UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



Commission File No. 1-35206



(Exact name of registrant as specified in its charter)





Registrant’s telephone number, including area code: 917-368-8600

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



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



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

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 Exchange Act).    Yes  ☐    No ☒ 

The number of outstanding shares of the issuer’s common stock as of July 31, 2017  was as follows: 89,695,515  shares of Common stock, $.01 par value.

 

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Table of Contents

Bankrate, Inc. and Subsidiaries

Quarterly Report on Form 10-Q for the Quarter Ended June  30, 2017







 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or similar expressions that relate to our strategy, plans or intentions. All statements we make relating to our estimated and projected earnings, margins, revenues, costs, expenditures, cash flows, growth rates and financial results or to our expectations regarding future industry trends or regarding resolution of regulatory matters described in this Quarterly Report on Form 10-Q are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon certain assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known or unknown factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on, and speak only as of, the date of this report.

Important factors that could cause actual results to differ materially from our expectations, which we refer to as cautionary statements, are discussed in detail in Part I, Item 1A. “Risk Factors” in our Annual  Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC” or “Commission”) on March 22, 2017, as updated in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. All forward-looking information in this Quarterly Report on Form 10-Q and subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Some of the factors that we believe could affect our results include without limitation:

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We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q may not in fact occur. Accordingly, investors should not place undue reliance on those statements. We

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undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.





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PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements (Unaudited)



Bankrate, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

















The accompanying notes are an integral part of these condensed consolidated financial statements.







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Bankrate, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands, except share and per share data)









The accompanying notes are an integral part of these condensed consolidated financial statements.



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Bankrate, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows 

(Unaudited)

(In thousands)





The accompanying notes are an integral part of these condensed consolidated financial statements.







 

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Bankrate, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)





NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION



The Company



Bankrate, Inc. and its subsidiaries (“Bankrate” or the “Company,” “we,” “us,” “our”) own and operate an Internet-based consumer banking, personal finance and senior care network (“Online Network”). Our flagship websites, CreditCards.com,  Bankrate.com, and Caring.com are some of the Internet’s leading aggregators of information on more than 300 financial and senior care products and services, including credit cards, mortgages, deposits, and other personal finance categories. Additionally, we provide financial applications and information to a network of distribution partners.



We operate the following reportable business segments:





Basis of Presentation



The accompanying condensed consolidated financial statements include the accounts of Bankrate, Inc., and its subsidiaries. Intercompany accounts and transactions are eliminated in consolidation.  



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of our results have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, for any future interim period or for any future year.



The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s 2016 Annual Report on Form 10-K (“2016 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 22, 2017.



There have been no significant changes in the Company’s accounting policies from those disclosed in our 2016 Annual Report.



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Reclassifications



Certain amounts presented for the six months ended June 30, 2017 reflect reclassifications made to conform to the presentation in our 2016 Annual Report and our current presentation as follows: 



In 2016 we adopted ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” on a retrospective basis. In doing so, the presentation and classification of certain transactions involving cash paid for contingent acquisition consideration on our statement of cash flows for the six months ended June 30, 2016 have been retrospectively adjusted to conform to our current presentation and classification.



As disclosed in our 2016 Annual Report, in  the third quarter 2016 management revised the strategy of its Quizzle reporting unit to focus its technology resources primarily on enhancing the user experience of the products and services provided by the Banking segment through greater personalization, and realigned its management reporting structure by integrating the Quizzle operations into the Banking segment, as it was previously reported in Other. All segment results reported for the three and six months ended June 30, 2016 have been revised to reflect such change.



New Accounting Pronouncements



Recently Adopted Pronouncements



In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and to provide related footnote disclosures in certain circumstances. We adopted this guidance and it may have an impact on future disclosures to our condensed  consolidated financial statements.



In March 2016, the FASB issued ASU 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This update is intended to reduce complexity in the accounting standard and simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition, the amendments in this update eliminate the guidance in Topic 718. We adopted this guidance on January 1, 2017, as required, on a modified retrospective basis, adjusted forfeiture rates in related calculations and recorded a cumulative-effect adjustment to retained earnings (See Note 4 – Stockholders’ Equity).



In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The primary amendment of the guidance update to simplify the subsequent measurement of goodwill eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any entity in any interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We elected to early adopt this standard on January 1, 2017 and it did not have an impact on our condensed consolidated financial statements and related disclosures.



Recently Issued Pronouncements, Not Adopted as of June 30, 2017



The FASB issued several updates on Topic 606 “Revenue from Contracts with Customers”, including:



The standards provide companies with a single model for use in accounting for revenue arising from contracts with customers that supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks

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and rewards transfer to the customer under the existing revenue guidance. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, to be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We plan to adopt this guidance effective January 1, 2018, as required. We understand that the adoption of these updates have the potential to materially impact our revenue recognition process and related expenses. We have engaged a third-party to assist in our analysis and review of our contracts regarding this guidance and we are in the process of completing the analysis of the standard’s impact. We have completed our review of the standard’s impact on our Credit Cards segment, our largest revenue producing segment,  and we have not identified any provisions that we would expect to have a significant impact on how we recognize revenue and related expenses for this segment.  We are in the process of completing the analysis of this standard on our Banking and Senior Care segments,  and at this time we have not identified any provisions that we would expect to have a significant impact on how we recognize revenue and related expenses for these segments.  We are evaluating the impact of this update on our financial statement disclosures. We expect to complete our assessments prior to adoption of the guidance.



In January 2016, the FASB issued ASU 2016-01 “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This update amends some of the existing guidance related to the recognition, measurement, presentation, and disclosure of financial instruments. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures, while at this time we do not anticipate that this update will have a significant impact on our consolidated financial statements and related disclosures.



In January 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” This update will supersede the leases requirements in Topic 840, Leases, and create an additional Topic 842, which specifies the accounting for leases. The objective is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures.  



In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update requires a financial asset, or group of financial assets, measured at amortized cost basis to be presented at the net amount expected to be collected. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any entity in any interim or annual period within those fiscal years, beginning after December 15, 2018. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures.



In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for all entities in the first interim period if an entity issues interim financial statements. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures.



In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing the diversity in presentation. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This update may have an effect on our future classification of certain transactions on our consolidated statements of cash flows and related disclosures.



In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” These amendments clarify the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted under certain circumstances. The amendments should be applied prospectively as of the beginning of the period of adoption. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures.



In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718) Scope of Modification Accounting,”to provide clarity and reduce the diversity of practice and cost and complexity when applying guidance in Topic 718, Compensation-Stock Compensation, to a change in terms and conditions of a share-based payment award. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15,

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2017. Early adoption is permitted for reporting periods for which financial statements have not yet been issued. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures.





NOTE 2 – GOODWILL AND INTANGIBLE ASSETS



Goodwill activity for the six months ended June 30, 2017 is shown below:



Intangible assets consist primarily of trademarks and domain names, customer relationships, affiliate relationships and developed technologies. Intangible assets are being amortized over their estimated useful lives on a straight-line basis.



Intangible assets subject to amortization were as follows as of June 30, 2017:  





Intangible assets subject to amortization were as follows as of December 31, 2016:





Amortization expense for the three and six months ended June 30, 2017 was $9.3 million and $18.6 million, respectively, and amortization expense for the three and six months ended June 30, 2016 was $8.7 million and $17.1 million, respectively.  



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Future amortization expense for intangible assets placed into service on or before June 30, 2017 is expected to be:



















NOTE 3 – EARNINGS (LOSS) PER SHARE



We compute basic earnings (loss) per share by dividing net income (loss) for the period by the weighted average number of shares outstanding for the period. Diluted earnings (loss) per share includes the effects of dilutive common stock equivalents, consisting of outstanding stock-based awards in accordance with ASC 718, Compensation—Stock Compensation, to the extent the effect is not anti-dilutive, using the treasury stock method.



The following table presents the computation of basic and diluted earnings (loss) per share:







As we incurred a loss from continuing operations for the three and six months ended June 30, 2017 and 2016, all outstanding stock options, restricted stock awards and performance stock awards have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding for those periods. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods. The following were excluded from the calculation of diluted earnings per share because their impact would have been anti-dilutive:





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NOTE 4 – STOCKHOLDERS’ EQUITY



The activity in stockholders’ equity for the six months ended June 30, 2017 is shown below:





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NOTE 5 – SEGMENTS



The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and utilized on a regular basis by its chief operating decision maker, the Company’s chief executive officer, to assess performance and allocate resources. Management evaluates the operating results of each of the Company’s operating segments based upon revenue and “Adjusted EBITDA”, which we define as income from continuing operations before depreciation and amortization; interest; income taxes; changes in fair value of contingent acquisition consideration; stock-based compensation and other items such as loss on extinguishment of debt, legal settlements, acquisition, disposition and related expenses; restructuring charges; any impairment charges; NextAdvisor contingent deferred compensation for the acquisition; costs related to the amendment and restatement of our consolidated financial statements and other financial information, which was set forth in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “Restatement”) and related internal review, the SEC and DOJ investigations and related litigation and indemnification obligations; purchase accounting adjustments; and our operations in China as we are winding down and ceasing its operations. The Company’s presentation of Adjusted EBITDA, a non-GAAP measure, may not be comparable to similarly titled measures used by other companies.





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Segment revenues during the three and six months ended June 30, 2017 included $4.5 million and $7 million of intersegment revenue, respectively, and the three and six months ended June 30, 2016 included $1.5 million and $2.9 million of intersegment revenue, respectively. Intersegment revenue is eliminated in Other.

 

 







NOTE 6 – FAIR VALUE MEASUREMENT



Fair value, in accordance with ASC 820, Fair Value Measurement, is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Valuation techniques include the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). These valuation techniques may be based upon observable and unobservable inputs. The three levels of inputs used to measure fair value pursuant to the guidance are as follows:



Level 1—Quoted prices in active markets for identical assets or liabilities.

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Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, which includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.



Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accrued interest, the assets held in the Rabbi Trust and our Senior Notes (see Note 10 – Debt).  



The carrying amounts of cash, accounts receivable and accrued interest approximate estimated fair value due to their short term nature.  In measuring the fair value of our long term debt, we use Level 2 market information. These estimates require considerable judgment in interpreting market data, and changes in assumptions or estimation methods could significantly affect the fair value estimates.



The following table presents estimated fair value, and related carrying amounts of our Senior Notes:





We make recurring fair value measurement of contingent acquisition consideration and contingent acquisition deferred compensation liabilities using Level 3 unobservable inputs. We recognize the fair value based on its estimated fair value at the beginning period date using discounted cash flows, Monte Carlo simulations or probability weighted-expected return models. Subsequent adjustments to the fair value are due to the passage of time as we approach the payment date or changes to management’s estimates of the projected performance target. In determining the fair value, we review current results along with projected results for the remaining earnout period to calculate the expected contingent acquisition consideration and contingent acquisition deferred compensation to be paid using the agreed upon formula as laid out in the acquisition agreement. The fair value of these liabilities will be adjusted based on the change in fair value resulting from the passage of time at the applicable discount rate, or changes in the forecasted results as we approach the payment dates absent any significant changes in assumptions related to the valuation or the probability of payment.



The following tables present the fair value measurements of the assets of the non-qualified deferred compensation plan, contingent acquisition deferred compensation and the contingent acquisition consideration using the fair value hierarchy:











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The following table sets forth a reconciliation of changes in the fair value of our contingent acquisition consideration Level 3 financial liabilities:









The unobservable inputs used in determining the fair value of contingent acquisition consideration for earnout periods not yet completed include discount factor of 14.0% based on our weighted average cost of capital and projected results of the acquired businesses. In addition, we consider the cost of debt to be a significant input in the valuation of the fair value of the contingent bonus and continent acquisition consideration. We used 3.0% percent as our cost of debt in these valuations as of June 30, 2017.  The fair value calculated as of June 30, 2017 is subject to sensitivity as it relates to the projected results of the acquired businesses, which are uncertain in nature. Each calculation is based on a separate formula and results that differ from our projections could impact the fair value significantly.



During the six months ended June 30, 2017, we recorded an expense of $40.1 million for the change in fair value of contingent acquisition consideration, which consists of an increase of approximately $38.9 million due to a change in estimate for revised forecasted results and probability of achievement, and an increase of approximately $1.3 million related to the passage of time. As of June 30, 2017, the possible contingent acquisition consideration payouts from our acquisition ranges from zero to $134.1 million, depending on the achievement of certain Adjusted EBITDA targets by the acquired operations. This liability is recorded on the condensed consolidated balance sheet in other current liabilities at June 30, 2017 and in other liabilities at December 31, 2016.



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The following table sets forth a reconciliation of changes in the fair value of our contingent acquisition deferred compensation Level 3 financial liabilities:









The fair value of the contingent acquisition deferred compensation is based on the achievement of certain Adjusted EBITDA targets, and is tied to the participant’s employment. During the six months ended June 30, 2017, we recorded an expense of approximately $3.2 million for the change in fair value of contingent acquisition deferred compensation, which consists of increases of approximately $2.1 million related to a change in estimate for revised forecasts and probability of achievement, and $1.1 million related to the passage of time. As of June 30, 2017, the possible contingent acquisition deferred compensation payout ranges from zero to $11.7 million, depending on the achievement of certain Adjusted EBITDA targets. This liability is recorded on the condensed consolidated balance sheet in other current liabilities at June 30, 2017 and in other liabilities at December 31, 2016.



 





NOTE 7 – STOCK-BASED COMPENSATION



The Company’s stock-based compensation program is a long-term retention program that is intended to attract, retain and provide incentives for directors, officers and employees in the form of awards of non-qualified stock options, restricted stock and performance-based restricted shares or units. Stock unit awards entitle the holder to receive shares of common stock of the Company upon vesting on a one-to-one basis. The Company typically settles stock based awards with treasury shares. As of June 30, 2017, approximately 5.0 million shares were available for future grants of awards under the plan.



The stock-based compensation expense for stock options, restricted stock and performance stock awards recognized in our condensed consolidated statements of comprehensive income (loss) are as follows:







Stock-based compensation expense for the three and six months ended June 30, 2017 includes $282,000 and $819,000, respectively, and for the three and six months ended June 30, 2016 includes $213,000 and $366,000, respectively, of expense related to performance-based restricted share grants that are classified as a liability until the number of shares is determinable and granted. This amount is included in the performance-based restricted share expense discussed below. These grants vest 50% on their determination dates and 50% on the first anniversary of their determination dates. During the second quarter 2017, a portion of these performance-based restricted share grants became determinable and are no longer classified as a liability.





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Stock-based compensation expense, by award type, recognized in our condensed consolidated statements of comprehensive income (loss) is as follows:





Restricted Stock



The following table summarizes restricted stock award activity for the six months ended June 30, 2017:







The total fair value of restricted stock awards that vested during the six months ended June 30, 2017 was $6.2 million.  



As of June 30, 2017, there was unrecognized compensation cost related to non-vested restricted stock awards of $4.2 million, which is estimated to be recognized over a weighted average period of 0.8 years.



Restricted Stock Units



During the six months ended June 30, 2017, restricted stock units were awarded that vest ratably over a three year period following the date of the grant.







The total fair value of restricted stock units that vested during the six months ended June 30, 2017 was $7.0 million.



As of June 30, 2017, there was unrecognized compensation cost related to non-vested restricted stock units of $28.1 million, which is expected to be recognized over an estimated weighted average period of 1.5 years.



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Performance-based Restricted Shares



Performance-based restricted shares activity was as follows for the six months ended June 30, 2017:







The total fair value of performance-based restricted shares that vested during the six months ended June 30, 2017 was $2.6 million.



As of June 30, 2017, there was unrecognized compensation expense related to non-vested performance stock awards, including grants classified as liability awards where the number of shares is not yet determinable, of $1.6 million, which is expected to be recognized over an estimated weighted average period of 1.3 years.



Performance-based Restricted Stock Units



During 2017, performance-based restricted stock units were awarded that vest based upon a performance factor, which is equal to a measure of the Company’s profitability over a 2 year period with 50% vesting on the determination date, which will be the date on which the audit of the Company’s financial statements for its fiscal year 2018 is completed, and 50% on the third anniversary of the grant date. The granted amount represents the target amount of performance-based restricted stock units to be awarded. The amount awarded is determined based on the Company’s financial performance metric, Adjusted EBITDA. The total number of performance-based restricted stock units earned based on the financial performance metric can range from 0% to 150% of the target amount.



In 2016, performance-based restricted stock units were awarded that vest based upon a performance factor, which is equal to a measure of the Company’s profitability over a 2 year period and multiplied by a total shareholder return factor achieved by the Company relative to a determined peer group, with 50% vesting on the determination date, which will be the later of (i) the date on which the audit of the Company’s financial statements for its fiscal year 2017 is completed and (ii) the date on which the final calculation of the relative total shareholder return factor is made by the Compensation Committee of the Board of Directors; and 50% on the third anniversary of the grant date. The granted amount represents the target amount of performance-based restricted stock units to be awarded. The amount awarded is determined based on the Company’s financial performance metric, Adjusted EBITDA. The total number of performance-based restricted stock units earned based on the financial performance metric can range from 0% to 150% of the target amount. The total shareholder return factor could further adjust the number of performance-based restricted stock units earned by a maximum increase or decrease of 25%.  



The grant date fair value of the 2016 performance-based restricted stock units incorporates a total-stockholders return metric, which is estimated using a Monte Carlo simulation model to estimate the Company’s ranking relative to an applicable stock index of peers. The weighted average assumptions used in the Monte Carlo simulation model to calculate the fair value of the Company’s 2016 performance-based restricted stock unit awards are outlined below:





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Performance-based restricted stock unit activity was as follows for the six months ended June 30, 2017:





As of June 30, 2017, there was unrecognized compensation expense related to non-vested performance-based restricted stock units of $11.7 million, which is expected to be recognized over an estimated weighted average period of 2.0 years.



Stock Options



Stock option activity was as follows for the six months ended June 30, 2017:









Approximately 34,000 stock options vested during the six months ended June 30, 2017.



The following table summarizes our options outstanding and options currently exercisable:







The aggregate intrinsic value of stock options outstanding in the tables above is calculated as the difference between the closing price of Bankrate’s common stock on the last trading day of the reporting period ($12.85 at June 30, 2017) and the exercise price of the stock options multiplied by the number of shares underlying options with an exercise prices less than the closing price on the last trading day of the reporting period.



As of June 30, 2017, approximately $128,000 of total unrecognized compensation costs related to non-vested stock option awards is expected to be recognized over an estimated weighted average period of 0.1 years.

 

 

NOTE 8 – INCOME TAXES



We calculate our income tax provision for interim periods based on two components: (i) the estimate of the annual effective tax rate and (ii) the existence of any interim period (i.e., discrete) events. The difference between income tax expense computed at the statutory rate and the reported income tax expense during the six months ended June 30, 2017 and 2016 is primarily due to a discrete tax charge related to share-based awards and the effect of U.S. state income taxes.



Our effective tax rate on continuing operations was a benefit of 28.5% during the six months ended June 30, 2017, compared to a benefit of 8.5% during the six months ended June 30, 2016. The change in our effective tax rate during the six months ended June 30,

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2017 is primarily attributed to a higher discrete tax charge related to share-based awards and the tax non-deductibility of the GAAP goodwill impairment charge over a loss before tax in 2016.



We have approximately $5.8 million and $5.6 million of unrecognized tax benefits at June 30, 2017 and December 31, 2016, respectively, including accrued interest and penalties.



We are subject to income taxes in the U.S. federal jurisdiction, various states, and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2012.  



On June 6, 2017, the State of California Franchise Tax Board notified us of an examination into the 2015 tax year.



We accrued approximately $26,000 and $51,000 during the three and six months ended June 30, 2017, respectively, and approximately $21,000 and $28,000 during the three and six months ended June 30, 2016, respectively, for the payment of interest and penalties which is recorded as income tax expense.



During the six months ended June 30, 2017, we recorded an additional reserve for uncertain tax positions in the amount of $149,000. 





NOTE 9 – COMMITMENTS AND CONTINGENCIES



Legal Proceedings



From time to time, the Company is party to litigation and regulatory matters and claims. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability will be incurred and the amount or range of the loss can be reasonably estimated. The results of complex proceedings and reviews are difficult to predict and the Company’s view of these matters may change in the future as events related thereto unfold. Except as otherwise stated, we have concluded that we cannot estimate the reasonably possible loss or range of loss, including reasonably possible losses in excess of amounts already accrued, for each matter disclosed below. An unfavorable outcome to any legal or regulatory matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of operations.



BanxCorp Litigation



In July 2007, BanxCorp, an online publisher of rate information provided by financial institutions with respect to various financial products, filed suit against the Company in the United States District Court for the District of New Jersey alleging violations of Federal and New Jersey State antitrust laws, including the Sherman Act and the Clayton Act. BanxCorp has alleged that it has been injured as a result of monopolistic and otherwise anticompetitive conduct on the part of the Company and is seeking approximately $180 million in compensatory damages, treble damages, and attorneys' fees and costs. In October 2012, BanxCorp filed a Seventh Amended Complaint, alleging violations of Section 2 of the Sherman Act, Section 7 of the Clayton Act and parallel provisions of New Jersey antitrust laws, and dropping its claims under Section 1 of the Sherman Act. Discovery closed on December 21, 2012 and both parties filed motions in the first quarter of 2013 seeking summary judgment that are pending before the court. The Company will continue to vigorously defend this lawsuit. The Company cannot presently estimate the amount of loss, if any, that would result from an adverse resolution of this matter.



DOJ Investigation



As previously reported, the DOJ has informed the Company that it is investigating the matters that were the subject of the SEC investigation settled by the Company in 2015. It is not possible to predict when the DOJ investigation will be completed, the final outcome of the investigation, and what if any actions may be taken by the DOJ.



CFPB Investigation



The Company and certain of its employees previously received Civil Investigative Demands (CIDs) from the CFPB to produce certain documents and answer questions relating to the Company’s quality control process for its online mortgage rate tables. The Company has cooperated in responding to the CIDs. In late 2015, the Company received a communication from the CFPB inviting the Company to respond to the CFPB’s identified issues in the form of a Notice of Opportunity to Respond and Advise during which the CFPB identified potential claims it might bring against the Company. In early 2016, the Company submitted a response that it believed addressed the CFPB’s issues with respect to the Company’s online mortgage rate tables and its quality control processes. In July 2017, 

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the CFPB informed the Company that the investigation has been completed and the staff of the CFPB’s Office of Enforcement currently does not intend to recommend that the CFPB take enforcement action.



In addition to the above, we are also involved in other litigation and regulatory matters and claims that arise in the ordinary course of business and although we cannot be certain of the outcome of any such litigation or claims, nor the amount of damages and exposure that we could incur, we currently believe that the final disposition of such matters will not have a material effect on our business, financial position, results of operations or cash flow. Regardless of the outcome, litigation and regulatory matters can have an adverse impact on us because of investigative, defense or settlement costs, diversion of management resources and other factors.

 



NOTE 10 – DEBT



Senior Notes



The Company’s $300.0 million 6.125% senior unsecured notes due 2018 (the “Senior Notes”) were issued in August 2013. Interest on the Senior Notes accrues daily on the outstanding principal amount thereof and is payable semi-annually, in arrears, on August 15 and February 15. On or after August 15, 2015, the Company may redeem some or all of the Senior Notes at a premium that will decrease over time as set forth in Bankrate, Inc.’s Indenture, dated as of August 7, 2013 (the “Senior Notes Indenture”).



We amortize original issue discount and deferred loan fees related to the Senior Notes, which are included within interest and other expenses, net on the accompanying condensed consolidated statements of comprehensive income (loss). Interest expense, amortization of original issue discounts and amortization of deferred financing costs, related to the Senior Notes were as follows:







The following amounts remain to be amortized: 







Revolving Credit Facility



The Company has  a $70.0 million revolving credit facility (“Revolving Credit Facility”),  which matures on May 17, 2018. The proceeds can be used for ongoing working capital requirements and other general corporate purposes, including the financing of capital expenditures and acquisitions.



Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at our option, either (i) an alternate base rate (as defined in the Revolving Credit Facility) or (ii) an adjusted LIBO rate (as defined in the Revolving Credit Facility), each calculated in a customary manner, plus applicable margin. The applicable margin is 3.00% per annum with respect to alternate base rate loans and 2.00% per annum with respect to adjusted LIBO rate loans. In addition to paying interest on the outstanding principal amount of borrowings under the Revolving Credit Facility, we must pay a commitment fee to the Lenders in respect of their average daily unused amount of revolving commitments at a rate that ranges from 0.375% to 0.50% per annum depending on our consolidated total leverage ratio. We may voluntarily prepay loans under the Revolving Credit Facility at any time without premium or penalty (subject to customary “breakage” fees in the case of Eurodollar rate loans).



The Credit Agreement contains customary affirmative and negative covenants and events of default and requires the Company to comply with a maximum consolidated total leverage ratio of 4.00:1.00 as of the last day of any fiscal quarter only if the aggregate amount (without duplication) of letters of credit (other than letters of credit that are issued and not drawn to the extent such letters of credit are cash collateralized) and loans outstanding under the Revolving Credit Facility exceed, on a pro forma basis, 30% of the total revolving commitments of all Lenders at such time. We were in compliance with all required covenants as of June 30, 2017.

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All obligations under the Credit Agreement are guaranteed by the Guarantors and are secured, subject to certain exceptions, by first priority liens on the assets of the Company and the Guarantors.



As of June 30, 2017 $69.4 million was available for borrowing under the Revolving Credit Facility and there were approximately $593,000 in letters of credit issued against the facility. 



We amortize deferred financing costs related to the Revolving Credit Facility, which is included within interest and other expenses, net on the accompanying condensed consolidated statements of comprehensive income (loss). Interest expense and amortization of deferred financing costs related to the Revolving Credit Facility were as follows:







Deferred financing costs remaining to be amortized:













NOTE 11 – ACQUISITION 



2016 Acquisition



In  June 2016, we completed the acquisition of certain assets of Next Advisor, Inc. (the “Acquired NextAdvisor Business”),  an online source of research and reviews of credit cards, personal finance and internet services. The acquisition is accounted for as a business combination and was made to accelerate our business, broaden our reach and increase ways to engage consumers looking for credit cards. The results of operations of the Acquired NextAdvisor Business are being reported in our Credit Cards segment and are included in our condensed consolidated results from the acquisition date.



The Company paid $63.4 million at closing, recorded $37.3 million of deferred contingent consideration, and placed $11.9 million into escrow as a  deferred payment and to serve as recourse for indemnity obligations. An additional $1.3 million was paid to the seller subsequent to the closing date, related to net working capital adjustments. The deferred payment is recorded in other assets and is being amortized into compensation expense over the period earned. As of June 30, 2017, approximately $7.9 million has been paid from escrow to the seller. 



The transaction called for cash consideration as well as contingent payments based on levels of Adjusted EBITDA achieved.  We have estimated contingent payments, which are classified as purchase consideration if made or due to the seller and as compensation if made to current employees. As part of the purchase price, the Company recorded a $37.3 million liability on the date of acquisition for the deferred contingent consideration due to seller based upon the net present value of the Company’s estimate of the future payments. Subsequent measurements are made using the same methodology. This fair value measurement represents a Level 3 measurement as it is based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date. Subsequent changes to the fair value of the contingent acquisition consideration are recorded as changes in fair value of contingent acquisition consideration, see Note 6 – Fair Value Measurement.



We recorded approximately $67.9 million in goodwill, which reflects the adjustments necessary to allocate the purchase price to the fair value of the assets acquired and the liabilities assumed and represents the expected future economic benefits from future growth arising from the Acquired NextAdvisor Business’s scale and expertise in driving traffic via sponsored content,  benefits expected from using that expertise to drive traffic to other Bankrate-owned websites and future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. We expect goodwill will be deductible for income tax purposes. The valuations used to determine the estimated fair value of the intangible assets and the resulting goodwill in the purchase price allocation principally use the discounted cash flow methodology and were made concurrent with the effective date of the acquisition. Intangible assets including trademarks and internet domain name, customer relationships, and the non-compete covenant were valued using the income approach, and the developed technology was valued using cost methodology. Approximately $30.0 million was

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recorded as intangible assets consisting of customer relationships for $22.2 million, trademarks and internet domain name for $6.2 million, non-compete covenant for $1.4 million and developed technology for $150,000. The current assets and receivables acquired and the current liabilities assumed were recorded at cost which approximated fair value.



The following table presents the June 30, 2017, fair value of assets acquired and liabilities assumed at the acquisition date:





Included in the amounts disclosed and the table above are adjustments recorded subsequent to the acquisition for approximately $1.5 million, primarily for post-closing working capital adjustments and changes in the valuation of acquired assets.



The estimated weighted average amortization periods for intangible assets recorded in the acquisition are as follows:







The amounts of revenue and net income generated by the Acquired NextAdvisor Business included in our Condensed Consolidated Statement of Comprehensive Income (Loss) for the six months ended June 30, 2017 are approximately $42.8 million and $11.1 million, respectively. These amounts include both results from existing NextAdvisor operations and revenue and net income on CreditCards.com which resulted from content marketing managed by NextAdvisor. We record stock-based compensation expense, contingent acquisition expense, contingent deferred compensation expense and income tax expense at the consolidated level and do not allocate these expenses to the businesses.



Unaudited pro forma revenue, net income, weighted average shares and net loss of the Company, assuming the Acquired NextAdvisor Business occurred January 1, 2016, for the three and six months ended June 30, 2016:







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NOTE 12 – RESTRUCTURING



During April 2017 management implemented a restructuring initiative to exit the print product sales channel and drive increased efficiencies by better aligning resources with strategic objectives. The initiative will reduce headcount and consolidate functions and locations. During the three months ended June 30, 2017, as part of this process, we have formally communicated the termination of employment to approximately 40 employees and as of June 30, 2017 approximately 20 employees have been separated from service. We expect to incur costs of approximately $2.0 million as part of this process, inclusive of (i) approximately $800,000 for termination costs, including severance and retention expenses, (ii) approximately $900,000 for facility closure costs and (iii) approximately $300,000 for the acceleration of amortization of certain assets, of which, approximately $1.4 million is expected to be settled in cash. This initiative is expected to be completed by December 31, 2017. During the three months ended June 30, 2017, we incurred $669,000 in restructuring expense related to severance, retention and other personnel related expenses, and $201,000 within amortization expense for the acceleration of intangible assets.



The following table summarizes the changes to our restructuring liabilities and identifies the amounts recorded within our reporting segments for restructuring charges and corresponding payments:







 

NOTE 13 – DISCONTINUED OPERATION



During the three and six months ended June 30, 2016, we had $353,000 of net income and $86,000 of a loss, respectively, in discontinued operations related to the December 2015 disposal of our former Insurance business. This activity primarily relates to reimbursements from some states for previous sales tax remittances, and legal and other post-closing expenses.  









 NOTE 14 – SUBSEQUENT EVENTS



Proposed Merger with Red Ventures



As previously announced, on July 2, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Red Ventures Holdco, LP, a North Carolina limited partnership (“Red Ventures”), and Baton Merger Corp., a Delaware corporation and an indirect wholly owned subsidiary of Red Ventures (“Merger Sub”).



The Merger Agreement provides, among other things and subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and as a wholly owned subsidiary of Red Ventures. The Merger Agreement provides that each share of common stock, par value $0.01 per share, of the Company (“Common Stock”) outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares of Common Stock owned by the Company, Red Ventures, Merger Sub or any wholly owned subsidiary of the Company and shares of Common Stock owned by stockholders of the Company who properly demand and do not withdraw a demand for, or lose their right to, appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware) will at the Effective Time automatically be cancelled and converted into the right to receive $14.00 in cash, without interest (the “Merger Consideration”).



The Company’s Board of Directors has unanimously approved and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Merger. The obligation of the parties to complete the Merger is subject to customary closing conditions, including, among others, (i) the adoption of the Merger Agreement by a majority of outstanding shares of Common Stock entitled to vote thereon (the “Company Stockholder Approval”), (ii) the expiration or earlier termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the absence of any law, order or injunction of a court or governmental entity of competent jurisdiction prohibiting the consummation of the Merger, (iv) the accuracy of the representations and warranties contained in the Merger Agreement (subject to certain qualifications), (v) the performance by the

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parties of their respective obligations under the Merger Agreement in all material respects and (vi) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) after the date of the Merger Agreement.



Red Ventures has obtained debt financing commitments for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses. The obligations of the lenders to provide debt financing under the debt commitment letter are subject to customary conditions.



The Merger Agreement contains certain termination rights, including the right of either party to terminate the Merger Agreement if the Merger is not consummated on or before December 21, 2017 or if the Company Stockholder Approval is not obtained at a meeting of the Company’s stockholders at which a vote on the adoption of the Merger Agreement is taken, the right of the Company to terminate the Merger Agreement if Red Ventures fails to consummate the Merger following satisfaction or waiver of the conditions to Red Ventures’ obligation to consummate the Merger and completion of a specified marketing period for Red Ventures’ debt financing, and the right of Red Ventures to terminate the Merger Agreement if the Company’s Board of Directors effects a Change of Recommendation (as defined in the Merger Agreement). The Merger Agreement provides that, upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Red Ventures a termination fee of approximately $37.7 million. The Merger Agreement further provides that Red Ventures will be required to pay the Company a termination fee of approximately $87.9 million if the Merger Agreement is terminated under specified circumstances.



The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of such agreement, which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2017.



In connection with the execution of the Merger Agreement, Red Ventures entered into a voting agreement (the “Voting Agreement”) with Ben Holding S.à r.l., a stockholder of the Company. Subject to the terms and conditions set forth therein, Ben Holding S.à r.l. has agreed, among other things, to vote the shares of Common Stock over which it has voting power in favor of the adoption of the Merger Agreement and the transactions contemplated thereby, including the Merger, against alternative acquisition proposals, and against any other action or agreement that would reasonably be expected to result in a material breach of the Merger Agreement by the Company or prevent, materially impair or materially delay the consummation of the Merger. The aggregate number of shares covered by the voting obligations set forth in the Voting Agreement shall automatically be reduced (on a pro rata basis with each other stockholder of the Company who executes a similar voting agreement with Red Ventures in connection with the Merger Agreement and the transactions contemplated thereby, if any) to the extent necessary in order that the aggregate number of shares subject to the Voting Agreement, together with all other shares of Common Stock subject to such other voting agreements, if any, represents no more than 39.9% of the shares of Common Stock outstanding and entitled to vote. The Voting Agreement also contains certain restrictions on the transfer of shares of Common Stock by Ben Holding S.à r.l. The Voting Agreement will terminate upon the earlier of the consummation of the Merger, the termination of the Merger Agreement in accordance with its terms or a Change of Recommendation by the Company’s Board of Directors in connection with a Superior Proposal (as defined in the Merger Agreement) pursuant to the Merger Agreement.



The foregoing description of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of such agreement, which is attached as Exhibit A to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2017.



Approximately $2.0 million in deal costs have been accrued to date in the third quarter 2017 in connection with the pending Merger.















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



You should read the following discussion of our results of operations and financial condition with the financial statements and related notes included elsewhere in this Quarterly Report and with our 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “2016 Annual Report”). The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and that involve numerous risks and uncertainties, including, but not limited to, those described in the “Cautionary Statement Concerning Forward-Looking Statements” section of this Quarterly Report on Form 10-Q and in the materials referenced therein. Actual results may differ materially from those contained in any forward-looking statements. See “Cautionary Statement Concerning Forward-Looking Statements.”



Introduction



Our Company



We are a leading publisher, aggregator and distributor of personal finance content on the Internet. We provide consumers with proprietary, fully researched, comprehensive, independent and objective personal finance editorial content across multiple vertical categories including credit cards, mortgages, deposits, senior care and other personal finance categories.



Our sources of revenue include performance-based advertising, lead generation, display advertising, distribution arrangements and traditional media avenues, such as the syndication of editorial content and subscriptions.



Primarily through our CreditCards.com brand and our other owned and operated sites, we provide free credit card marketplaces for consumers seeking a new, different or better credit card. Our credit card marketplaces provide consumers with free content, tools, applications, credit scores, card matching services and comparisons of numerous credit card offers. Via these credit card offers that are largely clicked on by consumers, we provide consumer inquiries to credit card issuers and principally record revenue after the credit card issuers approve the consumer’s credit card application.



Primarily through our Bankrate.com brand, we provide consumer inquiries to advertisers that are listed in our mortgage and deposit rate tables and that hyperlink their listings or provide a phone number. Under this arrangement, advertisers pay Bankrate each time a consumer clicks on that advertiser's hyperlink or calls the phone number. All clicks and calls are screened for fraudulent characteristics in accordance with Interactive Advertising Bureau advertising standards by an independent third party vendor and then charged to the customer’s account. Through our Quizzle.com brand, we provide consumers with tools, services and content that includes credit monitoring, identity theft protection, debt management, credit reports and credit scores, budget planning and credit management techniques.



Primarily through our Caring.com brand, we provide helpful caregiving content, a comprehensive online senior living community directory for the United States, and telephone support and advice from trained Family Advisors to consumers looking for senior care options as well as thousands of original articles, helpful tools, a local directory covering a wide array of other senior caregiving services, and the collective wisdom of an involved online community.



We provide a variety of digital display advertising formats. Our most common digital display advertisement sizes are leader boards and banners, which are prominently displayed at the top, bottom or side rails of a page. We charge for these advertisements based on the number of times the advertisement is displayed or based on a fixed amount for a campaign. Advertising rates may vary depending upon the product areas targeted, geo-targeting, the quantity of advertisements purchased by an advertiser, and the length of time an advertiser runs an advertisement on our online network. We sell to advertisers targeting a specific audience in a city or state and also to national advertisers targeting the entire country.



We also derive revenue through the sale of print advertisements and the distribution (or syndication) of our editorial content.



We operate the following reportable segments:





Executive Summary



During 2017:





On July 2, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Red Ventures Holdco, LP, a North Carolina limited partnership, and Baton Merger Corp., a Delaware corporation and an indirect wholly owned subsidiary of Red Ventures (see Note 14 – Subsequent Events of the Notes to the Condensed Consolidated Financial Statements). The following discussion excludes any impact that may result from the Merger Agreement or the transactions contemplated thereby.



Certain Trends Influencing Our Business



Our business benefits from the secular shift toward consumer use of the Internet to research and shop for personal finance products coupled with increased consumer interest in comparison shopping for such products, and the related shift in advertiser demand from offline to online and toward the targeting of in-market consumers. Our ability to benefit from these trends depends on the strength of our position in the personal finance services markets driven by our brands, proprietary and aggregated content, breadth and depth of personal finance products, distribution, position in search results and monetization capabilities. The key drivers of our business include the number of in-market consumers visiting our online network, the number of page views they generate, the availability of financial products and the demand of our online network advertisers, each of which are correlated to general macroeconomic conditions in the United States. We believe that increases in housing activity and general consumer financial activity and fluctuations in interest rates positively impact these drivers while decreases in these areas, or a deterioration in macroeconomic conditions, could have a negative impact on these drivers.



Key Initiatives



We are focused on the following key initiatives to drive our business:





Critical Accounting Policies



Critical Accounting Estimates



The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenue and expenses during the period. We base our judgments, estimates and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies or estimates during the six months ended June 30, 2017 as compared to the critical accounting policies and estimates disclosed in management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K dated March 22, 2017 and filed with the SEC, except as updated in Note 1 in Notes to the Condensed Consolidated Financial Statements.



Recent Accounting Pronouncements



See Note 1 in Notes to Condensed Consolidated Financial Statements.



Results of Operations



Our chief operating decision maker, the Company’s Chief Executive Officer, manages, assesses performance and allocates resources for our businesses based upon separate financial information for each of our operating segments (see Note 5 to our Condensed Consolidated Financial Statements for further information). In identifying the reportable segments, we also considered the nature of the services provided by our operating segments and other relevant factors. Senior Care does not meet the quantitative thresholds for a reportable segment, however management believes that information about the segment should be separately disclosed as it is useful to the readers of the consolidated financial statements.



As described in our 2016 Annual Report, in the third quarter 2016, management revised the strategy of our Quizzle reporting unit to focus its technology resources primarily on enhancing the user experience of the products and services provided by the Banking segment through greater personalization, and realigned its management reporting structure by integrating the Quizzle operations into the Banking segment from Other.  All segment results reported for the three and six months ended June 30, 2016 have been revised to reflect such change.



Management evaluates the operating results of each of the Company’s operating segments based upon revenue and “Adjusted EBITDA”, which we define as income from continuing operations before depreciation and amortization; interest; income taxes; changes in fair value of contingent acquisition consideration; stock-based compensation and other items such as loss on extinguishment of debt, legal settlements, acquisition, disposition and related expenses; restructuring charges; any impairment charges; NextAdvisor contingent deferred compensation for the acquisition; costs related to the Restatement and related internal review, the SEC and DOJ investigations and related litigation and indemnification obligations; purchase accounting adjustments; and our operations in China as we are winding down and ceasing its operations. The Company’s presentation of Adjusted EBITDA, a non-GAAP measure, may not be comparable to similarly titled measures used by other companies.



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The following table displays our results for the respective periods expressed as a percentage of total revenue.









Three months ended June 30, 2017 compared to June 30, 2016



Revenue



Total revenue was $115.9 million and $98.3 for the three months ended June 30, 2017 and 2016, respectively, representing an increase of $17.6 million or 17.9%. Credit Cards segment revenue increased $9.2 million, Banking segment revenue increased $10.9 million and Senior Care segment revenue increased $775,000, while revenue in Other decreased $3.3 million. See our Segment results of operations discussion for further information.



Cost of Revenue



Cost of revenue for the three months ended June 30, 2017 of $64.4 million was $11.6 million higher than the same period in 2016, primarily attributed to the inclusion of NextAdvisor for the full three month period, with higher paid marketing expense of $15.6 million, higher employee compensation,  benefits and incentive compensation expense of $1.7 million, higher stock based compensation of $289,000 and other costs, partially offset by lower distribution payments to our online partners of $6.1 million as a result of lower affiliate revenue and $111,000 lower information technology spend.



Sales and Marketing



Sales and marketing expenses for the three months ended June 30, 2017 of $5.3 million increased $1.3 million from prior year, primarily due to $691,000 increased professional and consulting fees, and other costs, and $623,000 increased salaries, benefits, commissions and other employee costs.

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Product Development and Technology



Product development and technology costs for the three months ended June 30, 2017 of $8.9 million were approximately $1.4 million higher than the comparable period in 2016, primarily due to $1.5 million of higher total employee costs, including compensation, benefits and incentive compensation and $291,000 increased stock compensation expense, partially offset by a $251,000 decrease in consulting and professional fees and a $101,000 decrease in technology spend.



General and Administrative



General and administrative expenses for the three months ended June 30, 2017 of $23.9 million were $3.9 million higher than the same period in 2016, due primarily to $3.4 million of higher compensation and benefit costs, which includes $2.8 million increased contingent compensation expense due to NextAdvisor employees, $2.1 million higher stock compensation expense, $413,000 in higher expenses related to the Restatement and related internal review, the SEC and DOJ investigations and related litigation and indemnification obligations, partially offset by $1.4 million lower consulting and professional fees and temporary staff costs primarily related to accounting and legal and  $573,000 decreased information technology costs.



Legal Settlements



During the three months ended June 30, 2016, we recorded a $20.0 million expense for a proposed settlement of the private securities class action lawsuit. Approximately $13.8 million of the settlement was funded from insurance proceeds during the third quarter 2016.



Acquisition, disposition and related expenses



Acquisition, disposition and related expenses for the three months ended June 30, 2017 were $240,000, related to the previously announced July 2, 2017 merger agreement with Red Ventures, and for the three months ended June 30, 2016 were $1.3 million, primarily related to our acquisition of the Next Advisor business.



Changes in Fair Value of Contingent Acquisition Consideration



Changes in fair value of contingent acquisition consideration for the three months ended June 30, 2017 was an expense of $27.3 million related to an increase of $26.5 million for a change in estimate related to current results, revised forecasted results and the probability of achievement, and an increase of $806,000 for the passage of time.



Changes in fair value of contingent acquisition consideration for the three months ended June 30, 2016 was $263,000 due to the passage of time.



Depreciation and Amortization



Depreciation and amortization expense for the three months ended June 30, 2017 of $10.9 million was $192,000 lower than the same period in 2016 primarily as a result of accelerated depreciation of capitalized internally developed software in 2016, partially offset by additional amortization expense in connection with our acquisition.



Restructuring



During the second quarter 2017, management implemented a restructuring initiative to exit our print business and drive increased efficiencies by better aligning resources with strategic objectives. The initiative will reduce headcount and consolidate functions and locations. During the three months ended June 30, 2017, we incurred $669,000 related to severance, retention and other personnel related expenses.



Impairment



During the three months ended June 30, 2016, we recorded $25.0 million for the impairment of goodwill in our Banking segment as management noted that the operating results of this segment had begun to track below plan, primarily due to macro trends impacting its deposit and display advertising businesses which resulted in a triggering event for impairment testing.



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Interest expense



Interest expense for the three months ended June 30, 2017 and 2016 was $5.4 million, respectively.



Interest income and other, net



Interest income and other, net for the three months ended June 30, 2017 was an expense of $265,000, a  decrease of  $691,000 from income of $426,000 for the same period in 2016, due primarily to foreign exchanges loss realized in the quarter.



Income Tax Expense



Our effective tax rate was a benefit of 25.8% during the three months ended June 30, 2017 compared to a benefit of 15.3% in the same period in 2016. The change in our effective tax rate during the three months ended June 30, 2017 is primarily attributed to a higher discrete tax charge related to share-based awards and the tax non-deductibility of the GAAP goodwill impairment charge over a loss before tax in 2016.







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Credit Cards



Revenue increased $9.2 million (13.3%) for the three months ended June 30, 2017 compared with 2016, and was attributable to the results of the NextAdvisor business acquired during the second quarter of 2016. Excluding the impact of NextAdvisor, Credit Cards consumer inquiry volume declined 2.0% year-over-year, while revenue per consumer inquiry declined 13.6%. The decline in revenue per consumer inquiry reflects lower conversion of consumer inquiries into approved credit cards.

 

Adjusted EBITDA increased $421,000 (1.7%) for the three months ended June 30, 2017 compared with 2016. Expenses included in Adjusted EBITDA increased $8.8 million from the prior year period, primarily due to inclusion of NextAdvisor’s expenses for the full period in the current year. Cost of revenue increased  $5.4 million, mainly related to increased paid marketing expense and investment in social media spend, partially offset by lower affiliate revenue share payments resulting from lower affiliate revenue. Sales and marketing expense increased $1.4 million, primarily due to consulting and professional fees, employee compensation, benefits and corporate marketing costs. Product development and technology cost increased by $1.0 million primarily due to increased development spend related to website redesign. General and administrative expenses were $1.1 million higher, mainly attributed to the increase in expenses for the addition of NextAdvisor.



Banking



Revenue increased $10.9 million  (45.7%) for the three months ended June 30, 2017 compared with 2016. Of the total revenue increase, consumer inquiry revenues generated through our rate tables increased by $6.9 million (43.1%) due primarily to advertiser demand in our deposit and mortgage verticals compared to the prior year. Consumer inquiry volume increased 58.6%  primarily due to growth in our deposit and mortgage verticals while overall unit pricing was 9.8% lower due to our efforts to align the price of each click with the value received by advertisers. Other revenue increased by $4.0 million primarily driven by an increase in Credit Card revenue earned on Bankrate.com.



Adjusted EBITDA increased $4.2 million (88.1%) due primarily to revenue growth. Expenses included in Adjusted EBITDA increased $6.7 million from the prior year period primarily due to cost of revenue which increased by $7.1 million primarily due to investing in marketing to drive growth. Sales and marketing expense decreased by $90,000. Product development costs increased by approximately $311,000 primarily due to additional compensation expense for data science and engineering headcount. General and administrative expenses decreased $623,000 primarily due to lower compensation and benefits expense.



Senior Care



Revenue increased $775,000  (12.9%) for the three months ended June 30, 2017 compared with 2016. This was primarily due to an increase of $607,000 in revenue from senior housing referrals which is largely attributable to increased capacity in our call center and higher spending for lead acquisition which resulted in more referrals to senior living communities and more move-ins. Revenue from the sale of home care leads increased $437,000, as we continued to shift home care customers from subscription contracts to cost-per-lead agreements, which also accounts for a $219,000 decrease in home care subscription revenue. Advertising revenue was down $90,000 due to running fewer large advertising campaigns.



Adjusted EBITDA decreased $1.2 million. Expenses included in Adjusted EBITDA increased approximately $2.0 million from the prior year period. Cost of revenue increased by $1.9 million primarily due to lead acquisition costs. Sales and marketing expense was $151,000 higher. Product development and technology cost decreased by $95,000, and general and administrative expenses increased $13,000.



Other



The Other segment includes general corporate expenses and intercompany eliminations. Revenue for the three months ended June 30, 2017 compared with 2016 decreased $3.3 million, a decrease of $3.0 million excluding China, while Adjusted EBITDA excluding the China operations which are being wound down, increased $1.3 million. The revenue decrease is attributed to increased intersegment revenue eliminations. The increase in Adjusted EBITDA was primarily due to lower professional fees.





Six months ended June 30, 2017 compared to June 30, 2016



Revenue



Total revenue was $234.6 million and $191.8 million for the six months ended June 30, 2017 and 2016, respectively, representing an increase of $42.8 million or 22.3%. Credit Cards segment revenue increased $31.6 million, Banking segment revenue increased $15.4

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million and Senior Care segment revenue decreased $417,000, while revenue in Other decreased $4.6 million. See our Segment results of operations discussion for further information.



Cost of Revenue



Cost of revenue for the six months ended June 30, 2017 of $127.6 million was $27.2 million higher than the same period in 2016, primarily due to the inclusion of NextAdvisor for the full six month period. The increase was primarily attributed to higher paid marketing expense of $37.2 million, higher employee compensation, benefits and incentive compensation expense of $3.5 million, higher stock based compensation of $441,000 and other costs, partially offset by lower distribution payments to our online partners of $14.4 million resulting from lower affiliate revenue.



Sales and Marketing



Sales and marketing expenses for the six months ended June 30, 2017 of $10.5 million increased $2.0 million from prior year, primarily due to $1.0 million increased consulting and professional fees, and $1.1 million higher employee compensation and benefits, including commissions and incentive compensation expense, partially offset by $183,000 lower stock compensation expense.



Product Development and Technology



Product development and technology costs for the six months ended June 30, 2017 of $17.5 million were approximately $3.4 million higher than the comparable period in 2016, primarily due to $3.2 million of higher total employee costs, including salary, wages, benefits and incentive compensation, and $748,000 increased stock compensation expense partly offset by $671,000 of decreased consulting and professional fees.



General and Administrative



General and administrative expenses for the six months ended June 30, 2017 of $45.8 million were $8.7 million higher than the same period in 2016, due primarily to $8.1 million of higher compensation and benefit costs, which includes contingent compensation expense due to NextAdvisor employees, $4.1 million higher stock compensation expense, $1.2 million higher facility and other expenses primarily related to the addition of NextAdvisor’s office space and our new headquarters location, and $207,000 in higher expenses related to the Restatement and related internal review, the SEC and DOJ investigations and related litigation and indemnification obligations, partially offset by $3.4 million lower consulting and professional fees primarily related to accounting and legal and $1.2 million decreased information technology costs.



Legal Settlements



During the six months ended June 30, 2016, we recorded a $20.0 million expense for a proposed settlement of the private securities class action lawsuit, of which approximately $13.8 million was funded from insurance proceeds during the third quarter 2016. This expense was partially offset by the recognition of insurance proceeds of $851,000 for reimbursement of previously incurred legal expenses in connection with this lawsuit.



Acquisition, disposition and related expenses



Acquisition, disposition and related expenses for the six months ended June 30, 2017 were $240,000, related to the previously announced July 2, 2017 merger agreement with Red Ventures, and for the six months ended June 30, 2016 were $1.3 million, primarily related to our acquisition of the Next Advisor business.



Changes in Fair Value of Contingent Acquisition Consideration



Changes in fair value of contingent acquisition consideration for the six months ended June 30, 2017 was an expense of $40.1 million related to an increase of approximately $38.9 million for a change in estimate related to current results, revised forecasted results and the probability of achievement, and an increase of approximately $1.3 million for the passage of time.



Changes in fair value of contingent acquisition consideration for the six months ended June 30, 2016 was $101,000 due to the passage of time.



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Depreciation and Amortization



Depreciation and amortization expense for the six months ended June 30, 2017 of $21.4 million was $723,000 higher than the same period in 2016 primarily as a result of amortization expense in connection with our acquisition and higher depreciation expense associated with higher capitalized internally developed software as compared to 2016.



Restructuring



During the second quarter 2017, management implemented a restructuring initiative to exit our print business and drive increased efficiencies by better aligning resources with strategic objectives. The initiative will reduce headcount and consolidate functions and locations. During the six months ended June 30, 2017, we incurred $669,000 related to severance, retention and other personnel related expenses.



Impairment



During the six months ended June 30, 2016, we recorded $25.0 million for the impairment of goodwill in our Banking segment as management noted that the operating results of this segment had begun to track below plan, primarily due to macro trends impacting its deposit and display advertising businesses which resulted in a triggering event for impairment testing.



Interest expense



Interest expense for the six months ended June 30, 2017 and 2016 was $10.9 million, respectively.



Interest income and other, net



Interest income and other, net for the six months ended June 30, 2017 of $244,000 decreased $814,000 from the same period in 2016 primarily due to a realized foreign exchange loss in the second quarter.

  

Income Tax Expense



Our effective tax rate was a benefit of 28.5% during the six months ended June 30, 2017 compared to a benefit of 8.5% in the same period in 2016. The change in our effective tax rate during the six months ended June 30, 2017 is primarily attributed to a higher discrete tax charge related to share-based awards and the tax non-deductibility of the GAAP goodwill impairment charge over a loss before tax in 2016.





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Following is a discussion of the results of each of our reportable segments:





__________





Credit Cards



Revenue increased $31.6 million  (23.8%) for the six months ended June 30, 2017 compared with 2016,  which is greatly attributable to the results of the NextAdvisor business acquired during the second quarter of 2016. Excluding the impact of NextAdvisor, Credit Cards consumer inquiry volume increased 7.1% year-over-year, while revenue per consumer inquiry declined 9.9%. The decline in revenue per consumer inquiry reflects lower conversion of consumer inquiries into approved credit cards.



Adjusted EBITDA increased $3.6 million (7.2%) for the six months ended June 30, 2017 compared with 2016. Expenses included in Adjusted EBITDA increased $28.0 million from the prior year period, primarily due to the inclusion of the results of NextAdvisor for the full year-to-date period in 2017. Cost of revenue increased $19.8 million, mainly related to increased paid marketing expense and employee costs, partially offset by lower affiliate revenue share payments resulting from lower affiliate revenue. Sales and marketing expense increased $2.0 million, primarily due the inclusion of NextAdvisor for the whole six months period and consulting fees related to brand marketing. Product development and technology cost increased by $2.8 million primarily due to higher employee

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expenses with the inclusion of NextAdvisor for the entire six month period. General and administrative expenses were $3.3 million higher, mainly attributed to the addition of NextAdvisor.



Banking



Revenue increased $15.4 million (31.3%) for the six months ended June 30, 2017 compared with 2016. Of the total revenue increase, consumer inquiry revenues generated through our rate tables increased by $9.5 million (28.7%) due to advertiser demand in our deposit and mortgage verticals compared to the prior year. Volume increased 46.4% due to growth in our deposit and mortgage verticals while overall unit pricing was 12.0% lower due to our efforts to align the price of each click with the value received by advertisers. Other revenue increased by $5.9 million primarily driven by an increase in Credit Card revenue earned on Bankrate.com.



Adjusted EBITDA increased $7.9 million (78.5%) due primarily to increased revenue. Expenses included in Adjusted EBITDA increased $7.5 million from the prior year period. Cost of revenue increased by $9.2 million primarily due to increases in marketing expense to drive growth. Sales and marketing expense decreased by $49,000. Product development costs increased by approximately $102,000. General and administrative expenses decreased $1.7 million primarily due to lower compensation and decreased information technology expenses.



Senior Care



Revenue increased $417,000 (3.4%) for the six months ended June 30, 2017 compared with 2016. This was primarily due to an increase of $104,000 in revenue from senior housing referrals which is partly attributable to increased capacity in our call center in the second quarter of 2017 and a corresponding increase in spending for lead acquisition which resulted in more referrals to senior living communities and more move-ins, partly aided by a slightly higher average referral fee generated per move-in. Revenue from the sale of home care leads increased $784,000, as we continued to shift customers from subscription contracts to cost-per-lead agreements, which also accounts for a $380,000 decrease in home care subscription revenue. Advertising revenue was down $137,000 due to running fewer large advertising campaigns.



Adjusted EBITDA decreased $1.9 million primarily due to cost of revenue. Expenses included in Adjusted EBITDA increased $2.3 million from the prior year period. Cost of revenue increased by $2.1 million primarily due to increased lead acquisition costs, higher travel expenses related to training for new Family Advisors, and increased contractor costs in support of our call center. Sales and marketing expense was $424,000 higher, primarily attributed to employee compensation, benefits and commissions and contractor expenses. Product development and technology cost decreased by $203,000, and general and administrative expenses increased $22,000.



Other



The Other segment includes general corporate expenses and intercompany eliminations. Revenue for the six months ended June 30, 2017 compared with 2016 decreased $4.6 million, a decrease of $4.1 million excluding China, while Adjusted EBITDA excluding the China operations which are being wound down, increased $2.2 million. The revenue decrease is attributed to increased intersegment revenue eliminations. The increase in Adjusted EBITDA was primarily due to lower professional fees.





Liquidity and Capital Resources





Our principal ongoing source of operating liquidity is the cash generated by our business operations. We consider all highly liquid debt investments purchased with an original maturity of less than three months to be cash equivalents.



Our primary uses of cash have been to fund our working capital and capital expenditure needs, fund acquisitions, service our debt obligations and repurchase Company shares. We believe that we can generate sufficient cash flows from operations to fund our operating and capital expenditure requirements, as well as to service our debt obligations, for the next 12 months. In the event we experience a significant adverse change in our business operations, we would likely need to secure additional sources of financing.



As of June 30, 2017, we had working capital of $170.6 million and our primary commitments were normal working capital requirements and $6.9 million in accrued interest for the Senior Notes. In addition, we have accrued $74.9 million for contingent

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liabilities related to a past acquisition due within the next twelve months.



As of December 31, 2016, we had working capital of $217.1 million and our primary commitments were normal working capital requirements and $6.9 million in accrued interest for the Senior Notes. In addition, we had commitments for acquisition related obligations related to past acquisitions totaling $3.7 million for guaranteed earnouts as of December 31, 2016, that were due within the next twelve months, and $31.6 million accrued for non-current contingent liabilities related to a past acquisition.



We assess acquisition opportunities as they arise. Financing may be required if we decide to make additional acquisitions or if we are required to make any earnout payments to which the former owners of our acquired businesses may be entitled. There can be no assurance, however, that any such opportunities may arise, or that any such acquisitions may be consummated. Additional financing may not be available on satisfactory terms or at all when required.



Debt Financing



Senior Notes



As of June 30, 2017, we had $300.0 million in Senior Notes outstanding for which interest is accrued daily on the outstanding principal amount at 6.125% and is payable semi-annually, in arrears, on February 15th and August 15th. The Senior Notes are due August 15, 2018. Accrued interest on the Senior Notes as of June 30, 2017 is approximately $6.9 million. Refer to Note 10 in the Notes to Condensed Consolidated Financial Statements for a further description of the Senior Notes.



Revolving Credit Facility



We have a Revolving Credit Facility in an aggregate amount of $70.0 million which matures on May 17, 2018 ("Revolving Credit Facility"). All obligations under the Revolving Credit Facility are guaranteed by the Guarantors and are secured, subject to certain exceptions, by first priority liens and security interests in the assets of the Company and the Guarantors.



As of June 30, 2017, we had approximately $593,000 in letters of credit outstanding under the Revolving Credit Facility and we were in compliance with all required covenants.





Cash Flows



Operating Activities



During the six months ended June 30, 2017, operating activities provided cash of $26.8 million compared to $14.0 million during the six months ended June 30, 2016. This increase is mainly due to:



Investing Activities



For the six months ended June 30, 2017, cash used in investing activities was $5.6 million and primarily consisted of $5.6 million for purchases of furniture, fixtures, leasehold improvements, equipment and capitalized website development costs



For the six months ended June 30, 2016, cash used in investing activities was $66 million and primarily consisted of:



Financing Activities



For the six months ended June 30, 2017, cash used in financing activities was $9.4 million due to:



For the six months ended June 30, 2016, cash used by financing activities was $63.1 million primarily due to:



OFF-BALANCE SHEET ARRANGEMENTS



Off-balance sheet arrangements include the following four categories: obligations under certain guarantees or contracts; retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements; obligations under certain derivative arrangements; and obligations under material variable interests.



Besides our Senior Notes, we have not entered into any material arrangements which would fall under any of these four categories and which would be reasonably likely to have a current or future material effect on our results of operations, liquidity or financial condition. 

 

   

















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Item 3.   Quantitative and Qualitative Disclosures About Market Risk



Interest Rate Risk



We maintain or may maintain a portfolio of investments including bank deposits, U.S. Treasury securities, U.S. Government Agency securities, municipal securities, corporate debt securities and money market funds. The Company’s investment objectives, in order of priority, are (i) to preserve capital, (ii) to maintain liquidity, and (iii) to obtain a fair rate of return. In addition to other restrictions based on credit quality, the maximum maturity date for each investment is 24 months and the weighted average maturity of the portfolio may not exceed 12 months.



None of our outstanding debt as of June 30, 2017 was subject to variable interest rates as we did not have an outstanding balance for borrowed money under our Revolving Credit Facility as of June 30, 2017. Interest under our Revolving Credit Facility accrues at variable rates based, at our option, on the alternate base rate (as defined in the Revolving Credit Facility) plus a margin of 3.00% or at the adjusted LIBO rate (as defined in the Revolving Credit Facility) plus a margin of 2.00%. Our fixed interest rate debt includes $300.0 million of our Senior Notes in aggregate principal amount.



Exchange Rate Sensitivity



Our exposure to exchange rate risk is primarily that of a net receiver of currencies other than the U.S. dollar, primarily British Pound Sterling. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, can affect the Company's net sales and income from operations as expressed in U.S. dollars. Additionally, we have not engaged in any derivative or hedging transactions to date. During the six months ended June 30, 2017, non-U.S. revenues were less than 1% of our total revenue. We estimate that a hypothetical 10% change (increase or decrease) in exchange rates would not have a material impact to our condensed consolidated financial statements.



Item 4.    Controls and Procedures



Disclosure Controls and Procedures

In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act, as amended (the “Exchange Act”), management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of June 30, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, due to the identification of a material weakness in our internal control over financial reporting as described in Item 9A of the 2016 Annual Report, our disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2017. For a description of the material weakness, see Part II, Item 9A in the 2016 Annual Report.

Remediation.  In response to the material weakness, management is implementing modifications to better ensure that the Company has validated all inputs used for, and all calculations performed in, valuation reports prepared by third party valuation specialists. The material weakness in our internal control over financial reporting will not be considered remediated until these modifications are implemented, in operation for a sufficient period of time, tested, and concluded by management to be designed and operating effectively. In addition, as we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify our remediation plan. Management will test and evaluate the implementation of these modifications during 2017 to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material misstatement in the Company’s financial statements.

Changes in Internal Control over Financial Reporting

Other than the changes described above under “Remediation” that occurred during the quarter ended June 30, 2017, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

The information with respect to legal proceedings is incorporated by reference from Note 9 of our Condensed Consolidated Financial

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Statements included herein.

Item 1A.  Risk Factors



The announcement and pendency of the Merger with Red Ventures could adversely affect our business, financial results and/or operations.



The announcement and pendency of the Merger could cause disruptions and create uncertainty surrounding our business. These uncertainties may impair our ability to attract, retain and motivate key personnel until the transaction is completed, and could cause customers, providers, advertisers, partners and other third parties to change existing business relationships. Changes to existing business relationships, including termination or modification, could negatively affect our revenues, earnings and cash flow, as well as the market price of our common stock.



We are also subject to restrictions on the conduct of our business prior to the completion of the transaction as provided in the Merger Agreement, including, among other things, restrictions on our ability to acquire other businesses and assets, sell, transfer or license our businesses and assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures, amend our organizational documents and incur indebtedness. These restrictions could prevent or delay the pursuit of strategic corporate or business opportunities, result in our inability to respond effectively and/or timely to competitive pressures, industry developments, developments relating to our customers, providers, advertisers, partners and other third parties, and future opportunities, and may as a result or otherwise have a significant negative impact on our business, results of operations and financial condition.



In addition, management and financial resources have been diverted and will continue to be diverted towards the completion of the Merger. The Company has incurred, and expects to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the transaction. These costs could adversely affect the financial condition and results of operation of the Company prior to the completion of the transaction.



We may not complete the Merger with Red Ventures within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results and/or operations.



There can be no assurance that the Merger with Red Ventures will occur. Completion of the Merger is subject to a number of closing conditions, including Bankrate stockholder approval and receipt of required regulatory approvals. We can provide no assurance that all required approvals will be obtained or that all closing conditions will be satisfied, and, if all required approvals are obtained and the closing conditions are satisfied, we can provide no assurance as to the terms, conditions and timing of such approvals or the timing of the completion of the Merger. In addition, the Merger Agreement may be terminated under certain specified circumstances.



If the transaction is not completed within the expected time frame or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. In addition, some costs related to the Merger must be paid whether or not the Merger is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, as well as the direction of management resources towards the Merger, for which we will have received little or no benefit if the closing of the Merger does not occur. We may also experience negative reactions from our stockholders and other investors, employees, customers, providers, advertisers, partners and other third parties. In addition, in specified circumstances, we could be required to pay Red Ventures a termination fee of approximately $37.7 million. If the Merger Agreement is not adopted by our stockholders, or if the Merger is not completed for any other reason, there can be no assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely affected.



In addition, if the Merger is not completed, our Board of Directors may review and consider various alternatives available to us, including, among others, continuing as a public company with no material changes to our business or capital structure, seeking an acquisition or attempting to implement another transaction that is similar to the Merger. These alternative transactions may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses as described above in connection with the proposed Merger, and risks and uncertainties related to our ability to consummate any such alternative transaction and other variables which may adversely affect our operations. During the pendency of the Merger, however, the Merger Agreement contains provisions that restrict our ability to entertain alternative transactions, which could discourage or make it difficult for a third party to propose or complete any such alternative transaction with us.



* * *



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An investment in our securities involves risk. You should carefully consider the following risk factors and those set forth in our 2016 Annual Report, as well as the other information included in this Quarterly Report, before investing in our securities. You should be aware that these risk factors and other information may not describe every risk facing our Company. Any of these risks could materially and adversely affect our business, financial condition, results of operations or prospects, and cause the value of our securities to decline, which could cause you to lose all or part of your investment in our Company.



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



None.



Company Purchase of Equity Securities









Item 3.   Default Upon Senior Securities



None.



Item 4.   Mine Safety Disclosures



Not Applicable

Item 5.    Other Information



Not Applicable

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Item 6.     Exhibits

*   Filed herewith.

**  This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

*** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.



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Signatures 

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

     Bankrate, Inc.















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