LendingTree, Inc.
LendingTree, Inc. (Form: 10-Q, Received: 07/28/2017 17:09:52)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q  
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
Or  
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                 
Commission File No. 001-34063  
 
 
IMAGE0A15.JPG
LendingTree, Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
26-2414818
(I.R.S. Employer
Identification No.)
  11115 Rushmore Drive, Charlotte, North Carolina 28277
(Address of principal executive offices)
(704) 541-5351
(Registrant's telephone number, including area code)
 
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ý   No   o  
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   ý   No   o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  o
 
Accelerated filer  x
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 
 
 
Emerging growth company  o
 
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.  o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   o   No   ý  
As of July 24, 2017 , there were 11,998,534 shares of the Registrant's common stock, par value $.01 per share, outstanding, excluding treasury shares.
 





TABLE OF CONTENTS


 
 
Page
Number
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 

2

Table of Contents

PART I—FINANCIAL INFORMATION


Item 1.  Financial Statements  

LENDINGTREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)  
 
Three Months Ended 
 June 30,

Six Months Ended 
 June 30,
 
2017

2016

2017

2016
 
(in thousands, except per share
amounts)
Revenue
$
152,773


$
94,290


$
285,288


$
189,003

Costs and expenses:
 


 


 


 

Cost of revenue (exclusive of depreciation and amortization shown separately below)
4,164


3,464


7,755


6,937

Selling and marketing expense
109,141


64,538


202,392


129,597

General and administrative expense
12,094


8,553


23,641


17,812

Product development
4,064


3,781


7,687


7,666

Depreciation
1,808


1,174


3,511


2,172

Amortization of intangibles
2,608


72


5,217


97

Change in fair value of contingent consideration
9,393




18,139



Severance
247


72


404


72

Litigation settlements and contingencies
285


(79
)

689


90

Total costs and expenses
143,804


81,575


269,435


164,443

Operating income
8,969


12,715


15,853


24,560

Other income (expense), net:
 


 


 


 

Interest expense, net
(1,079
)

(141
)

(1,244
)

(283
)
Other income
13




13

 

Income before income taxes
7,903


12,574


14,622


24,277

Income tax benefit (expense)
104


(3,572
)

1,183


(8,370
)
Net income from continuing operations
8,007


9,002


15,805


15,907

Loss from discontinued operations, net of tax
(689
)

(1,150
)

(1,621
)

(2,353
)
Net income and comprehensive income
$
7,318


$
7,852


$
14,184


$
13,554













Weighted average shares outstanding:











Basic
11,965


11,795


11,896


11,863

Diluted
13,604


12,730


13,552


12,800

Income per share from continuing operations:
 


 


 


 

Basic
$
0.67


$
0.76


$
1.33


$
1.34

Diluted
$
0.59


$
0.71


$
1.17


$
1.24

Loss per share from discontinued operations:
 


 


 


 

Basic
$
(0.06
)

$
(0.10
)

$
(0.14
)

$
(0.20
)
Diluted
$
(0.05
)

$
(0.09
)

$
(0.12
)

$
(0.18
)
Net income per share:
 


 


 


 

Basic
$
0.61


$
0.67


$
1.19


$
1.14

Diluted
$
0.54


$
0.62


$
1.05


$
1.06

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

3

Table of Contents

LENDINGTREE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 
 
June 30,
2017

December 31,
2016
 
(in thousands, except par value and share amounts)
ASSETS:
 


 

Cash and cash equivalents
$
355,636


$
91,131

Restricted cash and cash equivalents
4,089


4,089

Accounts receivable (net of allowance of $1,010 and $1,059, respectively)
52,217


41,382

Prepaid and other current assets
4,392


4,021

Total current assets
416,334


140,623

Property and equipment (net of accumulated depreciation of $12,064 and $9,739, respectively)
35,487


35,462

Goodwill
99,694


56,457

Intangible assets, net
85,393


71,684

Deferred income tax assets
18,517


14,610

Other non-current assets
849


810

Non-current assets of discontinued operations
3,781


3,781

Total assets
$
660,055


$
323,427







LIABILITIES:
 


 

Accounts payable, trade
$
1,885


$
5,593

Accrued expenses and other current liabilities
68,960


49,403

Current contingent consideration
23,942



Current liabilities of discontinued operations (Note 14)
12,899


11,711

Total current liabilities
107,686


66,707

Long-term debt
232,095

 

Non-current contingent consideration
22,785


23,600

Other non-current liabilities
1,559


1,685

Total liabilities
364,125


91,992

Commitments and contingencies (Note 11)





SHAREHOLDERS' EQUITY:
 


 

Preferred stock $.01 par value; 5,000,000 shares authorized; none issued or outstanding



Common stock $.01 par value; 50,000,000 shares authorized; 14,162,254 and 13,955,378 shares issued, respectively, and 11,998,509 and 11,791,633 shares outstanding, respectively
142


140

Additional paid-in capital
1,068,970


1,018,010

Accumulated deficit
(709,748
)

(722,630
)
Treasury stock; 2,163,745 and 2,163,745 shares, respectively
(64,085
)

(64,085
)
Noncontrolling interest (Note 5)
651

 

Total shareholders' equity
295,930


231,435

Total liabilities and shareholders' equity
$
660,055


$
323,427

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

4

Table of Contents

LENDINGTREE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
  (Unaudited)
 
 
 
 
Common Stock
 
 
 
 
 
Treasury Stock
 
 
Total
 
Number
of Shares
 
Amount
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Number
of Shares
 
Amount
Noncontrolling Interest
 
(in thousands)
 
Balance as of December 31, 2016
$
231,435

 
13,955

 
$
140

 
$
1,018,010

 
$
(722,630
)
 
2,164

 
$
(64,085
)
$

Net income and comprehensive income
14,184

 

 

 

 
14,184

 

 


Non-cash compensation
5,130

 

 

 
5,130

 

 

 


Purchase of treasury stock

 

 

 

 

 

 


Issuance of common stock for stock options, restricted stock awards and restricted stock units, net of withholding taxes
1,217

 
207

 
2

 
1,215

 

 

 



Cumulative effect adjustment due to ASU 2016-09
985

 

 

 
2,287

 
(1,302
)
 

 


Issuance of 0.625% Convertible Senior Notes, net
60,418

 

 

 
60,418

 

 

 


Convertible note hedge
(61,500
)
 

 

 
(61,500
)
 

 

 


Sale of warrants
43,410

 

 

 
43,410

 

 

 


Noncontrolling interest (Note 5)
651

 
 
 
 
 
 
 
 
 
 
 
 
651

Balance as of June 30, 2017
$
295,930

 
14,162

 
$
142

 
$
1,068,970

 
$
(709,748
)
 
2,164

 
$
(64,085
)
$
651

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

5

Table of Contents

LENDINGTREE, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  (Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
 
(in thousands)
Cash flows from operating activities attributable to continuing operations:
 

 
 

Net income and comprehensive income
$
14,184

 
$
13,554

Less: Loss from discontinued operations, net of tax
1,621

 
2,353

Income from continuing operations
15,805

 
15,907

Adjustments to reconcile income from continuing operations to net cash provided by operating activities attributable to continuing operations:
 

 
 

Loss on disposal of fixed assets
309

 
267

Amortization of intangibles
5,217

 
97

Depreciation
3,511

 
2,172

Rental amortization of intangibles and depreciation
525

 

Non-cash compensation expense
5,130

 
5,062

Deferred income taxes
(6,319
)
 
(781
)
Change in fair value of contingent consideration
18,139

 

Bad debt expense
96

 
387

Amortization of debt issuance costs
231

 
122

Amortization of convertible debt discount
909

 

Changes in current assets and liabilities:
 
 
 
Accounts receivable
(10,052
)
 
(12,122
)
Prepaid and other current assets
(323
)
 
(1,681
)
Accounts payable, accrued expenses and other current liabilities
16,852

 
(1,713
)
Income taxes payable
(1,524
)
 
6,825

Other, net
(282
)
 
373

Net cash provided by operating activities attributable to continuing operations
48,224

 
14,915

Cash flows from investing activities attributable to continuing operations:
 

 
 

Capital expenditures
(3,611
)
 
(6,452
)
Acquisition of DepositAccounts
(24,000
)
 

Acquisition of MagnifyMoney, net of cash acquired
(29,415
)
 

Acquisition of a business

 
(4,500
)
Decrease in restricted cash

 
2,454

Net cash used in investing activities attributable to continuing operations
(57,026
)
 
(8,498
)
Cash flows from financing activities attributable to continuing operations:
 

 
 

Proceeds from exercise of stock options, net of payments related to net-share settlement of stock-based compensation
1,274

 
(2,808
)
Proceeds from the issuance of 0.625% Convertible Senior Notes
300,000

 

Payment of convertible note hedge transactions
(61,500
)
 

Proceeds from the sale of warrants
43,410

 

Payment of equity offering costs

 
(23
)
Payment of debt issuance costs
(8,572
)
 
(8
)
Purchase of treasury stock

 
(48,090
)
Net cash provided by (used in) financing activities attributable to continuing operations
274,612

 
(50,929
)
Total cash provided by (used in) continuing operations
265,810

 
(44,512
)
Net cash used in operating activities attributable to discontinued operations
(1,305
)
 
(2,852
)
Total cash used in discontinued operations
(1,305
)
 
(2,852
)
Net increase (decrease) in cash and cash equivalents
264,505

 
(47,364
)
Cash and cash equivalents at beginning of period
91,131

 
206,975

Cash and cash equivalents at end of period
$
355,636

 
$
159,611

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

6

Table of Contents

LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 1—ORGANIZATION
Company Overview
LendingTree, Inc. ("LendingTree" or the "Company"), is the parent of LendingTree, LLC and several companies owned by LendingTree, LLC.
LendingTree operates what it believes to be the leading online loan marketplace for consumers seeking loans and other credit-based offerings. The Company offers consumers tools and resources, including free credit scores, that facilitate comparison-shopping for mortgage loans, home equity loans, reverse mortgage loans, auto loans, credit cards, personal loans, deposit accounts, student loans, small business loans and other related offerings. The Company primarily seeks to match in-market consumers with multiple lenders on its marketplace who can provide them with competing quotes for the loans, deposits or credit-based offerings they are seeking. The Company also serves as a valued partner to lenders seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer loan inquiries it generates with these lenders.
The consolidated financial statements include the accounts of LendingTree and all its wholly-owned entities. Intercompany transactions and accounts have been eliminated.
Discontinued Operations
The LendingTree Loans business is presented as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and comprehensive income and consolidated cash flows for all periods presented. The notes accompanying these consolidated financial statements reflect the Company's continuing operations and, unless otherwise noted, exclude information related to the discontinued operations. See Note 14 Discontinued Operations for additional information.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements as of June 30, 2017 and for the three and six months ended June 30, 2017 and 2016 , respectively, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position for the periods presented. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 , or any other period. The accompanying consolidated balance sheet as of December 31, 2016 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2016 (the "2016 Annual Report"). The accompanying consolidated financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. Accordingly, they should be read in conjunction with the audited financial statements and notes thereto included in the 2016 Annual Report. 
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. 
Significant estimates underlying the accompanying consolidated financial statements, including discontinued operations, include: loan loss obligations; the recoverability of long-lived assets, goodwill and intangible assets; the determination of income taxes payable and deferred income taxes, including related valuation allowances; contingent consideration related to business combinations; litigation accruals; various other allowances, reserves and accruals; and assumptions related to the determination of stock-based compensation. 

7

Table of Contents

LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Certain Risks and Concentrations
LendingTree's business is subject to certain risks and concentrations including dependence on third-party technology providers, exposure to risks associated with online commerce security and credit card fraud.
Financial instruments, which potentially subject the Company to concentration of credit risk at June 30, 2017 , consist primarily of cash and cash equivalents and accounts receivable, as disclosed in the consolidated balance sheet. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation insurance limits, but are maintained with quality financial institutions of high credit. The Company generally requires certain network lenders to maintain security deposits with the Company, which in the event of non-payment, would be applied against any accounts receivable outstanding.
Due to the nature of the mortgage lending industry, interest rate fluctuations may negatively impact future revenue from the Company's lender marketplace.
Lenders participating on the Company's marketplace can offer their products directly to consumers through brokers, mass marketing campaigns or through other traditional methods of credit distribution. These lenders can also offer their products online, either directly to prospective borrowers, through one or more online competitors, or both. If a significant number of potential consumers are able to obtain loans from participating lenders without utilizing the Company's services, its ability to generate revenue may be limited. Because the Company does not have exclusive relationships with the lenders whose loan offerings are offered on its online marketplace, consumers may obtain offers and loans from these lenders without using its service.
The Company maintains operations solely in the United States.
Litigation Settlements and Contingencies
Litigation settlements and contingencies consists of expenses related to actual or anticipated litigation settlements, in addition to legal fees incurred in connection with various patent litigation claims the Company pursues against others.
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09 which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award changes as a result of the change in terms or conditions. This ASU is effective prospectively for annual periods beginning on or after December 15, 2017, with early adoption permitted. The Company is evaluating the impact this ASU will have on its consolidated financial statements and whether to early adopt.
In January 2017, the FASB issued ASU 2017-04 which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (Step 2 of the goodwill impairment test). Instead, an impairment charge will be based on the excess of the carrying amount over the fair value. This ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is evaluating the impact this ASU will have on its consolidated financial statements and whether to early adopt.
In November 2016, the FASB issued ASU 2016-18 which is intended to reduce the diversity in the classification and presentation of changes in restricted cash in the statement of cash flows, by requiring entities to combine the changes in cash and cash equivalents and restricted cash in one line. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. In addition, if more than one line item is recorded on the balance sheet for cash and cash equivalents and restricted cash, a reconciliation between the statement of cash flows and balance sheet is required. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The retrospective transition method, requiring adjustment to all comparative periods presented, is required. The Company is evaluating the impact this ASU will have on its consolidated financial statements and whether to early adopt.
In August 2016, the FASB issued ASU 2016-15 which addresses eight cash flow classification issues, eliminating the diversity in practice. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively applied as of the earliest date practicable. The Company is evaluating the impact this ASU will have on its consolidated financial statements and whether to early adopt.

8

Table of Contents

LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


In March 2016, the FASB issued ASU 2016-09 which simplifies various aspects related to how share-based payments are accounted for and presented in the financial statements, including the income tax consequences, classification of awards as either equity or liabilities, forfeitures and classification of excess tax benefits on the statement of cash flows. This ASU was effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption permitted. Upon adoption, any adjustments are to be reflected as of the beginning of the fiscal year of adoption. The Company adopted this ASU during the first quarter of 2017.
The new standard requires excess tax benefits and deficiencies, which arise due to the difference in the measure of stock compensation and the amount deductible for tax purposes, to be recorded in earnings in income tax expense. These excess tax benefits and deficiencies were generally previously recorded in additional paid-in capital and had no impact on net income. The standard required prospective adoption for this portion of the new guidance. During the second quarter and first six months of 2017, the Company recognized $3.8 million and $7.6 million , respectively, of excess tax benefit in income tax expense in the accompanying consolidated statements of operations and comprehensive income. Additionally, the new standard requires the excess tax benefits and deficiencies to be classified as an operating activity in the accompanying consolidated statements of cash flows. These excess tax benefits and deficiencies were previously recorded as a financing activity in the statement of cash flows. The standard allowed for either prospective or retrospective adoption for the change in presentation in the statement of cash flows. The Company elected to retrospectively adopt the classification change in the statement of cash flows. Accordingly, prior periods have been adjusted, which increased the cash provided by operating activities and decreased the cash provided by financing activities by $4.1 million in the first six months of 2016 in the accompanying consolidated statements of cash flows. The standard also allows for an election by the Company to either estimate forfeitures, as required under previous guidance, or recognize forfeitures when they occur. The Company elected to recognize forfeitures of stock awards as they occur, with the modified retrospective transition method required. Accordingly, the Company recognized a $1.4 million cumulative-effect adjustment to retained earnings as of January 1, 2017.
In February 2016, the FASB issued ASU 2016-02 related to leases. This ASU requires the recognition of a right-of-use lease asset and a lease liability by lessees for all leases greater than one year in duration. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance must be adopted using a modified retrospective transition. The Company is evaluating the impact this ASU will have on its consolidated financial statements and whether to early adopt.
In May 2014, the FASB issued ASU 2014-09 related to revenue recognition. This ASU was initiated as a joint project between the FASB and the International Accounting Standards Board ("IASB") to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and international financial reporting standards ("IFRS"). This guidance will supersede the existing revenue recognition requirements in Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition and was set to be effective for annual reporting periods beginning after December 15, 2016. However, in July 2015, the FASB deferred the effective date by one year, such that the standard will be effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date of December 15, 2016. The ASU can be applied (i) retrospectively to each prior period presented or (ii) retrospectively with the cumulative effect of initially adopting the ASU recognized at the date of initial application. In March 2016, the FASB issued ASU 2016-08, which clarifies the principal versus agent guidance under ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, which clarifies the identification of distinct performance obligations in a contract. In May 2016, the FASB issued ASU 2016-12, which clarifies the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration and certain other transition matters. The clarification ASUs must be adopted concurrently with the adoption of ASU 2014-09. The Company is evaluating the impact these ASUs will have on its consolidated financial statements and which implementation method to apply.
NOTE 3—RESTRICTED CASH
Restricted cash and cash equivalents consists of the following (in thousands) :
 
June 30,
2017
 
December 31,
2016
Cash in escrow from sale of LendingTree Loans (a)
$
4,032

 
$
4,032

Other
57

 
57

Total restricted cash and cash equivalents
$
4,089

 
$
4,089


9

Table of Contents

LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(a)
Home Loan Center, Inc. ("HLC"), a subsidiary of the Company, continues to be liable for certain indemnification obligations, repurchase obligations and premium repayment obligations following the sale of substantially all of the operating assets of its LendingTree Loans business in the second quarter of 2012.
NOTE 4—GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill, net is as follows (in thousands)
 
Goodwill
 
Accumulated Impairment Loss
 
Net Goodwill
Balance at December 31, 2016
$
539,545

 
$
(483,088
)
 
$
56,457

Acquisition of DepositAccounts
$
19,389

 

 
$
19,389

Acquisition of MagnifyMoney
$
23,848

 

 
$
23,848

Balance at June 30, 2017
$
582,782

 
$
(483,088
)
 
$
99,694

The balance of intangible assets, net is as follows (in thousands)
 
June 30,
2017
 
December 31,
2016
Intangible assets with indefinite lives
$
10,142

 
$
10,142

Intangible assets with definite lives, net
75,251

 
61,542

Total intangible assets, net
$
85,393

 
$
71,684

Goodwill and Indefinite-Lived Intangible Assets
The Company's goodwill is associated with its one reportable segment. Intangible assets with indefinite lives relate to the Company's trademarks.
Intangible Assets with Definite Lives
Intangible assets with definite lives relate to the following (in thousands) :
 
Cost
 
Accumulated
Amortization
 
Net
Technology
$
37,100

 
$
(4,213
)
 
$
32,887

Customer lists
29,800

 
(1,851
)
 
27,949

Trademarks and tradenames
6,342

 
(1,387
)
 
4,955

Tenant leases
2,030

 
(374
)
 
1,656

Website content
7,800

 

 
7,800

Other
250

 
(246
)
 
4

Balance at June 30, 2017
$
83,322

 
$
(8,071
)
 
$
75,251

 
Cost
 
Accumulated
Amortization
 
Net
Technology
$
28,300

 
$
(659
)
 
$
27,641

Customer lists
28,100

 
(639
)
 
27,461

Trademarks and tradenames
5,342

 
(937
)
 
4,405

Tenant leases
2,030

 

 
2,030

Other
250

 
(245
)
 
5

Balance at December 31, 2016
$
64,022

 
$
(2,480
)
 
$
61,542


10

Table of Contents

LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on balances as of June 30, 2017 , future amortization is estimated to be as follows (in thousands) :
 
Amortization Expense
Remainder of current year
$
8,001

Year ending December 31, 2018
15,871

Year ending December 31, 2019
15,617

Year ending December 31, 2020
13,435

Year ending December 31, 2021
5,313

Thereafter
17,014

Total intangible assets with definite lives, net
$
75,251

 
NOTE 5 —BUSINESS ACQUISITION
CompareCards
On November 16, 2016, the Company acquired all of the membership interests of Iron Horse Holdings, LLC, which does business under the name CompareCards ("CompareCards"). CompareCards is an online marketing platform for credit cards, which the Company is utilizing to grow its existing credit card business. The Company paid $80.7 million in initial cash consideration and will make two earnout payments, each ranging from zero to $22.5 million , based on the amount of earnings before interest, taxes, depreciation and amortization CompareCards generates during the periods of January 1, 2017 through December 31, 2017 and January 1, 2018 through December 31, 2018, or up to $45.0 million in aggregate payments (the “Earnout Payments”). The purchase price for the acquisition is $103.8 million comprised of an upfront cash payment of $80.7 million on November 16, 2016 and $23.1 million for the estimated fair value of the Earnout Payments at the time of closing the acquisition.
As of June 30, 2017 , the estimated fair value of the Earnout Payments totaled $41.2 million , $21.7 million of which is included in current contingent consideration and $19.5 million of which is included in non-current contingent consideration in the accompanying consolidated balance sheet. The estimated fair value of the Earnout Payments is determined using an option pricing model. The estimated value of the Earnout Payments is based upon available information and certain assumptions, known at the time of this report, which management believes are reasonable. Any differences in the actual Earnout Payments from the current estimated fair value of the Earnout Payments will be recorded in operating income (expense) in the consolidated statements of operations. During the second quarter and first six months of 2017, the Company recorded $9.4 million and $18.1 million , respectively, of contingent consideration expense in the consolidated statement of operations and comprehensive income due to the change in estimated fair value of the Earnout Payments.
The acquisition has been accounted for as a business combination. During the quarter ended March 31, 2017, the Company completed the determination of the final allocation of the purchase price with respect to the assets acquired and liabilities assumed as follows (in thousands) :
 
Fair Value
Accounts receivable
$
3,538

Total intangible assets with definite lives, net
55,400

Goodwill
52,450

Accounts payable and accrued liabilities
(7,638
)
Total purchase price
$
103,750

Acquisition-related costs in the first six months of 2017 of $0.1 million are included in general and administrative expense in the accompanying consolidated statement of operations and comprehensive income.
DepositAccounts
On June 14, 2017, the Company acquired substantially all of the assets of Deposits Online, LLC, which does business under the name DepositAccounts.com (“DepositAccounts”). DepositAccounts is a leading consumer-facing media property in the

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depository industry and is one of the most comprehensive sources of depository deals and analysis on the Web, covering all major deposit product categories through editorial content, programmatic rate tables and user-generated content.
The Company paid $24.0 million of initial cash consideration and could make additional contingent consideration payments of up to $9.0 million . The potential contingent consideration payments are comprised of (i) up to seven payments of $1.0 million each based on specified increases in Federal Funds interest rates during the period commencing on the closing date and ending on June 30, 2020 and (ii) a one-time performance payment of up to $2.0 million based on the net revenue of deposit products during the period of January 1, 2018 through December 31, 2018 (the “Contingent Consideration”). These additional payments, to the extent earned, will be payable in cash. The Company has estimated a preliminary purchase price of $29.0 million , comprised of the upfront cash payment of $24.0 million and $5.0 million for the estimated fair value of the Contingent Consideration.
The estimated fair value of the portion of the Contingent Consideration payments based on increases in interest rates is determined using a scenario approach based on the interest rate forecasts of Federal Open Market Committee participants. The estimated fair value of the portion of the Contingent Consideration payments potentially earned based on net revenue is determined using an option pricing model. The estimated value of the Contingent Consideration is based upon available information and certain assumptions, known at the time of this report, which management believes are reasonable. Any differences in the actual Contingent Consideration payments after the final determination of purchase price will be recorded in operating income (expense) in the consolidated statements of operations.
The acquisition has been accounted for as a business combination. The preliminary allocation of purchase price to the assets acquired and liabilities assumed is as follows (in thousands) :
 
Preliminary Fair Value
Intangible assets
$
9,600

Goodwill
19,389

Total preliminary purchase price
$
28,989

The Company primarily used the income approach for the valuation as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are buyers and sellers unrelated to the Company and fair value is determined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction at the measurement date.
The acquired intangible assets are definite-lived assets consisting primarily of developed technology, customer relationships and trade name and trademarks. The estimated fair values of the developed technology were determined using excess earnings analysis, the customer relationships were determined using the distributor method and the trade name and trademarks were determined using relief from royalty analysis. The fair value of the intangible assets with definite lives are as follows (dollars in thousands) :
 
Preliminary Fair Value
Weighted Average Amortization Life
Technology
$
8,600

5 years
Customer Lists
600

8 years
Trade name and trademarks
400

4 years
Total intangible assets
$
9,600


As of June 30, 2017, the Company has not completed its determination of the final purchase price or the final allocation of the purchase price to the assets and liabilities of the acquisition. The purchase price and final allocation of purchase price is expected to be finalized in the third quarter of 2017. Any adjustment to the preliminary purchase price or the assets and liabilities assumed with the acquisition will adjust goodwill.
The Company recorded preliminary goodwill of $19.4 million , which represents the excess of the purchase price over the estimated fair value of the intangible assets acquired. The goodwill is primarily attributable to DepositAccounts as a going concern which represents the ability of the Company to earn a higher return on the collection of assets and business of DepositAccounts than if those assets were to be acquired and managed separately. The benefit of access to the workforce is an additional element

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of goodwill. The goodwill is recorded in the Company’s one reportable segment. For income tax purposes, the Company treated the acquisition as an asset purchase and the goodwill will be tax deductible.
As of the acquisition date, the Company’s consolidated results of operations include the results of the acquired DepositAccounts business. In the second quarter of 2017, revenue of $0.3 million and net income from continuing operations of $0.1 million have been included in the Company’s consolidated results of operations. Acquisition-related costs were $0.2 million in the second quarter of 2017 and are included in general and administrative expense on the consolidated statement of operations and comprehensive income.
MagnifyMoney
On June 20, 2017, the Company acquired the membership interests of Camino Del Avion (Delaware), LLC, which does business under the name MagnifyMoney (“MagnifyMoney”) for $29.6 million cash consideration at the closing of the transaction. Camino del Avion (Delaware), LLC was immediately merged with and into LendingTree, LLC following such acquisition. MagnifyMoney is a leading consumer-facing media property that offers unbiased editorial content, expert commentary, tools and resources to help consumers compare financial products and make informed financial decisions. The Company also has an option to acquire a foreign affiliate of one of the principals for $0.5 million at any time during the three years after the closing. This foreign affiliate provides technology and research support to MagnifyMoney under a services agreement.
In addition, the Company issued two key employees of MagnifyMoney restricted stock unit awards for a total of 38,468 shares of Company common stock, and may issue a further restricted stock unit award for 19,234 shares to a third key employee of the foreign affiliate should he become employed by the Company following the Company’s exercise of the option to acquire the foreign affiliate. The total value of these restricted stock unit awards was $10.0 million on June 20, 2017. All of these restricted stock units will vest, if at all, on the basis of performance conditions following the acquisition.
The acquisition has been accounted for as a business combination. The preliminary allocation of purchase price to the assets acquired and liabilities assumed is as follows (in thousands) :
 
Preliminary Fair Value
Net working capital
$
821

Intangible assets
9,700

Goodwill
23,848

Deferred tax liabilities
(4,163
)
Noncontrolling interest
(651
)
Total preliminary purchase price
$
29,555

The Company primarily used the income approach for the valuation as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are buyers and sellers unrelated to the Company and fair value is determined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction at the measurement date.
The acquired intangible assets are definite-lived assets consisting primarily of content, developed technology, customer relationships and trade name and trademarks. The estimated fair values of the content was determined using excess earnings analysis, developed technology was determined using cost savings analysis, the customer relationships were determined using the distributor method and the trade name and trademarks were determined using relief from royalty analysis.

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The fair value of the intangible assets with definite lives are as follows (dollars in thousands) :
 
Preliminary Fair Value
Weighted Average Amortization Life
Technology
$
200

3 years
Customer lists
1,100

9 years
Trade name and trademarks
600

4 years
Content
7,800

3 years
Total intangible assets
$
9,700

 
As of June 30, 2017, the Company has not completed its determination of the final purchase price or the final allocation of the purchase price to the assets and liabilities of the acquisition. The purchase price and final allocation of purchase price is expected to be finalized in the third quarter of 2017. Any adjustment to the preliminary purchase price or the assets and liabilities assumed with the acquisition will adjust goodwill.
The Company recorded preliminary goodwill of $23.8 million , which represents the excess of the purchase price over the estimated fair value of the tangible and intangible assets acquired, net of the liabilities assumed. The goodwill is primarily attributable to MagnifyMoney as a going concern which represents the ability of the Company to earn a higher return on the collection of assets and business of MagnifyMoney than if those assets were to be acquired and managed separately. The benefit of access to the workforce is an additional element of goodwill. The goodwill is recorded in the Company’s one reportable segment. For income tax purposes, the Company treated the acquisition as an equity purchase and the goodwill will not be tax deductible.
The Company has determined that the foreign entity which provides technology and research support to MagnifyMoney under a services agreement is a variable interest entity which must be consolidated for financial reporting. The Company has recorded the assets, liabilities and non-controlling interest in this entity at their estimated fair value.
As of the acquisition date, the Company’s consolidated results of operations include the results of the acquired MagnifyMoney business. In the second quarter of 2017, revenue of $0.1 million and net income from continuing operations of $0.0 million have been included in the Company’s consolidated results of operations. Acquisition-related costs were $0.2 million and $0.4 million , respectively, in the second quarter and first six months of 2017, respectively, and are included in general and administrative expense on the consolidated statement of operations and comprehensive income.
Pro forma Financial Results
The unaudited pro forma financial results for the second quarter and first six months of 2016 combines the consolidated results of the Company and CompareCards, DepositAccounts and MagnifyMoney giving effect to the acquisitions as if the CompareCards acquisition had been completed on January 1, 2015 and as if the DepositAccounts and MagnifyMoney acquisitions had been completed on January 1, 2016. This unaudited pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the acquisition been completed as of January 1, 2015 or 2016, or any other date.
The unaudited pro forma financial results include adjustments for additional amortization expense based on the fair value of the intangible assets with definite lives and their estimated useful lives. The provision for income taxes from continuing operations has also been adjusted to reflect the results of operations of CompareCards and DepositAccounts and the adjustment to historical results. CompareCards and DepositAccounts did not pay taxes at the entity level as these entities were limited liability companies whose members elected for them to be taxed as a partnership.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Pro forma revenue
$
155,220

 
$
114,199

 
$
290,270

 
$
226,677

Pro forma net income from continuing operations
$
8,457

 
$
9,940

 
$
16,387

 
$
14,452

The pro forma net income from continuing operations in the second quarter and first six months of 2017 include the after tax contingent consideration expense associated with the CompareCards Earnout of $5.6 million and $10.9 million , respectively. The

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


pro forma net income from continuing operations for the first six months of 2016 have been adjusted to include acquisition-related costs of $0.8 million incurred by the Company, DepositAccounts and MagnifyMoney that are directly attributable to the acquisitions, which will not have an on-going impact. Accordingly, the acquisition-related costs have been eliminated from the pro forma net income from continuing operations for the second quarter and first six month of 2017.
NOTE 6 —ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands) :
 
June 30,
2017
 
December 31,
2016
Accrued litigation liabilities
$
1,301

 
$
736

Accrued advertising expense
46,387

 
26,976

Accrued compensation and benefits
5,868

 
5,626

Accrued professional fees
1,903

 
1,411

Customer deposits and escrows
5,173

 
5,041

Other
8,328

 
9,613

Total accrued expenses and other current liabilities
$
68,960

 
$
49,403

NOTE 7—SHAREHOLDERS' EQUITY  
Basic and diluted income per share was determined based on the following share data (in thousands) :
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Weighted average basic common shares
11,965

 
11,795

 
11,896

 
11,863

Effect of stock options
1,557

 
869

 
1,564

 
855

Effect of dilutive share awards
82

 
66

 
92

 
82

Weighted average diluted common shares
13,604

 
12,730

 
13,552

 
12,800

Other than the 0.625% Convertible Senior Notes and the warrants, which can be converted into the Company's common stock in the future, as discussed below, no shares related to potentially dilutive securities were excluded from the calculation of diluted income per share for the three and six months ended June 30, 2017 and 2016 .
The 0.625% Convertible Senior Notes due June 1, 2022 and the warrants issued by the Company in the second quarter of 2017 could be converted into the Company’s common stock in the future, subject to certain contingencies. See Note 10 —Debt for additional information. Shares of the Company’s common stock associated with these instruments were excluded from the calculation of diluted income per share as they are anti-dilutive since the conversion price of the Convertible Senior Notes and the strike price of the warrants were greater than the average market price of the Company’s common stock during the second quarter of 2017.
 
Common Stock Repurchases
In each of January 2010, May 2014, January 2016 and February 2016, the board of directors authorized and the Company announced the repurchase of up to $10.0 million , $10.0 million , $50.0 million and $40.0 million , respectively, of LendingTree's common stock.  During the six months ended June 30, 2016, the Company purchased 686,627 shares of its common stock pursuant to this stock repurchase program. At June 30, 2017 , approximately $48.7 million of the previous authorizations to repurchase common stock remain available for the Company to purchase its common stock. 

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NOTE 8 —STOCK-BASED COMPENSATION
Non-cash compensation related to equity awards is included in the following line items in the accompanying consolidated statements of operations and comprehensive income (in thousands) :
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Cost of revenue
$
45


$
29

 
$
88

 
$
70

Selling and marketing expense
692


655

 
1,177

 
1,381

General and administrative expense
1,601


1,129

 
2,820

 
2,439

Product development
562


616

 
1,045

 
1,172

Total non-cash compensation
$
2,900

 
$
2,429

 
$
5,130

 
$
5,062

Stock Options
A summary of changes in outstanding stock options is as follows:
 
Number of Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value (a)
 
 
 
(per option)
 
(in years)
 
(in thousands)
Options outstanding at January 1, 2017
1,991,802

 
$
21.23

 
 
 
 

Granted (b)
26,229

 
156.14

 
 
 
 

Exercised
(172,025
)
 
30.53

 
 
 
 

Forfeited
(20,001
)
 
71.04

 
 
 
 

Expired

 

 
 
 
 

Options outstanding at June 30, 2017
1,826,005

 
21.74

 
4.76
 
$
274,738

Options exercisable at June 30, 2017
1,077,526

 
$
11.99

 
2.98
 
$
172,635

(a)
The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price of $172.20 on the last trading day of the quarter ended June 30, 2017 and the exercise price, multiplied by the number of shares covered by in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2017 . The intrinsic value changes based on the market value of the Company's common stock.
(b)
During the six months ended June 30, 2017 , the Company granted stock options to certain employees and members of the board of directors with a weighted average grant date fair value per share of $77.53 , calculated using the Black-Scholes option pricing model, which vesting periods include (a) three years from the grant date, (b) two years from the grant date and (c) immediately upon grant.
For purposes of determining stock-based compensation expense, the weighted average grant date fair value per share of the stock options was estimated using the Black-Scholes option pricing model, which requires the use of various key assumptions. The weighted average assumptions used are as follows:
Expected term (1)
5.00 - 6.00 years

Expected dividend (2)

Expected volatility (3)
51% - 52%

Risk-free interest rate (4)
1.74% - 2.17%

(1)
The expected term of stock options granted was calculated using the "Simplified Method," which utilizes the midpoint between the weighted average time of vesting and the end of the contractual term. This method was utilized for the stock options due to a lack of historical exercise behavior by the Company's employees.

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(2)
For all stock options granted in 2017 , no dividends are expected to be paid over the contractual term of the stock options, resulting in a zero expected dividend rate.
(3)
The expected volatility rate is based on the historical volatility of the Company's common stock.
(4)
The risk-free interest rate is specific to the date of grant. The risk-free interest rate is based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date.
Restricted Stock Units and Restricted Stock
A summary of the changes in outstanding nonvested restricted stock units ("RSUs") and restricted stock is as follows:
 
RSUs
 
Number of Units
 
Weighted Average Grant Date Fair Value
 
 
 
(per unit)
Nonvested at January 1, 2017
152,374

 
$
65.64

Granted
76,344

 
132.43

Vested
(65,562
)
 
51.15

Forfeited
(10,383
)
 
81.03

Nonvested at June 30, 2017
152,773

 
$
104.20

 
 
Restricted Stock
 
Number of
Shares
 
Weighted Average Grant Date Fair Value
 
 
 
(per share)
Nonvested at January 1, 2017
14,464

 
$
25.14

Granted

 

Vested
(14,464
)
 
25.14

Forfeited

 

Nonvested at June 30, 2017

 
$


Restricted Stock Units with Performance Conditions
A summary of the changes in outstanding nonvested RSUs with performance conditions is as follows:
 
RSUs with Performance Conditions
 
Number of Units
 
Weighted Average Grant Date Fair Value
 
 
 
(per unit)
Nonvested at January 1, 2017
44,509

 
$
88.28

Granted
53,306

 
164.07

Vested
(931
)
 
89.49

Forfeited

 

Nonvested at June 30, 2017
96,884

 
$
129.97


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NOTE 9 —INCOME TAXES
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except percentages)
Income tax benefit (expense)
$
104

 
$
(3,572
)
 
$
1,183

 
$
(8,370
)
Effective tax rate
(1.3
)%
 
28.4
%
 
(8.1
)%
 
34.5
%
For the three and six months ended June 30, 2017 , the effective tax rate varied from the federal statutory rate of 35% primarily due to a tax benefit of $3.8 million and $7.6 million , respectively, recognized for excess tax benefits due to employee exercises of stock options and vesting of restricted stock in accordance with ASU 2016-09. See Note 2 Significant Accounting Policies Recent Accounting Pronouncements for additional information.
For the three and six months ended June 30, 2016 , the effective tax rate varied from the federal statutory rate of 35% primarily due to the benefit derived from the federal research tax credit, partially offset by state taxes. The federal research tax credit benefit is the result of a study completed during the quarter for the open tax years 2011 through 2015, plus an estimate of the benefit from research activities.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Income tax expense - excluding excess tax benefit on stock compensation
$
(3,736
)
 
$
(3,572
)
 
$
(6,420
)
 
$
(8,370
)
Excess tax benefit on stock compensation
3,840

 

 
7,603

 

Income tax benefit (expense)
$
104

 
$
(3,572
)
 
$
1,183

 
$
(8,370
)
NOTE 10 —DEBT
Convertible Senior Notes
On May 31, 2017, the Company issued $300.0 million aggregate principal amount of its 0.625% Convertible Senior Notes due June 1, 2022 (the “Notes”) in a private placement. The issuance included $35.0 million aggregate principal amount of Notes under a 30-day purchase option, solely to cover over-allotments, which was exercised in full. The Notes bear interest at a rate of 0.625% per year, payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2017. The Notes will mature on June 1, 2022, unless earlier repurchased or converted.
The initial conversion rate of the Notes is 4.8163 shares of Common Stock per $1,000 principal amount of Notes (which is equivalent to an initial conversion price of approximately $207.63 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a fundamental change prior to the maturity of the Notes, the Company will, in certain circumstances, increase the conversion rate by a specified number of additional shares for a holder that elects to convert the Notes in connection with such fundamental change. Upon conversion, the Notes will settle for cash, shares of the Company’s stock, or a combination thereof, at the Company’s option. It is the intent of the Company to settle the principal amount of the Notes in cash and any conversion premium in shares of its common stock.
The Notes are the Company’s senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness, including borrowings under the Senior Secured Credit Facility, described below, to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

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Prior to the close of business on the business day immediately preceding February 1, 2022, the Notes will be convertible at the option of the holders thereof only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on September 30, 2017 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading day period ending on, and including the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period in which, for each trading day of that period, the trading price (as defined in the Notes) per $1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale price of the Common Stock and the conversion rate on each such trading day; or
upon the occurrence of specified corporate events including but not limited to a fundamental change.
On or after February 1, 2022, until the close of business on the second scheduled trading day immediately preceding the maturity date of the Notes, holders of the Notes may convert all or a portion of their Notes regardless of the foregoing conditions.
The Company may not redeem the Notes prior to the maturity date and no sinking fund is provided for the Notes. Upon the occurrence of a fundamental change prior to the maturity date of the Notes, holders of the Notes may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
If the market price per share of the Common Stock, as measured under the terms of the Notes, exceeds the conversion price of the Notes, the Notes could have a dilutive effect, unless the Company elects, subject to certain conditions, to settle the principal amount of the Notes and any conversion premium in cash.
The initial measurement of convertible debt instruments that may be settled in cash are separated into a debt and equity component whereby the debt component is based on the fair value of a similar instrument that does not contain an equity conversion option. The separate components of debt and equity of the Company’s Notes were determined using an interest rate of 5.36% , which reflects the nonconvertible debt borrowing rate of the Company at the date of issuance. As a result, the initial components of debt and equity were $238.4 million and $61.6 million , respectively.
In the second quarter of 2017, the Company recorded interest expense on the Notes of $1.1 million which consisted of $0.2 million associated with the 0.625% coupon rate and $0.9 million associated with the accretion of the debt discount. The debt discount will be amortized over the term of the debt.
Financing costs related to the issuance of the Notes were approximately $9.2 million of which $7.3 million were allocated to the liability component and are being amortized to interest expense over the term of the debt and $1.9 million were allocated to the equity component.
As of June 30, 2017 , the fair value of the Notes is estimated to be approximately $328.9 million using the Level 1 observable input of the last quoted market price on June 29, 2017.
A summary of the gross carrying amount, unamortized debt cost, debt issuance costs and net carrying value of the liability component of the Notes are as follows (in thousands) :
 
June 30,
2017
 
December 31,
2016
Gross carrying amount
$
300,000

 
$

Unamortized debt discount
60,679

 

Debt issuance costs
7,226

 

Net carrying amount
$
232,095

 
$

Convertible Note Hedge and Warrant Transactions
On May 31, 2017, in connection with the issuance of the Notes, the Company entered into Convertible Note Hedge (the “Hedge”) and Warrant transactions with respect to the Company’s common stock. The Company used approximately $18.1 million

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


of the net proceeds from the Notes to pay for the cost of the Hedge, after such cost was partially offset by the proceeds from the Warrant transactions.
On May 31, 2017, the Company paid $61.5 million to the counterparties for the Hedge transactions. The Hedge transactions cover approximately 1.4 million shares of the Company’s common stock, the same number of shares initially underlying the Notes, and are exercisable upon any conversion of the Notes. The Hedge Transactions are expected generally to reduce the potential dilution to the Common Stock upon conversion of the Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted Notes, as the case may be, in the event that the market price per share of Common Stock, as measured under the terms of the Hedge transactions, is greater than the strike price of the Hedge transactions, which initially corresponds to the initial conversion price of the Notes, or approximately $207.63 per share of Common Stock. The Hedge transactions will expire upon the maturity of the Notes.
On May 31, 2017, the Company sold to the counterparties, warrants (the "Warrants") to acquire 1.4 million shares of Common Stock at an initial strike price of $266.39 per share, which represents a premium of 70% over the reported sale price of the Common Stock of $156.70 on May 24, 2017. On May 31, 2017, the Company received aggregate proceeds of approximately $43.4 million from the sale of the Warrants.
If the market price per share of the Common Stock, as measured under the terms of the Warrants, exceeds the strike price of the Warrants, the Warrants could have a dilutive effect, unless the Company elects, subject to certain conditions, to settle the Warrants in cash.
The Hedge and Warrant transactions are indexed to, and potentially settled in, the Company's common stock and the net cost of $18.1 million has been recorded as a reduction to additional paid-in capital in the consolidated statement of shareholders’ equity.
Senior Secured Revolving Credit Facility
On October 22, 2015, the Company's wholly-owned subsidiary, LendingTree, LLC, entered into a $125.0 million five -year senior secured revolving credit facility which matures on October 22, 2020 (the “Revolving Credit Facility”). The proceeds of the Revolving Credit Facility can be used to finance the working capital needs, capital expenditures and general corporate purposes, including to finance permitted acquisitions. As of June 30, 2017 , the Company does not have any borrowings outstanding under the Revolving Credit Facility.
Up to $10.0 million of the Revolving Credit Facility will be available for short-term loans, referred to as swingline loans. Additionally, up to $10.0 million of the Revolving Credit Facility will be available for the issuance of letters of credit. Under certain conditions, the Company will be permitted to add one or more term loans and/or increase revolving commitments under the Revolving Credit Facility up to an aggregate amount of $50.0 million .
The Company’s borrowings under the Revolving Credit Facility bear interest at annual rates that, at the Company’s option, will be either:
a base rate generally defined as the sum of (i) the greater of (a) the prime rate of SunTrust Bank , (b) the federal funds effective rate plus 0.5% and (c) the LIBO rate (defined below) on a daily basis applicable for an interest period of one month plus 1.0% and (ii) an applicable percentage of 1.0% to 2.0% based on the funded debt to consolidated EBITDA ratio; or
a LIBO rate generally defined as the sum of (i) the rate for Eurodollar deposits in the applicable currency and (ii) an applicable percentage of 2.0% to 3.0% based on the funded debt to consolidated EBITDA ratio.
All swingline loans bear interest at the base rate defined above. Interest on the Company’s borrowings are payable quarterly in arrears for base rate loans and on the last day of each interest rate period (but not less often than three months) for LIBO rate loans.
The Revolving Credit Facility contains certain restrictive financial covenants, which include a funded debt to consolidated EBITDA ratio and a consolidated EBITDA to interest expense ratio. In addition, the Revolving Credit Facility contains customary affirmative and negative covenants in addition to events of default for a transaction of this type that, among other things, restrict additional indebtedness, liens, mergers or certain fundamental changes, asset dispositions, dividends, stock repurchases and other restricted payments, transactions with affiliates, sale-leaseback transactions, hedging transactions, loans and investments and other matters customarily restricted in such agreements. The Company was in compliance with all covenants at June 30, 2017 .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


During the second quarter of 2017, the Company entered into the Second Amendment to Credit Agreement (the “Second Amendment”). Among other things, the Second Amendment modified the original credit agreement to allow for the Notes and the Hedge and Warrant transactions, discussed above. The Second Amendment also increased the restrictive financial covenant for funded debt to consolidated EBITDA ratio. In addition, the Second Amendment also allows the Company to enter into a potential real estate term loan of an aggregate principal amount of no more than (a) $20.0 million which shall be used to finance all or a portion of the purchase price of certain real estate purchased in December 2016 and located in Charlotte, North Carolina, and (b) $25.0 million which shall be used to finance post-acquisition improvements to such real estate, related equipment, and related hedging obligations. As of July 28, 2017, the Company has not entered into the real estate term loan.
The Revolving Credit Facility requires LendingTree, LLC to pledge as collateral, subject to certain customary exclusions, 100% of its assets, including 100% of its equity in all of its subsidiaries. The obligations under this facility are unconditionally guaranteed on a senior basis by LendingTree, Inc. and specific subsidiaries of LendingTree, LLC, which guaranties are secured by a pledge as collateral, subject to certain customary exclusions, of 100% of each of such guarantor's assets, including 100% of its equity in all of its subsidiaries.
The Company is required to pay an unused commitment fee quarterly in arrears on the difference between committed amounts and amounts actually borrowed under the Revolving Credit Facility equal to an applicable percentage of 0.25% to 0.5% per annum based on a funded debt to consolidated EBITDA ratio. The Company is required to pay a letter of credit participation fee and a letter of credit fronting fee quarterly in arrears. The letter of credit participation fee is based upon the aggregate face amount of outstanding letters of credit at an applicable percentage of 2.0% to 3.0% based on the funded debt to consolidated EBITDA ratio. The letter of credit fronting fee is 0.125% per annum on the face amount of each letter of credit.
The Company incurred debt issuance costs of $1.3 million for the Revolving Credit Facility, which is included in prepaid and other current assets and other non-current assets in the Company's consolidated balance sheet and is being amortized to interest expense over the life of the Revolving Credit Facility of five years.
NOTE 11 —CONTINGENCIES
Overview
LendingTree is involved in legal proceedings on an ongoing basis. In assessing the materiality of a legal proceeding, the Company evaluates, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require it to change its business practices in a manner that could have a material and adverse impact on the business. With respect to the matters disclosed in this Note 11 , unless otherwise indicated, the Company is unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.
As of June 30, 2017 and December 31, 2016 , the Company had a litigation settlement accrual of $1.3 million and $0.7 million , respectively, in continuing operations and $4.0 million and $4.0 million , respectively, in discontinued operations. The litigation settlement accrual relates to litigation matters that were either settled or a firm offer for settlement was extended, thereby establishing an accrual amount that is both probable and reasonably estimable.
Specific Matters
Intellectual Property Litigation
Zillow
LendingTree v. Zillow, Inc., et al. Civil Action No. 3:10-cv-439 . On September 8, 2010, the Company filed an action for patent infringement in the US District Court for the Western District of North Carolina against Zillow, Inc., NexTag, Inc., Quinstreet, Inc., Quinstreet Media, Inc. and Adchemy, Inc. The complaint was amended to include Leadpoint, Inc. d/b/a Securerights on September 24, 2010. The complaint alleged that each of the defendants infringed one or both of the Company's patents-U.S. Patent No. 6,385,594, entitled "Method and Computer Network for Co-Ordinating a Loan over the Internet," and U.S. Patent No. 6,611,816, entitled "Method and Computer Network for Co-Ordinating a Loan over the Internet." The defendants in this action asserted various defenses and counterclaims against the Company, including the assertion by certain of the defendants of counterclaims alleging illegal monopolization via the Company's maintenance of the asserted patents. Defendant NexTag asserted defenses of laches and equitable estoppel. In July 2011, the Company reached a settlement agreement with Leadpoint, Inc., pursuant

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


to which all claims against Leadpoint, Inc. and all counterclaims against the Company by Leadpoint, Inc. were dismissed. In November 2012, the Company reached a settlement agreement with Quinstreet, Inc. and Quinstreet Media, Inc. (collectively, the "Quinstreet Parties"), pursuant to which all claims against the Quinstreet Parties and all counterclaims against the Company by the Quinstreet Parties were dismissed. After an unsuccessful attempt to reach settlement through mediation with the remaining parties, this matter went to trial beginning in February 2014, and on March 12, 2014, the jury returned a verdict. The jury found that the defendants Zillow, Inc., Adchemy, Inc. and NexTag, Inc. did not infringe the two patents referenced above and determined that those patents are invalid due to an inventorship defect, and the court found that NexTag was entitled to defense of laches and equitable estoppel. The jury found in the Company's favor on the defendants' counterclaims alleging inequitable conduct and antitrust violations. Judgment was entered on March 31, 2014. After the court entered judgment, on May 27, 2014, the Company reached a settlement agreement with defendant Adchemy, Inc., including an agreement to dismiss and withdraw all claims, counterclaims, and motions between the Company and Adchemy, Inc. As a result, a joint and voluntary dismissal was filed June 12, 2014 with respect to claims between the Company and Adchemy. The parties filed various post-trial motions; in particular, defendants collectively sought up to $9.7 million in fees and costs. On October 9, 2014, the court denied the Company's post-trial motion for judgment as a matter of law and denied Zillow's post-trial motions for sanctions and attorneys' fees. The court also denied in part and granted in part NexTag's post-trial motion for attorneys' fees, awarding NexTag a portion of its attorney's fees and costs totaling $2.3 million , plus interest.
In November 2014, the Company filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit with respect to the jury verdict concerning Zillow, Inc. and NexTag, Inc. and the award of attorneys' fees. In March 2015, the U.S. Court of Appeals for the Federal Circuit granted the Company's motion to stay appellate briefing pending an en banc review by such court of the laches defense in an unrelated patent infringement matter and ruled in favor of Zillow, Inc. on an immaterial amount of costs related to the trial process. In June 2015, the Company reached a settlement agreement for $1.1 million with defendant NexTag pursuant to which the Company dismissed its appeal of the jury verdict and the award of attorney's fees concerning NexTag, and NexTag dismissed its cross-appeal and claims relating to the jury verdict and the award of attorneys' fees. In July 2015, the stay was lifted on the Company's appeal with respect to the jury verdict concerning Zillow, Inc. The appeal was heard by the U.S. Court of Appeals for the Federal Circuit in June 2016, and in July 2016 the Court determined that certain of the claims of the two patents referenced above were directed to ineligible subject matter and thus such claims were invalid under 35 U.S.C. Section 101. With respect to the remaining claims that the Court did not hold were ineligible, the Court granted a remand to the federal district court to allow LendingTree to file a motion to vacate the judgment of invalidity for incorrect inventorship.
In June 2017, the Federal District Court vacated the invalidity judgment arising from the March 2014 jury verdict.  As a result, certain claims of the Company's two issued patents remain valid.  The case is now closed and the Company expects no further significant events regarding this litigation.  
Legal Matters
Next Advisor Continued, Inc.
Next Advisor Continued, Inc. v. LendingTree, Inc. and LendingTree, LLC, No. 15-cvs-20775 (N.C. Super. Ct.) . On November 6, 2015, the plaintiff filed this action against LendingTree, Inc. and LendingTree, LLC (together "LendingTree"). The plaintiff generally alleges that LendingTree breached a non-disclosure agreement and misappropriated trade secrets in the context of a potential business acquisition of the plaintiff by LendingTree. Based upon these allegations, the plaintiff asserts claims for breach of contract, misappropriation of trade secrets and violation of North Carolina Unfair and Deceptive Trade Practices Act. The plaintiff seeks damages, attorneys' fees and injunctive relief.
On December 16, 2015, LendingTree filed its answer to the plaintiff's complaint, denying the material allegations and asserting numerous defenses thereto. In June 2016, the Court granted plaintiff's motion for preliminary injunction and ordered that LendingTree cease any utilization of confidential and trade secret information of plaintiff and cease marketing its credit card product via certain third party content marketing platforms until the judge finally determines the facts in this matter and the appropriate relief, if any, to be granted with respect thereto. LendingTree believes that the plaintiff's allegations lack merit and intends to vigorously defend this action. In July 2016, LendingTree filed a notice of interlocutory appeal with respect to the order granting plaintiff's motion for preliminary injunction to the North Carolina Supreme Court; the interlocutory appeal was dismissed in December 2016. In February 2017, LendingTree filed a motion for partial summary judgment. In June 2017, the court granted LendingTree's motion for partial summary judgment, ruling that plaintiff is not entitled to injunctive relief after January 2, 2018 and that plaintiff is not entitled to recover compensatory damages on any of plaintiff's claims. LendingTree and the plaintiff are

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LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


currently in settlement discussions. An estimated liability of $0.8 million for this matter is included in the accompanying consolidated balance sheet as of June 30, 2017 .
Massachusetts Division of Banks
On February 11, 2011, the Massachusetts Division of Banks (the "Division") delivered a Report of Examination/Inspection to LendingTree, LLC, which identified various alleged violations of Massachusetts and federal laws, including the alleged insufficient delivery by LendingTree, LLC of various disclosures to its customers. On October 14, 2011, the Division provided a proposed Consent Agreement and Order to settle the Division's allegations, which the Division had shared with other state mortgage lending regulators. Thirty-four of such state mortgage lending regulators (the "Joining Regulators") indicated that if LendingTree, LLC would enter into the Consent Agreement and Order, they would agree not to pursue any analogous allegations that they otherwise might assert. None of the Joining Regulators have asserted any such allegations.
 The proposed Consent Agreement and Order calls for a fine to be allocated among the Division and the Joining Regulators and for LendingTree, LLC to adopt various new procedures and practices. The Company has commenced negotiations toward an acceptable Consent Agreement and Order. It does not believe its mortgage marketplace business violated any federal or state mortgage lending laws; nor does it believe that any past operations of the mortgage business have resulted in a material violation of any such laws. Should the Division or any Joining Regulator bring any actions relating to the matters alleged in the February 2011 Report of Examination/Inspection, the Company intends to defend against such actions vigorously. The range of possible loss is estimated to be between $0.5 million and $6.5 million , and an estimated liability of $0.5 million has been established for this matter in the accompanying consolidated balance sheet as of June 30, 2017
Litigation Related to Discontinued Operations
Residential Funding Company
Residential Funding Company, LLC v Home Loan Center, Inc., No. 13-cv-3451 (U.S. Dist. Ct., Minn.).  On or about December 16, 2013, Home Loan Center, Inc. was served in the above captioned matter. Generally, Residential Funding Company, LLC ("RFC") seeks damages for breach of contract and indemnification for certain residential mortgage loans as well as residential mortgage-backed securitizations ("RMBS") containing mortgage loans. RFC asserts that, beginning in 2008, RFC faced massive repurchase demands and lawsuits from purchasers or insurers of the loans and RMBS that RFC had sold. RFC filed for bankruptcy protection in May 2012. Plaintiff alleges that, after RFC filed for Chapter 11 protection, hundreds of proofs of claim were filed, many of which mirrored the litigation filed against RFC prior to its bankruptcy.
In December 2013, the United States Bankruptcy Court for the Southern District of New York entered an Order confirming the Second Amended Joint Chapter 11 Plan Proposed by Residential Capital, LLC et al. and the Official Committee of Unsecured Creditors. Plaintiff then began filing substantially similar complaints against approximately 80 of the loan originators from whom RFC had purchased loans, including Home Loan Center, in federal and state courts in Minnesota and New York. In each case, Plaintiff claims that the defendant is liable for a portion of the global settlement in RFC’s bankruptcy.
Plaintiff asserts two claims against HLC: (1) breach of contract based on HLC’s alleged breach of representations and warranties concerning the quality and characteristics of the mortgage loans it sold to RFC (Count One); and (2) contractual indemnification for alleged liabilities, losses, and damages incurred by RFC arising out of purported defects in loans that RFC purchased from HSBC and sold to third parties (Count Two). Plaintiff alleges that the “types of defects” contained in the loans it purchased from HLC included “income misrepresentation, employment misrepresentation, appraisal misrepresentations or inaccuracies, undisclosed debt, and missing or inaccurate documents.”
HLC filed a Motion to Dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure or, in the alternative, a Motion for More Definite Statement under Rule 12(e). On June 25, 2015 the judge denied HLC's motion.
On July 9, 2015, HLC filed its answer to RFC’s complaint, denying the material allegations of the complaint and asserting numerous defenses thereto.   Discovery is ongoing in this matter.  Plaintiff is seeking damages of $61.0 million in this action; HLC intends to vigorously defend this action. An estimated liability of $3.0 million for this matter is included in the accompanying consolidated balance sheet as of June 30, 2017 .
Lehman Brothers Holdings, Inc.
Lehman Brothers Holdings Inc. v. 1st Advantage Mortgage, LLC et al., Case No. 08-13555 (SCC), Adversary Proceeding No. 16-01342 (SCC) (Bankr. S.D.N.Y.). In February 2016, Lehman Brothers Holdings, Inc. (“LBHI”) filed an Adversary Complaint

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LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


against Home Loan Center and approximately 149 other defendants (the "Complaint"). The Complaint generally seeks (1) a declaratory judgment that the settlements entered into by LBHI with Fannie Mae and Freddie Mac as part of LBHI's bankruptcy proceedings gave rise to LBHI's contractual indemnification claims against defendants alleged in the Complaint; (2) indemnification from HLC and the other defendants for losses allegedly incurred by LBHI in respect of defective mortgage loans sold by defendants to LBHI or its affiliates; and (3) interest, attorneys' fees and costs incurred by LBHI in the litigation. On March 31, 2017, HLC filed an omnibus motion to dismiss with other defendants. HLC intends to defend this action vigorously. HLC had previously received a demand letter (the "Letter") from LBHI in December 2014 with respect to 64 loans (the “Loans”) that LBHI alleges were sold by HLC to Lehman Brothers Bank, FSB (“LBB”) between 2004 and 2008 pursuant to a loan purchase agreement (the “LPA”) between HLC and LBB.  The Letter generally sought indemnification from HLC in accordance with the LPA for certain claims that LBHI alleged it allowed in its bankruptcy with respect to the Loans.  An estimated liability of $1.0 million for this matter is included in the accompanying consolidated balance sheet as of June 30, 2017 .
NOTE 12—FAIR VALUE MEASUREMENTS
Other than the 0.625% Convertible Senior Notes and the Warrants, the carrying amounts of the Company's financial instruments are equal to fair value at June 30, 2017 . See Note 10—Debt for additional information on the 0.625% Convertible Senior Notes and the Warrants.
Contingent consideration payments related to acquisitions are measured at fair value each reporting period using Level 3 unobservable inputs. The changes in the fair value of the Company's Level 3 liabilities during the six months ended June 30, 2017 are as follows (in thousands) :
 
Contingent Consideration
Balance at December 31, 2016
$
23,100

Transfers into Level 3

Transfers out of Level 3

Total net gains (losses) included in earnings (realized and unrealized)
18,139

Purchases, sales and settlements:
 
Additions
4,988

Payments

Balance at June 30, 2017
$
46,227

The contingent consideration liability at June 30, 2017 is the estimated fair value of the Earnout Payments of the CompareCards and DepositAccounts acquisitions. The Company will make Earnout Payments ranging from zero to $45.0 million based on the achievement of certain defined earnings targets for CompareCards and payments ranging from zero to $9.0 million based on the achievement of defined milestone and performance targets for DepositAccounts. See Note 5 —Business Acquisition for additional information on the contingent consideration for each of these respective acquisitions. The significant unobservable inputs used to calculate the fair value of the contingent consideration are estimated future cash flows for the acquisitions, estimated date and likelihood of an increase in interest rates and the discount rate. Actual results will differ from the projected results and could have a significant impact on the estimated fair value of the contingent considerations. Additionally, as the liability is stated at present value, the passage of time alone will increase the estimated fair value of the liability each reporting period. Any changes in fair value will be recorded in operating income (expense) in the consolidated statements of operations and comprehensive income.

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LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 13—SEGMENT INFORMATION
The Company has one reportable segment.
Mortgage and non-mortgage product revenue is as follows (in thousands)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
2016
 
2017
2016
Mortgage products
$
71,515

$
56,032

 
$
134,453

$
111,048

Non-mortgage products
81,258

38,258

 
150,835

77,955

Total revenue
$
152,773

$
94,290

 
$
285,288

$
189,003

NOTE 14 —DISCONTINUED OPERATIONS
The revenue and net loss reported as discontinued operations in the accompanying consolidated statements of operations and comprehensive income are as follows (in thousands) :
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$

 
$

 
$
(750
)
 
$
1

 
 
 
 
 
 
 
 
Loss before income taxes
$
(1,059
)
 
$
(1,769
)
 
$
(2,494
)
 
$
(3,619
)
Income tax benefit
370

 
619

 
873

 
1,266

Net loss
$
(689
)
 
$
(1,150
)
 
$
(1,621
)
 
$
(2,353
)
LendingTree Loans
On June 6, 2012, the Company sold substantially all of the operating assets of its LendingTree Loans business for $55.9 million in cash to a wholly-owned subsidiary of Discover Financial Services ("Discover"). Discover generally did not assume liabilities of the LendingTree Loans business that arose before the closing date, except for certain liabilities directly related to assets Discover acquired. Of the purchase price paid, as of June 30, 2017 , $4.0 million is being held in escrow in accordance with the agreement with Discover for certain loan loss obligations that remain with the Company following the sale. The escrowed amount is recorded as restricted cash as of June 30, 2017 .
Significant Assets and Liabilities of LendingTree Loans
Upon closing of the sale of substantially all of the operating assets of the LendingTree Loans business on June 6, 2012, LendingTree Loans ceased to originate consumer loans. Liability for losses on previously sold loans will remain with LendingTree Loans and are discussed below.
Loan Loss Obligations
LendingTree Loans sold loans it originated to investors on a servicing-released basis, so the risk of loss or default by the borrower was generally transferred to the investor. However, LendingTree Loans was required by these investors to make certain representations and warranties relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the loan. Subsequent to the loan sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual loans, LendingTree Loans may be obligated to repurchase the respective loan or indemnify the investors for any losses from borrower defaults if such deficiency or defect cannot be cured within the specified period following discovery. In the case of early loan payoffs and early defaults on certain loans, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor.
HLC, a subsidiary of the Company, continues to be liable for these indemnification obligations, repurchase obligations and premium repayment obligations following the sale of substantially all of the operating assets of its LendingTree Loans business in the second quarter of 2012.

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LENDINGTREE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table represents the aggregate loans sold, subsequent settlements and remaining unsettled loans.
 
Number of Loans
 
Original Issue Balance
 
(in thousands)
 
(in billions)
Loans sold by HLC
234

 
$
38.9

Subsequent settlements
(172
)
 
(28.8
)
Remaining unsettled balance as of June 30, 2017
62

 
$
10.1

During the fourth quarter of 2015, LendingTree Loans completed a settlement agreement for $0.6 million with one of the investors to which it had sold loans. This investor accounted for approximately 10% of the total number of loans sold and 12% of the original issue balance. This settlement related to all existing and future losses on loans sold to this investor.
During the fourth quarter of 2014, LendingTree Loans completed a settlement agreement for $5.4 million with the largest investor to which it had sold loans. This investor accounted for approximately 40% of both the total number of loans sold and the original issue balance. This settlement related to all existing and future losses on loans sold to this investor.
In the second quarter of 2014, LendingTree Loans completed settlements with two buyers of previously purchased loans.
The Company has been negotiating with certain of the remaining secondary market purchasers to settle any existing and future contingent liabilities, but it may not be able to complete such negotiations on acceptable terms, or at all. Because LendingTree Loans does not service the loans it sold, it does not maintain nor generally have access to the current balances and loan performance data with respect to the individual loans previously sold to investors. Accordingly, LendingTree Loans is unable to determine, with precision, its maximum exposure for breaches of the representations and warranties it made to the investors that purchased such loans.
The Company uses a settlement discount framework for evaluating the adequacy of the reserve for loan losses. This model estimates lifetime losses on the population of remaining loans originated and sold by LendingTree Loans using actual defaults for loans with similar characteristics and projected future defaults. It also considers the likelihood of claims expected due to alleged breaches of representations and warranties made by LendingTree Loans and the percentage of those claims investors estimate LendingTree Loans may agree to repurchase. A settlement discount factor is then applied to the result of the foregoing to reflect publicly-announced bulk settlements for similar loan types and vintages, as well as LendingTree Loans' non-operating status, in order to estimate a range of potential obligation.
The estimated range of remaining loan losses using this settlement discount framework was determined to be $4.3 million to $7.9 million at June 30, 2017 . The reserve balance recorded as of June 30, 2017 was $7.6 million . Management has considered both objective and subjective factors in the estimation process, but given current general industry trends in mortgage loans as well as housing prices and market expectations, actual losses related to LendingTree Loans' obligations could vary significantly from the obligation recorded as of the balance sheet date or the range estimated above.
Additionally, LendingTree has guaranteed certain loans sold to two investors in the event that LendingTree Loans is unable to satisfy its repurchase and warranty obligations related to such loans.
Based on historical experience, it is anticipated that LendingTree Loans will continue to receive repurchase requests and incur losses on loans sold in prior years.
The activity related to loss reserves on previously sold loans is as follows (in thousands) :
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Loan loss reserve, beginning of period
$
7,554

 
$
8,127

 
$
6,804

 
$
8,127

Provisions

 

 
750

 

Charge-offs to reserves

 

 

 

Loan loss reserve, end of period
$
7,554

 
$
8,127

 
$
7,554

 
$
8,127

The liability for losses on previously sold loans is presented as current liabilities of discontinued operations in the accompanying consolidated balance sheet as of June 30, 2017 and December 31, 2016 .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 15—SUBSEQUENT EVENT
On July 25, 2017, the Company’s Compensation Committee of its Board of Directors approved new compensation arrangements for Douglas Lebda, its Chairman and Chief Executive Officer. The new compensation arrangements include the issuance of performance based equity compensation grants to Mr. Lebda with a modeled total grant date value of $87.5 million of which 25% would be in the form of time-vested restricted stock awards with a performance condition and 75% would be in the form of performance-based nonqualified stock options. The performance-based nonqualified stock options have a target number of shares that vest upon achieving targeted total shareholder return performance of 110% stock price appreciation and a maximum number of shares for achieving superior performance up to 167% of the target number of shares. No shares will vest unless 70% of the targeted performance is achieved. Time-based service vesting conditions would also have to be satisfied in order for performance-vested shares to become fully vested and no longer subject to forfeiture. In connection with the new compensation arrangements, on July 26, 2017, Mr. Lebda received an initial grant of performance-based nonqualified stock options with a target number of shares of 402,694 and a maximum number of shares of 672,499 . Mr. Lebda will also be entitled to future equity grants in each of 2018 through 2020.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations  
Cautionary Statement Regarding Forward-Looking Information
This report contains "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. These forward-looking statements also include statements related to our anticipated financial performance, business prospects and strategy; anticipated trends and prospects in the various industries in which our businesses operate; new products, services and related strategies; and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. The use of words such as "anticipates," "estimates," "expects," "projects," "intends," "plans" and "believes," among others, generally identify forward-looking statements. 
Actual results could differ materially from those contained in the forward-looking statements. Factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include those matters discussed or referenced in Part II, Item 1A. Risk Factors included elsewhere in this quarterly report and Part I, Item 1A. Risk Factors of the 2016 Annual Report.
Other unknown or unpredictable factors that could also adversely affect our business, financial condition and results of operations may arise from time to time. In light of these risks and uncertainties, the forward-looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward-looking statements, which only reflect the views of LendingTree management as of the date of this report. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results or expectations, except as required by law. 
Company Overview
LendingTree, Inc., is the parent of LendingTree, LLC and several companies owned by LendingTree, LLC.
LendingTree operates what we believe to be the leading online loan marketplace for consumers seeking loans, deposit accounts and other credit-based offerings. Our online marketplace provides consumers with access to product offerings from our Network Lenders, including mortgage loans, home equity loans and lines of credit, reverse mortgage loans, auto loans, credit cards, deposit accounts, personal loans, student loans, small business loans and other related offerings. In addition, we offer tools and resources, including free credit scores, that facilitate comparison shopping for these loan and other credit-based offerings. We seek to match consumers with multiple lenders, who can provide them with competing quotes for the product they are seeking. We also serve as a valued partner to lenders seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer inquiries we generate with these lenders. 
Our My LendingTree platform offers a personalized loan comparison-shopping experience by providing free credit scores and credit score analysis. This platform enables us to observe consumers' credit profiles and then identify and alert them to loan and other credit-based opportunities on our marketplace that may be more favorable than the loans they may have at a given point in time. This is designed to provide consumers with measurable savings opportunities over their lifetimes.
In addition to operating our core mortgage business, we are focused on growing our non-mortgage lending businesses and developing new product offerings and enhancements to improve the experiences that consumers and lenders have as they interact with us. By expanding our portfolio of loan and credit-based offerings, we are growing and diversifying our business and sources of revenue. We intend to capitalize on our expertise in performance marketing, product development and technology, and to leverage the widespread recognition of the LendingTree brand to effect this strategy.
We believe the consumer and small business financial services industry is in the early stages of a fundamental shift to online product offerings, similar to the shift that started in retail and travel many years ago and is now well established. We believe that like retail and travel, as consumers continue to move towards online shopping and transactions for financial services, suppliers will increasingly shift their product offerings and advertising budgets toward the online channel. We believe the strength of our brands and of our lender network place us in a strong position to continue to benefit from this market shift.
The LendingTree Loans business is presented as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and comprehensive income and consolidated cash flows for all periods presented. Except for the discussion under the heading "Discontinued operations," the analysis within Management's Discussion and Analysis of Financial Condition and Results of Operations reflects our continuing operations.

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Convertible Senior Notes and Hedge and Warrant Transactions
On May 31, 2017, we issued $300.0 million aggregate principal amount of our 0.625% Convertible Senior Notes due June 1, 2022 and, in connection therewith, entered into Convertible Note Hedge and Warrant transactions with respect to our common stock. For more information, see Note 10 —Debt, in the notes to the consolidated financial statements included elsewhere in this report.
Recent Business Acquisitions
On June 20, 2017, we acquired the membership interests of Camino Del Avion, LLC, which does business under the name MagnifyMoney for $29.6 million cash consideration at the closing of the transaction. MagnifyMoney is a leading consumer-facing media property that offers unbiased editorial content, expert commentary, tools and resources to help consumers compare financial products and make informed financial decisions.
On June 14, 2017, we acquired substantially all of the assets of Deposits Online, LLC, which does business under the name DepositAccounts.com (“DepositAccounts”) for $24.0 million in cash at closing and contingent consideration payments of up to $9.0 million through June 30, 2020. DepositAccounts is a leading consumer-facing media property in the depository industry and is one of the most comprehensive sources of depository deals and analysis on the Web, covering all major deposit product categories through editorial content, programmatic rate tables and user-generated content.
On November 16, 2016, we acquired Iron Horse Holdings, LLC, which does business under the name CompareCards for $80.7 million in cash at closing and contingent consideration payments of up to $22.5 million in each of 2017 and 2018, subject to achieving specific growth targets. CompareCards is a leading online source for side-by-side credit card comparison shopping. CompareCards provides consumers with one centralized location for pertinent credit card information needed to find the best card for their needs. The acquisition continues our diversification strategy.
Acquisition of North Carolina Office Properties
In December 2016, we completed the acquisition of two office buildings in Charlotte, North Carolina, for $23.5 million in cash. We intend to utilize one or both buildings in the future as our principal executive offices, and any unused space will continue to be occupied by tenants.
Seasonality
Revenue in our lending business is subject to cyclical and seasonal trends. Home sales (and purchase mortgages) typically rise during the spring and summer months and decline during the fall and winter months, while refinancing and home equity activity is principally driven by mortgage interest rates as well as real estate values.
We anticipate revenue in our newer products to be cyclical as well; however, we have limited historical data to predict the nature and magnitude of this cyclicality. Based on industry data, we anticipate as our personal loan product matures we will experience less consumer demand during the fourth and first quarters of each year. We also anticipate less consumer demand for credit cards in the fourth quarter of each year. Other factors affecting our business include macro factors such as credit availability in the market, interest rates, the strength of the economy and employment.
Recent Mortgage Interest Rate Trends
Interest rate and market risks can be substantial in the mortgage lead generation business. Short-term fluctuations in mortgage interest rates primarily affect consumer demand for mortgage refinancings, while long-term fluctuations in mortgage interest rates, coupled with the U.S. real estate market, affect consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for mortgage leads from third-party sources. Typically, a decline in mortgage interest rates will lead to reduced lender demand, as there are more consumers in the marketplace seeking financing and, accordingly, lenders receive more organic lead volume. Conversely, an increase in mortgage interest rates will typically lead to an increase in lender demand, as there are fewer consumers in the marketplace and, accordingly, the supply of organic mortgage lead volume decreases.
According to Freddie Mac, 30-year mortgage interest rates have started to fall, to a monthly average of 3.9% in June 2017. On a quarterly basis, 30-year mortgage interest rates in the second quarter of 2017 averaged 3.99%, as compared to 3.59% in the second quarter of 2016 and 4.17% in the first quarter of 2017.


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MORTGAGEORIGINATIONQ2.JPG
Typically, as mortgage interest rates rise, there are fewer consumers in the marketplace seeking refinancings and, accordingly, the mix of mortgage origination dollars moves towards purchase mortgages. According to Mortgage Bankers Association ("MBA") data, total refinance origination dollars decreased to 32% of total mortgage origination dollars, while purchase origination dollars increased to 68% in the second quarter of 2017 over the first quarter of 2017.
Looking forward, MBA is projecting 30-year mortgage interest rates to increase through the end of the year. According to MBA projections, as interest rates climb, the mix of mortgage origination dollars will move towards purchase mortgages with the refinance share representing just 33% for 2017.
The U.S. Real Estate Market
The health of the U.S. real estate market and interest rate levels are the primary drivers of consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for purchase mortgage leads from third-party sources. Typically, a strong real estate market will lead to reduced lender demand for leads, as there are more consumers in the marketplace seeking financing and, accordingly, lenders receive more organic lead volume. Conversely, a weaker real estate market will typically lead to an increase in lender demand, as there are fewer consumers in the marketplace seeking mortgages. 
According to the National Association of Realtors ("NAR"), 2017 started with the fastest pace of existing home sales in almost a decade. However, pending home sales declined in May for the third consecutive month due to limited supply. The NAR expects inventory to remain low for 2017, but forecasts an increase of 3.2% in existing home sales from 2016.

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Results of Operations for the Three and Six Months ended June 30, 2017 and 2016
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
2016
$
Change
%
Change
 
2017
2016
$
Change
%
Change
 
(Dollars in thousands)
Mortgage products
$
71,515

$
56,032

$
15,483

28
 %
 
$
134,453

$
111,048

$
23,405

21
 %
Non-mortgage products
81,258

38,258

43,000

112
 %
 
150,835

77,955

72,880

93
 %
Revenue
152,773

94,290

58,483

62
 %
 
285,288

189,003

96,285

51
 %
Costs and expenses:
 

 

 

 

 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization shown separately below)
4,164

3,464

700

20
 %
 
7,755

6,937

818

12
 %
Selling and marketing expense
109,141

64,538

44,603

69
 %
 
202,392

129,597

72,795

56
 %
General and administrative expense
12,094

8,553

3,541

41
 %
 
23,641

17,812

5,829

33
 %
Product development
4,064

3,781

283

7
 %
 
7,687

7,666

21

 %
Depreciation
1,808

1,174

634

54
 %
 
3,511

2,172

1,339

62
 %
Amortization of intangibles
2,608

72

2,536

3,522
 %
 
5,217

97

5,120

5,278
 %
Change in fair value of contingent consideration
9,393


9,393

N/A

 
18,139


18,139

N/A

Severance
247

72

175

243
 %
 
404

72

332

461
 %
Litigation settlements and contingencies
285

(79
)
364

461
 %
 
689

90

599

666
 %
Total costs and expenses
143,804

81,575

62,229

76
 %
 
269,435

164,443

104,992

64
 %
Operating income
8,969

12,715

(3,746
)
(29
)%
 
15,853

24,560

(8,707
)
(35
)%
Other income (expense), net:
 

 

 

 

 
 
 
 
 
Interest expense, net
(1,079
)
(141
)
938

665
 %
 
(1,244
)
(283
)
961

340
 %
Other income
13


13

N/A

 
13


(13
)
N/A

Income before income taxes
7,903

12,574

(4,671
)
(37
)%
 
14,622

24,277

(9,655
)
(40
)%
Income tax benefit (expense)
104

(3,572
)
3,676

103
 %
 
1,183

(8,370
)
9,553

114
 %
Net income from continuing operations
8,007

9,002

(995
)
(11
)%
 
15,805

15,907

(102
)
(1
)%
Loss from discontinued operations, net of tax
(689
)
(1,150
)
(461
)
(40
)%
 
(1,621
)
(2,353
)
(732
)
(31
)%
Net income and comprehensive income
$
7,318

$
7,852

$
(534
)
(7
)%
 
$
14,184

$
13,554

$
630

5
 %
Revenue
Revenue increased in the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016 due to increases in our non-mortgage products of $43.0 million and $72.9 million, respectively, and in our mortgage products of $15.5 million and $23.4 million, respectively.
Our non-mortgage products include the following non-mortgage lending products: personal loans, credit cards, home equity loans and lines of credit, reverse mortgage loans, auto loans, small business loans and student loans. Our non-mortgage products also include deposit accounts, home improvement referrals and other credit products such as credit repair and debt settlement. Many of our non-mortgage products are not individually significant to revenue. The increase in revenue from our non-mortgage products in the second quarter and first six months of 2017 from the second quarter and first six months of 2016 is primarily due to increases in our credit cards, personal loans and home equity products.
Revenue from our credit cards product increased $29.2 million to $37.0 million in the second quarter of 2017 from $7.8 million in the second quarter of 2016 , or 377%, and increased $53.9 million to $70.8 million in the first six months of 2017 from $16.9 million in the first six months of 2016, or 318%, primarily due to the contribution from the CompareCards acquisition, completed on November 16, 2016.
Revenue from our personal loans product increased $3.8 million to $20.5 million in the second quarter of 2017 from $16.7 million in the first quarter of 2016 , or 23% and increased $3.2 million to $37.5 million in the first six months of 2017 from $34.3 million in the first six months of 2016, or 10%, primarily due to increases in the number of consumers completing request forms,

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partially offset by decreases in revenue earned per consumer. Certain of our online personal loan lenders experienced well-publicized challenges in 2016, in particular, general unavailability of capital, increased pricing demanded by investors of personal loans, which in some cases led to reductions in marketing spend, and tightening in underwriting standards.
For the periods presented, no other non-mortgage product represented more than 10% of revenue, however certain other non-mortgage products experienced notable increases. Revenue from our home equity product increased by $6.9 million in the second quarter of 2017 compared to the second quarter of 2016 and increased by $11.6 million in the first six months of 2017 compared to the first six months of 2016 due to increases in lender coverage, revenue earned per consumer, and the number of consumers completing request forms, combined with increased marketing efforts.
The increase in revenue from our mortgage products in the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016 is primarily due to an increase in revenue from both our purchase and refinance products. The revenue from our purchase product increased $10.7 million in the second quarter of 2017 from the second quarter of 2016 and increased $17.2 million in the first six months of 2017 from the first six months of 2016. The revenue from our refinance product increased $4.8 million in the second quarter of 2017 from the second quarter of 2016 and $6.2 million in the first six months of 2017 from the first six months of 2016. The increase in revenue from our mortgage product is primarily due to an increase in lender demand and an increase in marketing efforts. The revenue earned per consumer from our mortgage products increased in the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016, while the number of consumers completing a request form for mortgage products remained relatively consistent.
Cost of revenue
Cost of revenue consists primarily of costs associated with compensation and other employee-related costs (including stock-based compensation) relating to internally-operated customer call centers, third-party customer call center fees, credit scoring fees, credit card fees, website network hosting and server fees.
Cost of revenue increased in the second quarter of 2017 from the second quarter of 2016 , primarily due to increases of $0.5 million in compensation and benefits as a result of increases in headcount, and increases of $0.4 million in third-party customer call center fees.
Cost of revenue as a percentage of revenue decreased from 4% for the second quarter of 2016 to 3% for the second quarter of 2017 .
Cost of revenue increased in the first six months of 2017 from the first six months of 2016 , primarily due to increases of $0.9 million in compensation and benefits as a result of increases in headcount.
Cost of revenue as a percentage of revenue decreased from 4% for the first six months of 2016 to 3% for the first six months of 2017 .
Selling and marketing expense
Selling and marketing expense consists primarily of advertising and promotional expenditures, fees paid for consumer inquiries and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in sales or marketing functions. Advertising and promotional expenditures primarily include online marketing, as well as television, print and radio spending. Advertising production costs are expensed in the period the related ad is first run.
The increases in selling and marketing expense in the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016 were primarily due to increases in advertising and promotional expense of $44.1 million and $72.6 million, respectively, as discussed below.

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Advertising and promotional expense is the largest component of selling and marketing expense, and is comprised of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
$
Change
 
%
Change
 
2017
 
2016
 
$
Change
 
%
Change
 
(Dollars in thousands)
Online
$
92,791

 
$
50,566

 
$
42,225

 
84
%
 
$
173,451

 
$
101,093

 
$
72,358

 
72
 %
Broadcast
10,172

 
8,921

 
1,251

 
14
%
 
17,404

 
17,637

 
(233
)
 
(1
)%
Other
1,497

 
826

 
671

 
81
%
 
2,607

 
2,163

 
444

 
21
 %
Total advertising expense
$
104,460

 
$
60,313

 
$
44,147

 
73
%
 
$
193,462

 
$
120,893

 
$
72,569

 
60
 %
We increased our advertising expenditures in the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016 in order to generate additional consumer inquiries to meet the increased demand of lenders on our marketplace.
We will continue to adjust selling and marketing expenditures dynamically in relation to anticipated revenue opportunities.
General and administrative expense
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, corporate information technology, human resources and executive management functions, as well as facilities and infrastructure costs and fees for professional services. 
 General and administrative expense increased in the second quarter of 2017 from the second quarter of 2016 , primarily due to increases in compensation and benefits of $2.8 million as a result of increases in headcount.
 General and administrative expense as a percentage of revenue decreased to 8% in the second quarter of 2017 from 9% in the second quarter of 2016 .
General and administrative expense increased in the first six months of 2017 from the first six months of 2016