10-Q
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 September 30, 2015
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 
 
 
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 or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting 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)
 
 
 
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 October 19, 2015, there were 11,540,240 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share amounts)
Revenue
$
69,804

 
$
41,306

 
$
175,875

 
$
123,486

Costs and expenses:
 

 
 

 
 

 
 

Cost of revenue (exclusive of depreciation shown separately below)
2,436

 
2,110

 
6,402

 
5,670

Selling and marketing expense
48,901

 
27,168

 
118,615

 
83,581

General and administrative expense
7,069

 
6,590

 
21,336

 
18,201

Product development
2,675

 
1,658

 
7,238

 
5,416

Depreciation
764

 
840

 
2,135

 
2,541

Amortization of intangibles
25

 
41

 
124

 
96

Restructuring and severance
28

 
7

 
422

 
232

Litigation settlements and contingencies
133

 
2,338

 
(663
)
 
10,430

Total costs and expenses
62,031

 
40,752

 
155,609

 
126,167

Operating income (loss)
7,773

 
554

 
20,266

 
(2,681
)
Other income (expense), net:
 

 
 

 
 

 
 

Interest expense
(1
)
 
(1
)
 
(63
)
 
(1
)
Income (loss) before income taxes
7,772

 
553

 
20,203

 
(2,682
)
Income tax (expense) benefit
(389
)
 
2

 
(968
)
 
86

Net income (loss) from continuing operations
7,383

 
555

 
19,235

 
(2,596
)
Loss from discontinued operations, net of tax
(1,295
)
 
(174
)
 
(3,238
)
 
(3,679
)
Net income (loss) and comprehensive income (loss)
$
6,088

 
$
381

 
$
15,997

 
$
(6,275
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
11,445

 
11,182

 
11,378

 
11,180

Diluted
12,489

 
11,836

 
12,379

 
11,180

Income (loss) per share from continuing operations:
 

 
 

 
 

 
 

Basic
$
0.65

 
$
0.05

 
$
1.69

 
$
(0.23
)
Diluted
$
0.59

 
$
0.05

 
$
1.55

 
$
(0.23
)
Loss per share from discontinued operations:
 

 
 

 
 

 
 

Basic
$
(0.11
)
 
$
(0.02
)
 
$
(0.28
)
 
$
(0.33
)
Diluted
$
(0.10
)
 
$
(0.01
)
 
$
(0.26
)
 
$
(0.33
)
Net income (loss) per share:
 

 
 

 
 

 
 

Basic
$
0.53

 
$
0.03

 
$
1.41

 
$
(0.56
)
Diluted
$
0.49

 
$
0.03

 
$
1.29

 
$
(0.56
)
 
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)
 
 
September 30,
2015
 
December 31,
2014
 
(in thousands, except par value and share amounts)
ASSETS:
 

 
 

Cash and cash equivalents
$
106,251

 
$
86,212

Restricted cash and cash equivalents
18,621

 
18,716

Accounts receivable (net of allowance of $501 and $349, respectively)
25,181

 
13,611

Prepaid and other current assets
1,708

 
931

Current assets of discontinued operations
289

 
189

Total current assets
152,050

 
119,659

Property and equipment (net of accumulated depreciation of $15,173 and $14,810, respectively)
7,959

 
5,257

Goodwill
3,632

 
3,632

Intangible assets, net
11,017

 
11,141

Other non-current assets
126

 
102

Non-current assets of discontinued operations
—

 
100

Total assets
$
174,784

 
$
139,891

 
 
 
 
LIABILITIES:
 

 
 

Accounts payable, trade
$
6,245

 
$
1,060

Accrued expenses and other current liabilities
36,174

 
25,521

Current liabilities of discontinued operations (Note 13)
14,529

 
12,055

Total current liabilities
56,948

 
38,636

Other non-current liabilities
273

 
—

Deferred income taxes
4,738

 
4,738

Non-current liabilities of discontinued operations
31

 
151

Total liabilities
61,990

 
43,525

Commitments and contingencies (Notes 9 and 10)


 


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; 13,013,767 and 12,854,517 shares issued, respectively, and 11,540,240 and 11,386,240 shares outstanding, respectively
130

 
129

Additional paid-in capital
910,399

 
909,751

Accumulated deficit
(782,174
)
 
(798,171
)
Treasury stock 1,473,527 and 1,468,277 shares, respectively
(15,561
)
 
(15,343
)
Total shareholders' equity
112,794

 
96,366

Total liabilities and shareholders' equity
$
174,784

 
$
139,891

 
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
 
(in thousands)
Balance as of December 31, 2014
$
96,366

 
12,855

 
$
129

 
$
909,751

 
$
(798,171
)
 
1,468

 
$
(15,343
)
Net income and comprehensive income
15,997

 
—

 
—

 
—

 
15,997

 
—

 
—

Non-cash compensation
6,371

 
—

 
—

 
6,371

 
—

 
—

 
—

Purchase of treasury stock
(218
)
 
—

 
—

 
—

 
—

 
5

 
(218
)
Dividends
(11
)
 
—

 
—

 
(11
)
 
—

 
—

 
—

Issuance of common stock for stock options, restricted stock awards and restricted stock units, net of withholding taxes
(6,196
)
 
159

 
1

 
(6,197
)
 
—

 
—

 
—

Tax benefit from stock-based award activity
485

 
—

 
—

 
485

 
—

 
—

 
—

Balance as of September 30, 2015
$
112,794

 
13,014

 
$
130

 
$
910,399

 
$
(782,174
)
 
1,473

 
$
(15,561
)
 
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)
 
Nine Months Ended September 30,
 
2015
 
2014
 
(in thousands)
Cash flows from operating activities attributable to continuing operations:
 

 
 

Net income (loss) and comprehensive income (loss)
$
15,997

 
$
(6,275
)
Less: Loss from discontinued operations, net of tax
3,238

 
3,679

Income (loss) from continuing operations
19,235

 
(2,596
)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities attributable to continuing operations:
 

 
 

Loss on disposal of fixed assets
102

 
237

Amortization of intangibles
124

 
96

Depreciation
2,135

 
2,541

Non-cash compensation expense
6,371

 
4,859

Deferred income taxes
—

 
(3
)
Excess tax benefit from stock-based award activity
(485
)
 
—

Bad debt expense
236

 
130

Changes in current assets and liabilities:
 
 
 
Accounts receivable
(11,805
)
 
(1,356
)
Prepaid and other current assets
(756
)
 
(505
)
Accounts payable, accrued expenses and other current liabilities
15,272

 
(2,846
)
Income taxes payable
460

 
576

Other, net
207

 
(161
)
Net cash provided by operating activities attributable to continuing operations
31,096

 
972

Cash flows from investing activities attributable to continuing operations:
 

 
 

Capital expenditures
(4,265
)
 
(2,997
)
Acquisition of a business
(37
)
 
(540
)
Decrease in restricted cash
95

 
4,143

Net cash (used in) provided by investing activities attributable to continuing operations
(4,207
)
 
606

Cash flows from financing activities attributable to continuing operations:
 

 
 

Payments related to net-share settlement of stock-based compensation, net of proceeds from exercise of stock options
(6,127
)
 
(3,616
)
Excess tax benefit from stock-based award activity
485

 
—

Purchase of treasury stock
(218
)
 
(2,547
)
Dividends
(105
)
 
(196
)
Net cash used in financing activities attributable to continuing operations
(5,965
)
 
(6,359
)
Total cash provided by (used in) continuing operations
20,924

 
(4,781
)
Net cash used in operating activities attributable to discontinued operations
(885
)
 
(3,255
)
Total cash used in discontinued operations
(885
)
 
(3,255
)
Net increase (decrease) in cash and cash equivalents
20,039

 
(8,036
)
Cash and cash equivalents at beginning of period
86,212

 
91,667

Cash and cash equivalents at end of period
$
106,251

 
$
83,631

 

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"), formerly known as Tree.com, Inc., 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 a broad array of loan types and other credit-based offerings. The Company offers consumers tools and resources, including free credit scores, that help them to comparison-shop for mortgage loans, home equity loans and lines of credit, reverse mortgages, personal loans, auto loans, student loans, credit cards, small business loans and other related offerings. The Company seeks to primarily match in-market consumers with multiple lenders on its marketplace who can provide them with competing quotes for the loans 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 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 13 —Discontinued Operations for additional information.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014, 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 nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015, or any other period. The accompanying consolidated balance sheet as of December 31, 2014 was derived from audited financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2014 (the "2014 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 2014 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 September 30, 2015, 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 marketplace 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 increases 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, the Company's 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 April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-05 related to cloud computing arrangements. This ASU sets forth guidance on accounting for fees paid in a cloud computing arrangement and specifically outlines how to determine whether a cloud computing arrangement contains a software license or is solely a service contract. This ASU will be effective for annual and interim reporting periods beginning after December 15, 2015 and permits early adoption. The Company early adopted this ASU and it did not have a significant impact on its consolidated financial statements.
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. The Company is evaluating the impact this ASU will have on its consolidated financial statements and whether to adopt early.

8
Table of Contents

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


NOTE 3—RESTRICTED CASH
Restricted cash and cash equivalents consists of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
Cash in escrow for surety bonds (a)
$
2,453

 
$
2,453

Cash in escrow for corporate purchasing card program
—

 
100

Cash in escrow from sale of LendingTree Loans (b)
16,107

 
16,106

Other
61

 
57

Total restricted cash and cash equivalents
$
18,621

 
$
18,716

(a)
State laws and regulations generally require businesses which engage in mortgage brokering activity to maintain a mortgage broker or similar license. Mortgage brokering activity is generally defined to include, among other things, receiving valuable consideration for offering assistance to a buyer in obtaining a residential mortgage or soliciting financial and mortgage information from the public and providing that information to an originator of residential mortgage loans. All states require that the Company maintain surety bonds for potential claims.
(b)
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. As a result of a settlement agreement in 2014 with a secondary market purchaser of loans, $12.1 million of cash in escrow is expected to be released in December 2015.
NOTE 4—GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands): 
 
September 30,
2015
 
December 31,
2014
Goodwill
$
486,720

 
$
486,720

Accumulated impairment losses
(483,088
)
 
(483,088
)
Net goodwill
$
3,632

 
$
3,632

 
 
 
 
Intangible assets with indefinite lives
$
10,142

 
$
10,142

Intangible assets with definite lives, net
875

 
999

Total intangible assets, net
$
11,017

 
$
11,141

Goodwill and Indefinite-Lived Intangible Assets
The Company's goodwill is associated with its one reportable segment, lending. 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
Customer lists
$
1,049

 
$
(174
)
 
$
875

Other
1,087

 
(1,087
)
 
—

Balance at September 30, 2015
$
2,136

 
$
(1,261
)
 
$
875


9
Table of Contents

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


 
Cost
 
Accumulated
Amortization
 
Net
Customer lists
$
1,049

 
$
(50
)
 
$
999

Other
1,087

 
(1,087
)
 
—

Balance at December 31, 2014
$
2,136

 
$
(1,137
)
 
$
999

Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on balances as of September 30, 2015, future amortization is estimated to be as follows (in thousands):
 
Amortization Expense
Remainder of current year
$
25

Year ending December 31, 2016
100

Year ending December 31, 2017
100

Year ending December 31, 2018
100

Year ending December 31, 2019
100

Thereafter
450

Total intangible assets with definite lives, net
$
875

 
On June 30, 2014, the Company acquired certain intangible assets to be used in its home services business for $0.6 million paid on the acquisition date, plus contingent consideration of $0 to $0.8 million. During the fourth quarter of 2014, the Company finalized the purchase price of $1.0 million, which included an estimated contingent consideration of $0.4 million. The entire purchase price was allocated to the customer lists acquired, which is being amortized on a straight-line basis over a useful life of 10 years. During the first quarter of 2015, the Company reduced its estimated contingent consideration by $0.1 million, which is included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.
NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
Accrued litigation liabilities
$
636

 
$
2,786

Accrued advertising expense
22,200

 
11,170

Accrued compensation and benefits
3,838

 
2,666

Accrued professional fees
734

 
337

Accrued restructuring costs
—

 
178

Customer deposits and escrows
4,755

 
4,560

Deferred rent
2

 
162

Other
4,009

 
3,662

Total accrued expenses and other current liabilities
$
36,174

 
$
25,521


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


NOTE 6—SHAREHOLDERS' EQUITY 
Basic and diluted income (loss) per share was determined based on the following share data (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Weighted average basic common shares
11,445

 
11,182

 
11,378

 
11,180

Effect of stock options
891

 
471

 
841

 
—

Effect of dilutive share awards
153

 
183

 
160

 
—

Weighted average diluted common shares
12,489

 
11,836

 
12,379

 
11,180

For the nine months ended September 30, 2014, the Company had losses from continuing operations and, as a result, no potentially dilutive securities were included in the denominator for computing diluted loss per share, because the impact would have been anti-dilutive. Accordingly, the weighted average basic shares outstanding were used to compute loss per share amounts for the period. For the nine months ended September 30, 2014, approximately 0.7 million shares related to potentially dilutive securities were excluded from the calculation of diluted loss per share, because their inclusion would have been anti-dilutive. For the three months ended September 30, 2014, approximately 0.1 million shares related to potentially dilutive securities were excluded from the calculation of diluted earnings per share, because their inclusion would have been anti-dilutive. No potentially dilutive securities were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, 2015.
 
Common Stock Repurchases
In January 2010, the board of directors authorized and the Company announced the repurchase of up to $10.0 million of LendingTree's common stock.  In May 2014, the board of directors authorized and the Company announced the repurchase of up to an additional $10.0 million of LendingTree's common stock. During the nine months ended September 30, 2015, the Company purchased 5,250 shares of its common stock pursuant to this stock repurchase program. At September 30, 2015, approximately $7.3 million remains authorized for share repurchase. 
NOTE 7—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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Cost of revenue
$
24

 
$
11

 
$
68

 
$
24

Selling and marketing expense
425

 
205

 
1,080

 
664

General and administrative expense
1,178

 
1,292

 
3,909

 
3,281

Product development
351

 
278

 
1,176

 
854

Restructuring and severance
—

 
—

 
138

 
36

Total non-cash compensation
$
1,978

 
$
1,786

 
$
6,371

 
$
4,859


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


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, 2015
2,136,679

 
$
18.16

 
 
 
 

Granted (b)
44,635

 
66.68

 
 
 
 

Exercised
(134,515
)
 
17.51

 
 
 
 

Forfeited
(127,439
)
 
26.84

 
 
 
 

Expired
(1,339
)
 
7.88

 
 
 
 

Options outstanding at September 30, 2015
1,918,021

 
18.76

 
6.15
 
$
142,596

Options exercisable at September 30, 2015
934,288

 
$
8.53

 
3.70
 
$
78,944

(a)
The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price of $93.03 on the last trading day of the quarter ended September 30, 2015 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 September 30, 2015. The intrinsic value changes based on the market value of the Company's common stock.
(b)
During the nine months ended September 30, 2015, the Company granted stock options to certain employees and the board of directors with a weighted average grant date fair value per share of $26.71, which vesting periods include (a) three years from the grant date, (b) 25% and 75% over a period of 1.67 years and 2.67 years, respectively, (c) one year from the grant date and (d) two years from the grant date.
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)
5.50 - 6.23 years

Expected dividend (2)
—

Expected volatility (3)
37.51% - 42.46%

Risk-free interest rate (4)
1.65% - 2.01%

(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.
(2)
For all stock options granted in 2015, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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, 2015
351,801

 
$
22.83

Granted
94,310

 
65.57

Vested
(176,914
)
 
20.31

Forfeited
(27,788
)
 
32.37

Nonvested at September 30, 2015
241,409

 
$
40.29

 
 
Restricted Stock
 
Number of
Shares
 
Weighted Average Grant Date Fair Value
 
 
 
(per share)
Nonvested at January 1, 2015
123,057

 
$
23.41

Granted
—

 
—

Vested
(35,295
)
 
20.62

Forfeited
—

 
—

Nonvested at September 30, 2015
87,762

 
$
24.54

NOTE 8—INCOME TAXES
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except percentages)
Income tax (expense) benefit
$
(389
)
 
$
2

 
$
(968
)
 
$
86

Effective tax rate
5.0
%
 
0.4
%
 
4.8
%
 
3.2
%
Tax expense for the three and nine months ended September 30, 2015 is primarily comprised of the federal Alternative Minimum Tax and state taxes.
For the three and nine months ended September 30, 2015 and 2014, the effective tax rates varied from the statutory rate primarily due to the existence of a valuation allowance that has been provided to offset the Company's net deferred tax asset and state taxes.
Valuation Allowance
There has been no change to the Company's valuation allowance assessment for the three and nine months ended September 30, 2015.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


NOTE 9—COMMITMENTS
The Company leases office space used in connection with its operations under various operating leases, which contain escalation clauses. The Company's operating leases relate to its office space in Charlotte, North Carolina and Burlingame, California. Effective, May 2015, the Company renewed the lease for its principal executive office located in Charlotte, North Carolina.
Future minimum payments as of September 30, 2015 under operating lease agreements having an initial or remaining non-cancelable lease term in excess of one year are as follows (in thousands):
 
Amount
Remainder of current year
$
68

Year ending December 31, 2016
1,217

Year ending December 31, 2017
1,036

Year ending December 31, 2018
995

Year ending December 31, 2019
1,025

Thereafter
1,055

Total
$
5,396

NOTE 10—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 10, 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 September 30, 2015 and December 31, 2014, the Company had a litigation settlement accrual for its continuing operations of $0.6 million and $2.8 million, respectively. 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 infringe 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 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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. The trial and post-trial motion process is now complete.
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 company filed its appellate brief in September 2015.
Legal Matters
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 a reserve of $0.5 million has been established for this matter in the accompanying consolidated balance sheet as of September 30, 2015. 
Litigation Related to Discontinued Operations
Dijkstra
Lijkel Dijkstra v. Harry Carenbauer, Home Loan Center, Inc. et al., No. 5:11-cv-152-JPB (U.S. Dist. Ct., N.D.WV).  In November 2008, the plaintiffs filed a putative class action in Circuit Court of Ohio County, West Virginia against Harry Carenbauer, HLC, HLC Escrow, Inc. et al. The complaint alleges that HLC engaged in the unauthorized practice of law in West Virginia by permitting persons who were neither admitted to the practice of law in West Virginia nor under the direct supervision of a lawyer admitted to the practice of law in West Virginia to close mortgage loans. The plaintiffs assert claims for declaratory judgment, contempt, injunctive relief, conversion, unjust enrichment, breach of fiduciary duty, intentional misrepresentation or fraud, negligent misrepresentation, violation of the West Virginia Consumer Credit and Protection Act ("CCPA"), violation of the West Virginia Lender, Broker & Services Act, civil conspiracy, outrage and negligence. The claims against all defendants other than Mr. Carenbauer, HLC and HLC Escrow, Inc. have been dismissed. The case was removed to federal court in October 2011. On January 3, 2013, the court granted a conditional class certification only with respect to the declaratory judgment, contempt, unjust enrichment and CCPA claims. The conditional class included consumers with mortgage loans in effect any time after November 8,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


2007 who obtained such loans through HLC, and whose loans were closed by persons not admitted to the practice of law in West Virginia or by persons not under the direct supervision of a lawyer admitted to the practice of law in West Virginia. In February 2014, the court granted and denied certain of each party's motions for summary judgment. With respect to the Class Claims, the court granted plaintiff's motions for summary judgment with respect to declaratory judgment, unjust enrichment and violation of the CCPA. The court granted HLC's motion for summary judgment with respect to contempt. In addition, the court denied HLC's motion to decertify the class. With respect to the claims applicable to the named plaintiff only (the "Individual Claims"), HLC's motions for summary judgment were granted with respect to conversion, breach of fiduciary duty, intentional misrepresentation, negligent misrepresentation and outrage. HLC and the plaintiff settled the remaining Individual Claims in June 2014.
In July 2014, the court awarded damages to plaintiffs in the amount of $2.8 million. HLC filed a notice of appeal in August 2014 and in September 2014, plaintiffs filed a motion to dismiss the appeal. In December 2014, the U.S. Court of Appeals for the Fourth Circuit determined that the district court's order was not yet final, and, accordingly, HLC's appeal was dismissed. In July 2015, the district court awarded attorneys' fees to Plaintiffs consisting of one-third of the class damages award plus an additional $389,500. The judge also awarded prejudgment interest to Plaintiffs. On July 30, 2015, the district court judge entered a final judgment order in this matter. On August 27, 2015, HLC filed its notice of appeal to the U.S. Court of Appeals for the Fourth Circuit with respect to the final judgment, the order granting attorneys' fees, and the orders on class damages, the pretrial conference, motions and class certification. A reserve of $3.2 million has been established for this matter in the accompanying consolidated balance sheet as of September 30, 2015, of which some or all may be covered by insurance.
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.  HLC intends to vigorously defend this action.
Lehman Brothers Holdings, Inc. Demand Letter
In December 2014, HLC received a demand letter  (the “Letter”) from the Bankruptcy Estate of Lehman Brothers Holdings, Inc. (“LBHI”) concerning 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 claims that LBB subsequently sold the Loans to LBHI and that LBB assigned to LBHI its contractual rights pursuant to the LPA with respect to the Loans.  LBHI now alleges that HLC breached certain representations and warranties in the LPA concerning the Loans.  The Letter states that LBHI, as an assign of LBB, now seeks indemnification from HLC in accordance with the LPA for certain claims that LBHI alleges it allowed in its bankruptcy with respect to the Loans.  HLC and LBHI are currently engaged in negotiations concerning the allegations made in the Letter.  Should LBHI bring any actions relating to the matters alleged in the Letter, the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Company intends to defend against such actions vigorously. A reserve of $0.5 million for this matter is included in the accompanying consolidated balance sheet as of September 30, 2015.
NOTE 11—SEGMENT INFORMATION
During the first quarter of 2015, management made certain changes to its organizational structure that impacted its previous operating segments. As a result, management concluded it had one reportable segment representing the Company's Lending activities. Previously reported segment results have been revised to conform to the Company's one reportable segment at September 30, 2015.
Mortgage and non-mortgage product revenue is as follows (in thousands): 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
2014
 
2015
2014
Mortgage products
$
44,171

$
32,026

 
$
118,367

$
100,936

Non-mortgage products
25,633

9,280

 
57,508

22,550

Total revenue
$
69,804

$
41,306

 
$
175,875

$
123,486

NOTE 12—RESTRUCTURING
Accrued restructuring costs primarily relate to lease obligations for call center leases exited in 2010, which were completed in 2015. Restructuring expense and payments against liabilities are as follows (in thousands): 
 
Continuing Lease Obligations
Balance at December 31, 2014
$
178

Restructuring income
(29
)
Payments
(149
)
Balance at September 30, 2015
$
—

NOTE 13—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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
1

 
$
114

 
$
4

 
$
118

 
 
 
 
 
 
 
 
Loss before income taxes
$
(1,343
)
 
$
(175
)
 
$
(3,369
)
 
$
(3,676
)
Income tax benefit (expense)
48

 
1

 
131

 
(3
)
Net loss
$
(1,295
)
 
$
(174
)
 
$
(3,238
)
 
$
(3,679
)
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. The buyer, a wholly-owned subsidiary of Discover Financial Services ("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 September 30, 2015, $16.1 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. As a result of a settlement agreement in 2014 with a secondary market purchaser of loans, $12.1 million of such amount is expected to be released from escrow in December 2015. The escrowed amount is recorded as restricted cash at September 30, 2015.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Discover participated as a marketplace lender from closing of the transaction through July 2015.
An evaluation of the facts and circumstances of the transaction and the applicable accounting guidance for discontinued operations indicates that the LendingTree Loans business should be reflected as discontinued operations in the accompanying consolidated financial statements for all periods presented. The continuing cash flows related to this transaction are not significant and, accordingly, are not deemed to be direct cash flows of the divested business.
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. The remaining operations are being wound down. These wind-down activities have included, among other things, selling the balance of loans held for sale to investors, paying off and then terminating the warehouse lines of credit and settling derivative obligations, all of which have been completed. 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. As of September 30, 2015, approximately $16.1 million is being held in escrow pending resolution of certain of these contingent liabilities. As a result of a settlement agreement in 2014 with a secondary market purchaser of loans, $12.1 million of such amount is expected to be released from escrow in December 2015.
Prior to the sale of substantially all of the operating assets of LendingTree Loans in June 2012, it originated approximately 234,000 loans with an original issue balance of $38.9 billion.
In October 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. The settlement was paid in the fourth quarter of 2014 with restricted cash of $3.1 million and cash on hand of $2.3 million. The settlement with this investor in the fourth quarter of 2014 and the impact this settlement had on the estimate of the remaining loan loss obligations resulted in income of $14.1 million, which was included in income from discontinued operations in the consolidated statements of operations and comprehensive income during the fourth quarter of 2014. The adjustment to the loan loss reserve did not result in tax expense recognition, due to the Company's full valuation allowance against its deferred tax assets.
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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 $6.0 million to $10.2 million at September 30, 2015. The reserve balance recorded as of September 30, 2015 was $8.8 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Loan loss reserve, beginning of period
$
8,750

 
$
28,390

 
$
8,750

 
$
28,543

Provisions
—

 
—

 
—

 
—

Charge-offs to reserves
—

 
—

 
—

 
(153
)
Loan loss reserve, end of period
$
8,750

 
$
28,390

 
$
8,750

 
$
28,390

The liability for losses on previously sold loans is presented as current liabilities of discontinued operations in the accompanying consolidated balance sheet as of September 30, 2015 and December 31, 2014.
NOTE 14—SUBSEQUENT EVENTS
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 October 26, 2015, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 consolidated debt to 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 and other restricted payments, transactions with affiliates, sale-leaseback transactions, hedging transactions, loans and investments and other matters customarily restricted in such agreements.
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 consolidated debt to 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 consolidated debt to EBITDA ratio. The letter of credit fronting fee is .125% per annum on the face amount of each letter of credit.
The Company paid $1.1 million in fees and expenses to the lenders at the time of closing in October 2015.


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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, Part II, Item 1A. Risk Factors of the quarterly report on Form 10-Q for the quarter ended June 30, 2015 and Part I, Item 1A. Risk Factors of the 2014 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., formerly known as Tree.com, Inc., is the parent of LendingTree, LLC and several companies owned by LendingTree, LLC.
LendingTree operates what we believe to be the leading online marketplace for consumers seeking a broad array of loan types and other credit-based offerings. We offer consumers tools and resources, including free credit scores, that help them to comparison-shop for mortgage loans, home equity loans and lines of credit, reverse mortgages, personal loans, auto loans, student loans, credit cards, small business loans and other related offerings. We primarily seek to match in-market consumers with multiple lenders on our marketplace who can provide them with competing quotes for the loans or credit-based offerings 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 loan inquiries we generate with these lenders. 
In June 2014, we re-launched My LendingTree, a platform that offers a personalized loan comparison-shopping experience, by providing free credit scores, credit score analysis and an in-depth view of a consumer's credit profile. We believe this new platform will enable us to provide consumers with measurable savings opportunities over their lifetimes, as we are able to observe their credit profiles and then identify loan and credit-based opportunities on our marketplace that may be more favorable than the loans they may have at a given point in time, which we can alert them to.
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.
Reportable and Operating Segments
During the first quarter of 2015, management made certain changes to its organizational structure that impacted its previous operating segments. As a result, management concluded it had one reportable segment representing our Lending activities. Previously reported segment results have been revised to conform to our reportable segments at September 30, 2015.

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Seasonality
Revenue is subject to the cyclical and seasonal trends of the U.S. housing and mortgage markets. Home sales 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. However, these trends in our businesses are not absolute and there have been exceptions to them. For example, in recent periods additional factors affecting the mortgage and real estate markets have impacted customary seasonal trends.
While we have not experienced seasonality in our personal loan product, based on industry data, we anticipate that as this product matures we will experience less consumer demand during the fourth and first quarters of each year.
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, since the end of 2013, 30-year fixed mortgage interest rates have generally declined, reaching a monthly average of 3.67% in January 2015, its lowest since May 2013. Since January 2015, mortgage interest rates have generally risen. On a quarterly basis, mortgage interest rates in the third quarter of 2015 averaged 3.95%, as compared to 3.83% in the second quarter of 2015 and 4.14% in the third quarter of 2014.

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Typically, as mortgage interest rates rise, there are less 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 37% of total mortgage origination dollars in the third quarter of 2015, as a result of the rise in average mortgage interest rates.
Looking forward, MBA is projecting mortgage interest rates to climb during the remainder of 2015, to an average 4.0% on 30-year fixed rate mortgages in the fourth quarter of 2015 and an average 3.9% for the full-year 2015. According to MBA projections, despite the anticipated rise in interest rates during the fourth quarter of 2015, the mix of mortgage origination dollars will move towards refinance mortgages, likely due to a slower U.S. real estate market during the winter holiday season, with the refinance share representing 42% of the fourth quarter of 2015 and 43% of the full-year 2015.
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. Over the last few years, the U.S. real estate market has been recovering, albeit slowly.
Despite continued indications of economic recovery, in 2014, existing home sales nationwide declined approximately 3% over 2013, according to the National Association of Realtors ("NAR"), likely due to lessening housing affordability and higher mortgage interest rates. However, sales of existing homes in the second half of 2014 were up 6% from the first half of the year, as economic growth accelerated, housing inventory increased and sales prices moderated. This momentum has continued into 2015 with the first half of 2015 with existing home sales nationwide up 1% over the second half of 2014.
For the remainder of 2015, the NAR expects economic recovery to continue. Existing home sales nationwide are expected to increase approximately 5% over the first half of 2015, resulting in full-year 2015 growth of over 7%, while supporting sales price growth of approximately 6%.

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Results of Operations for the Three and Nine Months ended September 30, 2015 and 2014
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
2014
$
Change
%
Change
 
2015
2014
$
Change
%
Change
 
(Dollars in thousands)
Mortgage products
$
44,171

$
32,026

$
12,145

38
 %
 
$
118,367

$
100,936

$
17,431

17
 %
Non-mortgage products
25,633

9,280

16,353

176
 %
 
57,508

22,550

34,958

155
 %
Revenue
69,804

41,306

28,498

69
 %
 
175,875

123,486

52,389

42
 %
Costs and expenses:
 

 

 

 

 
 
 
 
 
Cost of revenue (exclusive of depreciation shown separately below)
2,436

2,110

326

15
 %
 
6,402

5,670

732

13
 %
Selling and marketing expense
48,901

27,168

21,733

80
 %
 
118,615

83,581

35,034

42
 %
General and administrative expense
7,069

6,590

479

7
 %
 
21,336

18,201

3,135

17
 %
Product development
2,675

1,658

1,017

61
 %
 
7,238

5,416

1,822

34
 %
Depreciation
764

840

(76
)
(9
)%
 
2,135

2,541

(406
)
(16
)%
Amortization of intangibles
25

41

(16
)
(39
)%
 
124

96

28

29
 %
Restructuring and severance
28

7

21

300
 %
 
422

232

190

82
 %
Litigation settlements and contingencies
133

2,338

(2,205
)
(94
)%
 
(663
)
10,430

(11,093
)
(106
)%
Total costs and expenses
62,031

40,752

21,279

52
 %
 
155,609

126,167

29,442

23
 %
Operating income (loss)
7,773

554

7,219

1,303
 %
 
20,266

(2,681
)
22,947

856
 %
Other income (expense), net:
 

 

 

 

 
 
 
 
 
Interest expense
(1
)
(1
)
—

—
 %
 
(63
)
(1
)
(62
)
(6,200
)%
Income (loss) before income taxes
7,772

553

7,219

1,305
 %
 
20,203

(2,682
)
22,885

853
 %
Income tax (expense) benefit
(389
)
2

(391
)
(19,550
)%
 
(968
)
86

(1,054
)
(1,226
)%
Net income (loss) from continuing operations
7,383

555

6,828

1,230
 %
 
19,235

(2,596
)
21,831

841
 %
Loss from discontinued operations, net of tax
(1,295
)
(174
)
(1,121
)
(644
)%
 
(3,238
)
(3,679
)
441

12
 %
Net income (loss) and comprehensive income (loss)
$
6,088

$
381

$
5,707

(1,498
)%
 
$
15,997

$
(6,275
)
$
22,272

355
 %
Revenue
Revenue increased in the third quarter and first nine months of 2015 compared to the third quarter and first nine months of 2014 due to increases in our non-mortgage products of $16.4 million and $35.0 million, respectively, and in our mortgage products of $12.1 million and $17.4 million, respectively.
Our non-mortgage products include the following non-mortgage lending products: personal loans, home equity, reverse mortgage, credit cards, auto loans, student loans and small business loans. Our non-mortgage products also include home improvement referrals and education enrollment referrals. The increase in revenue from our non-mortgage products is primarily due to increases in revenue from our personal loans product and our credit cards product. Revenue from our personal loans product increased $11.9 million and $28.4 million, respectively, in the third quarter and first nine months of 2015 compared to the third quarter and first nine months of 2014 due to growing awareness in the market of the product, an increase in lenders on our exchange, increases in revenue earned per matched consumer and increased marketing efforts. Revenue from our credit cards product increased $2.5 million and $2.9 million, respectively, in the third quarter and first nine months of 2015 compared to the third quarter and first nine months of 2014 due to an increase in payouts from issuers in addition to increased marketing efforts. Revenue from each of our non-mortgage lending products increased in the third quarter and first nine months of 2015 compared to the third quarter and first nine months of 2014.
The increase in revenue from our mortgage products in the third quarter of 2015 compared to the third quarter of 2014 is primarily due to an increase in revenue from our refinance product, although revenue from our purchase product also increased. The increase in revenue from our mortgage products in the first nine months of 2015 compared to the first nine months of 2014 is primarily due to an increase in revenue from our refinance product, partially offset by a decrease in revenue from our purchase

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product. Mortgage interest rates were lower in the third quarter and first nine months of 2015 compared to the third quarter and first nine months of 2014, causing an increase in sales of the refinance product. Additionally, revenue from our refinance product increased in the third quarter of 2015 compared to the third quarter of 2014 due to increased demand of both new and existing lenders on our marketplace.
The number of consumers matched on our lending marketplace increased by 73% in the third quarter of 2015 compared to the third quarter of 2014 and by 82% in the first nine months of 2015 compared to the first nine months of 2014, while our average revenue earned from marketplace lenders per matched consumer decreased by 1% in the third quarter of 2015 compared to the third quarter of 2014 and decreased by 21% in the first nine months of 2015 compared to the first nine months of 2014. The decrease in revenue earned per matched consumer was primarily due to the increased relative contribution of our non-mortgage lending products, which have lower revenue per matched consumer rates than our mortgage products. Additionally, there was a reduction in revenue per matched consumer in our mortgage products in the first nine months of 2015 compared to the first nine months of 2014.
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 call centers, third-party customer call center fees, credit scoring fees, credit card fees and website network hosting and server fees.
Cost of revenue increased in the third quarter of 2015 from the third quarter of 2014, primarily due to increases of $0.3 million in compensation and benefits as a result of increases in headcount and $0.2 million in credit card fees, partially offset by a $0.1 million decrease in credit scoring fees and a $0.1 million decrease in licenses and permits.
Cost of revenue increased in the first nine months of 2015 from the first nine months of 2014, primarily due to increases of $0.7 million in compensation and benefits as a result of increases in headcount and $0.4 million in credit card fees, partially offset by a $0.4 million decrease in credit scoring fees.
Cost of revenue as a percentage of revenue decreased slightly from 5% for the third quarter and first nine months of 2014 to 3% for the third quarter of 2015 and 4% for the first nine months of 2015.
Selling and marketing expense
Selling and marketing expense consists primarily of advertising and promotional expenditures, fees paid to lead sources 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 third quarter and first nine months of 2015 compared to the third quarter and first nine months of 2014 were primarily due to increases in advertising and promotional expense of $20.9 million and $33.1 million, respectively, as discussed below. In addition, selling and marketing expense increased in the third quarter and first nine months of 2015 compared to the third quarter and first nine months of 2014 due to an increase in compensation and benefits of $0.9 million and $1.9 million, respectively, as a result of increases in headcount.
Advertising and promotional expense is the largest component of selling and marketing expense, and is comprised of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
$
Change
 
%
Change
 
2015
 
2014
 
$
Change
 
%
Change
 
(Dollars in thousands)
Online
$
34,412

 
$
20,501

 
$
13,911

 
68
%
 
$
85,135

 
$
63,597

 
$
21,538

 
34
%
Broadcast
8,614

 
2,792

 
5,822

 
209
%
 
18,304

 
8,475

 
9,829

 
116
%
Other
2,459

 
1,333

 
1,126

 
84
%
 
5,477

 
3,720

 
1,757

 
47
%
Total advertising expense
$
45,485

 
$
24,626

 
$
20,859

 
85
%
 
$
108,916

 
$
75,792

 
$
33,124

 
44
%

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We increased our advertising expenditures in the third quarter of 2015 compared to the third quarter of 2014 and the first nine months of 2015 compared to the first nine months of 2014, in order to generate additional lending lead volume 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 third quarter of 2015 from the third quarter of 2014, primarily due to increases in compensation and benefits of $0.2 million, increases in recruiting expenses of $0.1 million, increases in computer software maintenance of $0.3 million, increases in travel and entertainment expenses of employees of $0.2 million, and increases in potential acquisition expenses of $0.2 million, partially offset by decreases in professional fees of $0.3 million, decreases in loss on fixed assets of $0.1 million, and decreases of franchise taxes of $0.2 million.
 General and administrative expense as a percentage of revenue decreased to 10% in the third quarter of 2015 compared to 16% in the third quarter of 2014.
General and administrative expense increased in the first nine months of 2015 from the first nine months of 2014, primarily due to increases in compensation and benefits of $2.0 million, increases in recruiting expenses of $0.2 million, increases in professional fees of $0.4 million, increases in computer software maintenance of $0.4 million, increases in travel and entertainment expenses of employees of $0.3 million and increases in potential acquisition expenses of $0.2 million, partially offset by decreases in franchise taxes of $0.2 million and a decrease of $0.2 million related to an acquisition completed in the second quarter of 2014.
General and administrative expense as a percentage of revenue decreased to 12% in the first nine months of 2015 compared to 15% in the first nine months of 2014.
Product development
Product development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) that are not capitalized, for personnel engaged in the design, development, testing and enhancement of technology. 
Product development expense increased in the third quarter of 2015 compared to the third quarter of 2014, and the first nine months of 2015 compared to the first nine months of 2014, primarily due to increases in compensation and other employee-related costs. We increased headcount in 2015 compared to 2014, in order to support planned product launches for 2015.
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 we are pursuing. 
During the first quarter of 2014, we participated in a jury trial for the Zillow litigation, described in Note 10—Contingencies to the consolidated financial statements included elsewhere in this report. The legal expenses associated with this jury trial and post-trial motions increased our litigation settlements and contingencies expense for the first nine months of 2014. In addition, in October 2014, the court awarded NexTag's attorney fees and costs totaling $2.3 million, which we reserved for in the third quarter of 2014. We appealed the award of NexTag's attorney fees and costs in November 2014 and in June 2015, we reached a settlement agreement with NexTag for $1.1 million. During the first nine months of 2015, we recorded $0.7 million in income primarily due to an adjustment in the reserve for NexTag attorney fees and costs associated with this matter, partially offset by legal fees.
Income tax expense
Tax expense for the third quarter and first nine months of 2015 is primarily comprised of the federal Alternative Minimum Tax and state tax.
For the third quarter of 2015 and 2014 and for the first nine months of 2015 and 2014, the effective tax rates varied from the statutory rate primarily due to the existence of a valuation allowance that has been provided to offset our net deferred tax asset and state taxes.

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There have been no changes to our valuation allowance assessment for the third quarter and first nine months of 2015.
Discontinued operations
Losses from discontinued operations are attributable to losses associated with the LendingTree Loans business, the sale of which was completed on June 6, 2012. Losses from discontinued operations were primarily due to litigation settlements and contingencies and legal fees associated with ongoing legal proceedings.
Adjusted EBITDA
We report Adjusted EBITDA as a supplemental measure to GAAP. This measure is the primary metric by which we evaluate the performance of our businesses, on which our marketing expenditures and internal budgets are based and by which management and many employees are compensated. We believe that investors should have access to the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below.
Definition of Adjusted EBITDA
We report Adjusted EBITDA as operating income or loss (which excludes interest expense and taxes) adjusted to exclude amortization of intangibles and depreciation, and to further exclude (1) non-cash compensation expense, (2) non-cash impairment charges, (3) gain/loss on disposal of assets, (4) restructuring and severance expenses, (5) litigation settlements and contingencies and legal fees for certain patent litigation, (6) adjustments for acquisitions or dispositions, and (7) one-time items. Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including depreciation, non-cash compensation and acquisition-related accounting. We endeavor to compensate for the limitations of the non-GAAP measures presented by also providing the comparable GAAP measures with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measures. These non-GAAP measures may not be comparable to similarly titled measures used by other companies. 
One-Time Items
Adjusted EBITDA is adjusted for one-time items, if applicable. Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods presented in this report, there are no adjustments for one-time items, except for $0.1 million related to an estimated settlement for unclaimed property.
Non-Cash Expenses that are Excluded from Adjusted EBITDA
Non-cash compensation expense consists principally of expense associated with grants of restricted stock, restricted stock units and stock options. These expenses are not paid in cash, and we include the related shares in our calculations of fully diluted shares outstanding. Upon settlement of restricted stock units, exercise of certain stock options or vesting of restricted stock awards, the awards may be settled, on a net basis, with us remitting the required tax withholding amount from our current funds.
Amortization of intangibles are non-cash expenses relating primarily to intangible assets acquired through acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as purchase agreements, technology and customer relationships, are valued and amortized over their estimated lives.

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The following table is a reconciliation of Adjusted EBITDA to net income (loss) from continuing operations.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
Adjusted EBITDA
$
10,999

 
$
5,791

 
$
28,837

 
$
15,792

Adjustments to reconcile to net income (loss) from continuing operations:
 

 
 

 
 
 
 
Amortization of intangibles
(25
)
 
(41
)
 
(124
)
 
(96
)
Depreciation
(764
)
 
(840
)
 
(2,135
)
 
(2,541
)
Restructuring and severance
(28
)
 
(7
)
 
(422
)
 
(232
)
Loss on disposal of assets
(64
)
 
(185
)
 
(102
)
 
(237
)
Non-cash compensation
(1,978
)
 
(1,786
)
 
(6,233
)
 
(4,823
)
Estimated settlement for unclaimed property
—

 
—

 
(134
)
 
—

Acquisition expense
(234
)
 
(40
)
 
(84
)
 
(114
)
Litigation settlements and contingencies
(133
)
 
(2,338
)
 
663

 
(10,430
)
Interest expense
(1
)
 
(1
)
 
(63
)
 
(1
)
Income tax (expense) benefit
(389
)
 
2

 
(968
)
 
86

Net income (loss) from continuing operations
$
7,383

 
$
555

 
$
19,235

 
$
(2,596
)
Financial Position, Liquidity and Capital Resources
General
As of September 30, 2015, we had $106.3 million of cash and cash equivalents and $18.6 million of restricted cash and cash equivalents, compared to $86.2 million of cash and cash equivalents and $18.7 million of restricted cash and cash equivalents as of December 31, 2014.
We expect our cash and cash equivalents and cash flows from operations to be sufficient to fund our operating needs for the next twelve months and beyond. Additionally, we expect $12.1 million of restricted cash to be released to us from escrow in December 2015. Our revolving credit facility described below is an additional potential source of liquidity.
Senior Secured Revolving Credit Facility
On October 22, 2015, we established 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 working capital needs, capital expenditures and general corporate purposes, including to finance permitted acquisitions. As of October 26, 2015, we do not have any borrowings outstanding under the Revolving Credit Facility.
For additional information on the Revolving Credit Facility, see Note 14—Subsequent Events, in Part I Item 1, Financial Statements.
Cash Flows from Continuing Operations
Our cash flows attributable to continuing operations are as follows:
 
Nine Months Ended September 30,
 
2015
 
2014
 
(in thousands)
Net cash provided by operating activities
$
31,096

 
$
972

Net cash (used in) provided by investing activities
(4,207
)
 
606

Net cash used in financing activities
(5,965
)
 
(6,359
)

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Cash Flows from Operating Activities
Net cash provided by operating activities attributable to continuing operations in the first nine months of 2015 was $31.1 million and consisted primarily of income from continuing operations of $19.2 million, net positive adjustments for non-cash items of $8.5 million, and cash provided by working capital of $3.2 million. Adjustments for non-cash items primarily consisted of $6.4 million in non-cash compensation expense and $2.1 million of depreciation. Accounts receivable increased $11.8 million primarily due to increases in revenue. Accounts payable, accrued expenses and other current liabilities increased $15.3 million, primarily due to increased marketing expenses and an increase in accrued compensation and benefits, partially offset by the settlement of the court's partial award of attorneys' fees to NexTag in the Zillow patent litigation in the second quarter of 2015.
Net cash provided by operating activities attributable to continuing operations in the first nine months of 2014 was $1.0 million and consisted primarily of losses from continuing operations of $2.6 million and cash used for working capital of $4.1 million, more than offset by positive adjustments for non-cash items of $7.9 million. Adjustments for non-cash items primarily consisted of $4.9 million in non-cash compensation expense and $2.5 million of depreciation. Accounts payable, accrued expenses and other current liabilities decreased $2.8 million, primarily due to increased marketing efforts and legal fees associated with the jury trial for the Zillow patent litigation and a $1.0 million payment to settle an earnout dispute related to an acquisition, which was partially offset by a $2.2 million liability attributable to the court's partial award of attorneys' fees to NexTag in the Zillow patent litigation.
Cash Flows from Investing Activities
Net cash used in investing activities attributable to continuing operations in the first nine months of 2015 of $4.2 million consisted primarily of capital expenditures of $4.3 million primarily related to internally developed software.
Net cash provided by investing activities attributable to continuing operations in the first nine months of 2014 of $0.6 million consisted primarily of a decrease in restricted cash of $4.1 million, which was partially offset by capital expenditures of $3.0 million primarily related to internally developed software and a business acquisition of $0.5 million. During the first quarter of 2014, we reached and executed a settlement with the disputing party on the earnout related to an acquisition, upon which $2.0 million of cash previously held in escrow was released. Additionally, during the second quarter of 2014, we reached and executed a settlement with one of our secondary market purchasers related to loan loss obligations, upon which $2.0 million of cash previously held in escrow was released.
Cash Flows from Financing Activities
Net cash used in financing activities attributable to continuing operations in the first nine months of 2015 of $6.0 million consisted primarily of $6.1 million in withholding taxes paid by us upon surrender of shares to satisfy obligations on equity awards, the repurchase of our stock of $0.2 million and $0.1 million in dividend payments; offset by $0.5 million in excess tax benefits from stock-based award activity.
Net cash used in financing activities attributable to continuing operations in the first nine months of 2014 of $6.4 million consisted primarily of $3.6 million in employee withholding taxes paid by us upon employees' surrender of shares to satisfy withholding obligations on equity awards and $2.5 million for the repurchase of our common stock.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than our operating lease obligations and funding commitments pursuant to our surety bonds.
Summary of Contractual Obligations
Effective May 2015, we renewed the lease for our principal executive office located in Charlotte, North Carolina. The following table sets forth our contractual obligations and commercial commitments as of September 30, 2015.
 
Payments Due By Period as of September 30, 2015
Contractual Obligations (a)
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
Operating lease obligations (b)
5,644

1,224

2,087

2,065

268

Total contractual obligations
$
5,644

1,224

2,087

2,065

268


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(a)
Excludes potential obligations under surety bonds and the indemnification obligations, repurchase obligations and premium repayment obligations for which our HLC subsidiary continues to be liable following the sale of substantially all of the operating assets of our LendingTree Loans business in the second quarter of 2012.
(b)
Our operating lease obligations are associated with office space.
New Accounting Pronouncements
For information regarding new accounting pronouncements, see Note 2- Significant Accounting Policies, in Part I, Item 1 Financial Statements.
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
Other than our Revolving Credit Facility, which currently has no borrowings outstanding, we do not have any financial instruments that are exposed to significant market risk. We maintain our cash and cash equivalents in short-term, highly liquid money market investments. A hypothetical 100-basis point increase or decrease in market interest rates would not have a material impact on the fair value of our cash equivalents securities, or our earnings on such cash equivalents, but would have an effect on the interest paid on borrowings under the Revolving Credit Facility, if any.
Fluctuations in interest rates affect consumer demand for new mortgages and the level of refinancing activity which, in turn, affects lender demand for mortgage leads. Typically, a decline in mortgage interest rates will lead to reduced lender demand for leads from third-party sources, as there are more consumers in the marketplace seeking refinancings and, accordingly, lenders receive more organic lead volume. Conversely, an increase in mortgage interest rates will typically lead to an increase in lender demand for third-party leads, as there are fewer consumers in the marketplace and, accordingly, the supply of organic mortgage lead volume decreases.
Item 4.  Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), management, with the participation of our principal executive officer (our Chief Executive Officer) and principal financial officer (our Chief Financial Officer), evaluated, as of the end of the period covered by this report, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, as of September 30, 2015, to reasonably ensure that information required to be disclosed and filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that management will be timely alerted to material information required to be included in our periodic reports filed with the Securities and Exchange Commission.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our third fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION
Item 1.  Legal Proceedings
In the ordinary course of business, we are party to litigation involving property, contract, intellectual property and a variety of other claims. The amounts that may be recovered in such matters may be subject to insurance coverage. We have provided information about certain legal proceedings in which we are involved in Part I, Item 3 Legal Proceedings of our 2014 Annual Report and updated that information in Note 10—Contingencies to the consolidated financial statements included elsewhere in this report.
Item 1A.  Risk Factors
Other than the risk factor set forth below, there have been no material changes to the risk factors included in Part II, Item 1A. Risk Factors of our quarterly report on Form 10-Q for the quarter ended June 30, 2015 and Part I, Item 1A. Risk Factors of our 2014 Annual Report.
Our Revolving Credit Facility contains financial covenants and other restrictions on our actions, and it could therefore limit our operational flexibility or otherwise adversely affect our financial condition .Failure to comply with the terms of such facility could impair our rights to the assets that have been pledged as collateral under the facility.
On October 22, 2015, our 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 proceeds of the Revolving Credit Facility can be used to finance working capital needs, capital expenditures, and general corporate purposes, including to finance permitted acquisitions. We do not currently have any borrowings outstanding under the Revolving Credit Facility.
The Revolving Credit Facility contains certain restrictive covenants, which include a consolidated debt to consolidated EBITDA ratio and a consolidated EBITDA to consolidated interest expense ratio. In addition, the Revolving Credit Facility contains customary affirmative and negative covenants, including, subject to certain exceptions, restrictions on our ability to, among other things:
•
incur additional indebtedness;
•
grant liens;
•
make loans and investments;
•
enter into mergers or make certain fundamental changes;
•
make certain restricted payments, including dividends, distributions or redemptions;
•
sell assets;
•
enter into transactions with affiliates;
•
enter into restrictive transactions;
•
enter into sale and leaseback transactions;
•
enter into hedging transactions; and
•
engage in certain other transactions without the prior consent of the lenders.
The Revolving Credit Facility requires LendingTree, LLC to pledge as collateral, subject to certain customary exclusions, 100% of the 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 guarantees are secured by a pledge as collateral, subject to certain customary exclusions, of 100% of each such guarantor's assets, including 100% of its equity in all of its subsidiaries.
If an event of default occurs or if we otherwise fail to comply with any of the negative or affirmative covenants of the Revolving Credit Facility, the lenders may declare all of the obligations and indebtedness under such facility due and payable. In such a scenario, the lenders could exercise their lien on the pledged collateral, which would have a material adverse effect on our business, operations, financial condition and liquidity. For additional information on the Revolving Credit Facility, see Note 14—Subsequent Events, in Part I Item 1, Financial Statements.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
In January 2010, the board of directors approved and we announced a stock repurchase program which allowed for the repurchase of up to $10.0 million of our common stock. In May 2014, the board of directors authorized and we announced an additional $10.0 million to the stock repurchase program. At September 30, 2015, approximately $7.3 million remains authorized for share repurchase under this program. Under this program, we can repurchase stock in the open market or through privately-negotiated transactions. We have used available cash to finance these repurchases. We will determine the timing and amount of any additional repurchases based on our evaluation of market conditions, applicable SEC guidelines and regulations, and other factors. This program may be suspended or discontinued at any time at the discretion of our board of directors. No shares of common stock were repurchased under the stock repurchase program during the quarter ended September 30, 2015.
Additionally, the LendingTree Fourth Amended and Restated 2008 Stock and Award Incentive Plan allows employees to forfeit shares of our common stock to satisfy federal and state withholding obligations upon the exercise of stock options, the settlement of restricted stock unit awards and the vesting of restricted stock awards granted to those individuals under this plan. During the quarter ended September 30, 2015, 11,518 shares were purchased related to these obligations under the LendingTree Fourth Amended and Restated 2008 Stock and Award Incentive Plan. The withholding of those shares does not affect the dollar amount or number of shares that may be purchased under the stock repurchase program described above.
The following table provides information about the company's purchases of equity securities during the quarter ended September 30, 2015.
Period
 
Total Number of
Shares Purchased (1)
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
 
Approximate
Dollar Value of Shares
that May Yet be
Purchased Under the
Plans or Programs
 
 
 
 
 
 
 
 
(in thousands)
July 2015
 
8,118

 
$
81.50

 
—

 
$
7,273

August 2015
 
2,755

 
$
120.79

 
—

 
$
7,273

September 2015
 
645

 
$
106.01

 
—

 
$
7,273

Total
 
11,518

 
$
92.27

 
—

 
$
7,273

(1)
During July 2015, August 2015 and September 2015, 8,118 shares, 2,755 shares and 645 shares, respectively (totaling 11,518 shares), were purchased to satisfy federal and state withholding obligations of our employees upon the settlement of restricted stock unit awards, all in accordance with our Fourth Amended and Restated 2008 Stock and Award Incentive Plan, as described above.
(2)
See the narrative disclosure above the table for further description of our publicly announced stock repurchase program.
Item 5.     Other Information
On October 22, 2015, our 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 working capital needs, capital expenditures, and general corporate purposes, including to finance permitted acquisitions. As of October 26, 2015, we do not have any borrowings outstanding under the Revolving Credit Facility. For more information about the Revolving Credit Facility and related documents, see Note 14—Subsequent Events, in Part I Item 1, Financial Statements.
This disclosure is provided in lieu of disclosure on Items 1.01, 2.03 and 3.03 on Form 8-K.

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Item 6.  Exhibits
Exhibit
 
Description
 
Location
 
 
 
 
 
3.1

 
Amended and Restated Certificate of Incorporation of LendingTree, Inc.
 
Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed August 25, 2008
3.2

 
Third Amended and Restated By-laws of LendingTree, Inc.
 
Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed December 31, 2014
10.1

 
Amended Employment Offer and Change in Control Letter and Release by and between Alexander Mandel and LendingTree, Inc., dated July 2, 2015 *
 
†
31.1

 
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
†
31.2

 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
†
32.1

 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
††
32.2

 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
††
99.1

 
Credit Agreement dated October 22, 2015.
 
†
101.INS

 
XBRL Instance Document
 
†††
101.SCH

 
XBRL Taxonomy Extension Schema Document
 
†††
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
†††
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document
 
†††
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document
 
†††
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
†††
________________________________________________________________________________________________________________________________
† Filed herewith
†† This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
††† Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
* Management contract or compensation plan or arrangement.



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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: October 26, 2015
 
 
LENDINGTREE, INC.
 
 
 
 
By:
/s/ GABRIEL DALPORTO
 
 
Gabriel Dalporto
 
 
Chief Financial Officer
 
 
(principal financial officer and duly authorized officer)


34