were, and will be, used for general corporate purposes, including investments in internal business development resources, internal technology systems and platforms, and continuous innovation of our products. For additional information, please see Note 15 to our consolidated financial statements.
We were incorporated in Delaware in 1999. Our principal executive offices are located at 3901 Stonecroft Boulevard, Chantilly, Virginia 20151 and our telephone number is (703) 488-6100. Our website address is www.intersections.com. We make available on this website at www.intersections.com, under “Investors and Media,” free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, Forms 3, 4 and 5 filed by our directors and executive officers and various other SEC filings, including amendments to these reports, as soon as reasonably practicable after we electronically file or furnish such reports to the SEC.
We also make available on our website our Corporate Governance Guidelines and Principles, Code of Business Conduct and Ethics, Statement of Policy with Respect to Related Person Transactions, and the charters of our Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, and Risk Management Committee. This information is also available by written request to Investor Relations at our executive office address listed above. The information on our website, or on the site of our third-party service provider, is not incorporated by reference into this report. Our website address is included here only as an inactive technical reference.
Our Primary Business
We offer identity and privacy protection services to consumers through our Personal Information Services segment. This segment constituted approximately 96% and 93% of our revenue in the years ended December 31, 2017 and 2016, respectively. We typically offer our services on a monthly or annual subscription basis. Our subscriber counts as of December 31, 2017 and 2016 were 1.1 million and 1.2 million, respectively.

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Products and 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. 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 focused on expanding Identity Guard® with Watson in 2017. 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 product of its kind that uses natural language processing and machine learning to reveal insights from large amounts of unstructured data, delivered through the IBM Watson technology platform. This platform is more scalable and adaptable than our legacy platform, which we believe will enable us to develop innovative new products and features for consumers and organizations more readily than in the past. As we focus on making Identity Guard® with Watson our leading offering to consumers and their families in the U.S. and Canada, 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.
Marketing and Distribution
We have a dual go-to-market strategy in the U.S. and Canada, through partner marketing and through direct-to-consumer marketing via search and display messaging. A substantial number of subscriptions in our products and services are canceled each year, as we believe is the case for similar products offered by our competitors in the identity theft monitoring industry. There is an investment cost to acquire a new subscriber and produce initial fulfillment materials, and therefore subscribers typically must be retained for a number of months in order to cover these costs. Our goal is to achieve a customer retention profile sufficient to achieve positive cash flow returns on these investment costs, above predetermined hurdle rates, across our entire subscription population.
In 2016 and 2017, we continued to expand our business relationships with new partners including retail, communication and other industrial partners, as well as partnering with employers to offer Identity Guard® as an employee benefit option. Building off our historically successful partner product distribution strategy, we have increased our internal business development capability in various channels more than 100% as we continue to pursue and contract with partners to bring our suite of differentiated and comprehensive products to their customers. We also made 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 using an agile development process. 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 55% and 59% of our Personal Information Services segment revenue in the years ended December 31, 2017 and 2016, respectively. Revenue from our largest client, Bank of America, constituted approximately 44% and 48% of our Personal Information Services segment revenue in the years ended December 31, 2017 and 2016, 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. Bank of America, however, has the right to require us to cease providing services to its customers under existing subscriptions if the contract is terminated due to material breach by us or based on various events such as certain legal or regulatory changes, a party’s bankruptcy or insolvency, or other events. Furthermore, we are dependent on Bank of America to cooperate in continued servicing, including subscriber billing. We did not generate any new subscribers from Bank of America or other U.S. financial institution clients in 2017 or

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2016, as all marketing of our products by our financial institution clients in the U.S. was terminated in both our Personal Information Services and Insurance and Other Consumer Services segments.
Sources of Supply
Our major source of data used in providing our services to consumers resulted from our continuing agreements with Equifax, Experian and TransUnion in both the U.S. and Canada. We believe we are an important customer to each of the three bureaus. The contract with Equifax expires in 2021. The Experian and TransUnion contracts may be terminated by them on 30 days’ and 60 days’ notice, respectively. Each of the credit reporting agencies also competes with us in providing credit scores, credit reports and limited credit monitoring services to subscribers.
In 2017, we renegotiated volume pricing, as well as any minimum fixed fees, of the supply of credit bureau data for our product features while also exploring alternative data sources. We have entered into long-term contracts with several other providers of data and analytics for our new Identity Guard® with Watson product, including new data sources, advanced tools and analytical capabilities, and more timely notification of activities and more useable content. In certain contractual arrangements, we pay non-refundable license fees in exchange for the limited exclusive rights to use the data. We routinely review the effectiveness and cost of these exclusivity agreements in conjunction with our projected data usage and business forecasts and may make adjustments to our data mix and providers.
Industry Overview and Competition
Identity fraud has been the most reported consumer complaint in the U.S. for the past 15 years, according to the Federal Trade Commission. According to Javelin Strategy & Research, identity fraud continued its sharp upward trend in 2017, as the number of victims in the U.S. alone rose to 16.7 million, 8% higher than 2016 and 27% higher than 2015. Account takeover and card-not-present fraud were the primary drivers of the significant increase. The estimated cost of identity fraud in the U.S. in 2017 was nearly $17 billion, up from $16 billion in 2016. The increased use of e-commerce (including the use of mobile applications), social media and the Internet, as well as the amount of reported breaches of consumer data by large retailers, healthcare providers and other organizations has compounded the amount of identity theft and identity fraud events. As a result, the markets for our Personal Information Services segment are quite robust and growing continually. We operate in a highly competitive and rapidly changing environment. We believe that the competitive factors in our market include access to a breadth of identity and consumer transaction data, broad and effective service offerings, brand recognition, technology, effective and cost-efficient customer acquisition, customer satisfaction, price, quality and reliable customer service, and accurate identification of appropriate target markets for our business. Our principal competitors include the following companies and their subsidiaries or affiliates: Equifax; Experian; TransUnion; LifeLock; AllClear ID; and Davis & Henderson in Canada. We compete with these companies to provide our services to our distribution partners’ customers and our own direct subscribers. Some of our competitors have substantially greater financial, technical, human and other resources than we do, which may allow them to devote greater resources to developing, promoting and selling services, offer services at lower prices than we do and develop and launch new products and services more quickly or effectively than we do. In addition, competitor distribution to and retention of new subscribers may benefit from greater brand recognition and brand loyalty than we have or may be able to achieve.
Other
 Our Insurance and Other Consumer Services segment includes insurance and membership products for consumers, delivered on a subscription basis. We are not planning to develop new business in this segment and are experiencing normal subscriber attrition due to ceased marketing and retention efforts. Some of our legacy subscriber portfolios have been cancelled, and our continued servicing of other subscribers may be cancelled as a result of actions taken by one or more financial institutions.
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 Innovations LLC ("i4c" or "Voyce"). Voyce generated substantial losses from formation to 2016 and, after concentrated efforts, was unable to generate an acceptable level of revenue. Effective July 31, 2017, we sold Voyce to a newly-formed entity of which Michael R. Stanfield, our Executive Chairman and President, is a minority investor. The results of this segment are reported as discontinued operations in accordance with U.S. GAAP in the years ended December 31, 2017 and 2016. For additional information, please see Note 4 to our consolidated financial statements.
Prior to January 31, 2017, our Bail Bonds Industry Solutions segment included the automated service solutions for the bail bonds industry provided by Captira Analytical LLC ("Captira"). Effective January 31, 2017, we divested our ownership in Captira. This segment’s operating results, along with the operating results of Habits at Work, have not had a major effect on our consolidated financial results and are not classified as a discontinued operation. For additional information, please see Note 4 to our consolidated financial statements.

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Government Regulation
We are subject to a wide variety of federal, state, foreign and local laws and regulations, including the Fair Credit Reporting Act ("FCRA"), the Gramm-Leach-Bliley Act, the Federal Trade Commission Act and comparable state laws that are patterned after the FTC Act, and other similar laws, rules and regulations. We also are subject to federal and state laws and regulations relating to the channels in which we sell and market our services, as well as a consent order with the Consumer Financial Protection Bureau as described below. We incur significant costs to operate our business and monitor our compliance with these laws, regulations, and consent decrees. Any changes to the existing applicable laws or regulations, or any determination that other laws or regulations are applicable to us, could increase our costs or impede our ability to provide our services to our customers, which could have a material adverse effect on our business, operating results, financial condition, and prospects. In addition, any of these laws or regulations may be subject to revision, and we cannot predict the impact of such changes on our business. Further, any determination that we have violated any of these laws, regulations, or consent decrees may result in liability for fines, damages, or other penalties, which could have a material adverse effect on our business, operating results, financial condition, and prospects.
Laws Governing Consumer Marketing, Product Distribution and Administration
Marketing, distribution and ongoing administration of our consumer products and services are subject to various federal and state laws, depending on the circumstances, including the federal Telephone Consumer Protection Act, Telemarketing and Consumer Fraud and Abuse Prevention Act, CAN-SPAM Act, Electronic Fund Transfer Act, U.S. Card Act, and both federal and state laws prohibiting unfair, deceptive or abusive practices or requiring disclosure of information about various products and services. Similar laws and regulations govern our business in Canada, and include federal and provincial laws.
Other state or federal laws may apply, depending on the nature of the products and services or marketing channel or method. For example, the insurance products we sell are subject to state insurance laws, including license requirements and oversight and other restrictions and requirements regarding the sale and administration of insurance and some of our products are governed by state laws governing discount medical plans or other programs.
Privacy and Information
Consumer marketing and products generally are governed by federal and state laws regarding the use, sharing and protection of personal information. Specific state or federal laws may apply depending on the nature of the products and services or marketing channel or method. For example, we are subject to the federal FCRA and similar state laws governing credit information, as well as to state and federal privacy laws governing financial institutions or products, including the federal Gramm Leach Bliley Act and certain state laws governing the sharing or use of personal information by financial institutions and their affiliates.
Privacy laws and regulations that may apply to our business in Canada include the federal Personal Information Protection and Electronic Documents Act and federal and provincial laws and regulations regarding credit report information.
With the growing public concern regarding privacy and the collection, distribution, and use of consumer personal information, we believe we are in an environment in which there is an increased regulatory scrutiny concerning data collection and use practices and the provision and marketing of services, like ours, that seek to protect that information. We expect that kind of scrutiny to continue as the marketplace for services like ours continues to develop.
Laws Governing Financial Products and Institutions
Our financial institution clients are subject to federal laws and regulations that govern financial institutions and their affiliates, financial products, financial information privacy, financial accounts such as credit cards, debit cards, demand deposit accounts and mortgages, and payment systems and processes. Our financial institution clients are subject to oversight by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, CFPB and other federal or state regulatory agencies. In part based on the requirements of those regulatory agencies, our financial institution clients are required to exercise oversight of us, and often require us by contract to comply with certain of the laws and regulations that apply directly to them.
Federal and state agencies, including the Federal Trade Commission, the Federal Communications Commission, the CFPB, state attorneys general and other state regulatory agencies, including state insurance regulators, continue to review and monitor the consumer finance and other industries for unfair, deceptive or abusive acts or practices and take enforcement actions. These agencies may, at times, pursue administrative proceedings or litigation to enforce the laws and regulations subject to its jurisdiction. In the proceedings, the agencies can obtain cease and desist orders, which include orders for restitution to consumers or rescission of contracts, as well as other types of relief, including, under certain circumstances, substantial monetary penalties.
In 2015, we entered into a consent order with the CFPB in the U.S. District Court for the Eastern District of Virginia. Without admitting or denying the allegations in the complaint, we agreed to implement a satisfactory compliance plan to comply with the Order and to provide a progress update. We also submitted an amended compliance plan to the CFPB in early 2017.

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Other Laws and Regulations
Other laws and regulations may apply to one or more of our business segments generally or specifically based on the activities of that segment. For example, state insurance laws and laws governing discount medical programs or other discount programs apply to certain of the products in our Insurance and Other Consumer Services segment.
Intellectual Property
We consider certain of our processes, systems, methodologies, databases, tangible and intangible materials, software and trademarks to be proprietary. We rely on a combination of trade secret, patent, copyright, trademark and other laws, license agreements and non-disclosure, non-competition and other contractual provisions, and technical measures, to protect our proprietary and intellectual property rights. Certain features and functions of our products and services use intellectual property under license from third parties, which we at times sub-license to our clients and others. We may depend on certain of those licenses to operate parts of our products. When we market our services in client-branded programs, we rely on licenses from our clients to use their trademarks.
We depend upon the skills, knowledge and experience of our management, as well as that of our other employees, advisors, consultants and contractors, none of which are patentable. To help protect our know-how, and any inventions for which patents may be difficult to obtain or enforce, we require all of our employees, consultants, advisors and other contractors to enter into confidentiality and inventions agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.
Cybersecurity
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.
We have adopted data security policies, data breach mitigation policies and data breach response policies and procedures, which we regularly review and update. Our data breach response policies and procedures delineate the actions that we will implement in the event that we discover or have reason to believe that a data breach has occurred, including but not limited to convening our Data Breach Response Team, terminating the breach, initiating an investigation, preserving relevant evidence, escalating and disseminating information and action plans throughout our organization, promptly identifying and notifying affected individuals, contacting regulators and law enforcement as appropriate and mitigating damage or loss incurred by affected individuals and the Company.
The Risk Management Committee of our Board of directors meets regularly with the members of management who lead our cyber and information security efforts. During those meetings, the Committee receives detailed reports and presentations regarding our cyber and information security, data breach risk mitigation and data breach response programs, engages with the responsible executives and reports any comments or concerns to management and the full Board.
Our Insider Trading Policy prohibits our employees from purchasing or selling our stock or other securities based upon material, non-public information, including but not limited to a data or information security breach. Employees must obtain from our Chief Legal Officer written pre-clearance for any such purchase or sale, which the Chief Legal Officer will not issue in the event of a known material data or information security breach, the existence of which has not been made public.
Employees
As of December 31, 2017, we had 362 employees, compared to 422 employees as of December 31, 2016. Our future performance depends significantly on the continued service of our key personnel. None of our employees are covered by collective bargaining arrangements. We believe our employee relations are good.
Financial Information about Segments and Geographic Areas
Please see Note 20 to the consolidated financial statements in Item 8 of this Annual Report on Form 10-K for financial information about our segments and geographic areas.

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ITEM 1A.    RISK FACTORS
We believe the following risk factors, as well as the other information contained in this Annual Report on Form 10-K, are material to an understanding of our company. Any of the following risks as well as other risks and uncertainties discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the value of our stock to decline. Additional risks and uncertainties that we are unaware of, or that are currently deemed immaterial, also may affect us.
Risks Related to our Business
Our revenue decreased in the year ended December 31, 2017 as compared to the year ended December 31, 2016, and there can be no assurances that our revenue will not continue to decline.
In the year ended December 31, 2017, our consolidated revenue declined by approximately 9.1% from 2016 primarily due to a decline in revenue from our financial institution clients, which is primarily the result of normal subscriber attrition within the portfolios we continue to service. We may continue to lose existing subscribers and the corresponding revenue due to a number of factors, including normal attrition and potential actions taken by our financial institution clients or us. We need to replace the revenue from the loss of new and existing subscribers with our other products and services, and there can be no assurances that we will be successful in doing so. Our failure to increase our revenue or grow our profitability likely could continue to adversely affect the value of our common stock.
We incurred consolidated losses from continuing operations of $11.8 million and $3.4 million in the years ended December 31, 2017 and 2016, respectively. We may continue to incur substantial expenses from increased overhead costs to grow our sales and business development departments, and we cannot give assurances of our future profitability.
We incurred significant consolidated loss from continuing operations in 2017 and 2016 primarily due to the decline in revenue in our Personal Information Services and Insurance and Other Consumer Services segments. In 2017, we divested our non-core businesses (including the Pet Health Monitoring and Bail Bonds Industry Solutions segments), which allows us to concentrate our resources to improve our core identity theft protection subscribers, revenue and results. However, there can be no assurances that we will not continue to report significant consolidated operating losses in future periods. We cannot predict whether we will be able to become profitable on an annual basis in the future, as we may not generate sufficient revenue to obtain and maintain profitability and expect to continue to incur significant expenses to maintain and expand our Identity Guard® and Identity Guard® with Watson products. We also may incur additional costs associated with our regulatory compliance as we are subject to a wide variety of federal, state and local laws and regulations, which may make it more difficult for us to achieve future profitability. If we are unable to become profitable, we may not be able to execute our business plan, our prospects may be harmed, and our stock price could further decline.
We are dependent upon our Personal Information Services segment for substantially all of our revenue, and our revenue from that segment may continue to decrease, primarily due to the attrition of subscribers obtained through our historical financial institution clients.
Approximately 96% of our revenue in the year ended December 31, 2017 was derived from our Personal Information Services segment. We are entirely dependent on revenue from this segment. Our revenue for this segment declined in 2017 by approximately 6.4% from 2016 as our subscriber base obtained through our historical financial institution clients continued to decline in excess of new subscribers in our suite of Identity Guard® products. Therefore, adverse developments in this business segment could have a significant adverse impact on our financial condition, results of operations and cash flows. We have lost subscribers in prior years, and may lose subscribers in future years, due to numerous factors, including changing subscriber preferences; subscriber dissatisfaction; cancellations required by marketing partners, or for regulatory or other reasons; competitive price pressure; recurring billing issues, such as changes to their credit card billing practices or policies; credit card or other billing vehicle declines or turnover, including as a result of a refinancing or account cancellation; and general economic conditions. As a result of these factors, our total number of subscribers may continue to decline during 2018. Our failure to increase our revenue likely would continue to adversely affect the value of our common stock.
Laws requiring the free issuance of credit reports by credit reporting agencies, and other services that must be provided by credit reporting agencies, could impede our ability to obtain new subscribers or retain existing subscribers and could have a material adverse effect on our business.
The Fair Credit Reporting Act provides consumers the ability to receive one free consumer credit report per year from each major consumer credit reporting agency and requires each major consumer credit reporting agency to provide the consumer a credit score along with the consumer’s credit report for a reasonable fee as determined by the FTC. In addition, the Fair Credit Reporting Act and state laws give consumers other rights with respect to the protection of their credit files at the credit reporting agencies. For example, the Fair Credit Reporting Act gives consumers the right to place “fraud alerts” at the credit reporting agencies, and the laws in approximately 40 states give consumers the right to place “freezes” to block access to their credit files. The rights of consumers to

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obtain free annual credit reports and credit scores from consumer reporting agencies, and to place fraud alerts and credit freezes directly with them, could cause consumers to perceive that the value of our services is reduced or replaced by those benefits, which could have a material adverse effect on our business.
We remain dependent on our historical financial institution clients to continue to service and bill a material portion of our subscribers.
We historically depended upon our agreements with a small number of financial institutions in the U.S. to derive a significant portion of our revenue. For example, in 2017 and 2016, we derived approximately 55% and 59%, respectively, of our Personal Information Services segment revenue from our agreements with U.S. financial institutions. Under these contracts, our right to continue to service subscribers after termination of a contract by a financial institution varies based on the specific contract terms. Under some contracts, we may continue to provide our services to the existing subscribers, and the financial institution must provide certain applicable services, for varying time periods. Under other contracts, the financial institution may require us at any time to cease providing services under existing subscriptions. Financial institutions under most contracts also may require us to cease providing services to their customers under existing subscriptions if the contract is terminated for material breach by us or based on various events such as certain legal or regulatory changes, a party’s bankruptcy or insolvency, or other events. Even in contracts under which we have a right to continue to provide our services to existing subscribers after termination, we often are substantially dependent on those clients to cooperate in continued servicing, including continued billing by those clients. If those financial institutions do not perform their contractual obligations with respect to the servicing of existing subscribers, or otherwise do not cooperate in our continued servicing of those subscribers, or, where permitted under our contracts, they terminate our servicing of the subscribers, we could lose significant current sources of revenue, and those losses could have a material adverse effect on our business, financial condition and results of operations.
We could lose our access to data from any of the three major credit reporting agencies, each of which competes with us, which could cause demand for our services to decrease, affect our profitability and have a material adverse effect on our business.
We rely on the major credit reporting agencies, Equifax, Experian and TransUnion, in both the U.S. and Canada to provide us with essential credit-related data for our consumer identity theft protection services. The Experian and TransUnion contracts may be terminated by them on 30 days’ and 60 days’ notice, respectively, while the contract with Equifax expires in 2021. Each of the three major credit reporting agencies competes with us by providing credit information directly to consumers, and may decide to stop supplying data to us on a timely manner or at all, or to significantly increase the costs they charge us for their data. Any change, interruption, deterioration or termination of our relationship with one or more of the three credit reporting agencies would be disruptive to our business and could cause us to lose subscribers or incur increased expenses. We may not be successful in maintaining our relationships on the current terms with the three credit reporting agencies and may not be able to continue to obtain data from them on acceptable terms or at all. Furthermore, there can be no assurances that we will be able to obtain data from alternative or additional sources if our current sources become unavailable or too costly.
Our failure to protect personal data could cause us to expend capital and resources to protect against future security breaches or other unauthorized access, result in litigation costs, liability and damage to our reputation and business.
We collect, distribute and protect nonpublic and sensitive personal data in delivering our services. We are subject to the risk that unauthorized users might access that data, technical issues might release or expose that data to unauthorized users or human error might cause the wrongful dissemination of that data. If we experience a security breach or other unauthorized access to information, the integrity of our services may be affected. We continue to incur significant costs to protect against security breaches or other mishaps and to minimize the adverse effects of a data breach, were one to occur. Moreover, any public perception that we mishandle personal information could adversely affect our ability to attract and retain clients and subscribers, or maintain key supplier relationships, and could subject us to legal claims and liability and damage to our reputation. In addition, unauthorized third parties might alter information in our databases, which could adversely affect both our ability to market our services and the credibility of our information.
Our business is dependent on the secure operation of our websites, mobile apps, working environments, storage, security and other data systems as well as the operation of the Internet generally. Our business involves the storage and transmission of users’ personal information, and security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. Like many companies, we are the target of frequent and repeated cyber-attacks of varying levels of sophistication. Many companies regularly disclose security breaches, some of which have involved intentional attacks. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Attacks may be targeted at us, our clients, our suppliers or others. If an actual or perceived breach of our security occurs, client, customer and/or supplier perception of the effectiveness of our security measures could be harmed and we could lose clients, customers and/or suppliers. Actual or anticipated attacks and risks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third party experts and consultants.

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If our security measures are circumvented, our personal information or that of our subscribers could be misappropriated, causing interruption in our operations, damaging our information systems or those of our users, or otherwise damaging our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.
We rely on various technologies, including without limitation encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including without limitation customer payment card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to fail to protect personal data from being breached or compromised. Data breaches can also occur as a result of non-technical issues.
Under payment card rules and our contracts with our card processors and clients, if there is a breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay our fees. If we were unable to accept payment cards, our business would be seriously damaged.
Our servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including “denial-of-service” type attacks. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach suffered by us or by persons with whom we have commercial relationships, that result in the unauthorized release of our users’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability.
Many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. Federal and state laws in the U.S. provide for more than 45 regulatory and notification regimes, all of which we are subject to, and additional requirements may be instituted in the future. In the event of a data security breach, these mandatory disclosures often lead to widespread negative publicity. In addition, complying with such numerous and complex regulations in the event of a data security breach is often expensive, difficult and time consuming, and the failure to comply with these regulations could subject us to regulatory scrutiny and additional liability and harm our reputation.
Any actual or perceived security breach, whether successful or not and whether or not attributable to the failure of our services or our information technology systems, as well as our failure to promptly and appropriately react to a breach, would likely harm our reputation, adversely affect market perception of our services, and cause the loss of customers and strategic partners. Our property and business interruption insurance may not be adequate to compensate us for losses or failures that may occur. Our third-party insurance coverage will vary from time to time in both type and amount depending on availability, cost and our decisions with respect to risk retention.
We recognized impairment charges in the past and may be required to recognize impairment charges in the future that could materially affect our financial results.
We recorded one-time intangible and other asset impairment charges of $8.5 million in the year ended December 31, 2016, primarily due to the cessation of operations in our Pet Health Monitoring business. Additionally, we assess our goodwill and other intangible assets as well as our other long-lived assets as and when required by U.S. GAAP to determine whether they are impaired and, if they are, we record appropriate impairment charges. We had no goodwill impairment charges in 2017 or 2016, but it is possible that we may be required to record additional significant impairment charges in the future and, if we do so, our operating income could be materially adversely affected.
The New Credit Agreement provides our lenders with a first-priority lien against substantially all of our assets and contains certain restrictions on our ability to take certain actions. We cannot provide assurance that we will maintain compliance with the financial and other restrictive covenants under the New Credit Agreement.
We are subject to a number of financial and other restrictive covenants under the New Credit Agreement. These covenants include restrictions that prohibit or otherwise limit our ability to pay dividends and repurchase stock, incur additional indebtedness, make certain investments and other payments, enter into acquisitions, encumber or dispose of assets or engage in certain other types of transactions, and also require that we maintain certain minimum cash balances, financial ratios and EBITDA levels (as defined in the New Credit Agreement and adjusted for certain non-cash, non-recurring and other items) during specified periods. Failure to comply with any of the covenants under the New Credit Agreement could result in a default under the facility, which could cause the lenders to declare all obligations immediately due and payable and exercise their lien on substantially all of our assets. We cannot provide assurance that we will maintain compliance with such covenants for future periods, or, if necessary, be able to amend the financial or restrictive covenants contained therein or enter into new credit arrangements to maintain liquidity in the future. We have taken and may continue to take actions including, but not limited to, delaying or forgoing capital investments, reducing marketing or other expenditures compared to current plans, and/or renegotiating or seeking a waiver or amendment of the terms of the New Credit Agreement as means of maintaining compliance with these covenants.

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We are substantially dependent on third party suppliers and service providers, and our clients and their service providers, to market and provide our products, and failures by those third parties or our clients could harm our business and prospects.
Our consumer products and services are substantially dependent on third party suppliers, including providers of credit and other data, analytics, and software and other technology, including without limitation, our relationship with IBM under which we utilize its Watson technology and trademarks in some of our products and services. Our failure to develop and maintain these third party relationships could harm our ability to provide our products and services. We also rely on various third party service providers, including outsourced telemarketing vendors, customer service providers, network and systems hosts and other providers. In some arrangements we rely on our clients or their service providers, including the marketing of products, billing of subscribers and customer service.
Failure of any of our third party suppliers or service providers, or our clients or their service providers, to satisfy our contracts or requirements, or to comply with applicable laws and regulations, could cause us to lose subscribers or clients, expose us to private lawsuits or governmental investigations or proceedings, cause us to be liable for damages and fines, or harm our reputation. Any such event could have a material adverse impact on our business, results of operations or financial condition.
We could be unable to meet our future capital requirements to grow our business, which could adversely impact our financial condition and growth strategy.
In November 2017, we amended our existing credit agreement in which we received additional operating funds at a higher borrowing rate. We could need to continue to raise additional funds in the future in order to operate and expand our business. Our ability to meet our future capital requirements and grow our business by investing in and marketing our products and services could be materially adversely affected if we are unable to maintain compliance with the covenants under the New Credit Agreement or otherwise obtain financing in the future. There can be no assurances that additional funds will be available on terms acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate one or more of our product development programs or any future commercialization efforts. Our inability to obtain additional financing could have a material adverse effect on our financial condition.
A failure of any of the insurance companies that underwrite the insurance products or related benefits provided as part of our insurance services, or refusal by those insurance companies to provide the expected insurance, could harm our business.
Certain of our insurance services include or depend on insurance products, or are dependent on group insurance policies under which the customers for our services are the insureds. Adverse conditions in the economy could cause financial instability among one or more of those insurance companies. The failure of any of those insurance companies, or refusal by them to provide the expected insurance, could require us to remove the affected insurance from our services, cause us to lose customers or clients, or expose us to liability claims by our customers or clients.
If we experience system failures or interruptions in our telecommunications or information technology infrastructure, our revenue could decrease and our reputation could be harmed.
Our operations depend upon our ability to protect our telecommunications and information technology systems against damage or system interruptions from natural disasters, technical failures and other events beyond our control. We receive credit and other data electronically, and this delivery method is susceptible to damage, delay or inaccuracy. A significant portion of our business involves telephonic customer service as well as mailings, both of which depend upon the data generated from our computer systems. Unanticipated problems with our telecommunications and information technology systems may result in a significant system outage or data loss, which could interrupt our operations and have a material adverse impact on our business, including the loss of revenue, clients or customers or exposure to liability claims.
We may launch products and services in fields and markets that are new to us, and may be exposed to new risks that could impede the success of our efforts or result in unforeseen liabilities or expenses.
We are exploring or developing other new products and services, including new privacy products, which also may involve new risks. If we are unable to manage these new risks, our efforts to develop and launch new products and services may not be successful, or we may incur unforeseen liabilities or expenses, including product liability, regulatory violation, data or privacy breaches, intellectual property infringement or contract claims, which may have a material adverse effect on our business and financial condition.
We depend on key members of our management and other key personnel.
We depend on key members of our management. We do not maintain key person life insurance on our senior management. Loss of one or more of these key individuals, particularly our Executive Chairman or our other executive officers, could have a material adverse effect on our business. We also believe that our future success will depend, in part, on our ability to attract, retain and motivate

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skilled managerial, marketing and other personnel, and a failure to attract and retain those personnel may have a material adverse impact on our business.
Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited, which could potentially result in increased tax liabilities for us in the future.
As of December 31, 2017, we had approximately $10.6 million of a federal net operating loss carry-forward. Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carry-forwards and other pre-change tax attributes (such as research tax credits) to offset its post-change taxable income may be limited. Due to the nature of our closely-held stockholders, we have not performed an analysis to determine if there were any prior year ownership changes, which would limit our ability to utilize the federal net operating loss carry-forward. If we earn net taxable income in future years, our ability to use our net operating loss carry-forward to offset taxable income will be subject to our future analysis of ownership changes and, as a result, may be subject to limitations, which could potentially result in increased future tax liability to us.
The recently enacted Tax Cuts and Jobs Act, which was signed into law on December 22, 2017 may materially impact our future operating results and tax accounting policies.
The Tax Cuts and Jobs Act may have future implications to our financial reporting which, due to the varying assessment date provisions, may be materially different than what is completely reflected or disclosed in our financial statements for the year ended December 31, 2017. Changes to certain limitations and deductible provisions may have a favorable or unfavorable impact on future operating results and cash taxes including, but not limited to, repeal of the corporate alternative minimum tax, change to covered employees under Section 162(m), limitations on the deduction of interest expense from debt financing and expensing of qualifying depreciable assets. Ongoing analysis of the income tax reform may potentially impact our business, financial conditions and results of operations in one or more future periods.
Our Canadian business exposes us to operational, economic and currency risks.
Our Canadian operations represented approximately 8% and 7% of our consolidated revenue in 2017 and 2016, respectively, and a component of our strategy includes expanding and adding to our marketing partner relationships in Canada as well as adding Identity Guard® with Watson as a premier product offering. Our ability to successfully conduct business in Canada is affected by many of the same risks we face in our U.S. operations, as well as unique costs and difficulties of managing businesses in Canada. Transacting business with Canadian partners and vendors has made us subject to Canadian economic conditions, particularly currency exchange rate fluctuations, increased regulations, quotas, tariffs, and political factors, any of which could have a material adverse effect on our consolidated financial condition and results of operations as our business in Canada continues to expand. Further, we may be exposed to new forms of competition not present in our domestic markets, as well as subject to potentially different demographic tastes and preferences for our products.
We may not be able to consummate acquisitions or investments that are accretive or which improve our financial condition.
A component of our strategy may include selectively acquiring assets or businesses or making strategic investments in order to increase cash flow and earnings or diversify or expand our product offerings. This depends upon a number of factors, including our ability to identify acceptable acquisition or investment candidates, consummate transactions on favorable terms, successfully integrate acquired assets and obtain financing to support our growth and expansion, and many other factors beyond our control. We may encounter delays or other problems or incur substantial expenses in connection with seeking acquisitions that could negatively impact our operating results. In connection with any acquisitions or investments, we could issue stock that would dilute our stockholders, incur substantial debt, assume known, contingent and unknown liabilities and/or reduce our cash reserves. In addition, legal or regulatory requirements, availability of financing or other factors may prevent us from consummating acquisitions of membership agreements or customer portfolios offered by our clients, which may have an adverse impact on our relationships with those clients or our continued receipt of revenue from those portfolios or agreements. Acquisitions may also require material infrequent charges and could result in adverse tax consequences, impairment of goodwill, substantial depreciation and amortization, increased interest expense, deferred compensation charges, and the amortization of amounts related to deferred compensation and identifiable purchased intangible assets, any of which could negatively impact our results of operations in one or more future periods.
We may not realize planned benefits from any acquisitions.
From time to time we review opportunities for acquisitions of other businesses or material assets that would expand our business or otherwise offer growth opportunities to us. In connection with our acquisitions, we may experience unforeseen difficulties, expenses and delays as we attempt to integrate the acquired assets and businesses into our existing operations. These difficulties may require significant management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Any acquisition or investments by us involves risks, including:

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unexpected losses of key employees, customers and suppliers of the acquired operations;
difficulties in integrating the financial, technological and management standards, processes, procedures and controls of the acquired businesses with those of our existing operations;
challenges in managing the increased scope, geographic diversity and complexity of our operations;
establishing the internal controls and procedures that we are required to maintain under the Sarbanes-Oxley Act of 2002; and
mitigating contingent or assumed liabilities or unexpected costs.
Competition could reduce our market share or decrease our revenue.
We operate in a highly competitive business market. Our competitors may provide products and services comparable or superior to those provided by us, or at lower prices, adapt more quickly to evolving industry trends or changing market requirements, increase their emphasis on products and services similar to ours, enter the markets in which we operate or introduce competing products and services. Any of these factors could reduce our market share or decrease our revenue. Many of our competitors have greater financial and other resources than we do. Several of our competitors offer products and services that are similar to, or that directly compete with, our products and services. Competition for new subscribers for our products and services is also intense. We also compete directly with the credit reporting agencies that control the credit file data that we use to provide our services. One or more of these credit reporting agencies may not make available to us or our customers the same features that they may offer in direct competition with us.
Our inability to develop and offer services that are attractive to the growing number of consumers who utilize wireless devices other than personal computers to access online services could adversely affect our business.
The number of people who access services through devices other than personal computers, including mobile phones, smart phones, handheld computers, tablets, and other mobile devices, has increased dramatically in recent years and is projected to continue to increase. The services we develop for users of these alternative devices may not be attractive to users. Despite the expected growth in mobile devices, there is no guarantee that we will be able to effectively monetize our mobile applications and generate meaningful revenue in the future. If our mobile applications are not widely adopted or sufficiently profitable, or if we fail to continue to innovate and introduce enhanced mobile applications and other services for users of these alternative devices, our business could be adversely affected.
As new devices, platforms, and technologies are continually being released, it is difficult to predict the problems we may encounter in developing versions of our services for use with those devices, platforms, and technologies, and we may need to devote significant resources to the creation, support, and maintenance of such offerings. We are dependent on the interoperability of our mobile applications with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our applications’ functionality or give preferential treatment to competitive products could adversely affect usage of our mobile applications. Additionally, if we are slow to develop new services and technologies that are compatible with these devices, platforms, and technologies, or if our competitors are able to achieve those results more quickly than us, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business.
Our growth depends upon developing and successfully introducing new products and services that generate client and consumer interest, including new data sources, advanced tools and analytical capabilities, more timely notification of activities and more useable content. Since late 2016, we continue to unveil our new Identity Guard® with Watson product to various marketing channels and partners. We have made, and may make, significant investments in new products and services, including development costs and prepayment of royalties and fees to third party providers. Our failure to develop, introduce or expand successfully our products and services could have a material adverse effect on our business and prospects.
Events such as a security breach at one of our partners that result in a significant number of our members’ personally identifiable information being compromised or that otherwise interfaces with our systems could result in a large number of identity-related events that in turn could severely strain our operations and have a negative impact on our business.
Events such as a security breach at a large organization (including major financial institutions, retailers, and Internet service providers) could compromise the personally identifiable information of a significant number of our consumers. Any such event could in turn result in a large number of identity-related events that we must address, placing severe strain on our operations. Any failure in our ability to appropriately and timely process and address a large number of identity-related events taking place at the same time could result in a loss of members, harm to our reputation, and other damage to our business. Moreover, any related remediation services we provide may not meet member expectations and further exacerbate these risks. Furthermore, if these events result in significant claims made under our identity theft insurance, this could negatively impact our insurance premiums and our ability to continue to provide what we refer to as our guarantee on a cost-effective basis, or at all.

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If the material weaknesses identified in our internal control over financial reporting persist or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.
In connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2017, our management conducted an assessment of the effectiveness of our internal control over financial reporting. In connection with that assessment, a material weakness was identified in our internal controls over accounting for share based compensation, and a material weakness was identified in our internal controls over accounting for revenue recognition. Exchange Act Rule 12b-2 and Rule 1-02(b) of Regulation S-X define a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis. The identified material weaknesses are further described in Part II, Item 9A of this report.
Our remediation efforts regarding these material weaknesses are also described in Part II, Item 9A of this report. While we are confident that that our remediation plans will remediate the identified material weaknesses, it is possible that our remedial measures may not be sufficient or may take longer than anticipated. If our remedial measures are insufficient to address the material weaknesses on a timely basis, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. Even after the identified material weaknesses have been remediated, investors may lose confidence in our reported financial information and the market price of our shares of common stock may decline.
Risks Related to Government Regulation
Changes in legislation or regulations governing consumer privacy and other consumer protection aspects may affect our ability to collect, distribute, and use personally identifiable information.
There has been increasing public concern about the use of personally identifiable information and vulnerability of security practices intended to protect it. As a result, many federal, state, and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, disclosure, protection and use of personally identifiable information. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that apply to us. Because the interpretation and application of privacy, data protection and other consumer protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our services. If this is the case, in addition to the possibility of fines, lawsuits, and other claims, we could be required to fundamentally change our business activities and practices or modify our service offerings, which could have a material adverse effect on our business and our ability to retain our customers and partners. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy, data protection or other consumer protection laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, affect our ability to attract new customers and maintain relationships with our existing customers, and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our enterprise customers and strategic partners may limit the use and adoption of, and reduce the overall demand for, our services. Privacy concerns, whether valid or not, may inhibit market adoption of our services.
Our Personal Information Services segment and Insurance and Other Consumer Services segments are subject to a wide range of U.S. and foreign laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.
Our Personal Information Services and Insurance and Other Consumer Services segments are subject to a wide variety of U.S. federal and state laws and regulations. Our business in Canada is subject to similar laws. For additional information on the laws and regulations that may have an effect on our business, see “Business—Government Regulation” above.
Many of the laws in the U.S. and Canada that apply to us or our clients are or may become the subject of revision and addition, the issuance of rules, regulations, guidance and interpretations by government agencies, and rulings and interpretations by courts and other tribunals. We incur significant costs to operate our business in compliance with these laws and regulations, and to make changes to our business as needed to comply with legal and regulatory changes. We have made and may continue to make changes to our business and operations as a result of changes with respect to these laws or regulations. These changes have increased our costs and reduced our revenue, and we may make further changes that have such effect. Further, scrutiny of the sales, marketing and administration of add-on products by financial institution and financial product regulators has resulted in the termination of almost all marketing of our products by financial institutions and cancellation of certain subscribers. The effect of this combination of laws, regulations, reviews and proceedings is difficult to estimate, and any or a combination of them, or changes to them, may have a material adverse effect on our business, results of operations or financial condition.

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We and our clients are subject to legal actions and proceedings, including consumer class action litigation and government agency investigations and enforcement actions, which could require us to incur substantial expenses, pay damages, fines and penalties, lose subscribers and clients, and change our business practices, any of which could have a material adverse effect on our business, results of operations and financial condition.
Because we operate in highly regulated industries and must comply with various foreign, federal, state and local laws, we may be subject to claims and legal proceedings in the ordinary course of our business. These legal actions may include private class action lawsuits, and investigations and enforcement actions by governmental authorities. We cannot predict the outcome of any actions or proceedings, and the cost of responding to investigations or claims and defending against private actions, investigations or government enforcement actions might be material. If we are found liable in any actions or proceedings, or are required to indemnify our clients or others for their expenses or liability, we may have to pay substantial damages, fines and penalties, lose subscribers or clients, suffer harm to our reputation, and be required change the way we conduct our business, any of which may have a material adverse effect on our business, results of operations and financial condition. In addition, as a result of these investigations, proceedings or actions, or other regulatory oversight, our financial institution clients have taken, and we may take, remedial actions including the issuing of refunds and/or cancellation of subscriptions, and our clients may seek indemnification or contribution from us relating to those remedial actions, which could require us to incur substantial expenses, pay damages, fines and penalties, lose subscribers and clients, and change our business practices, any of which could have a material adverse effect on our earnings and cash flow.
We believe that the CFPB, along with other federal agencies including the OCC, are continuing to review policies and practices of financial institutions and their service providers with respect to add-on or ancillary products. The CFPB, OCC and FDIC have entered into public consent orders with Bank of America and several other financial institutions with respect to such products, including in some cases our identity theft protection products. Under these consent orders, financial institutions have agreed, among other things, to make restitution of fees collected from their customers, take other remedial actions, and cease marketing of the applicable products until their compliance plans are approved by regulators, and pay penalties. We cannot predict whether these governmental reviews of products marketed through financial institutions will continue, or whether they may include reviews by state government agencies. One or more financial institutions may seek indemnification from us, and we or the financial institutions may be subject to enforcement proceedings or private class actions. We may receive requests for information directly from federal or state agencies. We provided information to the CFPB in response to the previously reported Civil Investigative Demand regarding the provision of “ancillary products related to credit card or deposit accounts” and a subsequent request for voluntary production of information received in January 2014. In July 2015, a consent order with the CFPB was entered in the U.S. District Court for the Eastern District of Virginia. We agreed to make various changes to our disclosures and business practices. We also agreed under the consent order to be subject to certain ongoing injunctive relief and other compliance requirements, which we do not believe substantially changes our existing practices or business but may result in us incurring additional costs associated with compliance or redress. Based on the entry of the consent order, we paid the total penalty amount of $1.2 million in the year ended December 31, 2015, and in February 2016 we paid the remaining $63 thousand of refunds to 661 subscribers.
We may continue to incur material costs as a result of any other regulatory review and scrutiny, or class action litigation, which could reduce the operating results of our Personal Information Services or Insurance and Other Consumer Services segments and our cash flows provided by operations. Any finding that we have violated a law or regulation or our consent order with the CFPB, filing of an enforcement action or class action litigation against us, or entry by us into a consent order or settlement may have a material adverse effect on our business, operations and financial condition.
Judicial decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements the Company uses illegal or unenforceable.
The Company includes arbitration provisions in its consumer agreements and terms of use. These provisions are designed to allow the Company to resolve any customer disputes through individual arbitration rather than in court and explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, the Company’s arbitration agreements, if enforced, have the effect of shielding the Company from class action liability. The Company’s arbitration agreements do not generally have any impact on regulatory enforcement proceedings. The Company takes the position that the arbitration provisions in its consumer agreements and terms of use, including class action waivers, are valid and enforceable; however, the enforceability of arbitration provisions is often challenged in court. If those challenges are successful, the Company’s arbitration and class action waiver provisions could be unenforceable, which could subject the Company to additional litigation, including additional class action litigation. In addition, the U.S. Congress has considered legislation that would generally limit or prohibit mandatory arbitration agreements in consumer contracts. Any judicial decisions, legislation or other rules or regulations that impair the Company’s ability to enter into and enforce consumer arbitration agreements and class action waivers could significantly increase the Company’s exposure to class action litigation as well as litigation in plaintiff-friendly jurisdictions, which would be costly and could have a material adverse effect.

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Liabilities we establish or charges we incur for private or governmental legal proceedings may adversely affect our results of operations, cash flow and financial condition.
We periodically analyze currently available information about current legal proceedings 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.
We may determine in the future that we must establish a reserve or incur a charge for all or a portion of our legal proceedings for which we did not previously establish a reserve or take a charge. We also may determine that we are required to increase a reserve if we determine that the reserve we previously established was inadequate, or record an additional charge if we incur liabilities in excess of liabilities that we have previously recorded. Such charges or liabilities could be significant and could materially and adversely affect our results of operations, cash flow and financial condition.
We may be subject to assertions that taxes must be collected based on sales and use of our services in various states, which could expose us to liability and cause material harm to our business, financial condition and results of operations.
Currently, our products and services are subject to sales and use taxes in certain states to 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’ sales and use 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. One or more additional states may seek to impose sales or use tax or other tax collection obligations on us, whether based on sales by us or our resellers or clients, including for past sales. A successful assertion that we should be collecting sales or other related taxes on our services could result in substantial audit defense fees and tax liabilities for past sales, discourage clients from offering or billing for our services, or otherwise cause material harm to our business, financial condition and results of operations.
There are several applicable and potential governmental regulatory matters being considered by the U.S. Supreme Court, Congress and a number of U.S. states that may impact us by requiring remote online sellers to collect sales tax on their revenue. For example, the U.S. Supreme Court has agreed to hear during the current spring term the appeal from the South Dakota Supreme Court of the matter of South Dakota v. Wayfair, Inc. This case is expected to directly revisit the 25-year-old “doctrine” previously established by the Supreme Court in Quill Corp. v. North Dakota, which requires a minimum physical presence within a state in order to permit the state to impose sales tax on revenue derived within that state. We cannot predict the effect, if any, that these and other attempts to impose sales, income or other taxes on online sales may have on our business. Any new or revised taxes would likely increase our cost of doing business online and could reduce demand for our services and create additional administrative and compliance burdens, all of which could adversely affect our results of operations.
Risks Related to Intellectual Property
If our efforts to protect the proprietary nature of the intellectual property related to our current or future products and services, including our Identity Guard® and Identity Guard® with Watson products, are not adequate, we may not be able to compete effectively in our market.
Our success depends in part on our ability to protect our intellectual property, including our Identity Guard® and Identity Guard® with Watson products. We rely upon a combination of patents, trademarks, trade secret protection, confidentiality and license agreements to protect the intellectual property related to our current products and services. However, these measures afford only limited protection and might be challenged, invalidated, or circumvented by third parties. The measures we take to protect our intellectual property may not be sufficient or effective, and in some instances we have not undertaken comprehensive searches with respect to certain of our intellectual property. We have limited protections in countries outside the U.S., such as registrations for key trademarks. Moreover, our competitors may independently develop similar intellectual property.
Our patents may not adequately protect our intellectual property or prevent others from designing around our patents. If the breadth or strength of protection provided by the patents we own, license or pursue with respect to any of our current or future products and services is threatened, it could threaten our ability to commercialize any of our current or future products and services.
We also rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of our product development processes that involve proprietary know-how, information or technology that is not covered by patents. Although we require all of our employees to assign their inventions to us, and endeavor to execute confidentiality agreements with all of our employees, consultants, advisors and any

16



third parties who have access to our proprietary know-how, information or technology, we cannot be certain that we have executed such agreements with all parties who may have helped to develop our intellectual property or had access to our proprietary information, nor that our agreements will not be breached. We cannot guarantee that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. If we are unable to prevent material disclosure of the intellectual property related to our technologies to third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, results of operations and financial condition. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, thus eroding our competitive position in our market.
We may be subject to intellectual property rights claims, which may be costly to defend, could require the payment of damages and could limit our ability to use certain technologies.
Companies in the Internet, technology, data management, wireless communications, wearable technology and other industries own large numbers of patents, copyrights, trademarks and trade secrets, and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. The technologies we own or license from others may not be able to withstand challenge by the owners of any third-party claims or rights. Any intellectual property claims, with or without merit, could be time consuming, and expensive to litigate or settle, and could divert management resources and attention. An adverse determination also could prevent us from offering our products and services to others and may require that we procure substitute products or services for these customers and clients and could require us to pay damages, which could have a material adverse impact on our business and results of operations.
With respect to any intellectual property rights claim, we may have to pay damages or stop using technology found to be in violation of a third party’s rights. We may have to seek a license for the technology, which may not be available on reasonable terms and may significantly increase our operating expenses. The technology also may not be available for license to us at all. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for the infringing aspects of our business, we may be forced to limit our product and service offerings and may be unable to compete effectively.
We have received confidential and proprietary information from third parties. In addition, we employ individuals who were previously employed at other technology companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial cost and be a distraction to our management and employees.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe our intellectual property or the intellectual property of our licensors that are licensed to us. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, if we or one of our future collaborators were to initiate legal proceedings against a third party to enforce a patent covering our current products and services, or one of our future products or services, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the U.S., defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the U.S. PTO, or made a materially misleading statement, during prosecution. Third parties may also raise similar claims before the U.S. PTO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our current or future product candidates. Such a loss of patent protection could have a material adverse impact on our business.
Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. Furthermore, because of the substantial amount of discovery required in intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be unsuccessful, it could have an adverse effect on the price of our common stock. Finally, we may not be able to prevent, alone or with the support of our licensors, misappropriation of our trade secrets or confidential information, particularly in countries where the laws may not protect those rights as fully as in the U.S.

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We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents, trademarks and copyrights on products throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent, trademark or copyright protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent, trademark or copyright protection, but where enforcement is not as strong as that in the U.S. These products may compete with our products in jurisdictions where we do not have any issued or licensed patents, trademarks or copyrights and our intellectual property claims or other intellectual property rights may not be effective or sufficient to prevent them from so competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
Risks Related to Our Common Stock
Our stock price is volatile and may continue to fluctuate significantly over a short period of time.
The trading price of our common stock is volatile. In the past, our stock price has declined in response to period-to-period fluctuations in our revenue, expenses and operating results. In certain periods where our operating results have been below historical amounts, the price of our common stock decreased significantly following earnings announcements. In addition, our stock price may continue to fluctuate significantly in the future as a result of a number of factors, many of which are beyond our control, including:
the timing and rate of subscription cancellations and additions;
the decrease in our revenue and subscriber base in 2017 and the possible continued reduction in either or both in 2018;
our continued losses from continuing operations;
the loss of a key client or a change by a key client in the servicing of our products and services;
enforcement actions or other proceedings against us or our client;
our ability to introduce new and improve existing products and services on a timely basis;
the success of competing products and services by our competitors;
the demand for consumer subscription services generally;
amount and frequency of future dividend payments and share repurchases, if any;
our ability to generate and maintain cash flows provided by operations, including our ability to secure any additional debt or equity financing;
the ability of third parties to support our services; and
general economic conditions.
We do not expect to declare or pay dividends for the foreseeable future.
We have not paid cash dividends on our common stock since the first quarter of 2014. Because we currently intend to retain all cash we generate to fund the growth of our business and the New Credit Agreement currently prohibits us from declaring and paying ordinary cash dividends, we do not expect to pay dividends on our common stock for the foreseeable future. As a result, if we do not declare or pay dividends you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.
Insiders have substantial control over us and could delay or prevent a change in corporate control, which may harm the market price of our common stock.
Loeb Holding Corp., which is controlled by one of our directors, owns approximately 40% of our outstanding common stock, and Michael R. Stanfield, our Executive Chairman and President, owns approximately 7% of our outstanding common stock. In addition, our other executive officers and other directors collectively own significant shares of our outstanding common stock, and these insiders may acquire additional shares of common stock or other securities in the future. These stockholders may have interests that conflict with the other public stockholders. If these stockholders act together, they could have the ability to significantly influence or control the management and affairs of our company and potentially determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any sale of the Company. Accordingly, this concentration of ownership may harm the market price of our common stock by delaying, discouraging or preventing a change in control transaction.

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If we sell shares of our common stock or derivative securities in future financings, stockholders may experience immediate dilution and, as a result, our stock price may decline.
We may from time to time issue additional shares of common stock or derivative securities, including at a discount from the current trading price of our common stock. As a result, our stockholders could experience immediate dilution upon the sale or issuance of any shares of our common stock at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock, warrants or common stock. If we issue common stock or securities convertible, exchangeable or exercisable into common stock, our common stockholders would experience additional dilution and, as a result, our stock price may decline.
We are a smaller reporting company and are taking advantage of certain reduced governance and disclosure requirements, including that our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting. We cannot be certain if the omission of reduced disclosure requirements applicable to smaller reporting companies will make our common stock less attractive to investors.
Currently, we are a “smaller reporting company,” meaning that our outstanding common stock held by nonaffiliates had a value of less than $75 million. As a smaller reporting company, we are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. Our auditors are not required to attest to the effectiveness of the Company’s internal control over financial reporting. As a result, investors and others may become less comfortable with the effectiveness of the Company’s internal controls and the risk that any material weaknesses or other deficiencies in internal controls go undetected may increase. In addition, as a smaller reporting company, we intend to take advantage of our ability to provide certain other less comprehensive disclosures in our SEC filings, including, among other things, providing only two years of audited financial statements in annual reports and simplified executive compensation disclosures. Consequently, it may be more challenging for investors to analyze our results of operations and financial prospects, as the information we provide to stockholders may be different from what you might receive from other public companies in which you hold shares.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
As a smaller reporting company, we are not required to provide this information.
ITEM 2.    PROPERTIES
The following is a summary of our principal leased facilities:
Location
 
Lease Expiration
 
Segment
Chantilly, VA
 
2019
 
Personal Information Services
Santa Clara, CA
 
2020
 
Personal Information Services
Rio Rancho, NM
 
2023
 
Personal Information Services
Arlington Heights, IL
 
2019
 
Insurance and Other Consumer Services
We believe that our facilities will support our future business requirements or that we will be able to lease additional or replacement space, if needed, on reasonable terms. Certain properties are utilized by all of our segments and in such cases the property is reported in the segment with highest usage.
ITEM 3.    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 December 31, 2017, we do not have any significant liabilities accrued. Please refer to “Legal Proceedings” in Note 16 to our consolidated financial statements for information regarding certain judicial, regulatory and legal proceedings.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.

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Executive Officers of the Registrant
Our executive officers are as follows:
Name
 
Age
 
Position
Michael R. Stanfield
 
67
 
Executive Chairman and President
Melba Amissi
 
44
 
Chief Operating Officer
Ronald L. Barden
 
54
 
Chief Financial Officer
Duane L. Berlin
 
59
 
Chief Legal Officer, General Counsel
Tracy M. Ward
 
40
 
Vice President, Principal Accounting Officer
Michael R. Stanfield co-founded CreditComm, the predecessor to Intersections, in May 1996, and has served as our Chairman of the Board of Directors since that time. Since January 2018, Mr. Stanfield has served as Executive Chairman and President, pursuant to which he has assumed the duties as the principal executive officer of the Company. Prior to January 2018, Mr. Stanfield served as Chairman and Founder from inception until January 2018. Mr. Stanfield joined Loeb Partners Corporation, an affiliate of Loeb Holding Corporation, in November 1993 and served as a Managing Director at the time of his resignation in August 1999. Mr. Stanfield has been involved in management information services and direct marketing through investments and management since 1982, and has served as a director of CCC Information Services Inc. and BWIA West Indies Airways. Prior to beginning his operational career, Mr. Stanfield was an investment banker with Loeb, Rhoades & Co. and Wertheim & Co. He holds a B.B.A. in Business Administration from Emory University and an M.B.A. from Columbia University.
Melba Amissi joined the Company in 2001 and has served in a number of management positions over the years. Most recently, Ms. Amissi served as Senior Vice President, Chief Risk Officer since January 1, 2017, and prior to that became Senior Vice President, Chief of Staff on November 17, 2014, after previously serving as Vice President of Legal and Business Affairs since 2007. In these roles, Ms. Amissi was responsible for managing, directing, and implementing compliance and risk for marketing, technology, operations, customer care, information security, and human resources. Ms. Amissi received her business degree from Randolph Macon Woman’s College and she is a Certified Information Privacy Professional and IAPP Member since 2016.
Ronald L. Barden has served as our Chief Financial Officer since September 2014. Mr. Barden previously served as Chief Financial Officer of N1Health LLC, an early stage company building a national network of physician practices that deliver root-cause medicine, since April 2013. Prior to that Mr. Barden served as Chief Financial Officer of WellAWARE Systems, Inc., a wellness monitoring solutions company, from November 2010 through March 2013, and as Chief Financial Officer of Agility Healthcare Solutions from March 2007 until its sale to GE Healthcare, and then as Chief Financial Officer of GE-Agility business unit until November 2010. Mr. Barden also held various positions at Heilig-Meyers Company and spent ten years in public accounting at Deloitte & Touche and Ernst & Young. Mr. Barden holds a B.B.A and a M.B.A. from The College of William and Mary and is a Certified Public Accountant.
Duane L. Berlin has served as our Chief Legal Officer and General Counsel since September 2016. Mr. Berlin has practiced business law for more than three decades. His areas of expertise include securities law, mergers and acquisitions, commercial contracts, marketing and privacy law. Mr. Berlin is listed in the Martindale-Hubbell Bar Register of Preeminent Lawyers as an AV Preeminent attorney. Mr. Berlin has served as General Counsel for the Counsel of American Survey Research Organizations since 1998, a member of the International Association of Privacy Professionals since 2005, a Licensed U.S. Coast Guard Captain since 2007 and a member of the Board of Directors for The Roper Center for Public Opinion Research since 2011. Mr. Berlin received his bachelor's degree from Brandeis University and his Juris Doctorate, Cum Laude, from the University of Miami, where he served as an associate editor of the University of Miami Law Review and a member of the Society of the Wig and Robe. Mr. Berlin also completed studies at Harvard's John F. Kennedy School of Government. Mr. Berlin is a member of the bars of Virginia and Connecticut. Previously, Mr. Berlin served as managing principal of Lev & Berlin, P.C., and practiced law with Cummings & Lockwood.
Tracy M. Ward has served as our Vice President and Principal Accounting Officer since August 2014, after having previously served as the Director of Treasury and Financial Reporting since February 2010 and in other financial management positions since joining the Company in October 2006. Prior to joining Intersections, Ms. Ward worked for Federal Home Loan Mortgage Corporation in various accounting positions and was employed on the tax staff of PricewaterhouseCoopers, LLP. Ms. Ward holds a Bachelor of Science degree in Accounting and a Master’s degree in Accounting and Income Tax from Virginia Tech and is a Certified Public Accountant.

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PART II
ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock trades on The NASDAQ Global Market under the symbol “INTX.” As of February 28, 2018, the common stock was held by approximately 75 stockholders of record and an estimated 1,897 additional stockholders whose shares were held for them in street name or nominee accounts. Set forth below are the high and low closing sale prices per share and dividends declared on our common stock as reported on the NASDAQ Composite Tape.
 
Sales Price per Share
 
 
 
High
 
Low
 
Dividends Paid per Common Share
2017 Quarter ended:
 

 
 

 
 

March 31, 2017
$
4.19

 
$
3.55

 
$

June 30, 2017
$
5.73

 
$
3.96

 
$

September 30, 2017
$
4.74

 
$
2.96

 
$

December 31, 2017
$
3.36

 
$
1.91

 
$

 
Sales Price per Share
 
 
 
High
 
Low
 
Dividends Paid per Common Share
2016 Quarter ended:
 

 
 

 
 

March 31, 2016
$
2.94

 
$
2.25

 
$

June 30, 2016
$
2.58

 
$
2.13

 
$

September 30, 2016
$
2.23

 
$
1.74

 
$

December 31, 2016
$
4.13

 
$
1.72

 
$

We do not expect to declare or pay dividends for the foreseeable future. Dividends are considered quarterly by the Board of Directors and may be paid only when approved by the Board of Directors. Future dividends, if any, will depend on, among other things, our results of operations, capital requirements and such other factors as our Board of Directors may, in its discretion, consider relevant. Under the New Credit Agreement, we are prohibited from declaring and paying ordinary cash dividends.
In April 2005, our Board of Directors authorized a share repurchase program under which we can repurchase our outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. As of December 31, 2017, we had approximately $15.3 million remaining under our share repurchase program. The repurchases may be made on the open market, in block trades, through privately negotiated transactions or otherwise, and the program may be suspended or discontinued at any time. However, we are prohibited from repurchasing any shares of common stock under the New Credit Agreement.
We did not repurchase any shares during the three months ended December 31, 2017. The common share purchases described in the table below represent the withholding of restricted stock to satisfy tax withholding obligations upon the vesting of the related restricted stock during the three months ended December 31, 2017:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plan
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan
 
 
(in thousands, except average price paid per share)
October 1, 2017 to October 31, 2017
 
35

 
$
3.37

 

 
$

November 1, 2017 to November 30, 2017
 

 
$

 

 
$

December 1, 2017 to December 31, 2017
 

 
$

 

 
$

ITEM 6.    SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide this information.

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ITEM 7.    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 together with our financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Risk Factors,” “Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K.
Overview
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 products, we help protect consumers against the risks associated with the inappropriate exposure of their personal information that can result in fraudulent use or reputation damage. Identity Guard® is offered through large and small organizations as an embedded product for either its employees or consumers, as well as directly to consumers through our direct marketing efforts. In 2017, we expanded our suite of Identity Guard® and Identity Guard® with Watson products. Identity Guard® with Watson offers robust early detection of potential risks, stretching beyond credit-centric risks to include online privacy risks, and provides personalized threat alerts with actionable steps to help keep our customers’ information private from the earliest stage possible. We believe that our suite of products and services offer consumers the most proactive and comprehensive identity theft monitoring and online privacy services available on the market today.
We have ongoing operations in one other segment, Insurance and Other Consumer Services. As part of our strategy to have a singular focus on our Personal Information Services segment, we recently sold: 1) the business comprising our Bail Bonds Industry Solutions segment in January 2017; 2) our Habits at Work business, the results of which are recorded in our Personal Information Services segment, in June 2017; and 3) the business comprising our Pet Health Monitoring segment in July 2017. For additional information, please see Note 4 to our consolidated financial statements. 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. Given these divestitures, in 2017 we began to present the results of operations and provide management's discussion and analysis primarily on a consolidated basis.
During 2017, we refinanced our existing senior secured indebtedness under the Prior Credit Agreement with the New Credit Agreement, which had a principal outstanding amount of $21.5 million as of December 31, 2017. In connection with the New 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 a warrant to purchase 1.5 million shares of our common stock. The proceeds were, and will be, used for general corporate purposes, including investments in internal business development resources, internal technology systems and platforms, and continuous innovation of our products. For additional information, please see Note 15 to our consolidated financial statements.
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. 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 focused on expanding Identity Guard® with Watson in 2017. Identity Guard® with Watson is an identity theft monitoring and privacy advisory

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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 product of its kind that uses natural language processing and machine learning to reveal insights from large amounts of unstructured data, delivered through the IBM Watson technology platform. This platform is more scalable and adaptable than our legacy platform, which we believe will enable us to develop innovative new products and features for consumers and organizations more readily than in the past. As we focus on making Identity Guard® with Watson our leading offering to consumers and their families in the U.S. and Canada, 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.
In 2016 and 2017, we continued to expand our business relationships with new partners including retail, communication and other industrial partners, as well as partnering with employers to offer Identity Guard® as an employee benefit option. Building off our historically successful partner product distribution strategy, we have increased our internal business development capability in various channels more than 100% as we continue to pursue and contract with partners to bring our suite of differentiated and comprehensive products to their customers. We also made 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 using an agile development process. 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 55% and 59% of our Personal Information Services segment revenue in the years ended December 31, 2017 and 2016, respectively. Revenue from our largest client, Bank of America, constituted approximately 44% and 48% of our Personal Information Services segment revenue in the years ended December 31, 2017 and 2016, 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. Bank of America, however, has the right to require us to cease providing services to its customers under existing subscriptions if the contract is terminated due to material breach by us or based on various events such as certain legal or regulatory changes, a party’s bankruptcy or insolvency, or other events. Furthermore, we are dependent on Bank of America to cooperate in continued servicing, including subscriber billing. We did not generate any new subscribers from Bank of America or other U.S. financial institution clients in 2017 or 2016, as all marketing of our products by our financial institution clients in the U.S. was terminated in both our Personal Information Services and Insurance and Other Consumer Services segments.
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
 Our Insurance and Other Consumer Services segment includes insurance and membership products for consumers, delivered on a subscription basis. We are not planning to develop new business in this segment and are experiencing normal subscriber attrition due to ceased marketing and retention efforts. Some of our legacy subscriber portfolios have been cancelled, and our continued servicing of other subscribers may be cancelled as a result of actions taken by one or more financial institutions.
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 Innovations LLC ("i4c" or "Voyce"). Voyce generated substantial losses from formation to 2016 and, after concentrated efforts, was unable to generate an acceptable level of revenue. Effective July 31, 2017, we sold Voyce to a newly-formed entity of which Michael R. Stanfield, our Executive Chairman and President, is a minority investor. The results of this segment are reported as discontinued operations in accordance with U.S. GAAP in the years ended December 31, 2017 and 2016. For additional information, please see Note 4 to our consolidated financial statements.
Prior to January 31, 2017, our Bail Bonds Industry Solutions segment included the automated service solutions for the bail bonds industry provided by Captira Analytical LLC ("Captira"). Effective January 31, 2017, we divested our ownership in Captira. This segment’s operating results, along with the operating results of Habits at Work, have not had a major effect on our consolidated

23



financial results and are not classified as a discontinued operation. For additional information, please see Note 4 to our consolidated financial statements.
Critical Accounting Policies
Management Estimates
In preparing our consolidated financial statements, we make estimates and assumptions that can have a significant impact on our consolidated financial position and results of operations. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We have identified the following policies as critical to our business operations and the understanding of our consolidated results of operations. For further information on our critical and other accounting policies, please see Note 2 to our consolidated financial statements.
Revenue Recognition
We recognize revenue on 1) identity theft protection services, 2) insurance services and 3) other monthly membership products and transaction services.
Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees billed by our clients are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts. Subscription fees billed by us are generally billed directly to the subscriber’s credit card except for arrangements under which subscription fees are paid to us by our clients on behalf of the subscriber. The prices to subscribers of various configurations of our products and services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, our subscriptions periodically may be offered with trial, delayed billing or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed.
Identity Theft Protection Services
We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain signed contracts with all of our clients and paper and electronic confirmations with individual purchasers, b) delivery has occurred, c) the seller’s price to the buyer is fixed as sales are generally based on contract or list prices and payments from organizations are collected within 30 days with no significant write-offs, and d) collectability is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection. Revenue for monthly subscriptions is recognized on a straight-line basis over the term of the service period. We also generate revenue through a collaborative arrangement, which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement.
Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service and the service is earned over the year. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscriptions with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro-rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our historical experience. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year.
We record revenue on a gross basis in the amount that we bill the subscriber when our arrangements provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the credit risk for the amount billed to the subscriber. We also provide services for which certain clients are the primary obligors directly to their customers. We record revenue in the amount that we bill certain clients, and not the amount billed to their customers, when our client is the primary obligor, establishes the price to the customer and bears the credit risk. Revenue from these arrangements is recognized on a monthly basis when earned, which is at the time we provide the service.
Insurance Services
We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain paper and electronic confirmations with individual purchasers, b) delivery has occurred, c) the seller’s price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectability is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized when earned.

24



For insurance products, we record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products.
We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance carriers are excluded from our revenues and operating expenses. Insurance premiums collected but not remitted to insurance carriers as of December 31, 2017 and 2016 totaled $340 thousand and $360 thousand, respectively, and are included in accrued expenses and other current liabilities in our consolidated balance sheets.
Other Membership Products and Transaction Services
For other membership products, we record revenue on a gross basis as we serve as the primary obligor in the transactions, have latitude in establishing price and bear credit risk for the amount billed to the subscriber.
Goodwill, Identifiable Intangibles and Other Long-Lived Assets
We record, as goodwill, the excess of the purchase price over the fair value of the identifiable net assets acquired in purchase transactions. We review our goodwill for impairment annually, as of October 31, or more frequently if indicators of impairment exist. Goodwill is reflected as an asset in our Personal Information Services and Insurance and Other Consumer Services segments’ balance sheets, resulting from our acquisitions of Health at Work Wellness Actuaries LLC ("Habits at Work") and White Sky, Inc. ("White Sky") in 2015 as well as our prior acquisition of IISI Insurance Services Inc. ("IISI"), formerly known as Intersections Insurance Services Inc., in 2006.
On January 1, 2017, we prospectively adopted ASU 2017-04, "Intangibles-Goodwill and Other." In evaluating whether indicators of impairment exist, an initial assessment of qualitative factors to determine whether it is necessary to perform the goodwill impairment test can be utilized (commonly referred to as the step zero approach). For reporting units in which the qualitative assessment concludes it is more likely than not that the fair value is more than its carrying value, the guidance eliminates the requirement to perform further goodwill impairment testing. Upon adoption of ASU 2017-04, 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 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.

25



We estimate fair value giving consideration to both the income and market approaches. Consideration is given to the line of business and operating performance of the entities being valued relative to those of actual transactions, potentially subject to corresponding economic, environmental, and political factors considered to be reasonable investment alternatives.
If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its estimated fair value, then a goodwill impairment loss is recognized for the amount that the carrying value of the reporting unit (including goodwill) exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.
As of December 31, 2017, goodwill of $347 thousand resided in our Insurance and Other Consumer Services reporting unit and goodwill of $9.4 million resided in our Personal Information Services reporting unit. For additional information, please see Note 10 to our consolidated financial statements.
We review long-lived assets, including finite-lived intangible assets, property and equipment and other long-term assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Significant judgments in this area involve determining whether a triggering event has occurred and determining the future cash flows for assets involved. In conducting our analysis, we would compare the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be impaired. If the net book value exceeds the undiscounted cash flows, an impairment charge is measured and recognized. An impairment charge is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated by discounting the future cash flows associated with these assets.
Intangible assets subject to amortization may include customer, marketing and technology related intangibles, as well as trademarks. Such intangible assets, excluding customer related intangibles, are amortized on a straight-line basis over their estimated useful lives, which are generally two to ten years. Customer related intangible assets are amortized on either a straight-line or accelerated basis, depending upon the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized to interest expense using the effective interest method over the life of the related debt agreements. The effective interest rate applied to the amortization is reviewed periodically and may change if actual principal repayments of the term loan differ from estimates. In accordance with U.S. GAAP, short-term and long-term debt are presented net of the unamortized debt issuance costs in our consolidated balance sheets.
Classification of Debt
On April 20, 2017, we refinanced the Prior Credit Agreement with the New Credit Agreement. Pursuant to the New Credit Agreement, we are required to make certain prepayments on our term loans in addition to scheduled quarterly repayments, including but not limited to asset dispositions, extraordinary receipts, excess cash flows (as defined in the New Credit Agreement) and certain equity issuances. Scheduled quarterly repayments and estimated prepayments that we expect to remit in the next twelve months, if any, are classified as the current portion of long-term debt in our consolidated financial statements, net of unamortized debt issuance costs and debt discount to be amortized in the next twelve months based on the current effective interest rate applied.
Share Based Compensation
We currently issue equity and equity-based awards under the 2014 Stock Incentive Plan (the “Plan”), 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 years ended December 31, 2017 and 2016.
Expected Dividend Yield. Under the New Credit Agreement, we are currently prohibited from declaring and paying dividends and therefore, the dividend yield was zero for 2017 and 2016.
Expected Volatility. The expected volatility of options granted was estimated based upon our historical share price volatility based on the expected term of the underlying grants, or approximately 50% and 45% for 2017 and 2016, respectively.

26



Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants, or approximately 1.8% and 1.1% for 2017 and 2016, respectively.
Expected Term. The expected term of options granted was determined by considering employees’ historical exercise patterns, of approximately 4.6 and 4.8 years for 2017 and 2016, respectively. We will continue to review our estimate in the future and adjust it, if necessary, due to changes in our historical exercises.
During the year ended December 31, 2016, we granted performance-based restricted stock units ("PBRSUs"). In accordance with U.S. GAAP, we assess the probability that the performance conditions of the PBRSUs would be achieved and recorded share based compensation expense based on the probable outcome of that performance condition. Vesting of the PBRSUs was dependent upon continued employment and achievement of defined performance goals for the year, which were based upon Adjusted EBIDTA, as defined and determined by the Compensation Committee of the Board of Directors. We recognized the shared based compensation expense ratably over the implied service period. The 2016 PBRSU grant vested by March 15, 2017 and we adjusted the shared based compensation expense throughout the vesting period based on our assessment of probability. During the year ended December 31, 2017, we did not grant any PBRSUs.
Income Taxes
We account for income taxes under the applicable provisions of U.S. GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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.
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 the consolidated financial statements. The accrued interest is included as a component of other long-term liabilities in our 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
The Company 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.

27



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 on our consolidated balance sheet that relate to our variable interest in OHG. Other than the potential participation in future revenue if and when earned, we have no material, continuing economic or other involvement in OHG, including no exposure to loss as a result of our involvement with OHG. Please see Note 4 for additional information related to the divestiture.
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 regularly review our capitalized software projects for impairment.
Accounting Standards Updates Recently Adopted and Not Yet Effective
See Note 3 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K for information about accounting standards updates recently adopted and not yet effective.

28



Results of Continuing Operations
Years Ended December 31, 2017 and 2016 (in thousands):
The consolidated results of continuing operations are as follows:
 
Year Ended December 31,
 
Change
 
2017
 
Percent of Revenue
 
2016
 
Percent of Revenue
 
Dollars
 
Percent
Revenue
$
159,620

 
100.0
 %
 
$
175,592

 
100.0
 %
 
$
(15,972
)
 
(9.1
)%
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Marketing
11,330

 
7.1
 %
 
13,156

 
7.5
 %
 
(1,826
)
 
(13.9
)%
Commission
38,386

 
24.0
 %
 
42,775

 
24.4
 %
 
(4,389
)
 
(10.3
)%
Cost of revenue
51,710

 
32.4
 %
 
53,797

 
30.6
 %
 
(2,087
)
 
(3.9
)%
General and administrative
62,530

 
39.2
 %
 
59,671

 
34.0
 %
 
2,859

 
4.8
 %
Loss on dispositions of Captira and Habits at Work
106

 
0.1
 %
 

 
 %
 
106

 
N/M*

Impairment of intangibles and other assets

 
 %
 
1,428

 
0.8
 %
 
(1,428
)
 
(100.0
)%
Depreciation
5,485

 
3.4
 %
 
4,763

 
2.7
 %
 
722

 
15.2
 %
Amortization
152

 
0.1
 %
 
513

 
0.3
 %
 
(361
)
 
(70.4
)%
Total operating expenses
169,699

 
106.3
 %
 
176,103

 
100.3
 %
 
(6,404
)
 
(3.6
)%
Loss from operations
(10,079
)
 
(6.3
)%
 
(511
)
 
(0.3
)%
 
(9,568
)
 
1,872.4
 %
Interest expense, net
(2,227
)
 
(1.4
)%
 
(2,366
)
 
(1.3
)%
 
139

 
(5.9
)%
Loss on extinguishment of debt
(1,525
)
 
(1.0
)%
 

 
 %
 
(1,525
)
 
N/M*

Other income (expense), net
126

 
0.1
 %
 
(487
)
 
(0.3
)%
 
613

 
(125.9
)%
Loss from continuing operations before income taxes
(13,705
)
 
(8.6
)%
 
(3,364
)
 
(1.9
)%
 
(10,341
)
 
307.4
 %
Income tax benefit (expense) from continuing operations
1,915

 
1.2
 %
 
(75
)
 
(0.1
)%
 
1,990

 
(2,653.3
)%
Loss from continuing operations
(11,790
)
 
(7.4
)%
 
(3,439
)
 
(2.0
)%
 
(8,351
)
 
242.8
 %
Loss from discontinued operations, net of tax
(2,534
)
 
(1.6
)%
 
(27,030
)
 
(15.4
)%
 
24,496

 
(90.6
)%
Net loss
$
(14,324
)
 
(9.0
)%
 
$
(30,469
)
 
(17.4
)%
 
$
16,145

 
(53.0
)%
* Not meaningful.



29



Revenue and Subscribers
The following tables provide details of our revenue information for the years ended December 31, 2017 and 2016:
 
Year Ended December 31,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
 
(percent of total)
Bank of America
$
68,027

 
$
77,841

 
42.6
%
 
44.3
%
All other financial institution clients
16,037

 
18,361

 
10.0
%
 
10.5
%
Subtotal: financial institutions
84,064

 
96,202

 
52.6
%
 
54.8
%
Identity Guard® (1)
50,507

 
50,571

 
31.6
%
 
28.8
%
Canadian business lines
13,096

 
12,488

 
8.2
%
 
7.1
%
Breach services & other (1)
5,484

 
4,441

 
3.5
%
 
2.5
%
Subtotal: ongoing business lines
69,087

 
67,500

 
43.3
%
 
38.4
%
Total Personal Information Services revenue
153,151

 
163,702

 
95.9
%
 
93.2
%
Revenue from other segments
6,469

 
11,890

 
4.1
%
 
6.8
%
Consolidated revenue
$
159,620

 
$
175,592

 
100.0
%
 
100.0
%
The following tables provide details of our subscriber information for the years ended December 31, 2017 and 2016:
 
Financial Institution
 
Identity Guard® (1)
 
Canadian Business Lines
 
Total
 
(in thousands)
Balance at December 31, 2015
818

 
348

 
165

 
1,331

Additions
2

 
132

 
123

 
257

Cancellations
(115
)
 
(163
)
 
(126
)
 
(404
)
Balance at December 31, 2016
705

 
317

 
162

 
1,184

Additions
2

 
160

 
106

 
268

Cancellations
(87
)
 
(118
)
 
(107
)
 
(312
)
Balance at December 31, 2017
620

 
359

 
161

 
1,140

____________________
(1)
We periodically refine the criteria used to calculate and report our subscriber data. In the year ended December 31, 2017, we determined that certain subscribers who receive our breach response services should no longer be included in the presentation of Identity Guard® subscribers or revenue due to the nonrecurring nature of our breach response services. For comparability, all periods presented have been recast to reflect this change in subscribers and revenue.
Personal Information Services Revenue
Revenue from our actively marketed, ongoing business lines, Identity Guard®, Canada, and Breach services and other, increased $1.6 million, or 2.4%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The Identity Guard® business line revenue for 2017 was consistent with the prior year as revenue gains from subscriber increases in several of our Identity Guard® partner and programs were offset by decreases in revenue from subscribers acquired through one of our partners, Costco, that is no longer marketing our products. The Identity Guard® subscriber base increased approximately 13% as a result of new subscribers acquired in the later part of 2017 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 2018, which may result in reduced subscriber additions in those channels. We continue to focus on improving and expanding our affiliate marketing programs, partner relationships, and employer programs, which, if successful, could increase our revenue and subscriber counts over the next twelve months.
Revenue from our Canadian business line increased 4.8% in 2017 as our Canadian joint marketing partner operated for the full year of 2017 after transitioning form the prior partner in 2016. Our marketing partner has previous experience in the identity theft monitoring business and has existing relationships with Canadian businesses. This partner was successful in expanding its partners in 2017 and achieving a higher average revenue per subscriber, which was partially offset by normal subscriber attrition. We expect continued success in growing our Canadian market share in 2018.
The increase in revenue from our Breach services and other business lines of $1.0 million was primarily the result of the full year revenue from a client breach services program that was initiated in late 2016.

30



The revenue increase in the on-going business lines was more than offset by a $12.1 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 partially 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 products. We had approximately 39 thousand subscribers in our Insurance and Other Consumer Services segment as of December 31, 2017, which is a 23.5% decrease from our subscriber base of 51 thousand subscribers as of December 31, 2016.
The decrease in consolidated revenue is also due to the disposal of our Bail Bonds Industry Solutions segment in January 2017. This segment's operating results are not classified as a discontinued operation, and therefore the revenue related to this segment remains in the results of continuing operations for 2016. The effect is a decrease in consolidated revenue of $1.9 million for the year ended December 31, 2017 compared to the year ended December 31, 2016.
Marketing Expenses
Marketing expenses consisted of subscriber acquisition costs, including affiliate marketing payments, search engine marketing, web-based marketing and direct mail expenses such as printing and postage. In the years ended December 31, 2017 and 2016, our marketing expenses resulted primarily from marketing activity for direct-to-consumer and Canadian subscriber acquisitions, which decreased in the year ended December 31, 2017 compared to the year ended December 31, 2016. Amortization of deferred subscription solicitation costs related to marketing of our products for the years ended December 31, 2017 and 2016 was $9.6 million and $11.7 million, respectively. Marketing costs that do not meet the criteria for capitalization and are expensed as incurred for the years ended December 31, 2017 and 2016 were $1.8 million and $1.5 million, respectively. 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. Upon adoption of ASU 2014-09, "Revenue from Contracts with Customers," on January 1, 2018, we will no longer defer and amortize direct-response advertising costs, and as such, we expect our marketing expenses in 2018 to be significantly lower than in prior years. For additional information, please see Note 3 to our consolidated financial statements.
Commission Expenses
Commission expenses consist of commissions paid to our clients and other partners. The decrease is related to a decrease in overall subscribers for which commissions are paid, 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 related to increased sales of our new product offerings. We expect commission expenses as a percentage of revenue to remain flat in 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 additional expense for non-income business taxes of $1.3 million (or 0.8% of revenue), which is the result of both an assessment received in a state audit and contingent liabilities in other applicable state jurisdictions. We incur fixed fee long term pricing for the supply of credit bureau data and certain alternative data sources for our products, which is expected to reduce our effective rates (or alternatively, the variable rate of tiered and fixed subscriber fulfillment costs) as volume increases. 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. We incurred additional general and administrative expenses in 2017 as we significantly invested in our sales and business development departments, as the pipeline of engagement leads have grown and we continue to seek to convert the market opportunities into sustainable revenue for 2018 and beyond. We expect this increased investment to be partially offset by the forecasted future reduction of payroll expenses in other departments, which increased severance expense by $1.4 million in 2017 compared to 2016. General and administrative expenses were favorably impacted in 2017 by a one-time, non-cash benefit resulting from a change in our vacation policy (see Note 12 to our consolidated financial statements) as well as decreased professional fees, the majority of which were incurred in 2016 for the development of Identity Guard® with Watson, which was launched in late 2016.

31



In addition, our total share based compensation expense increased to $8.5 million for the year ended December 31, 2017 from $4.7 million for the year ended December 31, 2016, primarily due to grants of 2.1 million stock options and 2.6 million RSUs to employees in 2017.
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, the majority of which was placed into service in late 2016.
Goodwill
Both our Personal Information Services and Insurance and Other Consumer Services reporting units had negative carrying amounts of net assets, and therefore we did not perform an annual test of our goodwill for impairment. In addition, we did not identify any triggering events in the year ended December 31, 2017. 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.
Interest Expense
The decrease in 2017 compared to 2016 is primarily due to a lower interest rate on our outstanding debt under the New Credit Agreement as compared to the Prior Credit Agreement, partially offset by increased interest expense on the underpayment of non-income business taxes. For additional information, please see "—Other" in Note 16 to our consolidated financial statements.
As a result of the outstanding debt under the New Credit Agreement, we expect to continue to incur significant interest expense until maturity. For additional information, please see Note 15 to our consolidated financial statements.
Other Income (Expense), net
Other income was $126 thousand for the year ended December 31, 2017 compared to other (expense) of $(487) thousand for the year ended December 31, 2016. The increase in other income is primarily due to the reversal of an unrealized foreign currency exchange gain related to the resolution of a non-income tax audit in 2016.
Income Taxes
Our consolidated effective tax rate from continuing operations for the years ended December 31, 2017 and 2016 was 14.0% and (2.2)%, respectively. The increase in the effective tax rate is primarily due to estimated impacts of the broad and complex changes in the Tax Cuts and Jobs Act of 2017 (“Tax Act”), which was enacted in 2017 and resulted in the reduction of the valuation allowance on our deferred tax assets, which will become indefinite-lived under the future net operating loss carryforward rules, and the repeal of the corporate alternative minimum tax.
We continued to evaluate all significant 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.
The amount of deferred tax assets considered realizable as of December 31, 2017 could be adjusted if facts and circumstances in future reporting periods change, including, but not limited to, generating sufficient future taxable income in the carryforward periods. If certain substantial changes in the entity’s ownership were to occur, there could be an annual limitation on the amount of the carryforwards that can be utilized in the future.
There were no material changes to our uncertain tax positions during the years ended December 31, 2017 or 2016. We believe it is reasonably possible we could reduce our unrecognized tax benefits by up to $1.2 million within the next twelve months, primarily related to the settlement of general business credits refunded under audit, which would also reduce the income tax receivable and the income tax provision in our consolidated financial statements.
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 years ended December 31, 2017 and 2016. For additional information, please see Note 4 to our consolidated financial statements.

32



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 4 to our consolidated financial statements, 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 consolidated financial statements
Liquidity and Capital Resources
Cash Flow
Cash and cash equivalents were $8.5 million as of December 31, 2017 compared to $10.8 million as of December 31, 2016. Our cash and cash equivalents are highly liquid investments and may include short-term U.S. Treasury securities with original maturity dates of less than or equal to 90 days.
Our accounts receivable balance as of December 31, 2017 was $8.2 million compared to $9.4 million as of December 31, 2016. The likelihood of non-payment has historically been remote with respect to our Identity Guard®, financial institution and insurance services clients billed, however, we do provide for an allowance for doubtful accounts with respect to breach response services. In addition, we provide for a refund allowance, which is included in liabilities in our consolidated balance sheets, against transactions that may be refunded in subsequent months. This allowance is based on historical results.
We had a working capital surplus of $2.3 million as of December 31, 2017 compared to $786 thousand as of December 31, 2016. The increase is primarily due to the execution of an amendment to our New Credit Agreement, which increased our term loan by $1.5 million. 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 New 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 New Credit Agreement.
We believe that the cash and cash equivalents on hand and anticipated cash provided by operations will be sufficient to fund our anticipated working capital requirements of our business segments for the next twelve months. 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 indefinitely and continue to have a positive impact on our cash flows provided by operations. We also expect our Identity Guard® and Canadian subscriber bases and related revenues 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 objectives or for other reasons, at a time when we are not in compliance with all of the covenants in the New Credit Agreement or otherwise do not have access to other sources of capital, our liquidity could be negatively affected.

33



We may explore additional or replacement financing sources, 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, which 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 common stock, could result in increased interest expense and other costs, and could contain additional covenants that could restrict operations.
 
Year Ended December 31,
 
2017
 
2016
 
Difference
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 

 
 

 
 
Cash flows (used in) provided by continuing operations
$
(50
)
 
$
13,262

 
$
(13,312
)
Cash flows used in discontinued operations
(2,398
)
 
(17,183
)
 
14,785

Net cash used in operating activities
(2,448
)
 
(3,921
)
 
1,473

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

 
 
Cash flows used in continuing operations
(6,387
)
 
(5,578
)
 
(809
)
Cash flows provided by (used in) discontinued operations
4

 
(1,031
)
 
1,035

Net cash used in investing activities
(6,383
)
 
(6,609
)
 
226

NET CASH PROVIDED BY FINANCING ACTIVITIES
6,155

 
10,237

 
(4,082
)
DECREASE IN CASH AND CASH EQUIVALENTS
(2,676
)
 
(293
)
 
(2,383
)
CASH AND CASH EQUIVALENTS — Beginning of period
10,797

 
11,471

 
(674
)
Cash reclassified to assets held for sale at beginning of period
381

 

 
381

Less: cash reclassified to assets held for sale at end of period

 
(381
)
 
381

CASH AND CASH EQUIVALENTS — End of period
$
8,502

 
$
10,797

 
$
(2,295
)
The decrease in operating cash flows from continuing operations is primarily due to decreases in revenue from reduced subscribers from the comparable period. In addition, costs in our business development and sales departments increased compared to the prior year period, and we expect to incur similar costs in these departments in 2018 as we continue our efforts to support our growth initiatives in various marketing channels. We divested our non-core businesses in 2017, which partially offset the decrease in our cash flows from continuing operations and will have a positive impact on our future operating cash flows.
In 2017, we paid executive management bonuses of $1.0 million, which were approved by the Compensation Committee. Additionally, we recorded a $1.5 million liability primarily related to an audit by a state for non-income business taxes, for which we remitted $827 thousand in 2017. We continue to correspond with the applicable authorities in an effort toward resolution of our potential remaining indirect tax obligations in 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. Subsequent to December 31, 2017, we effectively settled a portion of our refund claim, which was under federal income tax audit, and we expect to receive approximately $1.3 million in the first half of 2018. We continue our efforts to resolve the remaining federal income tax refund claims, which, if successful, would also increase our cash flows from operations.
The decrease in investing cash flows from continuing operations is primarily due to payments related to the sale of Captira (see Note 4 to our consolidated financial statements), as well as an increase in acquisition costs of 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 due to proceeds of $20.0 million from the closing of the Prior Credit Agreement in the first quarter of 2016, partially offset by net proceeds received from the closing of the New Credit Agreement and Warrant in 2017, described below. We anticipate making a voluntary principal payment on our term loan facility of approximately $1.0 million in early 2018, which may be subject to a mutual agreement with our lender and may include, but may not be limited to, an amendment to the minimum cash on hand covenant requirement.
Credit Facility and Borrowing Capacity
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. As of

34



December 31, 2016, $13.4 million was outstanding, which was presented net of unamortized debt issuance costs of $1.2 million in our consolidated balance sheets in accordance with U.S. GAAP.
In April 2017, we refinanced our indebtedness under the Prior Credit Agreement with a new term loan facility with PEAK6 Investments. We also executed amendments to the new term loan facility in July and November 2017 (together with the amendments, the "New Credit Agreement"), which had a principal outstanding amount of $21.5 million as of December 31, 2017 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 New Credit Agreement is April 20, 2021 with quarterly principal payments of $1.3 million commencing on September 30, 2019. The New 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 New Credit Agreement to repay in full the aggregate principal amount outstanding under the Prior Credit Agreement and to pay interest, prepayment penalties, transaction fees and expenses as a result of the termination. We are using the remainder of the proceeds from the New Credit Agreement for general corporate purposes, including to increase subscriber acquisitions and continue our innovative product development. 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.
The New Credit Agreement requires the prepayment of the aggregate principal amount outstanding in an amount equal to 25% of our excess cash flow (as defined in the New Credit Agreement) for each fiscal year commencing with the fiscal year ending December 31, 2018 and continuing thereafter. Certain other events defined in the New Credit Agreement require prepayment of the aggregate principal amount of the term loan, including all or a portion of proceeds received from asset dispositions (except for proceeds from the sale of assets in our i4c subsidiary), casualty events, extraordinary receipts, and certain equity issuances. Once amounts borrowed have been paid or prepaid, they may not be reborrowed.
As of December 31, 2017, $21.5 million was outstanding under the New Credit Agreement, which is presented net of unamortized debt issuance costs and debt discount totaling $764 thousand in our consolidated balance sheets in accordance with U.S. GAAP. As of December 31, 2017, none of the outstanding balance is classified as short-term.
The New Credit Agreement contains certain customary covenants, including among other things covenants that limit or restrict the following: the incurrence of liens; the making of investments including a prohibition of any capital contributions to our subsidiary i4c other than to complete the wind-down as noted above and fair and reasonable allocation of overhead and administrative expenses; the incurrence of certain indebtedness; mergers, dissolutions, liquidations, or consolidations; acquisitions (other than certain permitted acquisitions); sales of substantially all of our or any of our subsidiaries' assets, except for the orderly wind down of the Pet Health Monitoring, and the exits of our Bail Bonds Industry Solutions and Habits at Work businesses; the declaration of certain dividends or distributions; transactions with affiliates (other than parties to the New Credit Agreement) other than on fair and reasonable terms; and the formation or acquisition of any direct or indirect domestic or first-tier foreign subsidiary unless such subsidiary becomes a guarantor and enters into certain security documents.
The New Credit Agreement requires us to maintain at all times a minimum cash on hand amount of the lesser of 20% or certain stated amounts of the total amount outstanding under the term loan, as set forth in the New 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 New Credit Agreement and adjusted for certain non-cash, non-recurring and other items, and up to $4.3 million of non-recurring charges incurred in the wind-down events) of $2.0 million; provided consolidated EBITDA from the immediately preceding quarter in excess of $2.0 million may be added to a current quarter to make up any shortfall and provided further that when we have not met the minimum consolidated EBITDA test for any quarter (even after including excess consolidated EBITDA for the prior quarter) the test for compliance is deferred until the end of the next quarter and we shall be deemed to be in compliance if, taking into account consolidated EBITDA in excess of $2.0 million from the prior quarter, consolidated EBITDA from the test quarter, and consolidated EBITDA in excess of $2.0 million from the subsequent quarter, we pass the minimum compliance test. Excess consolidated EBITDA in any quarter can be counted only once for determining compliance with this covenant. As of December 31, 2017, we were in compliance with all such covenants.
Minimum Consolidated EBITDA
Fiscal Quarters Ending
 
Amount
Fiscal quarter ending on December 31, 2017
 
$1,500,000
Each fiscal quarter ending on or after March 31, 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

35



The New Credit Agreement also contains customary events of default, including among other things non-payment defaults, covenant defaults, inaccuracy of representations and warranties, bankruptcy and insolvency defaults, material judgment defaults, ERISA defaults, cross-defaults to other indebtedness, invalidity of loan documents defaults, change in control defaults, conduct of business defaults, and criminal and regulatory action defaults.
Failure to comply with any of the covenants under the New 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 New Credit Agreement, PEAK6 Investments purchased, for an aggregate purchase price of $1.5 million in cash, a warrant to purchase an aggregate of 1.5 million shares of our common stock at an exercise price of $5.00 per share ("Original Warrant”). In connection with a later amendment to the New 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. 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. Warrants are valued on our balance sheet at $2.8 million as of December 31, 2017. For additional information related to the fair value of the warrants, please see Note 6 to our consolidated financial statements.
Stock Redemption
In connection with the New 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 New Credit Agreement.
Share Repurchase
As of December 31, 2017, we had approximately $15.3 million remaining under our share repurchase program. During the year ended December 31, 2017, we repurchased 419 thousand shares of our common stock as described above. During the year ended December 31, 2016, we did not directly repurchase any shares of common stock for cash. As a result of shares withheld for tax purposes on the vesting of a restricted stock award, we increased our treasury shares by 103 thousand and 76 thousand in the years ended December 31, 2017 and 2016, respectively.
Other
In April 2017, our Board of Directors approved a second amendment to the 2014 Plan to increase the number of shares authorized and reserved for issuance thereunder by 4.0 million shares, from 5.5 million shares to 9.5 million shares. The amendment was effective immediately upon our stockholders' approval in May 2017.
We periodically analyze our facts and circumstances related to potential obligations in state jurisdictions, including the delivery nature of our services, the relationship through which our services are offered, and changing state laws and interpretations of those laws, and have determined we may have indirect tax obligations in state and other jurisdictions. The following table summarizes the non-income business tax liability activity during the years ended December 31, 2017 and 2016 (in thousands):
 
2017
 
2016
Balance, beginning of year
$
94

 
$
3,427

Adjustments to existing liabilities
1,516

 
(2,110
)
Payments
(827
)
 
(1,223
)
Balance, end of year
$
783

 
$
94


36



We continue to analyze what obligations we have, if any, to state taxing authorities. As a result of an audit by a state for non-income business taxes, for which an assessment was received in the year ended December 31, 2017, we recorded a liability of $936 thousand in the same period for the underpayment of taxes and related interest, which was recorded primarily in cost of revenue in our consolidated statements of operations. Additionally, we recorded an estimated liability of $580 thousand for the potential underpayment in other jurisdictions. We analyzed all the information available to us in order to estimate a liability for potential obligations in other jurisdictions including, but not limited to: the delivery nature of our services; the relationship through which our services are offered; the probability of obtaining resale or exemption certificates; limited, if any, nexus-creating activity; and our historical success in settling or abating liabilities under audit. We continue to correspond with the applicable authorities in an effort toward resolution of our potential liabilities using a variety of settlement options including, but not limited to, voluntary disclosures, negotiation and standard appeals process, and we may adjust the liability as a result of such correspondence. Proceedings with jurisdictions are inherently unpredictable, but we believe it is reasonably possible that other states may approach us or that the scope of the taxable base in any state may also increase.
We have entered into various software licenses and operational commitments totaling approximately $70.6 million as of December 31, 2017, 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 services revenue and general and administrative expenses in our consolidated statements of operations.
Off-Balance Sheet Arrangements
As of December 31, 2017, we did not have any off-balance sheet arrangements other than the revenue participation rights as discussed in "—Recent Developments — Divestiture of Voyce" above.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth beginning on page F-1 of this Annual Report on Form 10-K.
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 1, 2016, the Audit Committee of our Board of Directors dismissed our independent registered public accounting firm, Deloitte & Touche LLP ("Deloitte"), effective as of that same date.
Deloitte's audit reports on our financial statements as of and for the fiscal years ended December 31, 2015 and 2014 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During our fiscal years ended December 31, 2015 and 2014 and the subsequent interim period through April 1, 2016, (i) there were no disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Deloitte's satisfaction, would have caused Deloitte to make reference to the subject matter in connection with their reports on our financial statements for such years; and (ii) there were no reportable events, within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
On and effective as of April 1, 2016, we selected RSM US LLP ("RSM") as our independent registered public accounting firm. During our fiscal years ended December 31, 2015 and 2014 and the subsequent interim period through April 1, 2016, neither we, nor any party on our behalf, consulted RSM with respect to (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of the audit opinion that might be rendered on our financial statements, and no written report or oral advice was provided to us that RSM concluded was an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was subject to any disagreement, as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions thereto, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “34 Act”)) as of the end of the period

37



covered by this report to ensure that information required to be disclosed in the reports we file or submit under the 34 Act is accumulated and communicated to our management, including our Chief 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 the 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 (the “SEC”). Our officers have concluded that our disclosure controls and procedures are not effective as of December 31, 2017 as a result of material weaknesses in our internal control over financial reporting, as described below in Management’s Report on Internal Control over Financial Reporting.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) promulgated under the 34 Act). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation of reliable financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes self-monitoring mechanisms and actions taken to correct deficiencies as they are identified. Because of the inherent limitations in any internal control, no matter how well designed, misstatements may occur and not be prevented or detected. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.
Management conducted an evaluation of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2017 based on the framework set forth in “Internal Control — Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission and effective as of December 15, 2014. Based on the evaluation performed, management concluded that material weaknesses existed as of December 31, 2017 in our controls over accounting for share based compensation and revenue recognition, as described below.
The first material weakness in internal control over financial reporting resulted from the lack of controls which allowed for the misapplication of Accounting Standards Codification Topic 718, Share Based Compensation ("ASC 718"). Specifically, we did not have adequate controls in place to properly identify and account for a retirement age-specific provision in our stock incentive plan, employment agreements and option award agreements that were subject to acceleration of the requisite service period requirement in accordance with the accounting guidance.
The second material weakness in internal control over financial reporting resulted from the lack of controls which allowed for the misapplication of Accounting Standards Codification Topic 605, Revenue Recognition. Specifically, we did not have adequate controls in place to properly recognize revenue from the sale of subscriptions on a straight-line basis over the 30-day membership period and ratably recognize the corresponding commission expense.
To remediate the material weaknesses described above, we have initiated compensating controls in the near term and are enhancing and revising the design of existing controls and procedures to properly apply accounting for share based compensation under ASC 718 and revenue recognition under ASC 606, Revenue from Contracts with Customers, which we adopted as of January 1, 2018. 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 expect that the remediation of these material weaknesses will be completed prior to the end of 2018.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Pursuant to Item 308(b) of Regulation S-K, management’s report is not subject to attestation by our independent registered public accounting firm because the Company is neither an “accelerated filer” nor a “large accelerated filer” as those terms are defined by the SEC.
Changes in Internal Control over Financial Reporting
Except as noted above, there have not been any changes in our internal control over financial reporting during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

38



ITEM 9B.    OTHER INFORMATION
Please refer to the “Liquidity and Capital Resources” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Report for information about our new credit facility.

39



PART III
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 as to executive officers of the Company is disclosed in Part I under the caption “Executive Officers of the Registrant.” The other information required by Item 10 as to the directors of the Company is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.
ITEM 11.    EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 regarding security ownership of certain beneficial owners and executive officers and directors is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.
ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A.
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. and 2. Financial Statements and Financial Statement Schedules
The consolidated financial statements and financial statement schedules of Intersections Inc. required by Part II, Item 8, are included in Part IV of this report. See Index to Consolidated Financial Statements and Financial Statement Schedules beginning on page F-1.
(a) 3. Exhibits
Exhibit
Number
 
Description
2.1+
 
Membership Interest Purchase Agreement dated as of July 31, 2017 between Intersections Holdings Inc. and One Health Group, LLC (Incorporated by reference to Exhibit 2.1, filed with the Registrant’s Form 8-K filed August 4, 2017).
 
 
 
3.1
 
Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1, filed with the Registrant’s Registration Statement on Form S-1 (File No. 333-111194) (the “Form S-1”)).
 
 
 
3.2
 
Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1, filed with the Form 8-K dated October 14, 2007).
 
 
 
10.1.1†
 
Broker Agreement for Consumer Disclosure Service, dated as of January 19, 2012, between the Registrant and Equifax Information Services LLC (Incorporated by reference to Exhibit 10.1, filed with the Registrant’s Form 8-K filed on January 24, 2012).
 
 
 
10.1.2†
 
Amendment effective January 1, 2013, to the Broker Agreement for Consumer Disclosure Service, dated as of January 19, 2012, between the Registrant and Equifax Information Services LLC (Incorporated by reference to Exhibit 10.1.1, filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2013).
 
 
 

40



Exhibit
Number
 
Description
10.1.3†
 
Amendment effective February 1, 2015, to the Broker Agreement for Consumer Disclosure Service, dated as of January 19, 2012 (as amended), between the Registrant and Equifax Information Services LLC (Incorporated by reference to Exhibit 10.1.2, filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2015).
 
 
 
10.1.4†
 
Amendment effective December 29, 2016, to the Broker Agreement for Consumer Disclosure, dated as of January 1, 2012 (as amended), between the Registrant and Equifax Information Services LLC (Incorporated by reference to Exhibit 10.1.4 filed with the Form 10-K for the year ended December 31, 2016).
 
 
 
10.2.1†
 
Consumer Review Service Reseller Service Agreement between the Registrant and Experian Information Solutions, Inc. (Incorporated by reference to Exhibit 10.12, filed with the Form S-1).
 
 
 
10.2.2†
 
Amendment, dated November 15, 2006, to the Pricing Schedule to the Consumer Review Services Reseller Agreement, dated July 1, 2003 between the Registrant and Experian Information Solutions, Inc. (Incorporated by reference to Exhibit 10.12.2 filed with the Form 10-K for the year ended December 31, 2006).
 
 
 
10.3†
 
Service Agreement for Consumer Resale, dated as of August 31, 1999 by and between CreditComm Services LLC and TransUnion Corporation. (Incorporated by reference to Exhibit 10.14, filed with the Form S-1).
 
 
 
10.4.1
 
Master Agreement dated March 8, 2007 by and between Digital Matrix Systems, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.3 filed with the Form 10-Q for the quarter ended March 31, 2007).
 
 
 
10.4.2
 
Data Services Agreement For Credit Bureau Simulator, effective as of September 1, 2004, between Digital Matrix Systems, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.1, filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
 
 
 
10.4.3
 
Professional Services Agreement, dated November 11, 2005, between Digital Matrix Systems, Inc. and the Registrant. (Incorporated by reference to Exhibit 10.15.4 filed with the Form 10-K for the year ended December 31, 2006).
 
 
 
10.4.4
 
Disaster Recovery Site Agreement, by and among the Registrant and Digital Matrix Systems, dated as of March 16, 2006 (Incorporated by reference to Exhibit 10.1, filed with the Form 10-Q dated May 5, 2006).
 
 
 
10.5
 
Data Services Agreement for Credit Browser, dated as of December 17, 2004, by and between Digital Matrix Systems, Inc. and the Registrant (Incorporated by reference to Exhibit 10.21, filed with the 2004 10-K).
 
 
 
10.6†
 
Data Services Agreement, dated as of September 26, 2016, by and between Digital Matrix Systems, Inc. and the Registrant (Incorporated by reference to Exhibit 10.2, filed with the Form 10-Q/A for the quarter ended September 30, 2016).
 
 
 
10.7.1
 
Credit Agreement dated as of April 20, 2017 among Intersections Inc., the Other Credit Parties party thereto, and PEAK6 Investments, L.P. (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Form 8-K filed April 25, 2017).
 
 
 
10.7.2
 
Amendment No. 1, dated as of July 31, 2017, to Credit Agreement dated as of April 20, 2017 among Intersections Inc., the Other Credit Parties party thereto, and PEAK6 Investments, L.P. (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Form 8-K filed August 4, 2017).
 
 
 
10.7.3
 
Amendment No. 2, dated as of November 30, 2017, to Credit Agreement dated as of April 20, 2017 (as amended by Amendment No. 1) 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 dated November 30, 2017).
 
 
 
10.8
 
Amended and Restated Warrant dated November 30, 2017 between Intersections Inc. and PEAK6 Investments, L.P. (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Form 8-K dated November 30, 2017).
 
 
 
10.9
 
Redemption Agreement dated as of April 20, 2017 by and between Intersections Inc. and PEAK6 Capital Management LLC (Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Form 8-K filed April 25, 2017).
 
 
 
10.10.1
 
Amended and Restated Employment Agreement dated as of January 10, 2017 between the Registrant and Johannes Jurgens Roets (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Form 8-K dated January 10, 2017).
 
 
 
10.10.2*
 
Amendment dated as of December 6, 2017 to Amended and Restated Employment Agreement dated as of January 10, 2017 between the Company and Johannes Jurgens Roets.
 
 
 
10.11.1
 
Amended and Restated Employment Agreement dated as of January 10, 2017 between the Registrant and Michael R. Stanfield (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Form 8-K dated January 10, 2017).
 
 
 

41



Exhibit
Number
 
Description
10.11.2*
 
Amendment dated as of December 6, 2017 to Amended and Restated Employment Agreement dated as of January 10, 2017 between the Company and Michael R. Stanfield.
 
 
 
10.12
 
Amended and Restated Employment Agreement dated as of February 17, 2017 between the Company and Ronald L. Barden (Incorporated by reference to Exhibit 10.10 filed with the Registrant’s Form 10-K for the year ended December 31, 2016).
 
 
 
10.13
 
Employment Agreement dated as of February 17, 2017 between the Registrant and Duane L. Berlin.
 
 
 
10.14.1
 
2014 Stock Incentive Plan of Intersections Inc. (Incorporated by reference to Exhibit 10.12 filed with the Form 10-K for the year ended December 31, 2014).
 
 
 
10.14.2
 
Amendment No. 1 to the 2014 Stock Incentive Plan of Intersections Inc. (Incorporated by reference to Exhibit 4.2 filed with the Registrant’s Form S-8 filed on June 1, 2016).
 
 
 
10.14.3
 
Amendment No. 2 to the 2014 Stock Incentive Plan of Intersections Inc. (Incorporated by reference to Exhibit 4.3 filed with the Registrant’s Form S-8 filed on June 22, 2017).
 
 
 
10.15
 
Restricted Stock Award Agreement dated as of November 14, 2014 between the Registrant and Michael R. Stanfield (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Form 8-K dated November 18, 2014).
 
 
 
10.16
 
Form of RSU Award Agreement (under the 2014 Stock Incentive Plan) between the Registrant and Michael R. Stanfield, as amended by Amendment dated as of November 14, 2014 between the Registrant and Michael R. Stanfield (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Form 8-K dated November 18, 2014).
 
 
 
10.17
 
Restricted Stock Award Agreement dated as of January 2, 2015 between the Registrant and Michael R. Stanfield (Incorporated by reference to Exhibit 10.15 filed with the Form 10-K for the year ended December 31, 2014).
 
 
 
10.18
 
Form of Performance-Based RSU Award Agreement for all Executive Officers (and certain other holders of PBRSUs) under the Intersections Inc. 2014 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1, filed with the Form 10-Q for the quarter ended June 30, 2016).
 
 
 
10.19
 
Form of RSU Award Agreement for Michael R. Stanfield under the Intersections Inc. 2014 Stock Incentive Plan for grants in 2016, 2017 and 2018 (Incorporated by reference to Exhibit 10.2, filed with the Form 10-Q for the quarter ended June 30, 2016).
 
 
 
10.20
 
Form of RSU Award Agreement for other Executive Officers (and certain other holders of RSUs) under the Intersections Inc. 2014 Stock Incentive Plan for grants in 2016 (and thereafter) (Incorporated by reference to Exhibit 10.3, filed with the Form 10-Q for the quarter ended June 30, 2016).
 
 
 
10.21
 
Nonqualified Stock Option Agreement, made on June 15, 2016, by and between Intersections Inc. and Michael R. Stanfield (Incorporated by reference to Exhibit 10.4, filed with the Form 10-Q for the quarter ended June 30, 2016).
 
 
 
10.22*
 
Nonqualified Stock Option Agreement, made on December 6, 2017, by and between Intersections Inc. and Michael R. Stanfield.
 
 
 
10.23*
 
Nonqualified Stock Option Agreement, made on December 6, 2017, by and between Intersections Inc. and Johannes Jurgens Roets.
 
 
 
14.1
 
Code of Ethics of the Registrant (Incorporated by reference to Exhibit 14.1, filed with the 2004 10-K).
 
 
 
21.1*
 
Subsidiaries of the Registrant
 
 
 
23.1*
 
Consent of RSM US LLP.
 
 
 
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.
 
 
 

42



Exhibit
Number
 
Description
101.INS*
 
XBRL Instance Document.
 
 
 
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB*
 
XBRL Taxonomy Extension Labels Linkbase Document.
 
 
 
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
*
Filed herewith.
Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission.
+
The schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Intersections Inc. undertakes to furnish supplemental copies of any of the omitted schedules or exhibits upon request by the Securities and Exchange Commission.
ITEM 16.
FORM 10-K SUMMARY
None.

43



INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
INTERSECTIONS INC.
Years Ended December 31, 2017 and 2016
 
F-2
 
F-3
F-4
F-5
F-6
F-7
F-34




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Intersections Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Intersections Inc. and its subsidiaries (the Company) as of December 31, 2017 and 2016, and the related notes, consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years then ended (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company's auditor since 2016.

McLean, Virginia
March 30, 2018
 

F-2



INTERSECTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
December 31,
 
2017
 
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
8,502

 
$
10,797

Accounts receivable, net of allowance for doubtful accounts of $34 (2017) and $15 (2016)
8,225

 
9,449

Prepaid expenses and other current assets
3,232

 
3,711

Income tax receivable
2,545

 
3,314

Deferred subscription solicitation and commission costs
1,655

 
5,050

Current assets of discontinued operations and assets held for sale

 
575

Total current assets
24,159

 
32,896

PROPERTY AND EQUIPMENT, net
11,040

 
10,611

GOODWILL
9,763

 
9,763

INTANGIBLE ASSETS, net
58

 
210

OTHER ASSETS
1,459

 
862

TOTAL ASSETS
$
46,479

 
$
54,342

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
3,498

 
$
2,000

Accrued expenses and other current liabilities
8,533

 
10,978

Accrued payroll and employee benefits
1,501

 
4,128

Commissions payable
141

 
99

Current portion of long-term debt, net

 
2,146

Capital leases, current portion
423

 
471

Deferred revenue
7,759

 
11,430

Current liabilities of discontinued operations and liabilities held for sale

 
858

Total current liabilities
21,855

 
32,110

LONG-TERM DEBT, net
20,736

 
10,092

OBLIGATIONS UNDER CAPITAL LEASES, less current portion
392

 
865

OTHER LONG-TERM LIABILITIES
2,895

 
3,436

DEFERRED TAX LIABILITY, net
7

 
1,905

TOTAL LIABILITIES
45,885

 
48,408

COMMITMENTS AND CONTINGENCIES (see Notes 15 and 16)


 


STOCKHOLDERS’ EQUITY:
 
 


Common stock at $0.01 par value, shares authorized 50,000; shares issued 28,194 (2017) and 27,303 (2016); shares outstanding 24,102 (2017) and 23,733 (2016)
282

 
273

Additional paid-in capital
150,305

 
142,247

Warrants
2,840

 

Treasury stock, shares at cost; 4,092 (2017) and 3,570 (2016)
(35,745
)
 
(33,822
)
Accumulated deficit
(117,088
)
 
(102,764
)
TOTAL STOCKHOLDERS’ EQUITY
594

 
5,934

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
46,479

 
$
54,342

 
See Notes to Consolidated Financial Statements.


F-3



INTERSECTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Year Ended December 31,
 
2017
 
2016
REVENUE
$
159,620

 
$
175,592

OPERATING EXPENSES:
 
 
 
Marketing
11,330

 
13,156

Commission
38,386

 
42,775

Cost of revenue
51,710

 
53,797

General and administrative
62,530

 
59,671

Loss on dispositions of Captira and Habits at Work
106

 

Impairment of intangibles and other assets

 
1,428

Depreciation
5,485

 
4,763

Amortization
152

 
513

Total operating expenses
169,699

 
176,103

LOSS FROM OPERATIONS
(10,079
)
 
(511
)
Interest expense, net
(2,227
)
 
(2,366
)
Loss on extinguishment of debt
(1,525
)
 

Other income (expense), net
126

 
(487
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(13,705
)
 
(3,364
)
Income tax benefit (expense) from continuing operations
1,915

 
(75
)
LOSS FROM CONTINUING OPERATIONS
(11,790
)
 
(3,439
)
Loss from discontinued operations, net of tax
(2,534
)
 
(27,030
)
NET LOSS
$
(14,324
)
 
$
(30,469
)
Basic and diluted loss per common share:
 
 
 
Loss from continuing operations
$
(0.49
)
 
$
(0.15
)
Loss from discontinued operations
(0.11
)
 
(1.16
)
Net loss per common share, basic and diluted
$
(0.60
)
 
$
(1.31
)
Weighted average common shares outstanding, basic and diluted
23,885

 
23,259

 
See Notes to Consolidated Financial Statements.

F-4



INTERSECTIONS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2017 and 2016
(in thousands)
 
 
Common Stock
 
Additional
 
 
 
Treasury Stock
 
 
 
Total
 
Shares
 
Amount
 
Paid-in
Capital
 
Warrants
 
Shares
 
Amount
 
Accumulated
Deficit
 
Stockholders’
Equity
BALANCE, DECEMBER 31, 2015
26,730

 
$
267

 
$
137,705

 
$

 
(3,494)

 
$
(33,632
)
 
$
(72,295
)
 
$
32,045

Issuance of common stock upon exercise of stock options and vesting of restricted stock units
343

 
4

 
(338
)
 

 

 

 

 
(334
)
Share based compensation

 

 
4,882

 

 

 

 

 
4,882

Issuance of common stock related to acquisition of Health at Work Wellness Actuaries LLC
230

 
2

 
(2
)
 

 

 

 

 

Withholding of restricted stock to satisfy tax withholding obligations upon the vesting of the related restricted stock

 

 

 

 
(76)

 
(190
)
 

 
(190
)
Net loss

 

 

 

 

 

 
(30,469
)
 
(30,469
)
BALANCE, DECEMBER 31, 2016
27,303

 
$
273

 
$
142,247

 
$

 
(3,570)

 
$
(33,822
)
 
$
(102,764
)
 
$
5,934

Issuance of common stock upon exercise of stock options and vesting of restricted stock units
676

 
7

 
(903
)
 

 

 

 

 
(896
)
Share based compensation

 

 
9,012

 

 

 

 

 
9,012

Issuance of common stock related to acquisition of Health at Work Wellness Actuaries LLC
215

 
2

 

 

 

 

 

 
2

Issuance of Warrant and Replacement Warrant

 

 

 
2,840

 

 

 

 
2,840

Repurchase of common stock

 

 

 

 
(419
)
 
(1,511
)
 

 
(1,511
)
Equity issuance costs

 

 
(51
)
 

 

 

 

 
(51
)
Withholding of restricted stock to satisfy tax withholding obligations upon the vesting of the related restricted stock

 

 

 

 
(103
)
 
(412
)
 

 
(412
)
Net loss

 

 

 

 

 

 
(14,324
)
 
(14,324
)
BALANCE, DECEMBER 31, 2017
28,194

 
$
282

 
$
150,305

 
$
2,840

 
(4,092)

 
$
(35,745
)
 
$
(117,088
)
 
$
594

 
 
See Notes to Consolidated Financial Statements.

F-5



INTERSECTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Year Ended December 31,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(14,324
)
 
$
(30,469
)
Loss from discontinued operations, net of tax
(2,534
)
 
(27,030
)
Loss from continuing operations
(11,790
)
 
(3,439
)
Adjustments to reconcile net loss to cash flows used in operating activities:
 

 
 

Depreciation and amortization
5,637

 
5,275

Deferred income tax, net
(1,898
)
 

Amortization of debt issuance cost
200

 
884

Accretion of debt discount
104

 

Provision for doubtful accounts
19

 
(89
)
Loss on disposal of fixed assets

 
267

Share based compensation
8,530

 
4,745

Amortization of deferred subscription solicitation and commission costs
10,326

 
12,655

Loss on disposition of Captira Analytical
130

 

Gain on disposition of Habits at Work
(24
)
 

Loss on extinguishment of debt
1,525

 

Impairment of goodwill, intangibles and other assets

 
1,428

Changes in assets and liabilities:
 
 
 

Accounts receivable
1,204

 
65

Prepaid expenses, other current assets and other assets
(91
)
 
796

Income tax receivable, net
769

 
4,415

Deferred subscription solicitation and commission costs
(6,931
)
 
(10,744
)
Accounts payable and accrued liabilities
(3,608
)
 
(8,308
)
Commissions payable
28

 
(59
)
Deferred revenue
(3,639
)
 
5,925

Other long-term liabilities
(541
)
 
(554
)
Cash flows (used in) provided by continuing operations
(50
)
 
13,262

Cash flows used in discontinued operations
(2,398
)
 
(17,183
)
Net cash used in operating activities
(2,448
)
 
(3,921
)
CASH FLOWS FROM INVESTING ACTIVITIES:


 


Cash received for the liquidating distribution of White Sky, Inc.

 
57

Net cash paid for the disposition of Captira Analytical
(315
)
 

Decrease (increase) in restricted cash
135

 
(265
)
Cash paid for withholding tax on vesting of RSUs in exchange for promissory note
(130
)
 

Proceeds from sale of property and equipment

 
394

Acquisition of property and equipment
(6,077
)
 
(5,764
)
Cash flows used in continuing operations
(6,387
)
 
(5,578
)
Cash flows provided by (used in) discontinued operations
4

 
(1,031
)
Net cash used in investing activities
(6,383
)
 
(6,609
)
CASH FLOWS FROM FINANCING ACTIVITIES:


 


Proceeds from issuance of debt
21,500

 
20,000

Repayments of debt
(13,920
)
 
(6,568
)
Repurchase of common stock
(1,511
)
 

Proceeds from issuance of warrants
2,200

 

Cash paid for debt and equity issuance costs
(322
)
 
(1,990
)
Capital lease payments
(548
)
 
(719
)
Withholding tax payment on vesting of restricted stock units
(1,244
)
 
(486
)
Net cash provided by financing activities
6,155

 
10,237

DECREASE IN CASH AND CASH EQUIVALENTS
(2,676
)
 
(293
)
CASH AND CASH EQUIVALENTS — Beginning of period
10,797

 
11,471

Cash reclassified to assets held for sale at beginning of period
381

 

Less: cash reclassified to assets held for sale at end of period

 
(381
)
CASH AND CASH EQUIVALENTS — End of period
$
8,502

 
$
10,797

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
$
1,874

 
$
1,641

Cash paid for taxes
$
9

 
$
28

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:


 


Equipment obtained under capital lease, including acquisition costs
$
202

 
$
241

Equipment additions accrued but not paid
$
22

 
$
173

Withholding tax payments accrued on vesting of restricted stock units and stock option exercises
$
27

 
$

Shares withheld in lieu of withholding taxes on vesting of restricted stock awards
$
35

 
$
39

See Notes to Consolidated Financial Statements.

F-6



INTERSECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2017 and 2016
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 products, we help protect consumers against the risks associated with the inappropriate exposure of their personal information that can result in fraudulent use or reputation damage. Identity Guard® is offered through large and small organizations as an embedded product for either its employees or consumers, as well as directly to consumers through our direct marketing efforts. In 2017, we expanded our suite of Identity Guard® and Identity Guard® with Watson products. Identity Guard® with Watson offers robust early detection of potential risks, stretching beyond credit-centric risks to include online privacy risks, and provides personalized threat alerts with actionable steps to help keep our customers’ information private from the earliest stage possible. We believe that our suite of products and services offer consumers the most proactive and comprehensive identity theft monitoring and online privacy services available on the market today.
We have ongoing operations in one other segment, Insurance and Other Consumer Services. As part of our strategy to have a singular focus on our Personal Information Services segment, we recently sold: 1) the business comprising our Bail Bonds Industry Solutions segment in January 2017; 2) our Habits at Work business, the results of which are recorded in our Personal Information Services segment, in June 2017; and 3) the business comprising our Pet Health Monitoring segment in July 2017. Corporate headquarter office transactions including, but not limited to, payroll, share based compensation and other expenses related to our Chairman and non-employee Board of Directors are reported in our Corporate business unit.
 Our Insurance and Other Consumer Services segment includes insurance and membership products for consumers, delivered on a subscription basis. We are not planning to develop new business in this segment and are experiencing normal subscriber attrition due to ceased marketing and retention efforts. Some of our legacy subscriber portfolios have been cancelled, and our continued servicing of other subscribers may be cancelled as a result of actions taken by one or more financial institutions.
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 Innovations LLC ("i4c" or "Voyce"). Voyce generated substantial losses from formation to 2016 and, after concentrated efforts, was unable to generate an acceptable level of revenue. Effective July 31, 2017, we sold Voyce to a newly-formed entity of which Michael R. Stanfield, our Executive Chairman and President, is a minority investor. The results of this segment are reported as discontinued operations in accordance with U.S. GAAP in the years ended December 31, 2017 and 2016. For additional information, please see Note 4.
Prior to January 31, 2017, our Bail Bonds Industry Solutions segment included the automated service solutions for the bail bonds industry provided by Captira Analytical LLC ("Captira"). Effective January 31, 2017, we divested our ownership in Captira. This segment’s operating results, along with the operating results of Habits at Work, have not had a major effect on our consolidated financial results and are not classified as a discontinued operation. For additional information, please see Note 4.
2.    Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared by us in accordance with U.S. GAAP and applicable rules and regulations of the Securities and Exchange Commission and in management’s opinion reflect all normal and recurring adjustments necessary for a fair presentation of results of operations, financial position and cash flows for the periods presented. They include the accounts of the Company and our subsidiaries.
In conjunction with our singular refocus on our identity and privacy protection services, we changed our policy of allocating general and administrative expenses from our Corporate business unit into our other segments, which resulted in a change in our measurement of segment profit and loss. Beginning in 2017, we directly charge our Personal Information Services segment for the majority of general and administrative expenses including executive, legal, human resources, finance and internal audit expenses. We have elected not to recast our consolidated financial statements to reflect this change for the year ended December 31, 2016. For information on the effects of the change in measurement, please see Note 20.
The information in our consolidated financial statements is presented for the years ended December 31, 2017 and 2016 giving effect to the disposal of i4c, with the historical financial results of the Voyce business reflected as discontinued operations. In accordance with U.S. GAAP, we did not allocate corporate overhead expenses to discontinued operations for the years ended December 31, 2017 or 2016. Additionally, we considered, and made the necessary adjustments to the historical financial results for,

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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 consolidated financial statements to include discontinued operations for the years ended December 31, 2017 and 2016. Unless otherwise indicated, the information in the notes to the consolidated financial statements refer only to our continuing operations and do not include discussion of balances or activity of i4c. For additional information, please see Note 4.
All intercompany transactions have been eliminated from the consolidated statements of operations. The consolidated results of operations for the interim periods are not necessarily indicative of results for the full year.
Revision to Previously Issued Financial Statements
Revenue for monthly subscriptions is recognized in the calendar month the subscription fee is earned. In 2017, we determined that our policy to recognize revenue from the sale of subscriptions should have been on a straight-line basis over the 30-day membership period, which results in a difference in the timing to recognize revenue on renewing 30-day subscriptions. As a result, to correct for the cumulative error, the December 31, 2016 consolidated balance sheet was revised by increasing current assets and current liabilities by $1.5 million and $2.9 million, respectively, and increasing accumulated deficit as of December 31, 2016 and 2015 by $1.4 million. The revision did not impact the 2016 consolidated statements of operations or cash flows. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the applicable provisions within U.S. GAAP, we concluded this misstatement was not material to any previously issued consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Restricted Cash
We classify cash as restricted when the cash is unavailable for withdrawal or usage for general operations. Our restricted cash represents cash collateral to one commercial bank for corporate credit cards and electronic payments. Restricted cash is included in prepaid expenses and other current assets in our consolidated balance sheets.
Revenue Recognition
We recognize revenue on 1) identity theft protection services, 2) insurance services and 3) other monthly membership products and transaction services.
Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees billed by our clients are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts. Subscription fees billed by us are generally billed directly to the subscriber’s credit card except for arrangements under which subscription fees are paid to us by our clients on behalf of the subscriber. The prices to subscribers of various configurations of our products and services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, our subscriptions periodically may be offered with trial, delayed billing or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed.
Identity Theft Protection Services
We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain signed contracts with all of our clients and paper and electronic confirmations with individual purchasers, b) delivery has occurred, c) the seller’s price to the buyer is fixed as sales are generally based on contract or list prices and payments from organizations are collected within 30 days with no significant write-offs, and d) collectability is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection. Revenue for monthly subscriptions is recognized on a straight-line basis over the term of the service period. We also generate revenue through a collaborative arrangement, which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement.
Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service and the service is earned over the year. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscriptions with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro-rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our historical experience. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year.

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We record revenue on a gross basis in the amount that we bill the subscriber when our arrangements provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the credit risk for the amount billed to the subscriber. We also provide services for which certain clients are the primary obligors directly to their customers. We record revenue in the amount that we bill certain clients, and not the amount billed to their customers, when our client is the primary obligor, establishes the price to the customer and bears the credit risk. Revenue from these arrangements is recognized on a monthly basis when earned, which is at the time we provide the service.
Insurance Services
We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain paper and electronic confirmations with individual purchasers, b) delivery has occurred, c) the seller’s price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectability is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized when earned.
For insurance products, we record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products.
We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance carriers are excluded from our revenues and operating expenses. Insurance premiums collected but not remitted to insurance carriers as of December 31, 2017 and 2016 totaled $340 thousand and $360 thousand, respectively, and are included in accrued expenses and other current liabilities in our consolidated balance sheets.
Other Membership Products and Transaction Services
For other membership products, we record revenue on a gross basis as we serve as the primary obligor in the transactions, have latitude in establishing price and bear credit risk for the amount billed to the subscriber.
Goodwill, Identifiable Intangibles and Other Long-Lived Assets
We record, as goodwill, the excess of the purchase price over the fair value of the identifiable net assets acquired in purchase transactions. We review our goodwill for impairment annually, as of October 31, or more frequently if indicators of impairment exist. Goodwill is reflected as an asset in our Personal Information Services and Insurance and Other Consumer Services segments’ balance sheets, resulting from our acquisitions of Health at Work Wellness Actuaries LLC ("Habits at Work") and White Sky, Inc. ("White Sky") in 2015 as well as our prior acquisition of IISI Insurance Services Inc. ("IISI"), formerly known as Intersections Insurance Services Inc., in 2006.
On January 1, 2017, we prospectively adopted ASU 2017-04, "Intangibles-Goodwill and Other." In evaluating whether indicators of impairment exist, an initial assessment of qualitative factors to determine whether it is necessary to perform the goodwill impairment test can be utilized (commonly referred to as the step zero approach). For reporting units in which the qualitative assessment concludes it is more likely than not that the fair value is more than its carrying value, the guidance eliminates the requirement to perform further goodwill impairment testing. Upon adoption of ASU 2017-04, 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 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