LIFELOCK, INC. - FORM 10-Q - November 8, 2016

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - LIFELOCK, INC.	lock-ex321x20160930x10q.htm
EX-31.2 - EXHIBIT 31.2 - LIFELOCK, INC.	lock-ex312x20160930x10q.htm
EX-31.1 - EXHIBIT 31.1 - LIFELOCK, INC.	lock-ex311x20160930x10q.htm
EX-10.7 - EXHIBIT 10.7 - LIFELOCK, INC.	lock-ex107x20160930x10q.htm
EX-10.6 - EXHIBIT 10.6 - LIFELOCK, INC.	lock-ex106x20160930x10q.htm
EX-10.5 - EXHIBIT 10.5 - LIFELOCK, INC.	lock-ex105x20160930x10q.htm
EX-10.4 - EXHIBIT 10.4 - LIFELOCK, INC.	lock-ex104x20160930x10q.htm
EX-10.3 - EXHIBIT 10.3 - LIFELOCK, INC.	lock-ex103x20160930x10q.htm
EX-10.2 - EXHIBIT 10.2 - LIFELOCK, INC.	lock-ex102x20160930x10q.htm
EX-10.1 - EXHIBIT 10.1 - LIFELOCK, INC.	lock-ex101x20160930x10q.htm

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, 2016



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 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 ý 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 ý 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	ý	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 ý

As of October 28, 2016, there were outstanding 94,146,117 shares of the registrant’s common stock, $0.001 par value.

LIFELOCK, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2016

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 Income (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	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	32
Item 4. Controls and Procedures	32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	33
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 6. Exhibits	59
Signatures	60

LifeLock, LifeLock Standard, LifeLock Advantage, LifeLock Ultimate, LifeLock Ultimate Plus, LifeLock Junior, Id Analytics and the LockMan logo are registered trademarks of LifeLock, Inc. or its subsidiaries. All other trademarks are the property of their respective owners.

PART I - FINANCIAL INFORMATION


Item 1.	Financial Statements (Unaudited)

LIFELOCK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)




	September 30, 2016			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	34,806		$	50,239
Marketable securities	131,298			196,474
Trade and other receivables, net	17,080			13,974
Prepaid expenses and other current assets	9,168			12,303
Total current assets	192,352			272,990
Property and equipment, net	44,665			30,485
Goodwill	172,087			172,087
Intangible assets, net	21,830			30,174
Deferred tax assets, net	81,164			77,363
Other non-current assets	13,627			9,710
Total assets	$	525,725		$	592,809
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	8,645		$	24,747
Accrued expenses and other liabilities	57,362			76,226
Deferred revenue	189,034			166,403
Total current liabilities	255,041			267,376
Other non-current liabilities	20,113			7,367
Total liabilities	275,154			274,743
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.001 par value, 300,000,000 authorized at September 30, 2016 and December 31, 2015; 100,850,257 and 95,877,947 shares issued and 93,647,679 and 95,832,238 outstanding at September 30, 2016 and December 31, 2015, respectively	101			96
Preferred stock, $0.001 par value, 10,000,000 shares authorized and no shares issued and outstanding at September 30, 2016 and December 31, 2015	—			—
Treasury stock, at cost; 7,202,578 shares and no shares held at September 30, 2016 and December 31, 2015, respectively	(74,974		)	—
Additional paid-in capital	544,009			532,388
Accumulated other comprehensive loss	(118		)	(361		)
Accumulated deficit	(218,447		)	(214,057		)
Total stockholders’ equity	250,571			318,066
Total liabilities and stockholders’ equity	$	525,725		$	592,809

See accompanying notes to condensed consolidated financial statements.

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,
	2016			2015			2016			2015
Revenue:
Consumer revenue	$	161,671		$	144,648		$	470,260		$	411,178
Enterprise revenue	8,623			7,304			23,746			20,139
Total revenue	170,294			151,952			494,006			431,317
Cost of services	34,782			33,988			118,410			103,470
Gross profit	135,512			117,964			375,596			327,847
Costs and expenses:
Sales and marketing	68,416			62,850			240,492			209,470
Technology and development	20,379			19,396			61,509			52,928
General and administrative	21,882			120,984			73,700			160,815
Amortization of acquired intangible assets	1,982			2,084			8,344			6,251
Total costs and expenses	112,659			205,314			384,045			429,464
Income (loss) from operations	22,853			(87,350		)	(8,449		)	(101,617		)
Other income (expense):
Interest expense	(111		)	(89		)	(403		)	(265		)
Interest income	272			219			875			498
Other, net	(85		)	—			(214		)	(183		)
Total other income	76			130			258			50
Income (loss) before income taxes	22,929			(87,220		)	(8,191		)	(101,567		)
Income tax expense (benefit)	8,527			(22,075		)	(3,801		)	(27,784		)
Net income (loss)	$	14,402		$	(65,145	)	$	(4,390	)	$	(73,783	)
Net income (loss) per share attributable to common stockholders:
Basic	$	0.16		$	(0.68	)	$	(0.05	)	$	(0.78	)
Diluted	$	0.15		$	(0.68	)	$	(0.05	)	$	(0.78	)
Weighted-average common shares outstanding used in computing net income (loss) per share attributable to common stockholders:
Basic	92,034			95,340			93,052			94,660
Diluted	97,321			95,340			93,052			94,660

See accompanying notes to condensed consolidated financial statements.

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,
	2016			2015			2016			2015
Net income (loss)	$	14,402		$	(65,145	)	$	(4,390	)	$	(73,783	)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on marketable securities	(89		)	117			243			39
Comprehensive income (loss)	$	14,313		$	(65,028	)	$	(4,147	)	$	(73,744	)

See accompanying notes to condensed consolidated financial statements.

LIFELOCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	For the Nine Months Ended September 30,
	2016			2015
Operating activities
Net loss	$	(4,390	)	$	(73,783	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	17,082			13,292
Stock-based compensation	25,509			20,287
Provision for doubtful accounts	352			150
Amortization of premiums on marketable securities	1,521			2,310
Deferred income tax benefit	(3,801		)	(27,784		)
Other	343			250
Change in operating assets and liabilities:
Trade and other receivables	(3,956		)	(3,469		)
Prepaid expenses and other current assets	3,136			(1,022		)
Other non-current assets	167			357
Accounts payable	(14,622		)	1,548
Accrued expenses and other liabilities	(18,120		)	117,693
Deferred revenue	22,631			25,629
Other non-current liabilities	408			265
Net cash provided by operating activities	26,260			75,723
Investing activities
Acquisition of business, net of cash acquired	—			(12,797		)
Acquisition of property and equipment, including capitalization of internal use software	(11,299		)	(9,057		)
Purchases of marketable securities	(83,896		)	(191,846		)
Sales and maturities of marketable securities	148,298			122,936
Premiums paid for company-owned life insurance policies	(4,337		)	(4,337		)
Net cash provided by (used in) investing activities	48,766			(95,101		)
Financing activities
Proceeds from stock-based compensation plans	15,780			10,144
Payments related to the repurchases of common stock	(100,000		)	—
Payments for employee tax withholdings related to restricted stock units and awards	(6,239		)	(1,793		)
Net cash provided by (used in) financing activities	(90,459		)	8,351
Net decrease in cash and cash equivalents	(15,433		)	(11,027		)
Cash and cash equivalents at beginning of period	50,239			146,569
Cash and cash equivalents at end of period	$	34,806		$	135,542
Supplemental cash flow information:
Non-cash financing and investing activities:
Building in progress - leased facility acquired under financing obligation	$	12,338		$	—

See accompanying notes to condensed consolidated financial statements.

LIFELOCK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), and applicable Securities and Exchange Commission (SEC), rules and regulations 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2015, or fiscal 2015 Form 10-K.

The condensed consolidated balance sheet as of December 31, 2015 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 anticipated results of operations for the entire year ending December 31, 2016 or any future period.

Basis of Consolidation

The condensed consolidated financial statements include our accounts and those of our wholly and indirectly owned subsidiaries. We eliminate all intercompany balances and transactions, including intercompany profits, 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 consolidated financial statements and accompanying notes. We continually evaluate our estimates, including those related to the allocation of the purchase price associated with acquisitions; the carrying value of long-lived assets; the amortization period of long-lived assets; the carrying value, capitalization, and amortization of software and website development costs; the carrying value of goodwill and other intangible assets; the amortization period of intangible assets; the provision for income taxes and related deferred tax accounts, and realizability of deferred tax assets; certain accrued expenses; contingencies, litigation, and related legal accruals; and the value attributed to employee stock options and other stock-based awards. We base our estimates on historical experience, current business factors, and various other assumptions that we believe are necessary to consider to form a basis for making judgments. Actual results could be materially different from these estimates.

2. Summary of Significant Accounting Policies

Leases

We lease office space and data centers in various locations under operating leases with original lease periods up to 11 years. Rent expense is recognized on a straight-line basis from the day we take possession of the premises through the end of the lease term. Rent abatements and rent escalation provisions are considered in determining the straight-line rent expense with any difference between rent expense and rent payable recorded as an increase or decrease in deferred rent. Tenant improvement allowances are recorded as leasehold improvements within property and equipment and within deferred rent.

We record assets and liabilities for the present value of estimated construction costs incurred under build-to-suit lease arrangements to the extent we are involved in the construction of structural improvements or take substantially all of the construction period risk prior to commencement of a lease. Ground rents are imputed and accrued for during the construction period, and are recorded in rent expense. At completion of a construction project, we perform an analysis to determine if the transfer to the owner/lessor meets the requirements for sale-leaseback treatment. If we maintain significant continuing involvement, we will continue to carry the construction costs and corresponding financing obligation on our balance sheet until the involvement or the term of the lease ends. If it is determined that we will not maintain significant continuing involvement, we record a sale of the premises back to the owner/lessor, and remove the construction costs and financing obligation from our consolidated balance sheet.

There have been no other material changes to our significant accounting policies from those disclosed in our fiscal 2015 Form 10-K.

Recently Issued Accounting Standards

In May 2014, the FASB, issued ASU 2014-09, Revenue from Contracts with Customers, 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. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities for one year. Consequently, the guidance provided in ASU 2014-09 will be effective for us in the first quarter of our fiscal year ending December 31, 2018. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The guidance permits the use of either the retrospective or cumulative effect transition method. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective the same date as ASU 2014-09, Revenue from Contracts with Customers. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the guidance related to identifying performance obligations and licensing implementation guidance. ASU 2016-10 reduces the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The effective date for ASU 2016-10 is the same as ASU 2014-09. We are currently in the process of evaluating the impact of the adoption of this guidance on our consolidated financial statements and have not yet selected a transition method.

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (ASU) 2016-02, Leases, which requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by operating leases and will also require disclosures designed to give users of financial statements information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance provided by ASU 2016-02 is effective for annual periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect of ASU 2016-06 on our consolidated financial statements and do not plan to early adopt this guidance.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting, which require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, as well as revising guidance around classification of awards as either equity or liabilities, forfeitures and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect of ASU 2016-09 on our consolidated financial statements and do not plan to early adopt this guidance.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which makes changes to how certain cash receipt and cash payments are presented and classified in the cash flow statement. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments in ASU 2016-15 will be applied using a retrospective transition method for each period presented unless it is impracticable to apply the amendments retrospectively, in which case prospective application would be applied as of the earliest date practicable. Early adoption is permitted. We are currently evaluating the effect of ASU 2016-15 on our consolidated financial statements and do not plan to early adopt this guidance.

3. Marketable Securities

We classify all marketable securities as current regardless of contractual maturity dates because we consider such investments to represent cash available for current operations.

As of September 30, 2016 and December 31, 2015, we did not consider any of our marketable securities to be other-than-temporarily impaired. When evaluating our investments 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 marketable securities designated as available-for-sale as of September 30, 2016:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Corporate bonds	$	100,964	$	14	$	(126	)	$	100,852
Government securities	9,695		10		—			9,705
Commercial paper	8,187		—		—			8,187
Agency securities	7,255		3		—			7,258
Municipal bonds	4,050		—		(2		)	4,048
Certificates of deposit	1,248		—		—			1,248
Total marketable securities	$	131,399	$	27	$	(128	)	$	131,298

The following is a summary of amortized cost and estimated fair value of marketable securities as of September 30, 2016 by maturity:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Due in one year or less	$	121,461	$	27	$	(94	)	$	121,394
Due after one year	9,938		—		(34		)	$	9,904
Total marketable securities	$	131,399	$	27	$	(128	)	$	131,298

The following is a summary of marketable securities designated as available-for-sale as of December 31, 2015:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Corporate bonds	$	125,132	$	1	$	(304	)	$	124,829
Commercial paper	37,236		—		—			37,236
Municipal bonds	16,228		2		(6		)	16,224
Government securities	8,704		1		(17		)	8,688
Agency securities	7,273		—		(20		)	7,253
Certificates of deposit	2,244		—		—			2,244
Total marketable securities	$	196,817	$	4	$	(347	)	$	196,474

The following is a summary of amortized cost and estimated fair value of marketable securities as of December 31, 2015 by maturity:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Due in one year or less	$	164,147	$	2	$	(221	)	$	163,928
Due after one year	32,670		2		(126		)	32,546
Total marketable securities	$	196,817	$	4	$	(347	)	$	196,474

4. Fair Value Measurements

As of September 30, 2016 and December 31, 2015, the fair value of our financial assets was as follows:



	Level 1		Level 2		Level 3		Total
	(in thousands)
September 30, 2016
Assets:
Money market funds ⁽¹⁾	$	14,733	$	—	$	—	$	14,733
Corporate bonds ⁽²⁾	—		100,852		—		100,852
Government securities ⁽²⁾	—		9,705		—		9,705
Commercial paper ⁽²⁾	—		8,187		—		8,187
Agency securities ⁽²⁾	—		7,258		—		7,258
Municipal bonds ⁽²⁾	—		4,048		—		4,048
Certificates of deposit ⁽²⁾	—		1,248		—		1,248
Total assets measured at fair value	$	14,733	$	131,298	$	—	$	146,031
December 31, 2015
Assets:
Money market funds ⁽¹⁾	$	18,114	$	—	$	—	$	18,114
Corporate bonds ⁽²⁾	—		124,829		—		124,829
Commercial paper ⁽³⁾	—		47,294		—		47,294
Municipal bonds ⁽²⁾	—		16,223		—		16,223
Government securities ⁽²⁾	—		8,688		—		8,688
Agency securities ⁽²⁾	—		7,253		—		7,253
Certificates of deposit ⁽²⁾	—		2,244		—		2,244
Total assets measured at fair value	$	18,114	$	206,531	$	—	$	224,645


⁽¹⁾	Classified in cash and cash equivalents


⁽²⁾	Classified in marketable securities.


⁽³⁾	Includes commercial paper with maturities of three months or less at time of purchase of $10.1 million classified in cash and cash equivalents and commercial paper with maturities of greater than three months of $37.2 million classified in marketable securities.

5. Financing Arrangements

There have been no changes in our Credit Agreement and related documents with Bank of America, which we refer to as our Senior Credit Facility, from the disclosure in our fiscal 2015 Form 10-K. At September 30, 2016 and December 31, 2015 we were in compliance with all the covenants of the Senior Credit Facility.

As of September 30, 2016, we had outstanding letters of credit in the amount of $1.3 million.

6. Leases

In April 2016, we entered into a lease agreement for approximately 60,000 rentable square feet of office space located in Mountain View, CA. We rented the total office space available in the building, which is currently under construction. As a result of our involvement during the construction period, we are deemed to be the owner of the construction project for accounting purposes. Accordingly, we recorded a $12.3 million construction in process asset in property and equipment, net, representing the total fair value of the building paid by the lessor including estimated construction period costs to date and a corresponding noncurrent financing obligation liability in our September 30, 2016 condensed consolidated balance sheet. We have also recorded imputed ground rent expense of $0.6 million for the three- and nine-months ended September 30, 2016. Construction is expected to be completed in the first quarter of 2017 at which point we will evaluate whether or not we meet the requirements for sale-leaseback treatment. If we do meet the requirements for sale-leaseback treatment upon completion of construction, we will record the sale of the premises back to the owner/lessor and remove the construction in process asset and corresponding noncurrent financing obligation liability from our consolidated balance sheet and the lease will be accounted for as an operating lease under which we expect to recognize rent expense of approximately $4.0 million per year during the term of the lease. If we are unable to meet the requirements for sale-leaseback treatment, the lease will be treated as a financing obligation and we will continue to carry the value of the building and construction costs on our balance sheet. Rent payments

will be treated as principal and interest payments on the financing obligation, with an amount recorded as estimated ground lease expense each period. The capitalized costs of the building will be depreciated over an estimated useful life of 30 years.

The following summarizes the future minimum lease payments for all outstanding lease agreements as of September 30, 2016:



				Financing
				Obligation,
				Building in
	Operating			Progress -
	Leases			Leased Facility
Remaining 2016	$	1,959		$	—
2017	7,429			1,717
2018	6,751			4,222
2019	6,355			4,349
2020	4,773			4,480
Thereafter	14,151			27,605
Gross future minimum lease payments	41,418			42,373
Less: expected proceeds from sublease rentals	(776		)	—
Net future minimum lease payments	$	40,642		$	42,373

Rent expense for the three- and nine-months ended September 30, 2016 was $2.4 million and $6.4 million, respectively, net of sublease income. Rent expense for the three- and nine-months ended September 30, 2015 was $1.5 million and $4.3 million, respectively.

7. Stockholders’ Equity

Stock Repurchases

In November 2015, we announced that our board of directors approved the repurchase of up to $100 million of our common stock, representing approximately 7% of our outstanding common stock. The repurchase program was completed in the second quarter of 2016, with the final settlement of shares completed in the third quarter 2016. Repurchases under the program were made through open market and privately negotiated transactions as described below.

In February 2016, we entered into an issuer forward repurchase transaction confirmation (the ASR Agreement) with Bank of America, N.A. to repurchase common stock as part of the approved $100 million share repurchase program. Under the ASR Agreement, we paid Bank of America, N.A. $50 million and received an initial delivery of 4.2 million shares of common stock. The total number of shares purchased was determined based on the volume weighted average price of our common stock during the term of the ASR Agreement. In the second quarter 2016, Bank of America, N.A. delivered approximately 76,000 shares for the final settlement of the ASR Agreement.

We accounted for the ASR Agreement as two separate transactions: (i) approximately 4.2 million shares of common stock initially delivered, which represented approximately $42.5 million, was accounted for as a treasury stock transaction and (ii) the remaining $7.5 million unsettled portion of the ASR Agreement was determined to be a forward contract indexed to our common stock. The initial repurchase of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income (loss) per share on the delivery date. We determined that the forward contract indexed to our common stock met all of the applicable criteria for equity classification, and therefore the contract was not accounted for as a derivative. We recorded the $7.5 million unsettled portion of the ASR Agreement, which represents the implied value of the forward contract, in additional paid-in capital on the condensed consolidated balance sheet upon execution of the ASR Agreement. Upon the final delivery of shares of the ASR Agreement, the forward contract was reclassified from additional paid-in capital to treasury stock for the value of the additional shares received, which amounted to approximately $1.0 million.

In May 2016, we entered into a second issuer forward repurchase transaction confirmation (the Second ASR Agreement) with Bank of America, N.A. to repurchase common stock as the final part of our approved $100 million share repurchase program. Under the Second ASR Agreement, we paid Bank of America, N.A. approximately $48.1 million and received an initial delivery of 3.5 million shares of common stock. The total number of shares purchased was determined based on the volume weighted average price of our common stock during the term of the Second ASR Agreement (the Valuation Period). In July 2016, we returned approximately 0.3 million shares to Merill Lynch, Pierce, Fenner & Smith pursuant to the Second ASR Agreement as a result of the increase in our stock price during the Valuation Period.

We accounted for the Second ASR Agreement as two separate transactions: (i) approximately 3.5 million shares of common stock initially delivered, which represented approximately $40.9 million, was accounted for as a treasury stock transaction; and (ii) the remaining $7.2 million unsettled portion of the Second ASR Agreement was determined to be a forward contract indexed to our common stock. The initial repurchase of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted net income (loss) per share on the delivery date. We determined that the forward contract indexed to our common stock met all of the applicable criteria for equity classification, and therefore the contract was not accounted for as a derivative. We recorded the $7.2 million unsettled portion of the Second ASR Agreement, which represented the implied value of the forward contract, in additional paid-in capital. Upon final settlement of the Second ASR Agreement in August 2016, the value of the shares delivered to Merill Lynch, Pierce, Fenner & Smith was reclassified to additional paid-in capital from treasury stock for approximately $4.8 million.

We were authorized by our board of directors pursuant to the $100 million share repurchase program to repurchase shares of common stock in the open market pursuant to trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, (the Exchange Act). During the nine-month period ended September 30, 2016, we repurchased 0.2 million shares of common stock at an average price of $10.49 per share under such trading plans. In connection with the Second ASR Agreement, we terminated our trading plans.

Stock-Based Compensation

We issue stock-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 stock-based compensation expense included in our condensed consolidated statements of operations:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
	(in thousands)
Cost of services	$	486	$	449	$	1,445	$	1,286
Sales and marketing	1,672		1,238		4,793		3,385
Technology and development	2,574		2,514		7,893		6,226
General and administrative	3,880		3,662		11,378		9,390
Total stock-based compensation	$	8,612	$	7,863	$	25,509	$	20,287

Unrecognized stock-based compensation expenses totaled $78.4 million as of September 30, 2016, which we expect to recognize over a weighted-average time period of 2.9 years.

Stock Warrants

During the nine-month period ended September 30, 2016, warrants to purchase common shares of 2,334,044 were net exercised for a total of 2,210,335 shares. There are no warrants outstanding as of September 30, 2016.

8. Net Income (Loss) Per Share

We compute basic net income (loss) per share using the two-class method required for participating securities. We consider unvested restricted stock to be participating because holders of such shares have non-forfeitable one-for-one dividend rights. The holders of unvested restricted stock do not have a contractual obligation to share in net losses. Basic net income (loss) per share attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. We compute diluted net income (loss) per share attributable to common stockholders giving effect to all potential dilutive common stock, including awards granted under our equity compensation plans and warrants to acquire common stock.

The following table sets forth the computation of basic and diluted net income (loss) per share attributable to common stockholders:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands, except share and per share data)
Numerator:
Net income (loss)	$	14,402		$	(65,145	)	$	(4,390	)	$	(73,783	)
Less: Net income attributable to participating securities	(109		)	—			—			—
Net income (loss) attributable to common stockholders	$	14,293		$	(65,145	)	$	(4,390	)	$	(73,783	)
Denominator (basic):
Weighted average common shares outstanding	92,034,474			95,340,136			93,052,376			94,659,931
Denominator (diluted):
Weighted average common shares outstanding	92,034,474			95,340,136			93,052,376			94,659,931
Dilutive stock options outstanding	3,716,283			—			—			—
Dilutive restricted stock units and awards	1,557,016			—			—			—
Dilutive shares purchased under ESPP	13,530			—			—			—
Net weighted average common shares outstanding	97,321,303			95,340,136			93,052,376			94,659,931
Net income (loss) per share attributable to common stockholders:
Basic	$	0.16		$	(0.68	)	$	(0.05	)	$	(0.78	)
Diluted	$	0.15		$	(0.68	)	$	(0.05	)	$	(0.78	)

Potentially dilutive securities, including common equivalent shares in which the exercise price together with other assumed proceeds exceed the average market price of common stock for the applicable period, were not included in the calculation of diluted net income (loss) per share attributable to common stockholders as their impact would be anti-dilutive. The following weighted-average number of outstanding employee stock options, restricted stock units and restricted stock awards, warrants to purchase common stock, and shares purchased under our ESPP were excluded from the computation of diluted net income (loss) per share attributable to common stockholders:



	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2016	2015	2016	2015
Stock options outstanding	5,006,875	10,328,593	9,268,689	8,876,984
Restricted stock units and restricted stock awards	210,720	2,574,405	2,469,961	1,888,205
Common equivalent shares from stock warrants	—	2,168,299	276,937	2,210,012
Shares purchased under ESPP	—	54,271	—	67,858
	5,217,595	15,125,568	12,015,587	13,043,059

9. Income Taxes

Income taxes for the interim periods presented have been included in the accompanying condensed consolidated financial statements on the basis of an estimated annual effective tax rate. Based on an estimated annual effective tax rate and discrete items, the estimated income tax expense for the three-month period ended September 30, 2016 was $8.5 million and the estimated income tax benefit for the three-month period ended September 30, 2015 was $22.1 million. For the nine-month periods ended September 30, 2016 and 2015, the estimated income tax benefit was $3.8 million and $27.8 million, respectively. The determination of the interim period income tax provision utilizes the effective tax rate method, which requires us to estimate certain annualized components of the calculation of the income tax provision, including the annual effective tax rate by entity and jurisdiction. Our effective tax rate differed from the U.S. federal and state statutory rate for the three- and -month periods ended September 30, 2016 and 2015 primarily as a result of tax return to provision adjustments which resulted in an income tax benefit of $0.8 million and $0.4 million, respectively.

We continually evaluate all positive and negative information to determine if our deferred tax assets are realizable in accordance with ASC 740-10-30, which states that "all available evidence shall be considered in determining whether a valuation allowance for deferred tax assets is needed." In December 2015, the proposed comprehensive settlement agreements resolving outstanding litigation relating to our past marketing representations and information security programs were approved by the Federal Trade Commission, (FTC), the representatives of the Ebarle class action (as described in more detail in Note 11), and were approved by the court presiding over the Ebarle lass action. As a result of the expense of $96 million and $20 million recorded in the years ended December 31, 2015 and 2014, respectively, we have three years of cumulative pretax net losses. We reviewed the cumulative settlement of $116 million and determined that it was non-recurring in nature, not indicative of future performance, and, as such, would not materially affect our ability to generate taxable income in the future. In addition to excluding the impact of the non-recurring settlement amounts, we have seen improving pre-tax book income over the past five years and we are forecasting to continue generating pre-tax book income. As a result of the consideration of the factors discussed above, we believe that it is more likely than not that we will be able to realize our net deferred tax assets not currently subject to a valuation allowance.

10. Segment Reporting

We operate our business and our Chief Operating Decision Maker, or CODM, who is our Chief Executive Officer and President, reviews and assesses our operating performance using two reportable segments: our consumer segment and our enterprise segment. In our consumer segment, we offer proactive identity theft protection services to consumers on an annual or monthly subscription basis. In our enterprise segment, we offer consumer risk management services to our enterprise customers.

Revenue and income (loss) from operations by operating segment for the three-month period ended September 30, 2016 and goodwill and total assets by operating segment as of September 30, 2016 were:



	Consumer		Enterprise			Eliminations			Total
	(in thousands)
Revenue
External customers	$	161,671	$	8,623		$	—		$	170,294
Intersegment revenue	—		2,253			(2,253		)	—
Income (loss) from operations	26,636		(3,783		)	—			22,853
Goodwill	112,550		59,537			—			172,087
Total assets	434,517		91,979			(771		)	525,725

Revenue and income (loss) from operations by operating segment for the nine-month period ended September 30, 2016 was as follows:



	Consumer		Enterprise			Eliminations			Total
	(in thousands)
Revenue
External customers	$	470,260	$	23,746		$	—		$	494,006
Intersegment revenue	—		6,866			(6,866		)	—
Income (loss) from operations	4,881		(13,330		)	—			(8,449		)

Revenue and loss from operations by operating segment for the three-month period ended September 30, 2015 and goodwill and total assets by operating segment as of December 31, 2015 were:



	Consumer			Enterprise			Eliminations			Total
	(in thousands)
Revenue
External customers	$	144,648		$	7,304		$	—		$	151,952
Intersegment revenue	—			2,068			(2,068		)	—
Loss from operations	(84,249		)	(3,101		)	—			(87,350		)
Goodwill	112,550			59,537			—			172,087
Total assets	492,796			100,753			(740		)	592,809

Revenue and loss from operations by operating segment for the nine-month period ended September 30, 2015 was as follows:



	Consumer			Enterprise			Eliminations			Total
	(in thousands)
Revenue
External customers	$	411,178		$	20,139		$	—		$	431,317
Intersegment revenue	—			6,232			(6,232		)	—
Loss from operations	(90,456		)	(11,161		)	—			(101,617		)

We derive all of our revenue from sales in the United States, and substantially all of our long-lived assets are located in the United States.

11. Contingencies

As part of our consumer services, we offer broad member service support. If a member’s identity has been compromised, our member service team and remediation specialists will assist the member with its resolution. This includes our $1 million service guarantee, which is backed by an identity theft insurance policy, under which we will spend up to $1 million to cover certain third-party costs and expenses incurred in connection with the remediation, such as legal and investigatory fees, subject to certain terms and conditions. This insurance also covers certain out-of-pocket expenses, such as loss of income, replacement of fraudulent withdrawals, and costs associated with child and elderly care, travel, stolen purse/wallet, and replacement of documents, subject to certain terms and conditions. While we have reimbursed members for claims under this guarantee, the amounts in aggregate for the nine-month periods ended September 30, 2016 and 2015 were not material.

On January 19, 2015, plaintiffs Napoleon Ebarle and Jeanne Stamm filed a nationwide putative consumer class action lawsuit against us in the United States District Court for the Northern District of California. A second amended complaint was filed on November 4, 2015 on behalf of four plaintiffs who alleged that we engaged in deceptive marketing and sales practices in connection with our membership plans in violation of the Arizona Consumer Fraud Act, Breach of Contract, unjust enrichment and violation of the Federal Declaratory Judgment Act.

Under the terms of the FTC settlement, $100 million, was paid in December 2015 and was placed into the registry of the court overseeing the FTC Contempt Action, $68 million of which was authorized to be distributed to fund the consumer redress contemplated by the Ebarle Class Action settlement. Those funds have been transferred to the supervision of the court overseeing the Ebarle Class Action Settlement.

On September 20, 2016, the court overseeing the Ebarle Class Action entered judgment and an order granting plaintiffs’ motion for final approval of the parties’ proposed settlement agreement, awarding plaintiffs’ counsel $10.2 million in fees and costs and awarding each of the four plaintiffs $2,000 as a service award, these amounts were previously expensed in the third quarter of 2015. Beginning on October 11, 2016, the Court-appointed settlement administrator distributed settlement checks to settlement class members using the $68 million transferred in February 2016 to the court-appointed settlement administrator from the court’s registry in the FTC Contempt Action. The remaining $32 million of the settlement remains in the registry of the Arizona court. In addition, we have $3.0 million accrued for a potential settlement with states attorneys general for related claims.

Appeals of the final approval order and judgment were filed by six objectors prior to the filing deadline and are pending in the Ninth Circuit Court of Appeals. The appeals do not impact the timing of the payment of settlement checks to settlement class members or payment of the attorneys’ fees, costs and service awards to plaintiffs. A mediation assessment conference is scheduled with the Court of Appeals for November 9, 2016, in connection with the initial appeal filed, and the appeal briefs are currently due on various dates in January through March 2017. However, the parties have agreed to consolidate the appeals which is likely to have an impact on the current schedule.

third-party Xapo, Inc. and/or Xapo, Ltd. during their employment by the applicable Lemon Entity. On January 30, 2015, the Lemon Entities filed a second amended complaint alleging breaches of employment-related contracts, breaches of fiduciary duties, and fraud, and seeking declaratory relief against Mr. Casares, Ms. McAdam, and the Argentine Executives. The Argentine Executives entered their appearances in the litigation on July 24, 2015 and filed a motion to dismiss for inconvenient forum on September 8, 2015. That motion was heard on December 4, 2015 and granted on January 4, 2016, with an order staying the action in its entirety. The Lemon Entities filed a notice of appeal on March 1, 2016.

Mr. Casares filed a cross-claim against us and Lemon, Inc. (now Lemon, LLC) on July 24, 2015, for breach of contract, breach of the implied covenant of good faith and fair dealing, conversion, unjust enrichment, and declaratory relief, all arising from the termination of his employment. Because of the January 4, 2016 order staying the case in its entirety, the court did not rule on the motion to dismiss. Mr. Casares filed a separate complaint against us, Lemon, LLC, and Shareholder Representative Services LLC (SRS) in Delaware Chancery Court on October 7, 2015 for breach of contract and seeking a declaratory judgment. The action concerns a December 12, 2014 settlement agreement that resolved certain disputes against other former stockholders of Lemon, Inc. arising out of our December 11, 2013 Lemon acquisition. We, along with Lemon, LLC, moved to dismiss the complaint on October 28, 2015. Mr. Casares responded by filing an amended complaint on January 8, 2016. LifeLock, Inc. and Lemon, LLC moved to dismiss the amended complaint. That motion was heard on September 27, 2016 and granted in part and denied in part the same day. The Court has not yet set a schedule for pretrial or trial proceedings in the case.

On September 19, 2016, LifeLock and its subsidiary Lemon. LLC, filed a lawsuit in Delaware Chancery Court against Mr. Casares and Ms. McAdam, stemming from the December 11, 2013 merger between LifeLock and Lemon. Specifically, the complaint alleges that both Mr. Casares and Ms. McAdam breached the representations and warranties in the merger agreement and associated contracts, such as their respective non-disclosure agreement, by failing to disclose Lemon’s pre-merger development of Xapo. The complaint also alleges that Mr. Casares and Ms. McAdam fraudulently induced LifeLock to enter into the merger agreement, breached their fiduciary duties to Lemon, and were unjustly enriched from their fraudulent conduct. Defendants filed a motion to dismiss on October 24, 2016. The parties have not yet agreed to a briefing schedule for the motion.

On July 22, 2015, Miguel Avila, representing himself and seeking to represent a class of persons who acquired our securities from July 30, 2014 to July 20, 2015, inclusive, filed a class action complaint in the United States District Court for the District of Arizona. His complaint alleged that Todd Davis, Christopher Power, and we violated Sections 10(b) and 20(a) of the Exchange Act by making materially false or misleading statements, or failing to disclose material facts about our business, operations, and prospects, including with regard to our information security program, advertising, recordkeeping, and our compliance with the FTC Order. The complaint sought certification as a class action, compensatory damages, and attorney’s fees and costs. On September 21, 2015, four other Company stockholders, Oklahoma Police Pension and Retirement System, Oklahoma Firefighters Pension and Retirement System, Larisa Gassel, and Donna Thompson, and their respective attorneys all filed motions seeking to be appointed the lead plaintiff and lead counsel in this class action. On October 9, 2015, the Court appointed Oklahoma Police Pension and Retirement System and Oklahoma Firefighters Pension and Retirement System as lead plaintiffs. On December 10, 2015 lead plaintiffs filed a substantively similar amended complaint. Lead plaintiffs moved to lift the discovery stay imposed by the Private Securities Litigation Reform Act on January 21, 2016. On February 8, 2016, we, along with Mr. Davis and Mr. Power, opposed that motion and on April 22, 2016, the Court denied lead plaintiffs’ motion. We, along with Mr. Davis and Mr. Power, moved to dismiss the amended complaint on January 29, 2016. On August 3, 2016 the Court granted our motion to dismiss and later permitted lead plaintiffs until September 23, 2016 to seek leave to amend their complaint. On September 23, 2016, lead plaintiffs moved for leave to file a proposed Second Amended Complaint, which we did not oppose. On October 13, 2016, the Court granted lead plaintiffs’ motion for leave to file a second amended complaint. On October 14, 2016, lead plaintiffs filed the Second Amended Complaint, which is substantively similar to the amended complaint but adds our President, Hilary Schneider, as a named defendant. We, along with Ms. Schneider and Messrs. Davis and Power will move to dismiss the Second Amend Complaint by December 16, 2016, pursuant to a schedule stipulated by the parties and order by the Court.

attorneys’ fees and costs. On December 17, 2014, the court granted our and the other defendants’ motion and dismissed the Consolidated Amended Complaint, giving the lead plaintiff 21 days to seek leave to amend. On January 16, 2015, lead plaintiff filed his Second Consolidated Amended Complaint which contained similar allegations, but no longer named Ms. Schneider as a defendant. On July 21, 2015, the court granted our and the other defendants’ motion to dismiss the Second Consolidated Amended Complaint, without leave to amend, and entered judgment in our favor. On August 18, 2015, the lead plaintiff along with another stockholder, City of Hallandale Beach Police and Firefighters’ Personnel Retirement Fund, moved to vacate the judgment on the grounds that the FTC’s July 21, 2015 motion seeking to hold us in contempt of the FTC Order constituted surprise and newly discovered evidence. Plaintiffs also sought permission to file a Third Consolidated Amended Complaint. We, Mr. Davis, and Mr. Power opposed plaintiffs’ motion. On September 18, 2015, the court denied plaintiffs’ motion to vacate the July 21, 2015 judgment and plaintiffs’ request to file another complaint. On September 21, 2015, plaintiffs filed a notice of appeal with the Ninth Circuit Court of Appeals. Plaintiffs appeal from the lower court’s July 21, 2015 order dismissing the Second Consolidated Amended Complaint and entering judgment in our favor, and the court’s September 18, 2015 order denying plaintiffs’ motion to vacate that judgment. Briefing of the appeal has been completed, but oral argument on the appeal has not been set by the Ninth Circuit.

We are subject to other legal proceedings and claims that have arisen in the ordinary course of business. Although there can be no assurance as to the ultimate disposition of these matters and those discussed above, we believe, based upon the information available at this time, that, except as disclosed above, a material adverse outcome related to the matters is neither probable nor estimable.


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

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for fiscal year 2015, (the fiscal 2015 Form 10-K). This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act, including, but not limited to, statements regarding our expectations, beliefs, intentions and strategies, including our expectations and beliefs and intentions regarding our services, the identity theft protection services industry and competitive landscape, our strategic partner channel, our investments, our expected expenditures for new member acquisitions and to grow our business, investments in sales and marketing and in technology and development, future operations, future financial position, fluctuations in our financial performance from period to period, future revenue, projected expenses, our ability to fund continuing operations and plans and objectives of management and adapt our products and service offerings to evolving regulatory or data source requirements . In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words.

These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q and the other filings we make with the Securities and Exchange Commission (SEC). Furthermore, such forward-looking statements speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading provider of proactive identity theft protection services for consumers and consumer risk management services for enterprises. In our consumer business, we help protect our members by monitoring identity-related events, such as new account openings, credit-related applications and other non-credit related information. If we detect that someone is using a member’s personally identifiable information, we offer notifications and alerts, including actionable alerts for certain new account openings and applications, and allow our members to confirm valid or unauthorized identity use. If a member confirms that the use of his or her identity is unauthorized, we can take actions designed to help protect the member’s identity and help determine whether there has been an identity theft. In the event that an identity theft has actually occurred, we can take actions designed to help rectify the impact of the theft of the member’s identity through our remediation services. Our remediation service team works directly with government agencies, merchants, and creditors to help remediate the impact of the identity theft event utilizing our remediation expertise on behalf of our members. In our enterprise business, we help protect our enterprise customers by delivering on-demand identity risk, identity-authentication, and credit information about consumers. Our enterprise customers utilize this information to make decisions about additional steps required before opening or modifying accounts and providing products, services, or credit to consumers to reduce financial losses from identity fraud.

The foundation of our identity theft protection services is the LifeLock ecosystem. This ecosystem combines large data repositories of personally identifiable information and consumer transactions, proprietary predictive analytics, and a scalable technology platform. Our members and enterprise customers enhance our ecosystem by continually contributing to the identity and transaction data in our repositories. We apply predictive analytics to the data in our repositories to provide our members and enterprise customers actionable intelligence that helps protect against identity theft and identity fraud.

We derive the substantial majority of our revenue from member subscription fees from our consumer business. We primarily offer our identity theft protection services to consumer subscribers under our LifeLock Standard, LifeLock Advantage, LifeLock Ultimate Plus, and LifeLock Junior Services. We also offer LifeLock Benefit Elite, identity theft protection, created specifically for employers and brokers to offer as a benefit for employees. Our consumer services are offered on a monthly or annual subscription basis. Our average revenue per member is lower than our retail list prices due to wholesale or bulk pricing that we offer to strategic partners in our embedded product, employee benefits, and breach distribution channels to drive our membership growth. In our embedded product channel, our strategic partners embed our consumer services into their products and services and pay us on behalf of their customers; in our employee benefit channel, employers primarily offer our consumer services as a voluntary benefit as part of their employee benefit enrollment process; and in our breach channel, enterprises that have experienced a data breach pay us a fee to provide our services to the victims of

the data breach. We also offer special discounts and promotions from time to time as incentives to prospective members to enroll in one of our consumer services. Our members pay us the full subscription fee at the beginning of each subscription period, in most cases by authorizing us to directly charge their credit or debit cards. We initially record the subscription fee as deferred revenue and then recognize it ratably on a daily basis over the subscription period. The prepaid subscription fees enhance our visibility of revenue and allow us to collect cash prior to paying our fulfillment partners.

We also derive revenue from transaction fees from our enterprise customers. Our enterprise customers pay us based on their monthly volume of transactions with us, with over 30% of our enterprise customers committed to monthly transaction minimums. We recognize revenue at the end of each month based on transaction volume for that month and bill our enterprise customers at the conclusion of each month.

We have historically invested significantly in new member acquisition and expect to continue to do so for the foreseeable future. Our largest operating expense is advertising for member acquisition, which we record as a sales and marketing expense. This is comprised of radio, television, and print advertisements; direct mail campaigns; online display advertising; paid search and search-engine optimization; third-party endorsements; and education programs. We also pay internal and external sales commissions, which we record as a sales and marketing expense. In general, increases in revenue and cumulative ending members occur during and after periods of significant and effective direct retail marketing efforts.

Our Business Model

We operate our business and our Chief Operating Decision Maker, or CODM, who is our CEO and President, reviews and assesses our operating performance using two reportable segments: our consumer segment and our enterprise segment. We review and assess our operating performance primarily using segment revenue, income (loss) from operations, total assets and other key financial and operating metrics discussed below. These performance measures include the allocation of operating expenses to our reportable segments based on management’s specific identification of costs associated to those segments.

Consumer Services

We evaluate the lifetime value of a member relationship over its anticipated lifecycle. While we generally incur member acquisition costs in advance of or at the time we acquire the member, we recognize revenue ratably over the subscription period. As a result, a member relationship is not profitable at the beginning of the subscription period even though it is likely to have value to us over the lifetime of the member relationship.

When a member’s subscription automatically renews in each successive period, the relative value of that member increases because we do not incur significant incremental acquisition costs. We also benefit from decreasing fulfillment and member support costs related to that member, as well as economies of scale in our capital and operating and other support expenditures.

Enterprise Services

In our enterprise business, the majority of our costs relate to personnel primarily responsible for data analytics, data management, software development, sales and operations, and various support functions. Our enterprise customers typically provide us with their customer transaction data as part of our service, allowing us to build and refine our models without incurring significant third-party data expenses. We continually evaluate third-party data sources and acquire data from such sources when we believe such data will enhance the performance of our models. New customer acquisition is often a lengthy process. We make a significant investment in the sales team, including costs related to detailed retrospective data analysis to help demonstrate the return on investment to prospective customers had our services been deployed over a specific period of time. Because most of our enterprise business expenses are fixed, we typically incur modest incremental costs when we add new enterprise customers, resulting in additional economies of scale.

Key Metrics

We regularly review a number of operating and financial metrics to evaluate our business, determine the allocation of our resources, measure the effectiveness of our sales and marketing efforts, make corporate strategy decisions, and assess operational efficiencies.

Key Operating Metrics

The following table summarizes our key operating metrics:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands, except percentages and per member data) (Unaudited)
Cumulative ending members	4,414			4,080			4,414			4,080
Gross new members	254			251			903			989
Member retention rate	85.5		%	86.6		%	85.5		%	86.6		%
Average cost of acquisition per member	$	255		$	237		$	255		$	202
Monthly average revenue per member	$	12.25		$	11.91		$	12.05		$	11.68
Enterprise transactions	103,240			74,280			272,504			208,324

Cumulative ending members. We calculate cumulative ending members as the total number of members at the end of the relevant period. The majority of our members are paying subscribers who have enrolled in our consumer services directly with us on a monthly or annual basis. Other members receive our consumer services through third-party entities that pay us directly because of a breach within the entity. Entities also embed our service within a broader third-party offering, or as an employee benefit paid for by the member's employer, which adds to our member total. We monitor cumulative ending members because it provides an indication of the revenue and expenses that we expect to recognize in the future.

As of September 30, 2016, our cumulative ending member base increased 8% year over year. Several factors drove this increase, including the success of our marketing campaigns, increased awareness of data breaches, media coverage of identity theft, and our member retention rate. The year over year increase as of September 30, 2016 is lower than the year over year increase of 16% as of September 30, 2015, primarily as a result of an increase in members during the nine-month period ended September 30, 2015 as a result of a breach at a large health insurance company in the first quarter of 2015, which resulted in our most successful gross new member quarter in our history. In addition, as a result of the FTC litigation which commenced in the quarter ended September 30, 2015, we reduced marketing expenses with our strategic partners and certain other campaigns resulting in reduced enrollments. While new member growth from our direct to consumer channel has improved through the first nine months of 2016, we do not expect new member growth from our strategic partner channel to return to previous levels for several quarters. We have also experienced an increase in cancellations through the first nine months of 2016 due to the expiration of a large number of breach contracts and a higher number of cancellations from our online affiliates.

Gross new members. We calculate gross new members as the total number of new members who enroll in one of our consumer services during the relevant period. Many factors may affect the volume of gross new members in each period, including the effectiveness of our marketing campaigns, the timing of our marketing programs, the effectiveness of our strategic partnerships, and the general level of identity theft coverage in the media, including the occurrence of material breach events. In addition, enrollments from our employee benefit channel are expected to be heavily weighted to the fourth fiscal quarter when the majority of employers have open enrollment periods. We monitor gross new members because it provides an indication of the revenue and expenses that we expect to recognize in the future. Gross new members increased 1% for the three-month period ended September 30, 2016 and decreased 9% for the nine-month period ended September 30, 2016 compared to the same periods last year. The decrease in our gross new members for the nine-month periods ended September 30, 2016 was primarily due to the media attention related to the large breach at a health insurance company in the first quarter of 2015, which resulted in our most successful gross new member quarter in our history. In addition, we continue to develop the strategic partner channel which was significantly impacted by the FTC litigation which commenced in the quarter ended September 30, 2015. Due to the impact of the FTC litigation and a shift to focus on larger partners, we do not expect the strategic partner channel to have a material impact in the current year, but we expect the channel to have a positive impact in future years.

Member retention rate. We define member retention rate as the percentage of members on the last day of the prior year who remain members on the last day of the current year. Similarly, for quarterly presentations, we use the percentage of members on the last day of the comparable quarterly period in the prior year who remain members on the last day of the current quarterly period. A number of factors may increase our member retention rate, including increases in the proportion of members enrolled on an annual subscription, increases in the number of alerts a member receives, and increases in the proportion of members enrolled through strategic partners with whom the member has a strong association. Conversely, factors that may reduce our member retention rate include increases in the number of members enrolled on a monthly subscription and the end of enrollment programs in our embedded product and breach channels. In addition, the length of time a member has been enrolled in one of our services will affect our member retention rate with longer-term members having a positive impact. Historically, the member retention rate for our premium services has been lower than the member retention rate for our basic-level services, which we believe is driven primarily by the price difference of those services.

Our member retention rate as of September 30, 2016 was significantly impacted by the high number of cancellations of members who enrolled during the first quarter of 2015 as a result of the breach at a large health insurance company who failed to renew on their first anniversary during the first nine months of 2016. Historically the first renewal date for our members is when we experience our lowest member retention. In addition, there was a large number of cancellations in the nine-month period ended September 30, 2016 from oil and gas employers within our employee benefit channel as a result of a downturn in the oil and gas industry. We also saw a number of cancellations which resulted from the expiration of breach contracts. In addition we experienced an increase in cancellations in the last six months of fiscal 2015 associated with the announcement of

the FTC litigation. As our retention rate is determined on an annual basis these factors will continue to impact the annual retention rate for several quarters. We also continue to see an on-going shift of our enrollments to premium products and monthly billing plans. Both of these cohorts tend to have slightly higher cancellation rates than our standard product and annual payment plans, so we expect this trend to continue. We further expect that our retention rates may be affected by payments to class members related to our FTC litigation related Ebarle class action that began during the fourth quarter of 2016.

Average cost of acquisition per member. We calculate average cost of acquisition per member as our sales and marketing expense for our consumer segment during the relevant period divided by our gross new members for the period. A number of factors may influence this metric, including shifts in the mix of our media spend. For example, when we engage in marketing efforts to build our brand, our short-term cost of acquisition per member increases with the expectation that it will decrease over the long term as marketing spend decreases. In addition, when we introduce new partnerships, such as partnerships in our embedded product channel, our average cost of acquisition per member may decrease due to the volume of members that enroll in our consumer services in a relatively short period of time. The average cost of acquisition per member is typically lowered by enrollments in the employee benefit channel which typically have a much lower cost of acquisition and are expected to occur predominately in the fourth fiscal quarter when the majority of employers hold open enrollment. We monitor average cost of acquisition per member to evaluate the efficiency of our marketing programs in acquiring new members. Our average cost of acquisition per member increased for the three- and nine-month periods ended September 30, 2016 when compared with the same periods in the prior year as a result of our continued investment in our sales and marketing efforts and a decrease in gross new members period over period due in part to the impact of the breach at a large health insurance company in the first quarter of 2015. As a result of the high level of impacted people and the media coverage related to this breach, we were able to acquire a high number of gross new members at a lower cost of acquisition in the first half of 2015 as compared to our typical cost of acquisition, including the cost of acquisition in the first nine months of 2016. In addition, we believe that as a result of the FTC matter, enrollments through relationships with strategic partners were lower in the first nine months of 2016 than in prior periods. Generally, as with our employee benefits channel, enrollments through relationships with strategic partners are at a lower average cost of acquisition per member.

Our member retention rate and the increasing monthly average revenue per member, primarily from the continued penetration of our premium service offerings, results in a higher lifetime value of a member relationship. This enables us to absorb a higher average cost of acquisition per member and still recognize value over the lifetime of our member relationships.

Monthly average revenue per member. We calculate monthly average revenue per member as our consumer revenue during the relevant period divided by the average number of cumulative ending members during the relevant period (determined by taking the average of the cumulative ending members at the beginning of the relevant period and the cumulative ending members at the end of each month in the relevant period), divided by the number of months in the relevant period. A number of factors may influence this metric, including whether a member enrolls in one of our premium services; whether we offer the member any promotional discounts upon enrollment; the distribution channel through which we acquire the member, as we offer wholesale pricing in our embedded product, employee benefit, and breach channels; and whether a new member subscribes on a monthly or annual basis, as members enrolling on an annual subscription receive a discount for paying for a year in advance. While our retail list prices have historically remained unchanged, we have seen our monthly average revenue per member increase primarily due to increased adoption of our premium services by a greater percentage of our members, a trend we expect to continue. We monitor monthly average revenue per member because it is a strong indicator of revenue in our consumer business and of the performance of our premium services.

Our monthly average revenue per member increased approximately 3% for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The increases resulted primarily from the continued success of our premium service offerings, which accounted for more than 40% of our gross new members for the three- and nine-month periods ended September 30, 2016. Monthly average revenue per member growth has been negatively impacted by the slow-down in the strategic partner channel which typically has a higher premium mix of members.

Enterprise transactions. Our enterprise transactions are processed by ID Analytics, our wholly owned subsidiary, and are calculated as the total number of enterprise transactions processed for either an identity risk or credit risk score during the relevant period. Enterprise transactions have historically been higher in the fourth quarter as the level of credit applications and general consumer spending increases. We monitor the volume of enterprise transactions because it is a strong indicator of revenue in our enterprise business.

Enterprise transactions increased 39% and 31% for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. Enterprise transactions increased as we continued to add net new customers and to expand our offerings with our existing customer base.

Key Financial Metrics

The following table summarizes our key financial metrics:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016		2015		2016		2015
	(in thousands)
Consumer revenue	$	161,671	$	144,648	$	470,260	$	411,178
Enterprise revenue	8,623		7,304		23,746		20,139
Total revenue	170,294		151,952		494,006		431,317
Adjusted net income	33,549		27,579		35,060		32,323
Adjusted EBITDA	36,548		29,797		43,540		39,314
Free cash flow	22,927		18,378		41,097		68,302

Please see descriptions and reconciliations of non-GAAP financial measures below.

Adjusted Net Income

Adjusted net income is a non-U.S. GAAP financial measure that we calculate as net income excluding amortization of acquired intangible assets, stock-based compensation, income tax benefits and expenses resulting from changes in our deferred tax assets, and acquisition related expenses. For the three- and nine-month periods ended September 30, 2016, we also excluded the expenses for the FTC and related litigation and the impact of a legal reserve for the settlement of a derivative lawsuit. In addition, for the three- and nine-month periods ended September 30, 2015, we excluded the impact of the legal reserve for a settlement of a class action lawsuit and expenses for the FTC and related litigation. Adjusted net income is a key measure we use to understand and evaluate our operating performance and trends. In particular, the exclusion of certain expenses in calculating adjusted net income can provide a useful measure for period-to-period comparisons of our core business, and reflects a metric that management reviews in the evaluation of our business.

Accordingly, we believe that adjusted net income provides useful information to investors and others in understanding and evaluating our operating results in the same manner as we do. We believe that the exclusion of certain items of income and expense from net income (loss) in calculating adjusted net income is useful because (i) the amount of such income and expense in any specific period may not directly correlate to the underlying operational performance of our business, and/or (ii) such income and expense can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.

Our use of adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under U.S. GAAP. Some of these limitations include the following:


•	although amortization of intangible assets is a non-cash charge, additional intangible assets may be acquired in the future and adjusted net income does not reflect cash capital expenditure requirements for new acquisitions;


•	adjusted net income does not reflect the cash requirements for the class action lawsuit and the FTC and related litigation;


•	adjusted net income does not reflect the cash requirements for new acquisitions;


•	adjusted net income does not reflect changes in, or cash requirements for, our working capital needs;


•	adjusted net income does not consider the potentially dilutive impact of stock-based compensation;


•	adjusted net income does not reflect the deferred income tax benefit from the release of the valuation allowance or income tax expenses which reduce our deferred tax asset for net operating losses or other net changes in deferred tax assets;


•	adjusted net income does not reflect the expenses incurred for new acquisitions; and


•	other companies, including companies in our industry, may calculate adjusted net income (loss) or similarly titled measures differently, limiting their usefulness as a comparative measure.

Because of these limitations, you should consider adjusted net income alongside other financial performance measures, including various net income (loss), cash flow metrics, and our other U.S. GAAP results. The following table presents a reconciliation of net income (loss) to adjusted net income for applicable items of income and expense that impacted each of the periods indicated:



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2016		2015			2016			2015
Reconciliation of Net Income (Loss) to Adjusted Net Income:	(in thousands)
Net income (loss)	$	14,402	$	(65,145	)	$	(4,390	)	$	(73,783	)
Amortization of acquired intangible assets	1,982		2,084			8,344			6,251
Stock-based compensation	8,612		7,863			25,509			20,287
Deferred income tax expense (benefit)	8,527		(22,075		)	(3,801		)	(27,784		)
Legal reserves and settlements	—		96,000			6,000			98,500
Expenses related to the FTC litigation	26		5,733			3,398			5,733
Acquisition related expenses	—		3,119			—			3,119
Adjusted net income	$	33,549	$	27,579		$	35,060		$	32,323

Adjusted EBITDA

Adjusted EBITDA is a non-U.S. GAAP financial measure that we calculate as net income (loss) excluding depreciation and amortization, stock-based compensation, interest expense, interest income, other income (expense), income tax (benefit) expense, and acquisition related expenses. For the three- and nine-month periods ended September 30, 2016, we also excluded the expenses for the FTC and related litigation and the impact of a legal reserve for the settlement of the derivative lawsuit. In addition, for the three- and nine-month periods ended September 30, 2015, we excluded the impact of the legal reserve for a settlement with a class action lawsuit and expenses for the FTC and related litigation. We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure we use to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business, and reflects a metric that management reviews in the evaluation of our business. Additionally, adjusted EBITDA is a key financial measure used in determining management’s incentive compensation.

Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as we do. We believe that the exclusion of certain items of income and expense from net income (loss) in calculating adjusted EBITDA is useful because (i) the amount of such income and expense in any specific period may not directly correlate to the underlying operational performance of our business, and/or (ii) such income and expense can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.

Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under U.S. GAAP. Some of these limitations include the following:


•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;


•	adjusted EBITDA does not reflect the cash requirements for the class action lawsuit and the FTC and related litigation;


•	adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;


•	adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation;


•	adjusted EBITDA does not reflect cash interest income or expense;


•	adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;


•	adjusted EBITDA does not reflect the expenses incurred for new acquisitions; and


•	other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, limiting their usefulness as a comparative measure.

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various net income (loss), cash flow metrics, and our other U.S. GAAP results. The following table presents a reconciliation of net income (loss) to adjusted EBITDA for applicable items of income and expense that impacted each of the periods indicated:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Reconciliation of Net Income (Loss) to Adjusted EBITDA:	(in thousands)
Net income (loss)	$	14,402		$	(65,145	)	$	(4,390	)	$	(73,783	)
Depreciation and amortization	5,057			4,432			17,082			13,292
Stock-based compensation	8,612			7,863			25,509			20,287
Interest expense	111			89			403			265
Interest income	(272		)	(219		)	(875		)	(498		)
Other expense	85			—			214			183
Income tax expense (benefit)	8,527			(22,075		)	(3,801		)	(27,784		)
Legal reserves and settlements	—			96,000			6,000			98,500
Expenses related to the FTC litigation	26			5,733			3,398			5,733
Acquisition related expenses	—			3,119			—			3,119
Adjusted EBITDA	$	36,548		$	29,797		$	43,540		$	39,314

Free Cash Flow

Free cash flow is a non-U.S. GAAP financial measure that we calculate as net cash provided by operating activities less net cash used in investing activities for acquisitions of property and equipment. Additionally, we add or deduct legal settlements paid or received, respectively, and we also adjust for expenses paid for the FTC matters and related litigation. We use free cash flow as a measure of our operating performance; for planning purposes, including the preparation of our annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our business strategies; to provide consistency and comparability with past financial performance; to determine capital requirements; to facilitate a comparison of our results with those of other companies; and in communications with our board of directors concerning our financial performance.

We use free cash flow to evaluate our business because, although it is similar to net cash provided by (used in) operating activities, we believe it typically presents a more conservative measure of cash flow as purchases of property and equipment are necessary components of ongoing operations. We believe that this non-U.S. GAAP financial measure is useful in evaluating our business because free cash flow reflects the cash surplus available to fund the expansion of our business, excluding expenses related to the FTC litigation and settlement, after payment of capital expenditures relating to the necessary components of ongoing operations. We also believe that the use of free cash flow provides consistency and comparability with our past financial performance, and facilitates period-to-period comparisons of operations.

Although free cash flow is frequently used by investors in their evaluations of companies, free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under U.S. GAAP. Some of these limitations include the following:


•	free cash flow does not reflect our future requirements for contractual commitments to third- party providers;


•	free cash flow does not reflect the cash requirements or recoveries for legal settlements or expenses paid for the the FTC and related litigation;


•	free cash flow does not reflect the non-cash component of employee compensation or depreciation and amortization of property and equipment; and


•	other companies, including companies in our industry, may calculate free cash flow or similarly titled measures differently, limiting their usefulness as comparative measures.

Free cash flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash requirements. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by operating activities, net income (loss), and our other U.S. GAAP results. The following table presents a reconciliation of net cash provided by operating activities to free cash flow for each of the periods indicated:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Reconciliation of Net Cash Provided By Operating Activities to Free Cash Flow:	(in thousands)
Net cash provided by operating activities	$	5,626		$	20,826		$	26,260		$	75,723
Acquisitions of property and equipment	(1,962		)	(4,084		)	(11,299		)	(9,057		)
Legal settlements paid (received)	18,642			—			21,142			—
Expenses paid for the FTC litigation	621			1,636			4,994			1,636
Free cash flow	$	22,927		$	18,378		$	41,097		$	68,302

Factors Affecting Our Performance

Customer cost of acquisition. We expect to continue to make significant expenditures to grow our member and enterprise customer bases. Our average cost of acquisition per member and the number of new members we generate depends on a number of factors, including the effectiveness of our marketing campaigns, changes in cost of media, the competitive environment in our markets, the prevalence of identity theft issues in the media, publicity about our company, and the level of differentiation of our services. Shifts in the mix of our media spend also influence our member acquisition costs. For example, when we engage in marketing efforts to build our brand, our member acquisition costs increase in the short term with the expectation that they will decrease over the long term. We also continually test new media outlets, marketing campaigns, and call center scripting, each of which impacts our average cost of acquisition per member. In addition, given the past success of our premium services, we expect to be able to absorb a higher average cost of acquisition per member and still recognize value over the lifetime of our member relationships.

Mix of members by services, billing cycle, and distribution channel. Our performance is affected by the mix of members subscribing to our various consumer services, by billing cycle (annual versus monthly), and by the distribution channel through which we acquire the member. Our adjusted EBITDA, adjusted net income, free cash flow, and average cost of acquisition per member are all affected by this mix. We have seen a recent shift to more monthly members, in large part due to the increase in the number of members enrolling through our embedded product and employee benefits channels in which our members enroll on a monthly basis. Since releasing our Ultimate Plus and Advantage products in the third quarter of 2014, and with subsequent changes to these product offerings,we have continued to see over 40% of our new enrollments purchase these two premium products, and have seen an increase in these premium members electing to take the product on a monthly subscription.

Customer retention. Our ability to maintain our current member retention rate may be affected by a number of factors, including the effectiveness of our services, the performance of our member services organization, external media coverage of identity theft, the continued evolution of our service offerings, the competitive environment, the effectiveness of our media spend, the timing of employee benefit and breach service enrollments, and other developments.

Our enterprise business relies on the retention of enterprise customers to maintain the effectiveness of our services because our enterprise customers typically provide us with their customer transaction data as part of our service. Losing a significant number of these customers would reduce the breadth and effectiveness of our services. In addition, less than 1% of our overall revenue for the three- and nine-month periods ended September 30, 2016 was derived from direct competitors to our consumer business. As we have given notice of non-renewal to competitors in our consumer segment, we have allowed such contracts to lapse, and accordingly, this may continue to decline over time.

Investments to grow our business. We expect to continue to invest to grow our business. These investments include the development and marketing of new services, including investments in our technology and development team primarily in Northern and Southern California, and the continued enhancement of our existing services. These investments will increase our operating expenses in the near term and thus may negatively impact our operating results in the short term, although we anticipate that these investments will grow and improve our business over the long term.

Regulatory developments. Our business is subject to regulation by federal, state, local, and foreign authorities. Any changes to the existing applicable laws, regulations, or rules or the interpretation thereof by regulatory authorities; any determination that other laws, regulations, or rules are applicable to us; or any determination that we have violated any of these laws, regulations, or rules could adversely affect our operating results. The business of some of our vendors, data providers and enterprise customers may also by subject to regulation by such governmental authorities and changes in applicable laws, regulations or rules applicable to them may as a result require us to adapt our product and service offerings in a timely manner. As previously disclosed, in 2010, we entered into an order with the FTC (the FTC Order). In 2010, at the same time we entered into the FTC Order, we entered into companion orders with 35 states' attorneys general that imposed on us injunctive provisions similar to the FTC Order relating to our advertising and marketing of our identity theft protection services. On July 21, 2015, the FTC initiated a contempt action alleging that we violated the FTC Order, which we refer to as the FTC Contempt Action. On December 17, 2015, the FTC approved a comprehensive settlement agreement, pursuant to which we resolved all matters related to the FTC Contempt Action and provided a mechanism to fund a settlement in the Ebarle Class Action (as described in more detail in Part II, Item 1 - Legal Proceedings). Under the terms of the settlement, $100 million was placed into the registry of the court overseeing the FTC Contempt Action, $68 million of which was distributed to the court overseeing the Ebarle Class Action to fund the consumer redress contemplated by that settlement, which was approved by the court, and the remaining $32 million of the settlement remains in the registry of the Arizona court. While the Ebarle Class Action court ruling has been appealed by certain objectors in the case, the $68 million redress checks have been distributed to consumers who are members of the class. At this stage, we are not aware of proceedings initiated against us by any states’ attorneys general, alleging that we violated the companion orders from 2010. As of September 30, 2016, we have $3 million accrued for a potential settlement with states’ attorneys general. The ultimate resolution of the matter with the states’ attorneys general is uncertain and may involve a materially higher settlement than $3 million.

We collect and remit sales tax in several states related to the sale of our consumer services. Other states or one or more other jurisdictions could seek to impose sales or other tax collection obligations on us in the future. A successful assertion by any state or other jurisdiction that we should be collecting sales or other taxes on the sale of our services could, among other things, increase the cost of our services, create significant administrative burdens for us, result in substantial tax liabilities, discourage current members and other consumers from purchasing our services, or otherwise substantially harm our business and operating results.

For a discussion of additional factors and risks facing our business, see “Risk Factors” in Part II Item 1A. of this Form 10-Q, in our fiscal 2015 Form 10-K, and in our other filings with the SEC.

Basis of Presentation and Key Components of Our Results of Operations

We operate our business and our CODM reviews and assesses our operating performance using two reportable segments: our consumer segment and our enterprise segment. We review and assess our operating performance using segment revenue, income (loss) from operations, total assets and our key financial and operating metrics. These performance measures include the allocation of operating expenses to our reportable segments based on management’s specific identification of costs associated to those segments.

Revenue

We derive revenue in our consumer segment primarily from fees paid by our members for identity theft protection services offered on a subscription basis. Our members subscribe to our consumer services on a monthly or annual, automatically renewing basis and pay us the full subscription fee at the beginning of each subscription period, in most cases by authorizing us to directly charge their credit or debit cards. In some cases, we offer members a free trial period, which is typically 30 days. Our members may cancel their membership with us at any time without penalty and, when they do, we issue a refund for the unused portion of the canceled membership. We recognize revenue for member subscriptions ratably on a daily basis from the latter of cash receipt, activation of a member’s account, or expiration of free trial periods to the end of the subscription period.

We also provide consumer services for which the primary customer is an enterprise purchasing identity theft protection services on behalf of its employees or customers. In such cases, we defer revenue for each member until the member’s account has been activated. We then recognize revenue ratably on a daily basis over the term of the subscription period.

We derive revenue in our enterprise segment from fees paid by our enterprise customers for fraud and risk solutions, which we generally provide under multi-year contracts, many of which renew automatically. Our enterprise customers pay us based on their monthly volume of transactions with us, and approximately 30% of them are committed to paying monthly minimum fees. We recognize revenue based on a negotiated fee per transaction. Transaction fees in excess of any of the monthly minimum fees are billed and recorded as revenue in addition to the monthly minimum fees. In some instances, we receive up-front non-refundable payments against which the monthly minimum fees are applied. The up-front non-refundable payments are recorded as deferred revenue and recognized as revenue monthly over the usage period. If an enterprise customer

does not meet its monthly minimum fee, we bill the negotiated monthly minimum fee and recognize revenue for that amount. We derive a small portion of our enterprise revenue from special projects in which we are engaged to deliver a report at the end of the analysis, which we record upon delivery and acceptance of the report.

Cost of Services

Cost of services in our consumer segment consists primarily of costs associated with our member services organization and fulfillment partners. Our member support operations include wages and benefits for personnel performing these functions and facility costs directly associated with our sales and service delivery functions. We also pay fees to third-party service providers related to the fulfillment of our consumer services, including the premiums associated with the identity theft insurance that we provide to our members, and merchant credit card fees.

Costs of services in our enterprise segment primarily includes wages and benefits of personnel, and the facility costs that are directly associated with the data analytics and data management.

We expect our cost of services to increase to the extent we continue to increase the number of our members and enterprise customers. Our cost of services is heavily affected by prevailing salary levels, which affect our internal direct costs and fees paid to third-party service providers. Accordingly, increases in the market rate for wages would increase our cost of services.

Gross Margin

Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors. Increases in personnel and facility costs directly associated with the provision of our services can negatively affect our gross margin. Our gross margin can also be affected by higher fulfillment costs due to enhancements in our services or the introduction of new services, such as the addition of insurance coverage in our consumer services. A significant increase in the number of members we enroll through our strategic partner distribution channels can also negatively affect our gross margin because we offer wholesale pricing to our strategic partners. In prior periods, sales taxes we paid on behalf of our members, and settlements with state tax authorities, also negatively affected our gross margin. Conversely, operating efficiencies in our member services organization can improve our gross margin. We expect our gross margin to fluctuate from period to period depending on all of these factors.

Sales and Marketing

Sales and marketing expenses consist primarily of direct response advertising and online search costs, commissions paid on a per-member basis to our online affiliates and on a percentage of revenue basis to our co-marketing partners, and wages and benefits for sales and marketing personnel. Direct response marketing costs include television, radio, and print advertisements as well as costs to create and produce these advertisements. Online search costs consist primarily of pay-per-click payments to search engines and other online advertising media, such as banner ads. We expense advertising costs as incurred, and historically, they have occurred unevenly across periods. Our sales and marketing expenses also include payments related to our sponsorship and promotional partners. In order to continue to grow our business and the awareness of our services, we plan to continue to commit substantial resources to our sales and marketing efforts. As a result, for the near term, we expect our sales and marketing expenses will continue to increase in absolute dollars and vary as a percentage of revenue, depending on the timing of those expenses and our revenue.

Technology and Development

Technology and development expenses consist primarily of personnel costs incurred in product development, maintenance and testing of our websites, enhancing our existing services and developing new services, internal information systems and infrastructure, data privacy and security systems, third-party development, and other internal-use software systems. Our development costs are primarily incurred in the United States and are directed at enhancing our existing service offerings and developing new service offerings. In order to continue to grow our business and enhance our services, we plan to continue to commit resources to technology and development. In addition, ID Analytics has historically spent a higher portion of its revenue on technology and development. As a result, we expect our technology and development expenses will continue to increase in absolute dollars for the foreseeable future.

General and Administrative

General and administrative expenses consist primarily of personnel costs, professional fees, and facility-related expenses associated with our internal support functions. Our professional fees principally consist of outside legal, auditing, accounting, and other consulting fees. Legal costs included within our general and administrative expenses also include costs incurred to litigate and settle various legal matters, including the FTC related litigation. We expect our general and administrative expenses will increase in absolute dollars for the foreseeable future as we hire additional personnel and expand our office facilities to support our overall growth and incur additional costs associated with our public company and regulatory compliance.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets is the amortization expense associated with core technology, customer relationships, trade names and trademarks, and assembled workforce resulting from business acquisitions. As of September 30, 2016, we had $21.8 million in intangible assets, net of amortization, as a result of our acquisitions. The acquired intangible assets have useful lives of between one and ten years and we expect to recognize approximately $10.3 million of amortization expense in the year ending December 31, 2016.

Provision for Income Taxes

We are subject to federal income tax as well as state income tax in various states in which we conduct business. Our effective tax rate for the nine-month periods ended September 30, 2016 and 2015, approximated the U.S. federal statutory tax rate plus the impact of state taxes and permanent and other temporary differences.

Results of Operations

Comparison of the Three- and Nine-Month Periods Ended September 30, 2016 and 2015

Total Revenue



	For the Three Months Ended						For The Nine Months Ended
	September 30,						September 30,
	2016		2015		% Change		2016		2015		% Change
	(in thousands)
Consumer revenue	$	161,671	$	144,648	11.8	%	$	470,260	$	411,178	14.4	%
Enterprise revenue	8,623		7,304		18.1	%	23,746		20,139		17.9	%
Total revenue	$	170,294	$	151,952	12.1	%	$	494,006	$	431,317	14.5	%

Consumer revenue increased by $17.0 million and $59.1 million for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The increase resulted primarily from the increase in the number of our members, which grew 8% to approximately 4.4 million as of September 30, 2016 as compared to September 30, 2015. In addition, our monthly average revenue per member increased 3% for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The increase in members and monthly average revenue per member resulted from the continued success of our premium service offerings, including our LifeLock Advantage and LifeLock Ultimate Plus services, and our advertising and marketing campaigns designed to increase the overall awareness of our services and identity theft. However, the increase in members and monthly average revenue per member were slowed primarily due to the weakness in our strategic partner channel as a result of the FTC litigation in the third fiscal quarter of 2015 and a focus on larger partners, and therefore we do not expect this channel to provide significant new members in 2016.

Enterprise revenue increased by $1.3 million and $3.6 million for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The increases are attributable to the growth of our enterprise customer base and expansion of our offerings to our current customer base.

Cost of Services and Gross Profit



	For the Three Months Ended								For The Nine Months Ended
	September 30,								September 30,
	2016			2015			% Change		2016			2015			% Change
	(in thousands)
Cost of services	$	34,782		$	33,988		2.3	%	$	118,410		$	103,470		14.4	%
Percentage of revenue	20.4		%	22.4		%			24.0		%	24.0		%
Gross profit	135,512			117,964			14.9	%	375,596			327,847			14.6	%
Gross margin	79.6		%	77.6		%			76.0		%	76.0		%

Gross profit increased by $17.5 million and $47.7 million for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The increases resulted primarily from increased revenue associated with the growth in the number of our members and increased monthly average revenue per member. Gross margin for the nine-month period ended September 30, 2016 remained flat, primarily attributable to costs incurred in the second quarter with respect to the migration of credit services for premium members to our new data platform, which resulted in additional expense

of approximately $6.0 million that would have been spread out over the remainder of our fiscal year under our previous data platform.

Sales and Marketing



	For the Three Months Ended								For The Nine Months Ended
	September 30,								September 30,
	2016			2015			% Change		2016			2015			% Change
	(in thousands)
Sales and marketing	$	68,416		$	62,850		8.9	%	$	240,492		$	209,470		14.8	%
Percentage of revenue	40.2		%	41.4		%			48.7		%	48.6		%

Sales and marketing expenses increased by $5.6 million and $31.0 million for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The increases resulted from increased advertising expenses, external sales commissions, and personnel costs, including increased non-cash stock-based compensation. The increase in our sales and marketing expenses reflected our investment to drive new membership growth, our continued advertising of our premium service offerings, and our efforts to highlight the growing identity theft issue and to educate consumers.

Technology and Development



	For the Three Months Ended								For The Nine Months Ended
	September 30,								September 30,
	2016			2015			% Change		2016			2015			% Change
	(in thousands)
Technology and development	$	20,379		$	19,396		5.1	%	$	61,509		$	52,928		16.2	%
Percentage of revenue	12.0		%	12.8		%			12.5		%	12.3		%

Technology and development expenses increased by $1.0 million and $8.6 million for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The increases resulted primarily from increased personnel costs, including non-cash stock-based compensation, which were primarily the result of continuing to expand our product and technology team, primarily in Silicon Valley in Northern California. In addition, we also made investments in product enhancements, security, infrastructure, and market research.

General and Administrative



	For the Three Months Ended								For The Nine Months Ended
	September 30,								September 30,
	2016			2015			% Change		2016			2015			% Change
	(in thousands)
General and administrative	$	21,882		$	120,984		(81.9	)%	$	73,700		$	160,815		(54.2	)%
Percentage of revenue	12.8		%	79.6		%			14.9		%	37.3		%

General and administrative expenses decreased by $99.1 million and $87.1 million for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The decrease relates primarily to the third quarter 2015 accrual of $96 million for the settlement with the FTC and a national class of consumers as part of the Ebarle Class Action, to resolve outstanding litigation, and a potential settlement with certain states' attorneys general in addition to a decrease in legal fees associated with such matters, which caused general and administrative expenses to be significantly higher than usual for the three- and nine-month periods ended September 30, 2015. The decreases were partially offset by an increase in personnel costs, including non-cash stock-based compensation, and additional costs associated with our regulatory compliance, and office expansion. In the second quarter of 2016, we accrued $6.0 million for the settlement of securities derivative lawsuits, which was paid in the third quarter of 2016.

Amortization of Acquired Intangible Assets



	For the Three Months Ended								For The Nine Months Ended
	September 30,								September 30,
	2016			2015			% Change		2016			2015			% Change
	(in thousands)
Amortization of acquired intangible assets	$	1,982		$	2,084		(4.9	)%	$	8,344		$	6,251		33.5	%
Percentage of revenue	1.2		%	1.4		%			1.7		%	1.4		%

Amortization of acquired intangible assets decreased by $0.1 million and increased $2.1 million for the three- and nine-month periods ended September 30, 2016, respectively, compared to the same periods last year. The period over period increase and quarter over quarter decrease is due to the acceleration of amortization of our technology intangible asset acquired in the Lemon acquisition and an assembled workforce intangible asset acquired in 2015, which were fully amortized through the second quarter of 2016.

Other Income



	For the Three Months Ended								For The Nine Months Ended
	September 30,								September 30,
	2016			2015			% Change		2016			2015			% Change
	(in thousands)
Interest expense	$	(111	)	$	(89	)	24.7	%	$	(403	)	$	(265	)	52.1	%
Interest income	272			219			24.2	%	875			498			75.7	%
Other	(85		)	—			N/A		(214		)	(183		)	16.9	%
Total other income	$	76		$	130		(41.5	)%	$	258		$	50		416.0	%

Other income remained generally flat for the three-month period ended September 30, 2016 compared to the third quarter 2015, and increased $0.2 million for the nine-month period ended September 30, 2016 compared to the same period last year. The increase in the nine-month period was primarily due to the increase in interest income on our marketable securities.

Income Tax Expense (Benefit)



	For the Three Months Ended								For The Nine Months Ended
	September 30,								September 30,
	2016			2015			% Change		2016			2015			% Change
	(in thousands)
Income tax benefit	$	8,527		$	(22,075	)	(138.6	)%	$	(3,801	)	$	(27,784	)	(86.3	)%
Effective tax rate	37.2		%	25.3		%			46.4		%	27.4		%

Our effective tax rate for the three- and nine-month periods ended September 30, 2016 and 2015, differed from the U.S. federal statutory tax rate plus the impact of state taxes as a result of tax return to provision adjustments which resulted in an income tax benefit of $0.8 million and $0.4 million, respectively.

Liquidity and Capital Resources

As of September 30, 2016, we had $34.8 million in cash and cash equivalents, which consisted of cash and money market funds, and $131.3 million in marketable securities, which consisted of corporate bonds, municipal bonds, government securities, agency securities, commercial paper, and certificates of deposit. We classify our marketable securities as short-term regardless of contractual maturity based on our ability to liquidate those investments for use in current operations. Additionally, we have a revolving line of credit, described below. We did not draw on the line of credit during the nine-month period ended September 30, 2016. As of September 30, 2016, we had no outstanding debt. We believe that our existing cash and cash equivalents and marketable securities together with cash generated from operations will be sufficient to fund our operations for at least the next 12 months, including amounts reserved for potential legal settlements. However, our future liquidity and capital requirements may vary materially from our expectations depending on many factors, including, but not limited to our revenues and gross margins, our cash flows from operations, the timing of payments with respect to the settlements, expenses

and judgments related to our litigation matters, future disputes or litigation, and the availability of our revolving line of credit. We may need to seek additional capital and such capital may not be available on terms acceptable to us or at all.

Operating Activities

For the nine-month period ended September 30, 2016, operating activities generated $26.3 million in cash despite a net loss of $4.4 million, resulting from adjustments for non-cash items such as depreciation and amortization of $17.1 million, stock-based compensation of $25.5 million, and an income tax benefit of $3.8 million. We also had an increase in deferred revenue related to the overall growth of our business which provided operating cash of $22.6 million and we had a decrease in operating cash as a result of changes in other operating assets and liabilities of $33.0 million, which included payments for previously accrued legal settlements of $21.1 million.

For the nine-month period ended September 30, 2015, operating activities generated $75.7 million in cash as a result of a net loss of $73.8 million, adjusted by non-cash items such as depreciation and amortization of $13.3 million, stock-based compensation of $20.3 million, and an income tax benefit of $27.8 million. An increase in deferred revenue related to the overall growth of our business provided operating cash of $25.6 million and positive net operating cash flows of $115.4 million from other operating assets and liabilities.

Investing Activities

For the nine-month period ended September 30, 2016, we used $11.3 million of cash to acquire property and equipment, primarily computer equipment and software, including personnel and third-party costs related to internally developed software, as we continue to expand our team and enhance our service, and we paid $4.3 million of premiums for company-owned life insurance policies. In addition, we had net cash inflows of $64.4 million attributable to the maturities and coupon payments of our marketable securities.

For the nine-month period ended September 30, 2015, we acquired BitYota, Inc. for $12.8, we used $9.1 million of cash to acquire property and equipment primarily attributable to the expansion of our office locations, we invested a net $68.9 million of cash in marketable securities, and we paid $4.3 million of premiums for company-owned life insurance policies.

Financing Activities

For the nine-month period ended September 30, 2016, net cash used in financing activities was $90.5 million as a result of cash paid related to the repurchase of our common stock of $100.0 million, primarily under our accelerated share repurchase programs, and $6.2 million paid for employee withholding tax related to net distributions of restricted stock units and restricted stock, offset by cash received from the exercise of stock options of $15.8 million.

For the nine-month period ended September 30, 2015, financing activities generated net cash of $8.4 million as a result of cash received from the exercise of stock options of $10.1 million, offset by $1.7 million paid for employee withholding tax related to net distributions of restricted stock units and restricted stock.

Debt Obligations

Senior Credit Facility

There have been no changes in our Credit Agreement and related documents with Bank of America, which we refer to as our Senior Credit Facility, from the disclosure in our fiscal 2015 Form 10-K. At September 30, 2016, we were in compliance with all the covenants of the Senior Credit Facility.

As of September 30, 2016, we had outstanding letters of credit in the amount of $1.3 million in connection with certain leases for office space, and no other amounts were outstanding.

Contractual Obligations

In April 2016, we entered into a nine-year lease agreement for an office building in Mountain View, CA. The total expected minimum operating lease commitment is $42.4 million, which is accounted for as a build-to-suit lease. We have an option to renew the lease for an additional seven-year term. There were no other material changes in our commitments under contractual obligations to those disclosed in our fiscal 2015 Form 10-K.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financing activities, nor do we have any interest in entities referred to as variable interest entities.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that the assumptions and estimates associated with revenue recognition for payments and other fees, income taxes, and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our fiscal 2015 Form 10-K.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our primary market risk exposures or how we manage those exposures from the information disclosed in Part II, Item 7A of our fiscal 2015 Form 10-K. For further discussion of quantitative and qualitative disclosures about market risk, reference is made to our fiscal 2015 Form 10-K.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, together with our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. The purpose of this evaluation is to determine if, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective such that the information required to be disclosed in the reports we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2016.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to material affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our company have been or will be prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks that internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.

PART II - OTHER INFORMATION


Item 1.	Legal Proceedings

On July 21, 2015 the FTC lodged, under seal, in the United States District Court for the District of Arizona, a motion seeking to hold us in contempt of the consent decree we entered into with the FTC in 2010 (the FTC Order). On December 17, 2015, we entered into a comprehensive settlement agreement with the FTC, pursuant to which we resolved all matters related to the FTC Contempt Action and provided a mechanism to fund a settlement of the Ebarle Class Action described below. On January 19, 2015, plaintiffs Napoleon Ebarle and Jeanne Stamm filed a nationwide putative consumer class action lawsuit against us in the United States District Court for the Northern District of California. A second amended complaint was filed on November 4, 2015 on behalf of four plaintiffs who alleged that we engaged in deceptive marketing and sales practices in connection with our membership plans in violation of the Arizona Consumer Fraud Act, Breach of Contract, unjust enrichment and violation of the Federal Declaratory Judgment Act.

Under the terms of the FTC settlement, $100 million was placed into the registry of the court overseeing the FTC Contempt Action, $68 million of which was authorized to be distributed to fund the consumer redress contemplated by the Ebarle Class Action settlement. Those funds have been transferred to the supervision of the court overseeing the Ebarle Class Action Settlement.

On September 20, 2016, the court overseeing the Ebarle Class Action entered judgment and an order granting plaintiffs’ motion for final approval of the parties’ proposed settlement agreement, awarding plaintiffs’ counsel $10.2 million in fees and costs and awarding each of the four plaintiffs $2,000 as a service award. Beginning on October 11, 2016, the Court-appointed settlement administrator distributed settlement checks to settlement class members using the $68 million transferred in February 2016 to the court-appointed settlement administrator from the court’s registry in the FTC Contempt Action. The remaining $32 million of the settlement remains in the registry of the Arizona court. In addition, we have $3.0 million accrued for a potential settlement with states attorneys general for related claims.

On August 1, 2014, our subsidiaries Lemon and Lemon Argentina, S.R.L. (Lemon Argentina, and together, the Lemon Entities) filed a lawsuit in Santa Clara Superior Court in San Jose, California, against Wenceslao Casares, former General Manager of Lemon, Cynthia McAdam, former General Counsel of Lemon, and Federico Murrone, Martin Apesteguia and Fabian Cuesta, each a former employee and former member of the board of directors of Lemon Argentina (the Argentine Executives). The complaint alleges breaches of employment-related contracts and breaches of fiduciary duties involving each named individual’s work for third-party Xapo, Inc. and/or Xapo, Ltd. during their employment by the applicable Lemon Entity. On January 30, 2015, the Lemon Entities filed a second amended complaint alleging breaches of employment-related contracts, breaches of fiduciary duties, and fraud, and seeking declaratory relief against Mr. Casares, Ms. McAdam, and the Argentine Executives. The Argentine Executives entered their appearances in the litigation on July 24, 2015 and filed a motion to dismiss for inconvenient forum on September 8, 2015. That motion was heard on December 4, 2015 and granted on January 4, 2016, with an order staying the action in its entirety. The Lemon Entities filed a notice of appeal on March 1, 2016.

into the merger agreement, breached their fiduciary duties to Lemon, and were unjustly enriched from their fraudulent conduct. Defendants filed a motion to dismiss on October 24, 2016. The parties have not yet agreed to a briefing schedule for the motion.

On July 22, 2015, Miguel Avila, representing himself and seeking to represent a class of persons who acquired our securities from July 30, 2014 to July 20, 2015, inclusive, filed a class action complaint in the United States District Court for the District of Arizona. His complaint alleged that Todd Davis, Christopher Power, and we violated Sections 10(b) and 20(a) of the Securities Exchange Act by making materially false or misleading statements, or failing to disclose material facts about our business, operations, and prospects, including with regard to our information security program, advertising, recordkeeping, and our compliance with the FTC Order. The complaint sought certification as a class action, compensatory damages, and attorney’s fees and costs. On September 21, 2015, four other Company stockholders, Oklahoma Police Pension and Retirement System, Oklahoma Firefighters Pension and Retirement System, Larisa Gassel, and Donna Thompson, and their respective attorneys all filed motions seeking to be appointed the lead plaintiff and lead counsel in this class action. On October 9, 2015, the Court appointed Oklahoma Police Pension and Retirement System and Oklahoma Firefighters Pension and Retirement System as lead plaintiffs. On December 10, 2015 lead plaintiffs filed a substantively similar amended complaint. Lead plaintiffs moved to lift the discovery stay imposed by the Private Securities Litigation Reform Act on January 21, 2016. On February 8, 2016, we, along with Mr. Davis and Mr. Power, opposed that motion and on April 22, 2016, the Court denied lead plaintiffs’ motion. We, along with Mr. Davis and Mr. Power, moved to dismiss the amended complaint on January 29, 2016. On August 3, 2016 the Court granted our motion to dismiss and later permitted lead plaintiffs until September 23, 2016 to seek leave to amend their complaint. On September 23, 2016, lead plaintiffs moved for leave to file a proposed Second Amended Complaint, which we did not oppose. On October 13, 2016, the Court granted lead plaintiffs’ motion for leave to file a second amended complaint. On October 14, 2016, lead plaintiffs filed the Second Amended Complaint, which is substantively similar to the amended complaint but adds our President, Hilary Schneider, as a named defendant. We, along with Ms. Schneider and Messrs. Davis and Power will move to dismiss the Second Amend Complaint by December 16, 2016, pursuant to a schedule stipulated by the parties and order by the Court.

On March 3, 2014, and March 10, 2014, two securities class action complaints were filed in the United States District Court for the District of Arizona, against us, Mr. Davis, and Mr. Power. On June 16, 2014, the court consolidated the complaints into a single action captioned In re LifeLock, Inc. Securities Litigation and appointed a lead plaintiff and lead counsel. On August 15, 2014, the lead plaintiff filed the Consolidated Amended Class Action Complaint (the Consolidated Amended Complaint), seeking to represent a class of persons who acquired our securities from February 26, 2013 to May 16, 2014, inclusive (the Class Period). The Consolidated Amended Complaint alleged that we, along with Mr. Davis, Mr. Power, and Ms. Schneider, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, by making materially false or misleading statements, or failing to disclose material facts regarding certain of our business, operational, and compliance policies, including with regard to certain of our services, our data security program, and Mr. Davis’ compliance with the FTC Order. The Consolidated Amended Complaint alleged that, as a result, certain of our financial statements issued during the Class Period and certain public statements made by Ms. Schneider, Mr. Davis, and Mr. Power during the Class Period, were false and misleading. The Consolidated Amended Complaint sought certification as a class action, compensatory damages, and attorneys’ fees and costs. On December 17, 2014, the court granted our and the other defendants’ motion and dismissed the Consolidated Amended Complaint, giving the lead plaintiff 21 days to seek leave to amend. On January 16, 2015, lead plaintiff filed his Second Consolidated Amended Complaint which contained similar allegations, but no longer named Ms. Schneider as a defendant. On July 21, 2015, the court granted our and the other defendants’ motion to dismiss the Second Consolidated Amended Complaint, without leave to amend, and entered judgment in our favor. On August 18, 2015, the lead plaintiff along with another stockholder, City of Hallandale Beach Police and Firefighters’ Personnel Retirement Fund, moved to vacate the judgment on the grounds that the FTC’s July 21, 2015 motion seeking to hold us in contempt of the FTC Order constituted surprise and newly discovered evidence. Plaintiffs also sought permission to file a Third Consolidated Amended Complaint. We, Mr. Davis, and Mr. Power opposed plaintiffs’ motion. On September 18, 2015, the court denied plaintiffs’ motion to vacate the July 21, 2015 judgment and plaintiffs’ request to file another complaint. On September 21, 2015, plaintiffs filed a notice of appeal with the Ninth Circuit Court of Appeals. Plaintiffs appeal from the lower court’s July 21, 2015 order dismissing the Second Consolidated Amended Complaint and entering judgment in our favor, and the court’s September 18, 2015 order denying plaintiffs’ motion to vacate that judgment. Briefing of the appeal has been completed, but oral argument on the appeal has not been set by the Ninth Circuit.

On September 23, 2015, LifeLock stockholder Sridhar Manthangodu, filed a derivative complaint captioned Manthangodu v. Davis, et al., in the Superior Court of the State of Arizona, Maricopa County (Arizona Superior Court). The complaint alleged that certain of our directors (the Director Defendants) violated their fiduciary duties to LifeLock stockholders by, among other things, failing to ensure that we complied with the FTC Order. The complaint sought unspecified monetary damages, a return to the company of all personal compensation received by the Director Defendants, unspecified corporate governance reforms, and attorney’s fees. On December 24, 2015, the Arizona Superior Court issued an Order appointing plaintiff Manthangodu lead plaintiff and his counsel lead counsel.

Following the filing of the Manthangodu action, additional substantively similar stockholder derivative actions were purportedly filed on our behalf against certain of our current and former directors and officers, seeking similar relief as the Manthangodu complaint. Specifically, on October 28, 2015, a stockholder derivative complaint captioned Gassel v. Davis, et al., was filed in the United States District Court for the District Arizona (the “Arizona Federal District Court”); on November 19, 2015 and November 25, 2015, two stockholders derivative complaints captioned Stein v. Davis, et al. and John L. Munson Revocable Trust v. Davis, et al., respectively, were filed in the Delaware Court of Chancery; and on January 22, 2016, January 26, 2016, and February 1, 2016, three stockholders derivative complaints captioned, City of Pontiac General Employees’ Retirement Sys. v. Guthrie, et al.; Jiawei v. Davis, et al.; and Sprouse v. Davis, et al., respectively, were filed in the Arizona Superior Court. The plaintiffs in the Stein and Munson actions later voluntarily dismissed their actions, and on March 23, 2016, jointly filed a derivative complaint captioned, Stein and Munson v. Davis et al., in the Arizona Superior Court. In the Arizona Superior Court actions, from February to April 2016, the Court issued separate orders consolidating the Sprouse, City of Pontiac, Jiawei, and the Stein and the Munson actions with the Manthangodu action. The consolidated action is captioned In re: LifeLock, Inc. Derivative Litigation, with plaintiff Manthangodu as the lead plaintiff in the consolidated action. In the Gassel action, on April 13, 2016, on our motion, the Arizona Federal District Court granted a non-indefinite stay of that action and directed us to file a status update on the Manthangodu action, which we and the individual defendants filed on July 12, 2016 and October 10, 2016.

On June 30, 2016, we and the Director Defendants entered into a proposed settlement stipulation with lead plaintiff Manthangodu. In the proposed settlement stipulation, the lead plaintiff agreed to the dismissal, with prejudice, of the Manthangodu action as well as a release of any and all related stockholder claims against LifeLock and its current and former directors, officers, employees, and agents. In exchange, we and the Director Defendants agreed to continue and/or implement certain corporate governance measures and to pay attorney’s fees in the amount of $6 million. On July 1, 2016, lead plaintiff filed an unopposed motion for preliminary approval of the proposed settlement stipulation. On July 8, 2016, the Court preliminarily approved the proposed settlement stipulation, set a final approval hearing for August 30, 2016, and set August 16, 2016, as the deadline for stockholders to object to the terms of the proposed settlement stipulation. No objections to the settlement were filed and at the August 30, 2016 hearing, the Court granted final approval of the settlement, which was followed by a September 7, 2016 written order granting approval of the settlement. On November 1, 2016, the parties in the Gassel action filed a stipulation of dismissal of that action based on the release approved in the settlement. On November 2, 2016, the Arizona Federal District Court dismissed the Gassel action with prejudice.

On December 23, 2015, we filed an insurance coverage action in Arizona state court against our 2013-2014 primary and excess directors' and officers' (D&O) liability insurance carriers. LifeLock’s complaint alleges that the primary and excess D&O insurers breached their insurance policies by wrongfully denying LifeLock defense and indemnity coverage for the various securities class action and stockholder derivative lawsuits filed against us. LifeLock’s insurance coverage action also alleges that the primary D&O insurer breached its covenant of good faith and fair dealing, violated Arizona's consumer fraud statute and committed unfair insurance practices. The insurers have filed responsive pleadings to LifeLock’s complaint and discovery is scheduled to take place through August of 2017.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. Before deciding to invest in our common stock, you should carefully consider each of the risk factors described in “Part I – Item 1A. Risk Factors” in our fiscal 2015 Form 10-K, and all information set forth in this Quarterly Report on Form 10-Q, and in our other filings with the Securities and Exchange Commission, or SEC. Those risks and the risks described in this Quarterly Report on Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” could materially harm our business, financial condition, operating results, cash flow, and prospects. If that occurs, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

Excluding the settlement with the FTC and the nationwide consumer class action in fiscal year 2015, which we believe are non-recurring expenses, we have been continuously profitable on an annual basis from 2012 through 2015 after incurring significant net losses from our inception through fiscal 2011, but we may not be able to maintain profitability on an annual basis in the future.

Excluding the settlement with the FTC and the nationwide consumer class action in fiscal 2015, we have been continuously profitable year over year after incurring significant net losses from our inception through 2011, but we cannot predict whether we will be able to maintain profitability on an annual basis in the future.

Our recent growth, including our growth in revenue and customer base, may not be sustainable or our growth rate may decline, and we may not generate sufficient revenue to maintain annual profitability. Moreover, we expect to continue to make significant expenditures to maintain and expand our business and to operate as a consolidated entity with ID Analytics and our other subsidiaries. We also may incur additional costs associated with our regulatory compliance as we are subject to a wide variety of federal, state and local laws and regulations. These expenditures may make it more difficult for us to maintain future annual profitability. Our ability to maintain annual profitability depends on a number of factors, including our ability to attract and service customers on a profitable basis. If we are unable to maintain annual profitability, we may not be able to execute our business plan, our prospects may be harmed, and our stock price could be materially and adversely affected.

If the security of confidential information used in connection with our services is breached or otherwise subject to unauthorized access, our reputation and business may be materially harmed.

Our services require us to collect, store, use, and transmit significant amounts of confidential information, including personally identifiable information, credit card information, and other critical data. We employ a range of information technology solutions, controls, procedures, and processes designed to protect the confidentiality, integrity, and availability of our critical assets, including our data and information technology systems. While we deploy a number of measures aimed to protect against security breaches and to minimize problems if a data breach were to occur, our information technology systems and infrastructure may be vulnerable to damage, compromise, disruption, and shutdown due to attacks or breaches by hackers or due to other circumstances, such as error or malfeasance by employees or third party service providers or technology malfunction. The occurrence of any of these events, as well as a failure to promptly remedy these events should they occur, could compromise our systems, and the information stored in our systems could be accessed, publicly disclosed, lost, stolen, or damaged. Any such circumstance could adversely affect our ability to attract and maintain customers as well as strategic partners, cause us to suffer negative publicity, and subject us to legal claims and liabilities or regulatory penalties. In addition, unauthorized parties might alter information in our databases, which could adversely affect both the reliability of that information and our ability to market and perform our services. Techniques used to obtain unauthorized access or to sabotage systems change frequently, are constantly evolving and generally are difficult to recognize and react to effectively. We may be unable to anticipate these techniques or to implement adequate preventive or reactive measures. Several recent, highly publicized data security breaches at other companies have heightened consumer awareness of this issue and may embolden individuals or groups to target our systems or those of our strategic partners or enterprise customers.

Security technologies and information, including encryption and authentication technology licensed from third parties, are a key aspect of our security measures designed to secure our critical assets. While we routinely seek to update these technologies and information, advances in computer capabilities, new discoveries in the field of cryptography, or other developments may result in the technology we use becoming obsolete, breached, or compromised and cause us to incur additional expenses associated with upgrading our security systems. In addition, security information provided to us by third parties may be inaccurate, incomplete, or outdated, which could cause us to make misinformed security decisions and could materially and adversely affect our business.

Under payment card rules and our contracts with our card processors, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses if there is a breach of payment card information that we store. In addition, if we fail to follow payment card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our business would be materially harmed.

Many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. In the United States, federal and state laws provide for over 45 laws and notification regimes, all of which we are subject to, and additional requirements may be instituted in the future. In the event of a data security breach, these mandatory disclosures often lead to widespread negative publicity. In addition, complying with such numerous and complex regulations in the event of a data security breach is often expensive, difficult, and time consuming, and the failure to comply with these regulations could subject us to regulatory scrutiny and additional liability and harm our reputation.

Any actual or perceived security breach, whether successful or not and whether or not attributable to the failure of our services or our information technology systems, as well as our failure to promptly and appropriately react to a breach, would likely harm our reputation, adversely affect market perception of our services, and cause the loss of customers and strategic partners. Our property and business interruption insurance may not be adequate to compensate us for losses or failures that may occur. Our third-party insurance coverage will vary from time to time in both type and amount depending on availability, cost, and our decisions with respect to risk retention.

Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation would likely have a material adverse effect on our business.

Our brand recognition and reputation are critical aspects of our business. We believe that maintaining and further enhancing our LifeLock and ID Analytics brands as well as our reputation will be critical to retaining existing customers and attracting new customers. We also believe that the importance of our brand recognition and reputation will continue to increase as competition in our markets continues to develop. Our success in this area will be dependent on a wide range of factors, some of which are out of our control, including the following:


•	the efficacy of our marketing efforts;


•	our ability to retain existing and obtain new customers and strategic partners;


•	the quality and perceived value of our services;


•	actions of our competitors, our strategic partners, and other third parties;


•	positive or negative publicity, including material on the Internet;


•	regulatory and other governmental related developments; and


•	litigation related developments.

Sales and marketing expenses have historically been our largest operating expense, and we anticipate these expenses will continue to increase in the foreseeable future as we continue to seek to grow our business and customer base and enhance our brand. These brand promotion activities may not yield increased revenue and the efficacy of these activities will depend on a number of factors, including our ability to do the following:


•	determine the appropriate creative message and media mix for advertising, marketing, and promotional expenditures;


•	select the right markets, media, and specific media vehicles in which to advertise;


•	identify the most effective and efficient level of spending in each market, media, and specific media vehicle; and


•	effectively manage marketing costs, including creative and media expenses, in order to maintain acceptable customer acquisition costs.

Increases in the pricing of one or more of our marketing and advertising channels could increase our marketing and advertising expenses or cause us to choose less expensive but possibly less effective marketing and advertising channels. If we implement new marketing and advertising strategies, we may utilize marketing and advertising channels with significantly higher costs than our current channels, which in turn could adversely affect our operating results. Implementing new marketing and advertising strategies also would increase the risk of devoting significant capital and other resources to endeavors that do not prove to be cost effective. Further, we may over time become disproportionately reliant on one channel or strategic partner, which could limit our marketing and advertising flexibility and increase our operating expenses. We also may incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses, and our marketing and advertising expenditures may not generate sufficient levels of brand awareness or result in increased revenue. Even if our marketing and advertising expenses result in increased revenue, the increase might not offset our related

expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective terms or replace or supplement existing marketing and advertising channels with similarly or more effective channels, our marketing and advertising expenses could increase substantially, our customer base could be adversely affected, and our business, operating results, financial condition, and reputation could suffer.

Furthermore, negative publicity, whether or not justified, relating to events or activities attributed to us, our employees, our strategic partners, our affiliates, or others associated with any of these parties, may tarnish our reputation and reduce the value of our brands. Damage to our reputation and loss of brand equity may reduce demand for our services and have an adverse effect on our business, operating results, and financial condition. Moreover, any attempts to rebuild our reputation and restore the value of our brands may be costly and time consuming, and such efforts may not ultimately be successful.

We face intense competition, and we may not be able to compete effectively, which could reduce demand for our services and adversely affect our business, growth, reputation, revenue, and market share.

We operate in a highly competitive business environment in both our consumer and enterprise business. Our primary competitors are credit bureaus including Experian PLC, Equifax Inc., and TransUnion, as well as other entities, such as Affinion Group, EWS (Early Warning Services), Intersections Inc., CSID, LexisNexis Group and Credit Karma and other free credit monitoring services. We are also facing competition from large enterprises in the consumer, insurance and other industries offering similar products to ours powered by our competitors and at prices lower than we offer. Many of our competitors have substantially greater financial, technical, marketing, distribution, and other resources than we possess that afford them competitive advantages. As a result, they may be able to devote greater resources to the development, promotion, and sale of services, to deliver competitive services at lower prices or for free, and to introduce new solutions and respond to market developments and customer requirements more quickly than we can. Some of our competitors may also be our vendors and may be in a position to impair our ability to compete with them as a result of such relationship or threaten to do so if we chose to disengage with them. Some of our competitors may engage in deceptive or anti-competitive practices that may result in an increase in their market segment share and improve their position in the market. Consolidation of such competitors who are also vendors may adversely impact our ability to compete, the quality of service we receive from them or our ability to access data that was available to us prior to such consolidation. In addition, some of our competitors may have data that we do not have or cannot obtain without difficulty. Any of these factors could reduce our growth, revenue, access to valuable data, or market share.

Our ability to compete successfully in our markets depends on a number of factors, both within and outside our control, and our inability to compete successfully in our markets may reduce the demand for our services which could adversely affect our business and prospects.

Some of the factors affecting our ability to compete include the following:


•	access to a breadth of identity and consumer transaction data;


•	breadth and effectiveness of service offerings, including designing and introducing new services;


•	brand recognition;


•	technology;


•	effectiveness and cost-efficiency of customer acquisition;


•	customer satisfaction;


•	price;


•	quality and reliability of customer service; and


•	accurate identification of appropriate target markets for our business.

Any failure by us to compete successfully in any one of these or similar areas may reduce the demand for our services and the robustness of the LifeLock ecosystem, as well as adversely affect our business, growth, reputation, revenue, and market share. Moreover, new competitors, alliances among our competitors, or new service introductions by our competitors may emerge and potentially adversely affect our business and prospects.

We could lose our access to data sources or rely on sources that prove to be ineffective or inaccurate, which could cause us competitive harm and have a material adverse effect on our business, operating results, and financial condition.

Our services depend extensively upon continued access to and receipt of credible, timely and complete data from external sources, including data received from customers, vendors who are also competitors and fulfillment partners. Our data providers could stop providing data, provide untimely data, provide inaccurate or incomplete data, condition the delivery of data on additional measures that require a change to our product offerings or increase the costs for their data for a variety of reasons, including competitive considerations impacting willingness to share the data, lack of verification of the accuracy of the data, a perception that our systems are insecure as a result of a data security breach, budgetary constraints, a desire to generate additional revenue, or a contractual dispute. In addition, upon the termination of the contracts we have with certain of our enterprise customers or data providers, we are required to remove from our repositories the data contributed by and through those customers. We could also become subject to legislative, regulatory, or judicial restrictions or mandates on the collection, disclosure, or use of such data, in particular if such data is not collected by our providers in a way that allows us to legally use the data or if the data delivered to us is inaccurate or incomplete. Similarly, legislative, regulatory, or judicial restrictions or mandates impacting our enterprise customers or data providers may require us to change our product offerings or services in a timely manner and the failure to do so may negatively impact us as well. If we were to lose access to a substantial number of data sources or certain key data sources or certain data already in the LifeLock ecosystem, or if our access or use were restricted or became less economical or desirable, our ability to provide our services and the efficacy and attractiveness of the LifeLock ecosystem could be negatively affected, and this would adversely affect us from a competitive standpoint. This would also adversely affect our business, operating results, and financial condition. We may not be successful in maintaining our relationships with these external data source providers and may not be able to continue to obtain data from them on acceptable terms or at all. Furthermore, we cannot provide assurance that we will be able to obtain data from alternative or additional sources if our current sources become unavailable.

We may lose customers and significant revenue and fail to attract new customers if our existing services become less desirable or obsolete, or if we fail to develop and introduce new services with broad appeal or fail to do so in a timely or cost-effective manner.

The introduction of new services by competitors, the emergence of new industry standards, or the development of new technologies could render our existing or future services less desirable or obsolete. In addition, professional thieves continue to develop more sophisticated and creative methods to steal personal and financial information as consumers and enterprises today become increasingly interconnected and engage in a large number of daily activities that involve personal or financial information. Consequently, our financial performance and growth depends upon our ability to enhance and improve our existing services, develop and successfully introduce new services that generate customer interest, and sell our services in new markets. As our existing services mature, encouraging customers to purchase enhancements or upgrades becomes more challenging unless new service offerings provide features and functionality that have meaningful incremental value. To achieve market acceptance for our services, we must effectively anticipate and offer services that meet changing customer demands in a timely manner. Customers may require features and capabilities that our current services lack. In addition, any new markets in which we attempt to sell our services, including new industries, countries, or regions, may not be receptive to our service offerings. If we fail to enhance our existing services in a timely and cost-effective manner, successfully develop and introduce new services, or sell our services in new markets, our ability to retain our existing or attract new customers and our ability to create or increase demand for our services could be harmed, which could have an adverse effect on our business, operating results, and financial condition.

We will be required to make significant investments in developing new services and we may be unable to complete the development of new offerings and services in the anticipated time frame or cost. We also will be subject to all of the risks inherent in the development of new services, including unanticipated technical or other development problems, which could result in material delays in the launch and acceptance of the services or significantly increased costs. In some cases, we may expend a significant amount of resources and management attention on service offerings that do not ultimately succeed in their markets. Because new service offerings are inherently risky, they may not be successful and may harm our operating results and financial condition.

Our inability to develop and offer services that are attractive to the growing number of consumers who utilize mobile devices other than personal computers to access online services could adversely affect our business.

The number of people who access services through devices other than personal computers, including mobile phones, smart phones, handheld computers, tablets, and other mobile devices, has increased dramatically in recent years and is projected to continue to increase. The services we develop for users of mobile devices may not be attractive for users.

We launched a new mobile application in the second quarter of 2016. The success of our mobile application is unproven, and we have prioritized the quality of user experience with our mobile application over short-term monetization. Despite the expected growth in mobile devices, there is no guarantee that we will be able to effectively monetize

our mobile application and generate meaningful revenue in the future. If our mobile application is not widely adopted or sufficiently profitable, or if we fail to continue to innovate and introduce enhanced mobile applications and other services for users of these alternative devices, our business could be adversely affected.

As new devices, platforms, and technologies are continually being adopted and released, it is difficult to predict the problems we may encounter in developing versions of our services for use with those devices, platforms, and technologies, and we may need to devote significant resources to the creation, support, and maintenance of such offerings. We are dependent on the interoperability of our mobile application with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our application’s functionality or give preferential treatment to competitive products could adversely affect usage of our mobile application. Additionally, if we are slow to develop new services and technologies that are compatible with these devices, platforms, and technologies, or if our competitors are able to achieve those results more quickly than us, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business.

Our revenue and operating results depend significantly on our ability to retain our existing customers, and add new customers, and any decline in our retention rates or failure to add new customers will harm our future revenue and operating results.

Our revenue and operating results depend significantly on our ability to retain our existing customers and add new customers. In our consumer business from which we derive a significant portion of our revenue, we sell our services to our members on a monthly or annual subscription basis. Our members may cancel their membership with us at any time without penalty. In our enterprise business, our customers have no obligation to renew their agreements with us after the contractual term expires, and a substantial portion of our direct enterprise customers do not have monthly transaction minimums and, accordingly, may reduce their utilization of our services during the contractual term. We therefore may be unable to retain our existing members and enterprise customers on the same or on more profitable terms, if at all, and may generate lower revenue as a result of less utilization of our services by our enterprise customers. In addition, we may not be able to predict or anticipate accurately future trends in customer retention or enterprise customer utilization or effectively respond to such trends. Our customer retention rates and enterprise customer utilization may decline or fluctuate due to a variety of factors, including the following:


•	our customers’ levels of satisfaction or dissatisfaction with our services;


•	the quality, breadth, and prices of our services;


•	our general reputation and events impacting that reputation;


•	the services and related pricing offered by our competitors;


•	our customer service and responsiveness to any customer complaints;


•	customer dissatisfaction if they do not receive the full benefit of our services due to their failure to provide all relevant data;


•	customer dissatisfaction with the methods or extent of our remediation services;


•	our guarantee may not meet our customers’ expectations; and


•	changes in our target customers’ spending levels as a result of general economic conditions or other factors.

In addition, we experienced a higher level of cancellations in the second half of 2015, which we believe was driven by the announcement of the FTC litigation during the third quarter of 2015, which had a negative impact on our member retention rate. Our membership retention rate also was significantly impacted in the first nine months of 2016 by the high number of cancellations of members who enrolled during the first quarter of 2015 as a result of the breach at a large health insurance company during the first quarter of 2015. We also experienced increased cancellations in the first nine months of 2016, coming from our Employee Benefit, oil and gas vertical, due to a downturn in the oil and gas industry.

If we do not retain our existing customers and continue to add new customers at the same rate we have historically, our revenue may grow more slowly than expected or decline, and our operating results and gross margins will be harmed. In addition, our business and operating results may be harmed if we are unable to maintain our retention rates.

We also must continually add new customers both to replace customers who cancel or elect not to renew their agreements with us and to grow our business beyond our current customer base. If we are unable to attract new customers in numbers greater than the percentage of customers who cancel or elect not to renew their agreements with us, which we call “churn,” our customer base will decrease, and our business, operating results, and financial condition will be adversely affected. Churn negatively impacts the predictability of our subscription revenue model and the efficacy and attractiveness of the LifeLock ecosystem by decreasing the amount of data being added to our data repositories.The FTC litigation has

negatively impacted our member growth from the strategic partner channel as the pipeline of new partnerships slowed as a result of the FTC litigation. In addition we have focused our future growth on larger partners which has increased the time of the sales cycle. While we expect the business to recover from the impact of the FTC litigation, there is no guarantee that member growth derived from the partner channel will resume to its prior growth levels.

We depend on strategic partners in our consumer business, and our inability to maintain our existing and secure new relationships with strategic partners could harm our revenue and operating results.

We have derived, and intend to continue to derive, a significant portion of our revenue from members who subscribe to our consumer services through one of our strategic partners. In 2015, we derived just under half of our gross new members from our partner distribution channels. These distribution channels involve various risks, including the following:


•	we may be unable to maintain or secure favorable relationships with strategic partners;


•	our strategic partners may not be successful in expanding our membership base;


•	our strategic partners may seek to renegotiate the economic terms of our relationships;


•	our strategic partners may terminate their relationships with us;


•	bad publicity and other issues faced by us or our strategic partners could negatively impact our relationships; and


•	our strategic partners, some of which already compete with us, may present increased competition for us in the future and may elect to terminate their contracts with us or to violate their contractual obligations.

Our inability to maintain our existing and secure new relationships with strategic partners could harm our revenue and operating results.

Many of our key strategic partnerships are governed by agreements that may be terminated without cause and without penalty by our strategic partners upon notice of as few as 30 days. Under many of our agreements with strategic partners, our partners may cease or reduce their marketing of our services at their discretion, which may cause us to lose access to prospective members and significantly reduce our revenue and operating results.

Some of our strategic partners possess significant resources and advanced technical abilities. Some offer services that are competitive with our services and more may do so in the future, either alone or in collaboration with other competitors. Those strategic partners could give a higher priority to competing services or decide not to continue to offer our services at all. If any of our strategic partners discontinue or reduce the sale or marketing of our services, promote competitive services, or, either independently or jointly with others, develop and market services that compete with our services, our business and operating results may be harmed. In addition, some of our strategic partners may experience financial or other difficulties, causing our revenue through those strategic partners to decline, which could adversely affect our operating results. Some of our strategic partners may also experience a security breach that could impact our members or systems if they are not identified early and addressed successfully or can otherwise impact our business if we have to suspend or terminate those relationships as a result.

In order for us to implement our business strategy and grow our revenue, we must effectively manage and expand our relationships with qualified strategic partners. We expend significant time and resources in attracting qualified strategic partners, training those partners in our technology and service offerings, and then maintaining relationships with those partners. In order to continue to develop and expand our distribution channels, we must continue to scale and improve our processes and procedures that support our strategic partnerships. Those processes and procedures could become increasingly complex and difficult to manage. Our competitors also use arrangements with strategic partners, and it could be more difficult for us to maintain and expand our distribution channels if they are more successful in attracting strategic partners or enter into exclusive relationships with strategic partners. If we fail to maintain our existing or secure new relationships with strategic partners, our business will be harmed.

We are subject to extensive government regulation, which could impede our ability to market and provide our services and could have a material adverse effect on our business.

Our business and the information we use in our business is subject to a wide variety of federal, state, and local laws and regulations, including the Fair Credit Reporting Act, or FCRA, the Gramm-Leach-Bliley Act, the FTC Act and comparable state laws that are patterned after the FTC Act. In addition, laws governing credit information, consumer privacy and marketing, servicing of consumer products and services, and insurance products and services, govern our business information. Moreover, we are bound by the terms of the FTC Order, the companion orders with 35 states’ attorneys general that we entered into in March 2010, and the settlement we reached with the FTC in 2015. These laws, regulations, and orders cover, among other things, advertising, automatic subscription renewal, broadband residential Internet access, consumer protection, content, conditional services, copyrights, credit card processing procedures, data protection, distribution, electronic contracts, member

privacy, pricing, sales and other procedures, tariffs, and taxation. In addition, it is unclear how existing laws and regulations governing issues such as property ownership, sales and other taxes, and personal privacy apply to the Internet. We incur significant costs to operate our business and monitor our compliance with these laws, regulations, and orders. Any of these laws and regulations are subject to revision or new or changed interpretation, and we cannot predict the impact of such changes on our business. Complying with these varying requirements, the evolving nature of all of these laws and regulations, the evolving nature of various governmental bodies’ enforcement efforts, and the possibility of new laws or changed interpretation in this area, could increase our costs or impede our ability to provide our services to our customers. The occurrence of any of these could have a material adverse effect on our business, operating results, financial condition, and future prospect.

As disclosed, on July 21 2015, the FTC initiated the FTC Contempt Action alleging that LifeLock had violated the FTC Order. On December 17, 2015, we entered into a comprehensive settlement agreement with the FTC, pursuant to which we resolved all matters related to the FTC Contempt Action, and with representatives of a national class of consumers, which we refer to as the Consumer Class Action or the Ebarle Class Action. Under the terms of the settlement, $100 million was placed into the registry of the court overseeing the FTC Contempt Action, $68 million of which was distributed to the court overseeing Consumer Class Action and thereafter distributed to members of the class to fund the consumer redress as part of the Consumer Class Action settlement, and the remaining $32 million of the settlement remains in the registry of the Arizona court.

As of the date of this filing, no states’ attorneys general have initiated proceedings against us alleging that we violated the companion orders from 2010. As of September 30, 2016 we have accrued $3 million for a potential settlement with states’ attorneys general. The ultimate resolution of the matter with the states’ attorneys general is uncertain and may involve a materially higher settlement than $3 million. Engaging in settlement discussions and defending ourselves in any litigation that arises against states’ attorneys general related to this matter, and other actions that could arise, would be costly and time-consuming and would divert management’s, key personnel’s, and members of our board of directors' attention from our business operations. Any of these occurrences could have a material adverse effect on our business, reputation, product sales, financial condition, results of operation, and future prospects.

It is possible that other federal or local governmental agencies, at any time, will commence additional inquiries or investigations of our business practices or our compliance with the FTC Order. Moreover, there can be no assurance that, despite our best efforts to comply with the FTC Order, the other federal or local government agencies will interpret their orders in the same way. We believe the increased governmental and regulatory scrutiny will continue for the foreseeable future and could lead to additional meetings, inquiries, or investigations by governmental and regulatory agencies that regulate our business, including the FTC, the Department of Justice, the SEC, and the New York Stock Exchange. Responding to these inquiries, investigations, and actions may cause us to incur significant expenses and could divert the attention of our management, key personnel, and members of our board of directors from our business operations. Any determination that we violated any laws, regulations, or consent decrees could result in our liability for fines, damages, or other penalties, could require us to make changes to our services and business practices, and could cause us to lose customers, any of which could have a material adverse effect on our business, operating results, financial condition, and future prospects. In addition, recently, the media have been increasingly covering perceived noncompliance with consumer protection regulations and violations of notions of fair dealing with customers. Accordingly, we may be susceptible to unfounded claims by the media and others of regulatory noncompliance and unfair dealing.

Further, with the growing public concern regarding privacy and the collection, distribution, and use of consumer personal information, we believe we are in an environment in which there is increased regulatory scrutiny concerning data collection and use practices and the provision and marketing of services, like ours, that seek to protect that information. We expect that kind of scrutiny to continue as the marketplace for services like ours continues to develop.

Compliance with these federal, state and foreign regulations is generally our responsibility, and we could be subject to a variety of investigations, enforcement actions and/or private actions for any failure or perceived failure to comply with such regulations. Consumer complaints with respect to our industry have resulted in, and may in the future result in, state, federal and foreign regulatory and other investigations. In addition, we believe there has been a recent increase in whistleblower claims made to regulatory agencies, including whistleblower claims made by former employees or other third parties, including competitors. We believe these claims, will likely continue, in part because of the provisions enacted by the Dodd-Frank Act that provide for cash awards to persons who report alleged wrongdoing to the SEC, and because competitors may use it as a method to weaken their competitors, and others, like personnel or former personnel or vendors, may use it as means to extract payment or retaliate against the company.

Any changes to applicable regulations or new regulations could materially increase our compliance costs or impede our ability to provide our services to our customers. In addition, various governmental agencies have the authority to commence investigations and enforcement actions under these laws, regulations, and consent decrees, and private citizens as well as other third parties, such as competitors, may bring actions, including class action litigation and whistleblower claims, under some of these laws and regulations. The risk of our noncompliance with any rules and regulations interpreted differently by or otherwise enforced by a federal or state consumer protection authority or an enforcement agency in a foreign jurisdiction may subject us

(and in some cases our management) to fines, consumer restitution, or various forms of civil or criminal prosecution, any of which could impede our ability to market our programs and services and reduce our revenue and profitability. While we have invested and expect to continue to invest significant resources to continuously improving our compliance practices and security measures, there is no assurance that such efforts will be sufficient when reviewed by an enforcement authority. Even an inadvertent failure to comply with these laws and regulations, as well as rapidly evolving expected standards, could adversely affect our business or our reputation. Certain types of noncompliance may also give our partners the right to terminate certain of our contracts or assert claims under our contracts. Also, the media often publicizes perceived noncompliance with consumer protection regulations and violations of notions of fair dealing with customers, and our industry is susceptible to peremptory charges by the media and others of regulatory noncompliance and unfair dealing. Any failure or perceived failure by us to comply with regulatory requirements could have a material adverse effect on our business and results of operations. Similarly, disclosure of confidential information by regulatory agencies or other third parties may harm our business or reputation.

Marketing laws and regulations may materially limit our ability to offer our services to members.

We market our consumer services through a variety of marketing channels, including mass media, direct mail campaigns, online display advertising, paid search and search-engine optimization, and inbound customer service and account activation calls. These channels are subject to both federal and state laws and regulations. Over the past several years, there has been proposed legislation in several states that may interfere with our marketing practices. For example, over the past several years many states have proposed legislation that would allow customers to limit the amount of unsolicited direct mail they receive. Additionally, several bills have been proposed in Congress that could restrict the collection and dissemination of personal information for marketing purposes. If such legislation is passed in one or more states or by Congress, it could limit our ability to market to new members or offer additional services to existing members, which may have a material adverse effect on our ability to sell our services.

The Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the newly created Bureau of Consumer Financial Protection to adopt rules and take actions that could have a material adverse effect on our business.

In 2010, the Dodd-Frank Act was enacted to reform the practices in the financial services industry. Title X of the Dodd-Frank Act established the Bureau of Consumer Financial Protection, or the CFPB, to protect consumers from abusive financial services practices. Among other things, the CFPB has broad authority to write rules affecting the business of credit reporting companies as well as to supervise, conduct examinations of, and enforce compliance as to federal consumer financial protection laws and regulations with respect to certain “non-depository covered persons” determined by the CFPB to be “larger participants” that offer consumer financial products and services.

The CFPB has broad regulatory, supervisory, and enforcement powers and may exercise authority with respect to our services, or the marketing and servicing of those services, by overseeing our financial institution or credit reporting agency customers and suppliers, or by otherwise exercising its supervisory, regulatory, or enforcement authority over consumer financial products and services. Certain of our credit reporting agency customers and suppliers that meet the definition of a “larger participant” are included under the CFPB nonbank supervision program. The CFPB also created a section of its consumer complaint database for credit reporting complaints. Further, we believe that the CFPB has commenced review of certain of our financial institution and other customers and vendors, including their offering of some or all fee-based products. These or other actions by the CFPB could cause our credit agency customers and suppliers and financial institution customers to limit or change their business activities or condition their engagement with us on us changing our own practices, which could have a material adverse effect on our operating results. It is not certain whether the CFPB has, or will seek to exercise, supervisory or other authority directly over us or our services. Supervision and regulation of us or our enterprise customers by the CFPB could have a material adverse impact on our business and operating results, including the costs to make changes that may be required by us, our enterprise customers, or our strategic partners, and the costs of responding to examinations by the CFPB. In addition, the costs of responding to or defending against any enforcement action that may be brought by the CFPB, and any liability that we may incur, may have a material adverse impact on our business, results of operations, and financial condition. In the future, the CFPB may choose to enact new rules or amend currently existing rules which could further extend the scope of its jurisdiction with respect to our business activities or those of our customers and suppliers.

Changes in legislation or regulations governing consumer privacy and other consumer protection aspects may affect our ability to collect, distribute, and use personally identifiable information.

There has been increasing public concern about the use of personally identifiable information and vulnerability of security practices intended to protect it. As a result, many federal, state, and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, disclosure, protection and use of personally identifiable information. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that apply to us. Because the interpretation and application of privacy, data protection and other consumer protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that

is inconsistent with our existing data management practices or the features of our services. If this is the case, in addition to the possibility of fines, lawsuits, and other claims, we could be required to fundamentally change our business activities and practices or modify our service offerings, which could have a material adverse effect on our business and our ability to retain our customers and partners. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy, data protection or other consumer protection laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, affect our ability to attract new customers and maintain relationships with our existing customers, and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our enterprise customers and strategic partners may limit the use and adoption of, and reduce the overall demand for, our services. Privacy concerns, whether valid or not, may inhibit market adoption of our services.

Laws requiring the free issuance of credit reports by credit reporting agencies, and other services that must be provided by credit reporting agencies, or that otherwise impose restrictions or requirements related to such services, could impede our ability to obtain new members or retain existing members and could have a material adverse effect on our business.

The FCRA provides consumers the ability to receive one free consumer credit report per year from each major consumer credit reporting agency and requires each major consumer credit reporting agency to provide the consumer a credit score along with the consumer’s credit report for a reasonable fee as determined by the FTC. In addition, the FCRA and state laws give consumers other rights with respect to the protection of their credit files at the credit reporting agencies. For example, the Fair Credit Reporting Act gives consumers the right to place “fraud alerts” at the credit reporting agencies, and the laws in approximately 40 states give consumers the right to place “freezes” to block access to their credit files. The rights of consumers to obtain free annual credit reports and credit scores from consumer reporting agencies, and to place fraud alerts and credit freezes directly with them, could cause consumers to perceive that the value of our services is reduced or replaced by those benefits, which could have a material adverse effect on our business. Similarly, other laws, rules and regulations may impose restrictions or additional requirements on providing credit related services and the failure to comply with those requirements may impact our ability to enroll or retain our members, to otherwise provide services to our members.

The FTC Order, as well as the companion orders with 35 states’ attorneys general and the FTC Contempt Action imposes on us injunctive provisions that could subject us to additional injunctive and monetary remedies.

In March 2010, we and Todd Davis, our Executive Vice Chairman and former CEO, entered into the FTC Order. The FTC Order was the result of a settlement of allegations that certain of our advertising and marketing practices constituted deceptive acts or practices in violation of the FTC Act. We did not admit to those allegations. Under the FTC Order, we are enjoined from making any misrepresentation of the means, methods, procedures, effects, effectiveness, coverage, or scope of our identity theft protection services. The FTC investigation of our advertising and marketing activities occurred during the time that we relied significantly on the receipt of fraud alerts from the credit reporting agencies for our members. The FTC believed that such alerts had inherent limitations in terms of coverage, scope, and timeliness. Many of the allegations in the FTC complaint, which accompanied the FTC Order, related to the inherent limitations of using credit report fraud alerts as the foundation for identity theft protection. The FTC Order also includes injunctive provisions relating to our data security for members’ personally identifiable information. At the same time, we entered into companion orders with 35 states’ attorneys general that imposed injunctive provisions similar to those in the FTC Order.

The FTC Order provided for a consumer redress payment of $11 million, which we made in 2010 to the FTC for distribution to our members. The FTC Order also provided for an additional consumer redress payment of $24 million, which the FTC suspended based on our then-current financial condition. The FTC Order specifies that in the event the FTC were to find that the financial materials we submitted were not truthful, accurate, and complete, the court order entering the settlement could be re-opened, and the suspended judgment in the amount of the additional $24 million would become immediately due in full.

As previously disclosed, on July 21, 2015, the FTC initiated the FTC Contempt Action alleging that LifeLock had violated the FTC Order. On December 17, 2015, we entered into a comprehensive settlement agreement with the FTC, pursuant to which we resolved all matters related to the FTC Contempt Action and the Consumer Class Action. Under the terms of the settlement, $100 million was placed into the registry of the court overseeing the FTC Contempt Action, $68 million of which is to be distributed to the court overseeing Consumer Class Action to fund the consumer redress contemplated by the Consumer Class Action settlement, and the remaining $32 million of the settlement remains in the registry of the Arizona court.

As of the date of this filing, no states’ attorneys general have initiated proceedings against us alleging that we violated the companion orders from 2010. However, because the companion orders we entered into with 35 states’ attorneys general imposed injunctive provisions similar to those in the FTC Order, we initiated preliminary settlement discussions with certain states’ attorneys general. As of September 30, 2016, we have accrued $3 million for a potential settlement with states’ attorneys general. The ultimate resolution of the matter with the states’ attorneys general is uncertain and may involve a materially higher settlement than $3 million. Engaging in settlement discussions and defending ourselves in any litigation that arises against

states’ attorneys general related to this matter, and other actions that could arise, would be costly and time-consuming and would divert the attention of our management, key personnel, and members of our board of directors from our business operations. The outcome of the settlement discussions with the states’ attorneys general and potential related actions could result in liability for damages, fines, penalties, and injunctive relief. Any of these occurrences could have a material adverse effect on our business, operating results, financial condition, and prospects.

The outcome of litigation or regulatory proceedings could subject us to significant monetary damages, restrict our ability to conduct our business, harm our reputation, and otherwise negatively impact our business.

As previously disclosed, on July 21 2015, the FTC initiated the FTC Contempt Action alleging that LifeLock had violated the FTC Order. On December 17, 2015, we entered into a comprehensive settlement agreement with the FTC, pursuant to which we resolved all matters related to the FTC Contempt Action and the Consumer Class Action. Under the terms of the settlement, $100 million was placed into the registry of the court overseeing the FTC Contempt Action, $68 million of which is to be distributed to the court overseeing Consumer Class Action to fund the consumer redress contemplated by the Consumer Class Action settlement, and the remaining $32 million of the settlement remains in the registry of the Arizona court.

As of the date of this filing, no states’ attorneys general have initiated proceedings against us alleging that we violated the companion orders from 2010. However, because the companion orders we entered into with 35 states’ attorneys general imposed injunctive provisions similar to those in the FTC Order, we initiated preliminary settlement discussions with certain states’ attorneys general. The ultimate resolution of the matter with the states’ attorneys general is uncertain and may involve a settlement outside the FTC Contempt Action remaining $32 million settlement funds.

Engaging in settlement discussions and defending ourselves in any litigation that arises against states’ attorneys general related to this matter or otherwise with any other regulatory agencies, and other actions that could arise, would be costly and time-consuming. We may be unable to reach settlement on terms acceptable to us or at all and costly litigation would likely result. Further, as a result of these matters, including the settlement agreements themselves, we could face negative publicity, our reputation could be harmed, we could lose customers, including enterprise customers, and our ability to win new customers could be impeded any of which could have a material adverse effect on our business, operating results, financial condition and our future prospects.

We are also presently subject to various securities, consumer class action, and stockholder derivative complaints as described in more detail in this Form 10-Q and in our Form 10-K for the year ended December 31, 2015. The FTC settlement and the recent volatility in the trading price of our stock may result in our stockholders filing additional securities class actions and stockholder derivative complaints against us, our officers, and directors.

We cannot predict the outcome of these actions or proceedings, or any other actions or proceedings filed against us in the future, and the cost of defending such actions or proceedings could be material. Furthermore, defending such actions or proceedings could divert the attention of our management, key personnel, and members of our board of directors from our business operations. If we are found liable in any actions or proceedings, we may have to pay substantial damages, penalties, or fines, change the way we conduct our business, or lose customers, any of which may have a material adverse effect on our business, operating results, financial condition, and prospects. In addition, we are engaged in a dispute regarding insurance coverage for certain matters. If coverage is unavailable, we will be required to pay for any costs related to these matters out of pocket, which amounts may be material. There may also be negative publicity associated with litigation or regulatory proceedings that could harm our reputation or decrease acceptance of our services.

Moreover, we utilize contractors and third parties for various services, including certain advertising and promotions, which may result in misrepresentations made by such third parties being attributed to us or in additional claims or litigation against us. For example, a former service provider claimed that we misclassified her as an independent contractor, and we may be subject to other claims of this nature from time to time. These claims may be costly to defend and may result in our liability for damages, adverse tax consequences, and harm to our reputation, any of which could have a material adverse effect on our business, operating results, financial conditions, and future prospects.

We believe there has been a recent increase in whistleblower claims across our industry, including whistleblower claims arising after employee or vendor terminations or by competitors to impair competition, which will likely continue, in part because of the provisions enacted by the Dodd-Frank Act that may entitle persons who report alleged wrongdoing to the SEC to cash rewards. We anticipate that these provisions will result in a significant increase in whistleblower claims, and dealing with such claims could generate significant expenses and take up significant management and board time, even for frivolous and non-meritorious claims. Any investigations of whistleblower claims may impose additional expense on us, may divert the attention of our management, other key personnel, and members of our board of director, and may result in fines and/or reputational damage whether or not we are deemed to have violated any regulations. We believe there also has been a recent increase in claims made to regulatory agencies by former employees. Often the allegations underlying such claims to regulatory agencies lead to meetings, inquiries, or investigations by the regulatory agencies about such claims, inquiries, or investigations

by the agencies that regulate our business, including the FTC. Inquiries or investigation by regulatory agencies about such claims could generate significant expense and take up significant management and board time.

Our business could be negatively affected as a result of actions of stockholders.

The actions of stockholders could adversely affect our business. Specifically, certain actions of certain types of stockholders, including without limitation public proposals, requests to pursue a strategic combination or other transaction or special demands or requests, could disrupt our operations, be costly and time-consuming or divert the attention of our management and employees and increase the volatility of our stock. In addition, perceived uncertainties as to our future direction in relation to the actions of our stockholders may result in the loss of potential business opportunities or the perception that we are unstable and need to make changes, which may be exploited by our competitors and make it more difficult to attract and retain personnel as well as customers, service providers and partners. Actions by our stockholders may also cause fluctuations in our stock price based on speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

A limited number of enterprise customers provide a significant portion of our enterprise revenue, and our inability to retain these customers or attract new customers could harm our revenue and operating results and the efficacy and attractiveness of the LifeLock ecosystem.

ID Analytics has historically derived, and continues to derive, a significant portion of its revenue from a limited number of enterprise customers. For example, in 2015, 2014, and 2013, sales derived through ID Analytics’ top ten customers accounted for approximately 63%, 71%, and 65%, respectively, of ID Analytics’ revenue for those periods. Some of these customers also provide services that compete with our consumer services and, accordingly, may seek alternative services in the future. The loss of several of our enterprise customers, or of any of our large enterprise customers, could have a material adverse effect on our revenue and results of operations, as well as the efficacy and attractiveness of the LifeLock ecosystem.

In addition, new customer acquisition in our enterprise business is often a lengthy process requiring significant up-front investment. Accordingly, we may devote substantial resources in an effort to attract new enterprise customers that may not result in customer engagements or lead to an increase in revenue, which could have a material adverse effect on our business.

If we experience system failures or interruptions in our telecommunications or information technology infrastructure, it may impair the availability of our services, our revenue could decrease, and our reputation could be harmed.

Our operations depend upon our ability to protect the telecommunications and information technology systems utilized in our services against damage or system interruptions from natural disasters, technical failures, human error, and other events. We send and receive credit and other data, as well as key communications to and from our members, electronically, and this delivery method is susceptible to damage, delay, or inaccuracy. A portion of our business involves telephonic customer service and online enrollments, which depends upon the data generated from our computer systems. Unanticipated problems with our telecommunications and information technology systems may result in data loss, which could interrupt our operations. Our telecommunications or information technology infrastructure upon which we rely also may be vulnerable to computer viruses, hackers, or other disruptions.

We rely on our network and data center infrastructure and internal technology systems for many of our development, operational, support, sales, accounting, and financial reporting activities. We routinely invest resources to update and improve these systems and environments with the goal of better meeting the existing, as well as the growing and changing requirements of our customers. If we experience prolonged delays or unforeseen difficulties in updating and upgrading our systems and architecture, we may experience outages and may not be able to deliver certain service offerings and develop new service offerings and enhancements that we need to remain competitive. Such improvements and upgrades often are complex, costly, and time consuming. In addition, such improvements can be challenging to integrate with our existing technology systems or may result in problems with our existing technology systems. Unsuccessful implementation of hardware or software updates and improvements could result in outages, disruption in our business operations, loss of revenue, or damage to our reputation. Our systems and data are hosted by third-party data centers, and certain applications are hosted by other third-party cloud providers. If one or more of these third-party data centers or cloud providers experience any disruptions, outages, or catastrophes, it could disrupt our business and result in a loss of customers, loss of revenue, or damage to our reputation.

Natural or man-made disasters and other similar events may significantly disrupt our and our strategic partners’ or service providers’ businesses, and negatively impact our results of operations and financial condition.

Our enterprise business headquarters and the back-up data centers and cloud providers for our enterprise business are located in Southern California, which is situated on or near earthquake fault lines. Our primary data center for our enterprise business is located in Nevada. In our consumer business, we have data centers in Northern California and Arizona. Any of our or our strategic partners’ or service providers’ facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, tornadoes, hurricanes, wildfires, floods, nuclear disasters, acts of terrorism or other criminal activities, infectious disease outbreaks, and power outages, which may render it difficult or impossible for us or our strategic partners or service providers to operate our respective businesses for some period of time. Our and our strategic partners’ or service providers’ facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our or our strategic partners’ or service providers’ operations could negatively impact our business and results of operations and harm our reputation. In addition, we and our strategic partners or service providers may not carry business insurance or may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, results of operations, and financial condition.

Changes in the economy may significantly affect our business, operating results, and financial condition.

Our business may be affected by changes in the economic environment. Our services, particularly our consumer services, are discretionary purchases, and members may reduce or eliminate their discretionary spending on our services during a difficult economic environment. Although we have not yet experienced a material increase in membership cancellations or a material reduction in our member retention rate, we may experience such an increase or reduction in the future, especially in the event of a prolonged recessionary period or a worsening of current conditions. In addition, during an economic downturn, consumers may experience a decline in their credit, which may result in less demand for our services. Conversely, consumers may spend more time using the Internet during an economic downturn and may have less time for our services in a period of economic growth. In addition, media prices may increase in a period of economic growth, which could significantly increase our marketing and advertising expenses. As a result, our business, operating results, and financial condition may be significantly affected by changes in the economic environment.

Our rapid development and growth in an evolving industry make evaluating our business and future prospects difficult and may increase the risk of an investment in our company.

Our business, prospects, and growth potential must be considered in light of the risks, expenses, delays, difficulties, uncertainties, and other challenges encountered by companies that are rapidly developing and are experiencing rapid growth in evolving industries. We may be unsuccessful in addressing the various challenges we may encounter. Our failure to do so could have a material adverse effect on our business, prospects, reputation, and growth potential as well as the value of an investment in our company.

As a result of our rapid development and growth in an evolving industry, it is difficult to accurately forecast our revenue and plan our operating expenses, and we have limited insight into trends that may emerge and affect our business. In the event that our actual results differ from our forecasts or we adjust our forecasts in future periods, our operating results and financial position could be materially and adversely affected and our stock price could decline.

These risks are increased by our acquisitions of ID Analytics and Lemon, and will be further increased by any acquisitions we may make in the future.

We restated certain prior consolidated financial statements, which may lead to additional risks and uncertainties, including stockholder litigation, loss of investor confidence, and negative impacts on our stock price.

In November 2014, we restated our audited consolidated financial statements for the year ended December 31, 2013, our unaudited condensed consolidated financial statements for the quarters ended March 31, 2013, June 30, 2013, and September 30, 2013, and our unaudited condensed consolidated financial statements for the quarters ended March 31, 2014 and June 30, 2014. The determination to restate these financial statements was made by our Audit Committee, after discussion with management and Ernst & Young LLP, following the identification of an error related to our calculation of the volatility assumption within the Black-Scholes option pricing model used to compute our stock-based compensation expense since our initial public offering in October 2012, which resulted in a higher volatility and, accordingly, we materially overstated stock-based compensation expense for the impacted periods. As a result of these events, we have become subject to a number of additional risks and uncertainties, including potential stockholder litigation. If litigation did occur, we would incur substantial defense costs regardless of the outcome of such litigation. Likewise, such events may cause a diversion of our management’s time and attention. If we do not prevail in any such litigation, we could be required to pay substantial damages or settlement costs. In addition, the fact that we have completed a restatement may lead to a loss of investor confidence and have negative impacts on the trading price of our common stock.

If we are unable to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to furnish a report by our management on our internal control over financial reporting. The report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.

Although we remediated the material weakness we had as a result of our prior restatement, and while we determined that our internal control over financial reporting was effective as of December 31, 2015, as indicated in Management's Annual Report on Internal Control over Financial Reporting included in our Annual Report on Form 10-K for fiscal 2015, if we are otherwise unable to maintain adequate internal controls for financial reporting, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls as required pursuant to the Sarbanes-Oxley Act, it could result in another material misstatement of our financial statements that would require a restatement, investor confidence in the accuracy and timeliness of our financial reports may be impacted, or the market price of our common stock could be negatively impacted.

The failure to manage our growth may damage our brand recognition and reputation and harm our business and operating results.

We have experienced rapid growth in a relatively short period of time. Our revenue grew from $18.9 million in 2007 to $587.5 million in 2015, and our members increased from approximately 30,000 on December 31, 2006 to approximately 4.2 million on December 31, 2015. In addition, our acquisitions of ID Analytics in March 2012 and Lemon in December 2013 increased our revenue, facilities and number of employees, and we will continue to hire additional employees in the future. We must successfully manage our growth to achieve our objectives. Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:


•	introduce new service offerings that are attractive to our customers and enhance our gross margins;


•	develop and pursue cost-effective marketing and advertising campaigns that attract new customers;


•	satisfy existing and attract new customers;


•	hire, train, retain, and motivate additional employees;


•	enhance our operational, financial, and management systems;


•	enhance our intellectual property rights;


•	effectively manage and maintain our corporate culture; and


•	make sound business decisions in light of the scrutiny associated with operating as a public company.

These enhancements and improvements will require significant expenditures and allocation of valuable management and employee resources, and our growth will continue to place a strain on our operational, financial, and management infrastructure. Our future financial performance and our ability to execute on our business plan will depend, in part, on our ability to effectively manage any future growth. There are no guarantees we will be able to do so in an efficient or timely manner, or at all. Our failure to effectively manage growth could have a material adverse effect on our business, reputation, operating results, financial condition, and prospects.

Any future acquisitions that we undertake could disrupt our business, fail to achieve the anticipated results, harm our operating results, and dilute stockholder value.

From time to time, we may review opportunities to acquire other businesses or other assets that would expand the breadth of services that we offer, strengthen our distribution channels, enhance our intellectual property and technological know-how, augment the LifeLock ecosystem and our data repositories, or otherwise offer potential growth opportunities. For example, in March 2012, we completed our acquisition of ID Analytics, in December 2013, we completed our acquisition of Lemon, and in August 2015 we completed our acquisition of BitYota. We may in the future be unable to identify suitable acquisition candidates or to complete the acquisition of candidates that we identify. Increased competition for acquisition candidates or increased asking prices by acquisition candidates may increase purchase prices for acquisitions to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria. Acquisitions also may become more difficult in the future as we or others, including our competitors, acquire the most attractive candidates. Unforeseen expenses, difficulties, and delays that we may encounter in connection with rapid expansion through acquisitions could inhibit our growth and negatively impact our operating results.

Our ability to grow through acquisitions will depend upon various factors, including the following:


•	the availability of suitable acquisition candidates at attractive purchase prices;


•	the ability to compete effectively for available acquisition opportunities;


•	the availability of cash resources, borrowing capacity, or stock at favorable price levels to provide required purchase prices in acquisitions;


•	diversion of management’s attention to acquisition efforts; and


•	the ability to obtain any requisite governmental or other approvals.

As a part of our acquisition strategy, we frequently engage in acquisition discussions. In connection with these discussions, we and potential acquisition candidates often exchange confidential operational and financial information, conduct due diligence inquiries, and consider the structure, terms, and conditions of the potential acquisition. Potential acquisition discussions frequently take place over a long period of time and involve difficult business integration and other issues, including, in some cases, management succession and related matters. As a result of these and other factors, a number of potential acquisitions that from time to time appear likely to occur do not result in binding legal agreements and are not consummated, despite the expenditure of time and resources, which may affect our results.

Any borrowings made to finance future acquisitions could make us more vulnerable to a downturn in our operating results, a downturn in economic conditions, or increases in interest rates on borrowings. If our cash flow from operating activities is insufficient to meet our debt service requirements, we could be required to sell additional equity securities, refinance our obligations, or dispose of assets in order to meet our debt service requirements. If we finance any future acquisitions in whole or in part through the issuance of common stock or securities convertible into or exercisable for common stock, existing stockholders will experience dilution in the voting power of their common stock and earnings per share could be negatively impacted. The extent to which we will be able or willing to use our common stock for acquisitions will depend on the market price of our common stock from time to time and the willingness of potential sellers to accept our common stock as full or partial consideration for the sale of their businesses. Our inability to use our common stock as consideration, to generate cash from operations, or to obtain additional funding through debt or equity financings in order to pursue an acquisition program could materially limit our growth.

Any acquisitions that we undertake could be difficult to integrate, which could disrupt and harm our business.

In order to pursue a successful acquisition strategy, we will need to integrate the operations of any acquired businesses into our operations, including centralizing certain functions and pursuing programs and processes aimed at leveraging our revenue and growth opportunities. The integration of the management, operations, and facilities of acquired businesses with our own could involve difficulties, which could adversely affect our growth rate and operating results.

We may not realize all of the benefits anticipated with any acquisitions and may experience unanticipated detriments as a result of such acquisitions. As with any acquisition, we may be unable to complete effectively an integration of the management, operations, facilities, and accounting and information systems of the acquired business with our own; to manage efficiently the combined operations of the acquired business with our operations; to achieve our operating, growth, and performance goals for the acquired business; to achieve additional revenue as a result of our expanded operations; or to achieve operating efficiencies or otherwise realize cost savings as a result of anticipated acquisition synergies.

For example, we have an ongoing lawsuit and other claims against certain former executives and stockholders of Lemon, including its former General Manager, alleging breaches of employment related contracts, breaches of fiduciary duty, and fraud involving work for third party Xapo, Inc. and/or Xapo, Ltd. during their employment with Lemon. In addition, we have an ongoing lawsuit related to the Lemon acquisition against its former CEO and General Counsel in connection with false representations made by them as part of the negotiation of the acquisition.The outcome of this matter is unclear and although no counterclaims have been asserted against us, it is possible that they will be asserted in the future. In addition, in December 2014, we settled certain indemnification claims that we previously made with respect to our acquisition of Lemon, which resulted in a $5.0 million payment to us out of the escrow account established in connection with that acquisition.

The integration of acquired businesses, involves numerous risks, including the following integrating the different businesses, operations, locations, and technologies;


•	communicating to customers our perceived benefits of the acquisition and addressing any related concerns they might have;


•	the potential disruption of our core businesses;


•	risks associated with entering markets and businesses in which we have little or no prior experience;


•	diversion of management’s attention from our core businesses;


•	adverse effects on existing business relationships with suppliers and customers;


•	failure to retain key customers, suppliers, or personnel of acquired businesses;


•	adjusting to changes in key personnel post-combination;


•	adjusting to increased governmental scrutiny;


•	in connection with the acquisition of companies with foreign operations, integrating operations across different cultures and languages and addressing the particular economic, currency, political, and regulatory risks associated with specific countries;


•	managing the varying intellectual property protection strategies and other activities of the acquired company;


•	the potential strain on our financial and managerial controls and reporting systems and procedures;


•	greater than anticipated costs and expenses related to the integration of the acquired business with our business;


•	potential unknown liabilities associated with the acquired company for which we are not indemnified;


•	potential post-closing claims against or litigation with sellers of the acquired company;


•	challenges inherent in effectively managing an increased number of employees in diverse locations;


•	failure of acquired businesses to achieve expected results;


•	the risk of impairment charges related to potential write-downs of acquired assets in future acquisitions; and


•	difficulty of establishing uniform standards, controls, procedures, policies, and information systems.

We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the operations, technology, and personnel of any acquired business, or any significant delay in achieving integration, could have a material adverse effect on our business, results of operations, reputation, and prospects, and on the market price of our common stock.

We depend on key personnel, and if we fail to retain and attract skilled management and other key personnel, our business may be harmed.

Our success depends to a significant extent upon the continued services of our current management team, including Hilary Schneider, our President and Chief Executive Officer and Todd Davis, our founder and Executive Vice Chairman. The loss of Ms. Schneider or Mr. Davis or one or more of our other key executives or employees could have a material adverse effect on our business. Other than Mr. Davis, we do not maintain "key person" policies on the lives of our executive officers or any of our other employees. We employ all of our executive officers and key employees on an at-will basis, and their employment can be terminated by us or them at any time, for any reason and without notice, subject, in certain cases, to severance payment rights. In order to retain valuable employees, in addition to salary and cash incentives, we provide stock options or other stock-based compensation that vests over time. The value to employees of stock-based compensation that vests over time will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract offers from other companies.

Our success also depends on our ability to attract, retain, and motivate additional skilled management and technical personnel. We plan to continue to expand our work force to continue to enhance our business and operating results. We believe that there is significant competition for qualified personnel with the skills and knowledge that we require. Many of the other companies with which we compete for qualified personnel have greater financial and other resources than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than those which we have to offer. If we are not able to attract and retain the necessary qualified personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our business objectives and our ability to pursue our business strategy. New hires require significant training and, in most cases, take significant time before they achieve full productivity. New employees may not become as productive as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals. If our recruiting, training, and retention efforts are not successful or do not generate a corresponding increase in revenue, our business will be harmed.

A failure of the insurance companies that underwrite the identity theft insurance provided as part of our consumer services, or refusal by those insurance companies to provide the expected insurance, or failure of our products to comply with applicable state insurance regulations, could harm our business.

Our consumer services include identity theft insurance for our members that provides coverage for certain out-of-pocket expenses to our members, such as loss of income, replacement of fraudulent withdrawals, and costs associated with child and elderly care, travel, stolen purse/wallet, and replacement of documents. This identity theft insurance also backs our $1 million service guarantee. Any failure or refusal of our insurance providers to provide the expected insurance benefits, or failure of our products to comply with applicable state insurance regulations, could damage our reputation, cause us to lose members, expose us to liability claims by our members, negatively impact our sales and marketing efforts, and have a material adverse effect on our business, operating results, and financial condition.

Events such as a security breach at a large organization that compromise a significant number of our members’ personally identifiable information or that otherwise interfaces with our systems could result in a large number of identity-related events that in turn could severely strain our operations and have a negative impact on our business.

Events such as a security breach at a large organization (including major financial institutions, retailers, and Internet service providers) could compromise the personally identifiable information of a significant number of our members. Any such event could in turn result in a large number of identity-related events that we must address, placing severe strain on our operations. Any failure in our ability to appropriately and timely process and address a large number of identity-related events taking place at the same time could result in a loss of members, harm to our reputation, and other damage to our business. Moreover, any related remediation services we provide may not meet member expectations and further exacerbate these risks. Furthermore, if these events result in significant claims made under our identity theft insurance, this could negatively impact our insurance premiums and our ability to continue to provide what we refer to as our guarantee on a cost-effective basis, or at all.

We may require significant capital to fund our business, and our inability to generate and obtain such capital could harm our business, operating results, financial condition, and prospects.

To fund our expanding business, we must have sufficient working capital to continue to make significant investments in our service offerings, advertising, technology, and other activities. As a result, in addition to the revenue we generate from our business, we may need additional equity or debt financing to provide the funds required for these endeavors. If such financing is not available on satisfactory terms or at all, we may be unable to operate or expand our business in the manner and at the rate desired. Debt financing increases expenses, may contain covenants that restrict the operation of our business, and must be repaid regardless of operating results. Equity financing, or debt financing that is convertible into equity, could result in additional dilution to our existing stockholders, and any new securities we issue could have rights, preferences, and privileges superior to those associated with our common stock.

In addition, the current economic environment may make it difficult for us to raise additional capital or obtain additional credit, when needed, on acceptable terms or at all.

Our inability to generate or obtain the financial resources needed to fund our business and growth strategies may require us to delay, scale back, or eliminate some or all of our operations or the expansion of our business, which may have a material adverse effect on our business, operating results, financial condition, and prospects.

If we are unable to protect our intellectual property, including our LifeLock brand, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

The success of our business depends in part on our ability to protect our intellectual property and the LifeLock brand. We rely on a combination of federal, state, and common law trademark, patent, and trade secret laws, confidentiality procedures, and contractual provisions to protect our intellectual property. However, these measures afford only limited protection and might be challenged, invalidated, or circumvented by third parties. The measures we take to protect our intellectual property may not be sufficient or effective, and in some instances we have not undertaken comprehensive searches with respect to certain of our intellectual property. We have limited protections in countries outside the United States, such as registrations for key trademarks. Moreover, our competitors may independently develop similar intellectual property.

While we generally obtain non-disclosure agreements from each of our employees and independent contractors, there are former independent contractors from whom we have not obtained these agreements. Therefore, these former independent contractors may inappropriately disclose our confidential information or use that confidential information illegally, which could harm our business.

We currently have a number of issued and pending patents and trademarks, many of which were procured in connection with our acquisition of ID Analytics. We cannot assure you that any patents will issue from our currently pending patent applications in a manner that gives us the protection that we seek, if at all, or that any future patents issued to us will not be challenged, invalidated, or circumvented. Any patents that may issue in the future from pending or future patent applications may not provide sufficiently broad protection or may not prove to be enforceable in actions against alleged infringers. We also cannot assure you that any future trademark or service mark registrations will be issued from pending or future applications or that any registered trademarks or service marks will be enforceable or provide adequate protection of our proprietary rights.

We may find it necessary to take legal action in the future to enforce or protect our intellectual property rights, and such action may be expensive and time consuming. In addition, we may be unable to obtain a favorable outcome in any such intellectual property litigation.

Our services may infringe the intellectual property rights of others, which may cause us to pay unexpected litigation costs or damages or prevent us from selling our services.

From time to time, third parties may claim that our services infringe or otherwise violate their intellectual property rights. We may be subject to legal proceedings and claims, including claims of alleged infringement by us of the intellectual property rights of third parties. Any dispute or litigation regarding intellectual property could be expensive and time consuming, regardless of the merits of any claim, and could divert our management and key personnel from our business operations.

If we were to discover or be notified that our services potentially infringe or otherwise violate the intellectual property rights of others, we may need to obtain licenses from these parties in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, and any such license may substantially restrict our use of the intellectual property. Moreover, if we are sued for infringement and lose the lawsuit, we could be required to pay substantial damages or be enjoined from offering the infringing services. Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of intellectual property infringement. Any of the foregoing could cause us to incur significant costs and prevent us from selling our services.

Our business depends on our ability to utilize intellectual property, technology, and content owned by third parties, the loss of which could harm our business.

Our services utilize intellectual property, technology, and content owned by third parties. From time to time, we may be required to renegotiate with these third parties or negotiate with other third parties to include or continue using their intellectual property, technology, or content in our existing service offerings, in new versions of our service offerings, or in new services that we offer. We may not be able to obtain the necessary rights from these third parties on commercially reasonable terms, or at all, and the third-party intellectual property, technology, and content we use or desire to use may not be appropriately supported, maintained, or enhanced by the third parties. If we are unable to obtain the rights necessary to use or continue to use third-party intellectual property, technology, and content in our services, or if those third parties are unable to support, maintain, and enhance their intellectual property, technology, and content, we could experience increased costs or delays or reductions in our service offerings, which in turn may harm our financial condition, damage our brand, and result in the loss of customers.

We are building our intellectual property portfolio internally and through acquisitions, such as our acquisitions of ID Analytics. We may be required to incur substantial expenses to do so, and our efforts may not be successful.

Our use of “open source” software could negatively affect our ability to sell our services and subject us to possible litigation.

Software code that is freely shared in the software development community is referred to as open source software. A portion of the technologies licensed by us incorporates such open source software, and we may incorporate open source software in the future. Such open source software is generally licensed by its authors under open source licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses, such as the GNU General Public License, require that source code subject to the license be disclosed to third parties, grant such third parties the right to modify and redistribute that source code and a requirement that the source code for any software derived from it be disclosed. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar services and platforms with lower development effort and time and ultimately could reduce or eliminate our ability to commercialize or profit from our services.

Although we have established internal review and approval processes with respect to the use of open source software to avoid subjecting our technologies to conditions we do not intend, we cannot be certain that all open source software is submitted for approval prior to use in our services. The terms of many open source licenses have not been interpreted by the U.S. courts, and there is a risk that these licenses could be construed in a way that imposes unanticipated conditions or restrictions on our ability to commercialize our services. In this event, we could be required to seek licenses from third parties to continue offering our services, to make generally available, in source code form, our proprietary code, or to discontinue the sale of our services, any of which could adversely affect our business, operating results, and financial condition.

Our operating results may vary significantly and be unpredictable, which could cause the trading price of our stock to decline, make period-to-period comparisons less meaningful, and make our future results difficult to predict.

We may experience significant fluctuations in our revenue, expenses, and operating results in future periods. Our operating results may fluctuate in the future as a result of a number of factors, many of which are beyond our control. These fluctuations may result in declines in our stock price. Moreover, these fluctuations may make comparing our operating results on a period-to-period basis less meaningful and make our future results difficult to predict. You should not rely on our past results as an indication of our future performance. In addition, if our reported revenue does not meet our expectations, our operating results and ability to execute on our business plan are likely to be harmed. In addition to the other factors listed in this “Risk Factors” section, factors that could affect our operating results include the following:


•	our ability to expand our customer base and the market for our services;


•	our ability to generate revenue from existing customers;


•	our ability to establish and maintain relationships with strategic partners;


•	fluctuations in our expense and capital expenditure levels;


•	service introductions or enhancements and market acceptance of new services by us and our competitors;


•	pricing and availability of competitive services, which may put pressure on our pricing;


•	our ability to address competitive factors successfully;


•	changes in the competitive landscape as a result of mergers, acquisitions, or strategic alliances that could allow our competitors to gain market share, or the emergence of new competitors;


•	changes or anticipated changes in economic conditions; and


•	changes in legislation and regulatory requirements related to our business.

Due to these and other factors, our financial results for any quarterly or annual period may not meet our expectations or the expectations of investors or analysts that follow our stock and may not be meaningful indications of our future performance.

Because we recognize revenue in our consumer business from our members over the term of their subscription periods, fluctuations in sales or retention may not be immediately reflected in our operating results.

We recognize revenue in our consumer business from our members ratably over the term of their subscription periods. As a result, a large portion of the revenue we recognize in any period is deferred revenue from memberships purchased during previous periods. Consequently, a decline in new members or a decrease in member retention in any particular period will not necessarily be fully reflected in the consumer revenue in that period and will negatively affect our revenue in future periods. In addition, we may be unable to adjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant fluctuations in new members or member retention and market acceptance of our services may not be fully reflected in our operating results until future periods. Our subscription model also makes it difficult for us rapidly to increase our revenue through additional sales in any period, as revenue from new members is recognized ratably over the applicable subscription periods.

We may be subject to assertions that taxes must be collected based on sales and use of our services in various states, which could expose us to liability and cause material harm to our business, financial condition, and results of operations.

Whether sales of our services are subject to state sales and use taxes is uncertain, due in part to the nature of our services and the relationships through which our services are offered, as well as changing state laws and interpretations of those laws. In 2012 we entered into a settlement agreement with the New York State Department of Taxation and Finances regarding our historic and ongoing tax collection obligations. We currently collect and remit sales tax in several states related to the sale of our consumer services. Additional states or one or more countries or other jurisdictions may seek to impose sales or other tax collection obligations on us in the future. A successful assertion by any state, country, or other jurisdiction that we should be

collecting sales or other taxes on the sale of our services could, among other things, increase the cost of our services, create significant administrative burdens for us, result in substantial tax liabilities for past sales, discourage current members and other consumers from purchasing our services, or otherwise substantially harm our business and operating results.

Increases in credit card processing fees would increase our operating expenses and adversely affect our operating results, and the termination of our relationship with any major credit card company would have a severe, negative impact on our business.

A substantial majority of our members pay for our services using credit cards. From time to time, the major credit card companies or the issuing banks may increase the fees that they charge for each transaction using their cards. An increase in those fees would require us to either increase the prices we charge for our services or suffer a negative impact on our margins, either of which could adversely affect our business, operating results, and financial condition.

In addition, our credit card fees may be increased by credit card companies if our chargeback rate, or the rate of payment refunds, exceeds certain minimum thresholds. If we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or for all credit card transactions, may be increased, and, if the problem significantly worsens, credit card companies may further increase our fees or terminate their relationship with us. In addition, changes in billing systems in the future could increase the per transaction cost that we pay. Any increases in our credit card fees could adversely affect our operating results, particularly if we elect not to raise the retail list price for our consumer services to offset the increase. The termination of our ability to process payments on any major credit card would significantly impair our business.

Any indebtedness could adversely affect our business and limit our ability to expand our business or respond to changes, and we may be unable to generate sufficient cash flow to satisfy our debt service obligations.

As of September 30, 2016, we had no outstanding debt. We may incur indebtedness in the future, including borrowings available under our credit facility with Bank of America. Any substantial indebtedness and the fact that a substantial portion of our cash flow from operating activities could be needed to make payments on this indebtedness could have adverse consequences, including the following:


•	reducing the availability of our cash flow for our operations, capital expenditures, future business opportunities, and other purposes;


•	limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, which could place us at a competitive disadvantage compared to our competitors that may have less debt;


•	limiting our ability to borrow additional funds;


•	increasing our vulnerability to general adverse economic and industry conditions; and


•	failing to comply with the covenants in our debt agreements could result in all of our indebtedness becoming immediately due and payable.

Our ability to borrow any funds needed to operate and expand our business will depend in part on our ability to generate cash. Our ability to generate cash is subject to the performance of our business as well as general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. If our business does not generate sufficient cash flow from operating activities or if future borrowings are not available to us under our senior credit facility or otherwise in amounts sufficient to enable us to fund our liquidity needs, our operating results, financial condition, and ability to expand our business may be adversely affected. Moreover, our inability to make scheduled payments on our debt obligations in the future would require us to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures, or seek additional equity.

Covenants in our senior credit facility impose, and any future debt arrangements may impose, significant operating and financial restrictions that may adversely affect our business and ability to operate our business.

The agreement governing our senior credit facility with Bank of America contains covenants that limit various actions that we may take, including the following:


•	incurring additional indebtedness;


•	granting additional liens;


•	making certain investments and distributions;


•	merging, dissolving, liquidating, consolidating, or disposing of all or substantially all of our assets;


•	certain acquisitions;


•	prepaying and modifying debt instruments; and


•	entering into transactions with affiliates.

These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions, or pursue available business opportunities. Our senior credit facility also requires us to maintain specified financial ratios and satisfy financial condition tests at the end of each fiscal quarter. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not meet those tests. We may be required to take action to reduce our indebtedness or to act in a manner contrary to our business objectives to meet these ratios and satisfy these covenants. For example, under the terms of the recent amendment to our senior credit facility we are required to comply with certain additional financial and reporting covenants, including maintaining a minimum cash EBITDA. Pursuant to the amendment, we are also subject to certain limitations and conditions on borrowing, on acquisitions, and on making certain types of payments with respect to our equity interests. We could also incur additional indebtedness in the future having even more restrictive covenants.

Failure to comply with any of the covenants under our senior credit facility, or any other indebtedness we may incur, could result in a default under such agreements, which could result in an acceleration of the timing of payments on all of our outstanding indebtedness and other negative consequences. In addition, since our senior credit facility with Bank of America is secured by substantially all of our assets, a default under that facility could result in Bank of America exercising its lien on substantially all of our assets. Any of these events could have a material adverse effect on our business, operating results, and financial condition.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board members.

We incur significant legal, accounting, and other expenses as a public company, including costs resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act, the Dodd-Frank Act, and the listing requirements of the stock exchange on which our securities are listed. Compliance with these reporting requirements, rules, and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards are unsuccessful, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited, which could potentially result in increased tax liabilities to us in the future.

As of December 31, 2015, we had approximately $231.3 million of federal and approximately $99.9 million of state net operating loss carry-forwards. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), a corporation’s ability to use its pre-change net operating loss carry-forwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. In 2013, we completed an analysis of prior year ownership changes and determined that in prior years we had experienced an “ownership change” as defined by Section 382 of the Internal Revenue Code. However, we determined that none of our federal and state net operating loss carry-forwards will expire solely as a result of our prior ownership changes. We may also experience an “ownership change” in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards to offset taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

Risks Related to Ownership of Our Common Stock

Our stock price has been and will likely continue to be volatile, and the value of an investment in our common stock may decline.

The trading price of our common stock has been, and is likely to continue to be, volatile. In addition to the risk factors described in this Quarterly Report on Form 10-Q, in our Annual Report on Form 10-K for fiscal 2015, and in our other filings with the SEC, factors that may cause the price of our common stock to fluctuate include the following:


•	financial guidance we may provide to the public, any changes in such guidance, or our failure to meet such guidance;


•	failure of industry or securities analysts to maintain coverage of our company, changes in financial estimates by any industry or securities analysts that follow our company, or our failure to meet such estimates;


•	various market factors or perceived market factors, including rumors, whether or not correct, involving us, our customers, our strategic partners, or our competitors;


•	sales, or anticipated sales, of large blocks of our common stock;


•	short selling of our common stock by investors;


•	actions of activist stockholders;


•	additions or departures of key personnel;


•	announcements of technological innovations by us or by our competitors;


•	introductions of new services or new pricing policies by us or by our competitors;


•	regulatory or political developments;


•	litigation and governmental or regulatory investigations;


•	acquisitions or strategic alliances by us or by our competitors; and


•	general economic, political, and financial market conditions or events.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock, may induce stockholder activism and may otherwise negatively affect the price or liquidity of our common stock. In addition, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. For example, as described in more detail in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for fiscal 2015, we are subject to a securities class action lawsuit filed against us. As a result of this class action complaint, or if any of our stockholders were to bring a lawsuit against us in the future, we could incur substantial costs defending the lawsuits or paying for settlements or damages. Such lawsuits could also divert the time and attention of our management from our business.

Future sales of our common stock in the public market by our existing stockholders, or the perception that such sales might occur or not occur, could depress the market price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, and even the perception that these sales could occur or not occur may depress the market price. As of September 30, 2016, we had approximately 93.6 million shares of common stock outstanding. These shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume restrictions of Rule 144. In addition, shares issued or issuable upon the exercise of options and warrants, and shares delivered under restricted stock unit or restricted stock awards, are also eligible for sale. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

Former holders of our preferred stock are entitled, under contracts providing for registration rights, to require us to register our securities owned by them for public sale. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

Sales of common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Future sales and issuances of our common stock or rights to purchase common stock by us, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause our stock price to fall.

We intend to issue additional securities pursuant to our equity incentive plans and may issue equity or convertible securities in the future. To the extent we do so, our stockholders may experience substantial dilution. We may sell common stock, convertible securities, or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities, or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales and new investors could gain rights superior to our existing stockholders.

Anti-takeover provisions could impair a takeover attempt and adversely affect existing stockholders.

Certain provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may have the effect of rendering more difficult, delaying, or preventing an acquisition of our company, even when this would be in the best interest of our stockholders.

Our certificate of incorporation and bylaws include provisions that:


•	authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock;


•	require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;


•	specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, our chief executive officer, or our president (in the absence of a chief executive officer);


•	establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;


•	establish that our board of directors is divided into three classes, Class I, Class II, and Class III, with each class serving three-year staggered terms;


•	prohibit cumulative voting in the election of directors;


•	provide that our directors may be removed only for cause;


•	provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and


•	require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control of our company, whether or not it is desired by or beneficial to our stockholders. In addition, other provisions of Delaware law may also discourage, delay, or prevent someone from acquiring us or merging with us.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market, or our competitors. If adequate research coverage is not established or maintained on our company or if any of the analysts who may cover us downgrade our stock or publish inaccurate or unfavorable research about our business or provide relatively more favorable recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Since we do not expect to pay any cash dividends for the foreseeable future, our stockholders may be forced to sell their stock in order to obtain a return on their investment.

We have never declared or paid any cash dividends on our capital stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, our senior credit facility with Bank of America restricts our ability to pay cash dividends. We plan to retain any future earnings to finance our operations and growth plans discussed elsewhere in this Annual Report on Form 10-K. Accordingly, investors must rely on sales of shares of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment.


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

Issuer Purchases of Equity Securities

The following table provides information regarding repurchases of our common stock during the three-months ended September 30, 2016. All of the shares of common stock were surrendered to us to satisfy tax withholding obligations associated with the vesting of restricted stock.



Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2016 - July 31, 2016	—	$	—	—	$	—
August 1, 2016 - August 31, 2016	8,579	$	16.84	—	$	—
September 1, 2016 - September 30, 2016	3,242	$	16.85	—	$	—
Total	11,821			—


Item 6.	Exhibits.

Exhibit

Number

Description

Form

File No.

Exhibit

Filing Date

Filed Herewith

10.1**

First Amendment, dated July 15, 2016, to the New Services Addendum to Consumer Disclosure Agreement, entered into with Equifax Consumer Services LLC.

10.2†

LifeLock, Inc. 2012 Employee Stock Purchase Plan, as amended.

10.3†

LifeLock, Inc. Severance Plan effective as of August 29, 2016.

10.4†

Form of Amendment to Employment Agreement for Hilary Schneider, Richard Todd Davis and Douglas Jeffries.

10.5†

Form of Non-Qualified Stock Option Agreement under 2012 Incentive Compensation Plan.

10.6†

Form of Restricted Stock Unit Agreement under 2012 Incentive Compensation Plan.

10.7†

Form of Restricted Stock Agreement under 2012 Incentive Compensation Plan.

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.


**	Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions


†	Indicates management contract or compensatory plan or arrangement.

SIGNATURES

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



		LIFELOCK, INC.

Date:	November 8, 2016	By:	/s/ Hilary Schneider
		Name:	Hilary Schneider
		Title:	Chief Executive Officer and President
			(Principal Executive Officer)

Date:	November 8, 2016	By:	/s/ Douglas Jeffries
		Name:	Douglas Jeffries
		Title:	Chief Financial Officer and Chief Administrative Officer
			(Principal Financial and Accounting Officer)

Attached files

LIFELOCK, INC. Reports

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