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EX-32.1 - EX-32.1 - LIFELOCK, INC.lock-ex321_201409306.htm
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EXCEL - IDEA: XBRL DOCUMENT - LIFELOCK, INC.Financial_Report.xls

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

Commission file number: 001-35671

 

LifeLock, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

56-2508977

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

60 East Rio Salado Parkway, Suite 400

Tempe, Arizona 85281

(Address of principal executive offices and zip code)

(480) 682-5100

(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  x    No   ¨

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

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

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨  (Do not check if a smaller reporting company)

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  ¨    No  x

As of October 31, 2014, there were outstanding 93,595,046 shares of the registrant’s common stock, $0.001 par value.

 

 



EXPLANATORY NOTE

This Quarterly Report on Form 10-Q contains restated unaudited condensed consolidated financial statements and related disclosures for the three and nine month periods ended September 30, 2013. Details are discussed below and in Note 2 to the accompanying unaudited condensed consolidated financial statements.

Restatement Background

On November 5, 2014, the Audit Committee of our Board of Directors (the “Audit Committee”), after discussion with management and Ernst & Young LLP (“EY”), our independent registered public accounting firm, determined that the following financial statements previously filed with the Securities and Exchange Commission (the “SEC”) should no longer be relied upon: (1) the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013; (2) the unaudited condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013, June 30, 2013, and September 30, 2013; and (3) the unaudited condensed consolidated financial statements included our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014.

In connection with the preparation of our financial statements for the third quarter ended September 30, 2014, we reviewed the calculation of the volatility assumption within the Black-Scholes option pricing model used to compute our share-based compensation expense since our initial public offering in October 2012.  Based on this review, we determined that there was an error in the formula used to calculate the annualized volatility, which resulted in a higher volatility and, accordingly, we materially overstated share-based compensation expense for the impacted periods described above.

As a result of this error, we have restated our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2013.  This resulted in a decrease in our share-based compensation expense for the three and nine months ended September 30, 2013 of approximately $1.1 million and approximately $2.3 million, respectively, and, accordingly, our net income for the three months ended September 30, 2013 increased by approximately $1.0 million (including an increase in income tax expense for such period of approximately $39 thousand) and our net loss for the nine-months ended September 30, 2013 decreased by approximately $2.2 million (including an increase of income tax expense for such period of approximately $0.1 million).  As share-based compensation expense is a non-cash item, there was no impact to net cash provided by operating activities and there was no impact on our previously reported amounts for adjusted net income, adjusted EBITDA, and free cash flow.  

A detailed discussion of the impact of the error is contained in Note 2 to the notes to our audited consolidated financial statements in Part II, Item 8 of our Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC concurrently herewith (the “Form 10-K/A”).

Internal Control Consideration

Our management has determined that there was a control deficiency in our internal control over financial reporting that constitutes a material weakness, as discussed in Part I, Item 4 of this Form 10-Q.  A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.  For a discussion of management’s consideration of our disclosure controls and procedures and the material weakness identified, see Part I, Item 4 included in this Form 10-Q.

 

 

 

 


 

LIFELOCK, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

 

  

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1. Financial Statements (Unaudited):

 

1

 

Condensed Consolidated Balance Sheets

 

1

 

 

 

Condensed Consolidated Statements of Operations

 

2

 

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

3

 

 

 

Condensed Consolidated Statements of Cash Flows

 

4

 

 

 

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

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

 

14

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

Item 4. Controls and Procedures

 

30

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

32

 

 

 

Item 1A. Risk Factors

 

33

 

 

 

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

 

33

 

 

 

Item 6. Exhibits

 

34

 

 

 

Signatures

 

35

 

 

 

i


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited).

LIFELOCK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

 

September 30,

2014

 

 

December 31,

2013

(Restated)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

128,629

 

 

$

123,911

 

Marketable securities

 

109,706

 

 

 

48,688

 

Trade and other receivables, net

 

8,863

 

 

 

10,906

 

Deferred tax assets, net

 

13,304

 

 

 

13,117

 

Prepaid expenses and other current assets

 

7,662

 

 

 

6,961

 

Total current assets

 

268,164

 

 

 

203,583

 

Property and equipment, net

 

21,663

 

 

 

16,504

 

Goodwill

 

159,342

 

 

 

159,342

 

Intangible assets, net

 

40,520

 

 

 

47,213

 

Deferred tax assets, net – noncurrent

 

33,148

 

 

 

33,211

 

Other non-current assets

 

5,432

 

 

 

1,812

 

Total assets

$

528,269

 

 

$

461,665

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

7,532

 

 

$

2,422

 

Accrued expenses and other liabilities

 

46,051

 

 

 

34,926

 

Deferred revenue

 

145,848

 

 

 

119,106

 

Total current liabilities

 

199,431

 

 

 

156,454

 

Other non-current liabilities

 

6,256

 

 

 

4,640

 

Total liabilities

 

205,687

 

 

 

161,094

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value, 300,000,000 authorized at September 30, 2014

     and December 31, 2013; 93,275,288 and 91,441,771 shares issued and outstanding at

     September 30, 2014 and December 31, 2013, respectively

 

93

 

 

 

91

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized and no shares issued

     and outstanding at September 30, 2014 and December 31, 2013, respectively

 

 

 

 

 

Additional paid-in capital

 

488,464

 

 

 

466,046

 

Accumulated other comprehensive loss

 

(84

)

 

 

(18

)

Accumulated deficit

 

(165,891

)

 

 

(165,548

)

Total stockholders’ equity

 

322,582

 

 

 

300,571

 

Total liabilities and stockholders’ equity

$

528,269

 

 

$

461,665

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

1


 

LIFELOCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

2014

 

 

2013

(Restated)

 

 

2014

 

 

2013

(Restated)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer revenue

$

116,115

 

 

$

88,386

 

 

$

326,448

 

 

$

246,053

 

Enterprise revenue

 

6,916

 

 

 

7,353

 

 

 

19,882

 

 

 

21,300

 

Total revenue

 

123,031

 

 

 

95,739

 

 

 

346,330

 

 

 

267,353

 

Cost of services

 

30,327

 

 

 

24,887

 

 

 

89,675

 

 

 

73,870

 

Gross profit

 

92,704

 

 

 

70,852

 

 

 

256,655

 

 

 

193,483

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

51,818

 

 

 

40,423

 

 

 

166,710

 

 

 

125,334

 

Technology and development

 

12,341

 

 

 

10,462

 

 

 

37,996

 

 

 

29,564

 

General and administrative

 

16,781

 

 

 

11,265

 

 

 

45,489

 

 

 

30,799

 

Amortization of acquired intangible assets

 

2,231

 

 

 

1,966

 

 

 

6,693

 

 

 

5,898

 

Total costs and expenses

 

83,171

 

 

 

64,116

 

 

 

256,888

 

 

 

191,595

 

Income (loss) from operations

 

9,533

 

 

 

6,736

 

 

 

(233

)

 

 

1,888

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(89

)

 

 

(82

)

 

 

(264

)

 

 

(228

)

Interest income

 

73

 

 

 

29

 

 

 

189

 

 

 

75

 

Other

 

(134

)

 

 

(7

)

 

 

(151

)

 

 

(11

)

Total other expense

 

(150

)

 

 

(60

)

 

 

(226

)

 

 

(164

)

Income (loss) before provision for income taxes

 

9,383

 

 

 

6,676

 

 

 

(459

)

 

 

1,724

 

Income tax (benefit) expense

 

3,933

 

 

 

210

 

 

 

(116

)

 

 

245

 

Net income (loss)

$

5,450

 

 

$

6,466

 

 

$

(343

)

 

$

1,479

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.06

 

 

$

0.07

 

 

$

(0.00

)

 

$

0.02

 

Diluted

$

0.06

 

 

$

0.07

 

 

$

(0.00

)

 

$

0.02

 

Weighted-average common shares outstanding used in computing net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

92,925

 

 

 

89,318

 

 

 

92,437

 

 

 

87,841

 

Diluted

 

98,524

 

 

 

96,498

 

 

 

92,437

 

 

 

95,412

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


 

LIFELOCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

2014

 

 

2013

(Restated)

 

 

2014

 

 

2013

(Restated)

 

Net income (loss)

$

5,450

 

 

$

6,466

 

 

$

(343

)

 

$

1,479

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities

 

(78

)

 

 

(43

)

 

 

(66

)

 

 

(43

)

Comprehensive income (loss)

$

5,372

 

 

$

6,423

 

 

$

(409

)

 

$

1,436

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


 

LIFELOCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

For the Nine Months Ended

September 30,

 

 

2014

 

 

2013

(Restated)

 

Operating activities

 

 

 

 

 

 

 

Net income (loss)

$

(343

)

 

$

1,479

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

12,259

 

 

 

9,484

 

Share-based compensation

 

13,229

 

 

 

7,933

 

Provision for doubtful accounts

 

333

 

 

 

220

 

Amortization of premiums on marketable securities

 

1,213

 

 

 

18

 

Deferred income tax benefit

 

(124

)

 

 

84

 

Other

 

39

 

 

 

10

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Trade and other receivables

 

566

 

 

 

(3,698

)

Prepaid expenses and other current assets

 

(701

)

 

 

413

 

Other non-current assets

 

716

 

 

 

380

 

Accounts payable

 

5,282

 

 

 

831

 

Accrued expenses and other liabilities

 

11,303

 

 

 

5,993

 

Deferred revenue

 

26,742

 

 

 

24,939

 

Other non-current liabilities

 

1,617

 

 

 

3,741

 

Net cash provided by operating activities

 

72,131

 

 

 

51,827

 

Investing activities

 

 

 

 

 

 

 

Acquisition of property and equipment

 

(11,127

)

 

 

(5,264

)

Purchases of marketable securities

 

(95,686

)

 

 

(24,247

)

Maturities of marketable securities

 

34,418

 

 

 

 

Purchases of company-owned life insurance policies

 

(4,337

)

 

 

 

Net cash used in investing activities

 

(76,732

)

 

 

(29,511

)

Financing activities

 

 

 

 

 

 

 

Proceeds from share-based compensation plans

 

9,704

 

 

 

11,815

 

Proceeds from warrant exercises

 

375

 

 

 

 

Payments for employee tax withholdings related to restricted stock

 

(760

)

 

 

 

Payments for debt issuance costs

 

 

 

 

(440

)

Net cash provided by financing activities

 

9,319

 

 

 

11,375

 

Net increase in cash and cash equivalents

 

4,718

 

 

 

33,691

 

Cash and cash equivalents at beginning of period

 

123,911

 

 

 

134,197

 

Cash and cash equivalents at end of period

$

128,629

 

 

$

167,888

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

LIFELOCK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

(unaudited)

1. Description of Business and Basis of Presentation

We provide proactive identity theft protection services to our consumer subscribers, whom we refer to as our members, on an annual or monthly subscription basis. We also provide fraud and risk solutions to our enterprise customers.

We were incorporated in Delaware on April 12, 2005 and are headquartered in Tempe, Arizona. On March 14, 2012, we acquired ID Analytics, Inc. and its wholly owned subsidiary IDA, Inc., collectively, ID Analytics, each of which is incorporated in Delaware.  On December 11, 2013, we acquired Lemon, Inc., or Lemon, which is incorporated in Delaware.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Form 10-K/A for the fiscal year ended December 31, 2013.

The condensed consolidated balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP.

The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the entire year ending December 31, 2014 or any future period.

Basis of Consolidation

The condensed consolidated financial statements include our accounts and those of our wholly owned subsidiaries. We eliminate all intercompany balances and transactions, including intercompany profits, and unrealized gains and losses in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience, current business factors, and various other assumptions that we believe are necessary to consider in forming a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses, and the disclosure of contingent assets and liabilities.

 

2. Summary of Significant Accounting Policies

Restatement

In connection with the preparation of our financial statements for the third quarter ended September 30, 2014, we identified an error in our calculation of the volatility assumption within the Black-Scholes option pricing model used to compute our share-based compensation expense since our initial public offering in October 2012. Based on this review, we determined that there was an error in the formula used to calculate the annualized volatility, which resulted in a higher volatility and, accordingly, we materially overstated share-based compensation expense.

To correct this error, we have restated our unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2013.  The correction of this error resulted in a decrease in our share-based compensation for the three and nine months ended September 30, 2013 by $1,078 and $2,337, respectively, and, accordingly, our net income for the three months ended September 30, 2013 increased by $1,039 (including an increase in income tax expense for such period of approximately $39) and our net loss for the nine months ended September 30, 2013 decreased by $2,234(including an increase of income tax expense for such period of $103).

5


 

In a separate matter, unrelated to the error corrections described above, we have also reflected certain purchase price adjustments to our consolidated balance sheet as of December 31, 2013 related to our acquisition of Lemon, Inc., or Lemon, which we previously disclosed in our Form 10-Q for the quarter ended June 30, 2014. ASC 805-10-25-16 requires that adjustments to provisional amounts of assets and liabilities recognized in a business combination be made as if the accounting for the business combination had been completed at the acquisition date and that the financial statements be revised accordingly.  As such, we recorded a decrease in deferred tax assets, net – non-current and an increase to goodwill, which has been reflected in the December 31, 2013 balances of deferred tax assets, net – non-current and goodwill in the consolidated balance sheet as of December 31, 2013.

The following tables present the effect of the financial statement restatement adjustments on our previously reported condensed consolidated financial statements for the three- and nine-month periods ended September 30, 2013.  

 

Three Months Ended September 30, 2013

 

 

Nine Months Ended September 30, 2013

 

 

As Previously Reported

 

 

Adjustment

 

 

As Restated

 

 

As Previously Reported

 

 

Adjustment

 

 

As Restated

 

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

Cost of services

$

24,935

 

 

$

(48

)

 

$

24,887

 

 

$

73,965

 

 

$

(95

)

 

$

73,870

 

Gross profit

 

70,804

 

 

 

48

 

 

 

70,852

 

 

 

193,388

 

 

 

95

 

 

 

193,483

 

Sales and marketing

 

40,609

 

 

 

(186

)

 

 

40,423

 

 

 

125,651

 

 

 

(317

)

 

 

125,334

 

Technology and development

 

10,734

 

 

 

(272

)

 

 

10,462

 

 

 

30,128

 

 

 

(564

)

 

 

29,564

 

General and administrative

 

11,837

 

 

 

(572

)

 

 

11,265

 

 

 

32,160

 

 

 

(1,361

)

 

 

30,799

 

Total costs and expenses

 

65,146

 

 

 

(1,030

)

 

 

64,116

 

 

 

193,837

 

 

 

(2,242

)

 

 

191,595

 

Income (loss) from operations

 

5,658

 

 

 

1,078

 

 

 

6,736

 

 

 

(449

)

 

 

2,337

 

 

 

1,888

 

Income (loss) before provision for income taxes

 

5,598

 

 

 

1,078

 

 

 

6,676

 

 

 

(613

)

 

 

2,337

 

 

 

1,724

 

Income tax expense

 

171

 

 

 

39

 

 

 

210

 

 

 

142

 

 

 

103

 

 

 

245

 

Net income (loss)

 

5,427

 

 

 

1,039

 

 

 

6,466

 

 

 

(755

)

 

 

2,234

 

 

 

1,479

 

Basic earnings per share

$

0.06

 

 

$

0.01

 

 

$

0.07

 

 

$

(0.01

)

 

$

0.03

 

 

$

0.02

 

Diluted earnings per share

$

0.06

 

 

$

0.01

 

 

$

0.07

 

 

$

(0.01

)

 

$

0.03

 

 

$

0.02

 

 

 

Nine Months Ended September 30, 2013

 

 

As Previously Reported

 

 

Adjustment

 

 

As Restated

 

Condensed Consolidated Statements of Cash Flows:

(in thousands)

 

Net income (loss)

$

(755

)

 

$

2,234

 

 

$

1,479

 

Share-based compensation

 

10,270

 

 

 

(2,337

)

 

 

7,933

 

Deferred income tax benefit

 

(19

)

 

 

103

 

 

 

84

 

As the adjustment to correct the error in share-based compensation expense was a non-cash transaction, there was no impact on cash flows provided by or used in operating activities, investing activities, or financing activities.

Significant Accounting Policies

There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Form 10-K/A for the fiscal year ended December 31, 2013.

Company-Owned Life Insurance

We hold whole life insurance on certain members of our executive management team, or the Company-Owned Life Insurance, pursuant to which we are protected against the loss of talent, expertise, and knowledge of those certain executives.  The policies for the Company-Owned Life Insurance have an Exchange to Term Insurance Endorsement that permits us, during the first five years of the policies, to exchange the policy to which the endorsement is attached for an annually renewable convertible term policy for the insured.  As such, for the first five years of the policies, the fair values of such policies represent the Exchange Credit Value.  Fair values of the Company-Owned Life Insurance are included in other non-current assets in the condensed consolidated balance sheets.  Changes in the Exchange Credit Value are included in other income (expense) in the condensed consolidated statements of operations.

6


 

Recently Issued Accounting Standards

In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (ASU) No. 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements.  The updated guidance defines discontinued operations as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results and expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations.  ASU No. 2014-08 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014.  ASU No. 2014-08 would be applied to any future applicable transaction.

In May 2014, the FASB issued ASU 2014-09, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. This guidance will be effective for us in the first quarter of our fiscal year ending December 31, 2017. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The standard explicitly requires management to assess an entity’s ability to continue as a going concern every reporting period, including interim periods, and to provide related footnote disclosures in certain circumstances.  ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for interim periods thereafter, with early adoption permitted.  We do not expect the adoption of ASU 2014-15 to have a significant impact on our consolidated financial statements.

3. Business Combinations

Acquisition of Lemon

On December 11, 2013, we acquired Lemon, a mobile wallet innovator. In connection with this acquisition, we launched our new LifeLock mobile application. The aggregate purchase price consisted of approximately $42,369 of cash paid at the closing (net of cash acquired of $3,315).  We allocated the total purchase consideration to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, as determined by management, and, with respect to identifiable intangible assets, by management with the assistance of a valuation provided by a third-party valuation firm. We recorded the excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed as goodwill in our consumer segment.  

We accounted for this acquisition using the acquisition method in accordance with Accounting Standards Codification, or ASC, 805, Business Combinations. Accordingly, we allocated the purchase price of the acquired assets and liabilities based on their estimated fair values as of the acquisition date as summarized in the following table:

Net assets assumed

 

$

3,184

 

Deferred tax assets, net – noncurrent

 

 

8,706

 

Intangible assets acquired

 

 

3,880

 

Goodwill

 

 

29,914

 

Total purchase price consideration

 

$

45,684

 

 

4. Marketable Securities

The following is a summary of marketable securities designated as available-for-sale as of September 30, 2014:

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Corporate bonds

$

97,327

 

 

$

1

 

 

$

(93

)

 

$

97,235

 

Municipal bonds

 

12,223

 

 

 

2

 

 

 

(4

)

 

 

12,221

 

Certificates of deposit

 

250

 

 

 

 

 

 

 

 

 

250

 

Total marketable securities

$

109,800

 

 

$

3

 

 

$

(97

)

 

$

109,706

 

7


 

 

All marketable securities are classified as current regardless of contractual maturity dates because we consider such investments to represent cash available for current operations.  

As of September 30, 2014, we did not conclude that any of our marketable securities were other-than-temporarily impaired. When evaluating our marketable securities for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer, our ability and intent to hold the security, and whether it is more likely than not that we will be required to sell the investment before recovery of its cost basis.

The following is a summary of amortized cost and estimated fair value of marketable securities as of September 30, 2014, by maturity:

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Due in one year or less

$

109,518

 

 

$

3

 

 

$

(97

)

 

$

109,424

 

Due after one year

 

282

 

 

 

 

 

 

 

 

 

282

 

Total marketable securities

$

109,800

 

 

$

3

 

 

$

(97

)

 

$

109,706

 

 

The following is a summary of marketable securities designated as available-for-sale as of December 31, 2013:

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Corporate bonds

$

37,399

 

 

$

1

 

 

$

(29

)

 

$

37,371

 

Municipal bonds

 

10,820

 

 

 

2

 

 

 

(3

)

 

 

10,819

 

Certificates of deposit

 

498

 

 

 

 

 

 

 

 

 

498

 

Total marketable securities

$

48,717

 

 

$

3

 

 

$

(32

)

 

$

48,688

 

The following is a summary of amortized cost and estimated fair value of marketable securities as of December 31, 2013, by maturity:

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Estimated

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

Due in one year or less

$

47,398

 

 

$

3

 

 

$

(32

)

 

$

47,369

 

Due after one year

 

1,319

 

 

 

 

 

 

 

 

 

1,319

 

Total marketable securities

$

48,717

 

 

$

3

 

 

$

(32

)

 

$

48,688

 

 

5. Stockholders’ Equity

Share-Based Compensation

We issue share-based awards to our employees in the form of stock options, restricted stock units, and restricted stock. We also have an Employee Stock Purchase Plan, or ESPP. The following table summarizes the components of share-based compensation expense included in our condensed consolidated statements of operations for the three- and nine-month periods ended September 30:

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

2014

 

 

2013

(Restated)

 

 

2014

 

 

2013

(Restated)

 

 

(in thousands)

 

 

(in thousands)

 

Cost of services

$

334

 

 

$

162

 

 

$

910

 

 

$

527

 

Sales and marketing

 

761

 

 

 

387

 

 

 

2,235

 

 

 

975

 

Technology and development

 

867

 

 

 

782

 

 

 

3,766

 

 

 

1,829

 

General and administrative

 

2,340

 

 

 

1,600

 

 

 

6,318

 

 

 

4,602

 

Total share-based compensation

$

4,302

 

 

$

2,931

 

 

$

13,229

 

 

$

7,933

 

 

8


 

Unrecognized share-based compensation expenses totaled $49,760 as of September 30, 2014, which we expect to recognize over a weighted-average time period of 3.1 years.

Stock Warrants

As of September 30, 2014, we had the following warrants to purchase common stock outstanding:

 

Expiration Date

  

Shares

 

  

Exercise
Price

 

December 19, 2014

  

 

83,333

  

  

4.50

  

October 3, 2016

  

 

2,334,044

  

  

 

0.70

  

 

6. Fair Value Measurements

As of September 30, 2014 and December 31, 2013, the fair value of our financial assets was as follows:

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper (1)

$

 

 

$

54,370

 

 

$

 

 

$

54,370

 

Money market funds (1)

 

20,455

 

 

 

 

 

 

 

 

 

20,455

 

Corporate bonds (2)

 

 

 

 

97,235

 

 

 

 

 

 

97,235

 

Municipal bonds (2)

 

 

 

 

12,221

 

 

 

 

 

 

12,221

 

Certificates of deposit (2)

 

 

 

 

250

 

 

 

 

 

 

250

 

Total assets measured at fair value

$

20,455

 

 

$

164,076

 

 

$

 

 

$

184,531

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper (1)

$

 

 

$

45,110

 

 

$

 

 

$

45,110

 

Money market funds (1)

 

911

 

 

 

 

 

 

 

 

 

911

 

Corporate bonds (2)

 

 

 

 

37,371

 

 

 

 

 

 

37,371

 

Municipal bonds (2)

 

 

 

 

10,819

 

 

 

 

 

 

10,819

 

Certificates of deposit (2)

 

 

 

 

498

 

 

 

 

 

 

498

 

Total assets measured at fair value

$

911

 

 

$

93,798

 

 

$

 

 

$

94,709

 

(1)

Classified in cash and cash equivalents.

(2)

Classified in marketable securities.

The fair values of our cash equivalents and available-for-sale securities included in the Level 1 and Level 2 categories are obtained from an independent pricing service, which uses a model driven valuation technique using observable market data or inputs corroborated by observable market data.

9


 

7. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share for the three- and nine-month periods ended September 30:

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

2014

 

 

2013

(Restated)

 

 

2014

 

 

2013

(Restated)

 

Net income (loss)

$

5,450

 

 

$

6,466

 

 

$

(343

)

 

$

1,479

 

Denominator (basic):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

92,924,516

 

 

 

89,318,125

 

 

 

92,436,628

 

 

 

87,841,146

 

Denominator (diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

92,924,516

 

 

 

89,318,125

 

 

 

92,436,628

 

 

 

87,841,146

 

Dilutive stock options outstanding

 

3,136,115

 

 

 

4,730,268

 

 

 

 

 

 

5,180,967

 

Dilutive restricted stock units and awards

 

152,357

 

 

 

126,563

 

 

 

 

 

 

89,053

 

Dilutive common equivalents from stock warrants

 

2,304,931

 

 

 

2,310,137

 

 

 

 

 

 

2,300,773

 

Dilutive shares purchased under ESPP

 

6,115

 

 

 

13,249

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

98,524,034

 

 

 

96,498,342