Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. INTERSECTIONS INC (1095277) 10-K published on Mar 30, 2018 at 2:21 pm
Reporting Period: Dec 30, 2017
In connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2017, our management conducted an assessment of the effectiveness of our internal control over financial reporting. In connection with that assessment, a material weakness was identified in our internal controls over accounting for share based compensation, and a material weakness was identified in our internal controls over accounting for revenue recognition. Exchange Act Rule 12b-2 and Rule 1-02(b) of Regulation S-X define a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis. The identified material weaknesses are further described in Part II, Item 9A of this report.
There are several applicable and potential governmental regulatory matters being considered by the U.S. Supreme Court, Congress and a number of U.S. states that may impact us by requiring remote online sellers to collect sales tax on their revenue. For example, the U.S. Supreme Court has agreed to hear during the current spring term the appeal from the South Dakota Supreme Court of the matter of South Dakota v. Wayfair, Inc. This case is expected to directly revisit the 25-year-old “doctrine” previously established by the Supreme Court in Quill Corp. v. North Dakota, which requires a minimum physical presence within a state in order to permit the state to impose sales tax on revenue derived within that state. We cannot predict the effect, if any, that these and other attempts to impose sales, income or other taxes on online sales may have on our business. Any new or revised taxes would likely increase our cost of doing business online and could reduce demand for our services and create additional administrative and compliance burdens, all of which could adversely affect our results of operations.
Revenue for monthly subscriptions is recognized in the calendar month the subscription fee is earned. In 2017, we determined that our policy to recognize revenue from the sale of subscriptions should have been on a straight-line basis over the 30-day membership period, which results in a difference in the timing to recognize revenue on renewing 30-day subscriptions. As a result, to correct for the cumulative error, the December 31, 2016 consolidated balance sheet was revised by increasing current assets and current liabilities by $1.5 million and $2.9 million, respectively, and increasing accumulated deficit as of December 31, 2016 and 2015 by $1.4 million. The revision did not impact the 2016 consolidated statements of operations or cash flows. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the applicable provisions within U.S. GAAP, we concluded this misstatement was not material to any previously issued consolidated financial statements.
Our consolidated effective tax rate for the year ended December 31, 2017 was 14.0% compared to (2.2)% for the year ended December 31, 2016. The increase in the effective tax rate is primarily due to estimated impacts of the broad and complex changes in the Tax Act, which was enacted in 2017 and resulted in the reduction of the valuation allowance on our deferred tax assets, which will become indefinite-lived under the future net operating loss carryforward rules, and the repeal of the corporate alternative minimum tax. While we continue to evaluate the effects of the Tax Act, we have recorded an estimated net tax benefit of $1.9 million in 2017. In the absence of guidance on various uncertainties and ambiguities in the application of certain provisions of the Tax Act, we have used what we believe are reasonable interpretations and assumptions in applying the Tax Act. Given the complexity of the changes in tax law resulting from the Tax Act, we have not finalized the accounting for the income tax effects of the Tax Act, including any of the provisional amounts described above. During the one-year measurement period allowed under Staff Accounting Bulletin No. 118, we may make adjustments that differ from our initial assumptions based on new interpretations and regulatory changes from the Internal Revenue Service and state tax jurisdictions, the SEC and the Financial Accounting Standards Board. Amounts will be recorded as discrete items in the provision for income taxes in the period in which those adjustments become final. We will complete our analysis no later than December 31, 2018. It is possible that future adjustments may have a material adverse effect on our cash tax liabilities, results of operations, or financial condition.
As announced on February 2, 2018, Johan J. Roets ceased serving as the Chief Executive Officer of the Company effective January 29, 2018. Effective February 22, 2018, the Company terminated the employment of Mr. Roets for “cause.” On March 22, 2018, Mr. Roets filed a civil Complaint against the Company in the Circuit Court of Fairfax County Virginia. The Complaint alleges that the Company’s termination of Mr. Roets’ employment on February 22, 2018 violated his Employment Agreement and seeks monetary damages from the Company. The Company believes that this litigation is without merit and intends to vigorously defend the claims set forth therein. The Company’s Board of Directors has appointed Michael R. Stanfield, the Chairman and Founder of the Company, as the Company’s Executive Chairman and President, effective January 29, 2018, pursuant to which he has assumed the duties as the principal executive officer of the Company. Mr. Stanfield co-founded the predecessor to the Company in 1996 and has served as Chairman of the Board of Directors since that time, and was previously the Chief Executive Officer until January 2017.