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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2013

Commission file number: 001-35671

 

 

LifeLock, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   56-2508977

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

60 East Rio Salado Parkway, Suite 400

Tempe, Arizona 85281

(Address of principal executive offices and zip code)

(480) 682-5100

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 25, 2013, there were outstanding 90,447,444 shares of the registrant’s common stock, $0.001 par value.

 

 

 


Table of Contents

LIFELOCK, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

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

     12   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     29   

Item 4. Controls and Procedures

     29   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     29   

Item 1A. Risk Factors

     29   

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

     30   

Item 6. Exhibits

     31   

Signatures

     32   

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

LIFELOCK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

     September 30,
2013
    December 31,
2012
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 167,888      $ 134,197   

Marketable securities

     24,048        —    

Trade and other receivables, net

     11,540        7,560   

Prepaid expenses and other current assets

     5,359        5,753   
  

 

 

   

 

 

 

Total current assets

     208,835        147,510   

Property and equipment, net

     12,586        9,701   

Goodwill

     129,428        129,428   

Intangible assets, net

     45,344        51,242   

Other non-current assets

     1,759        1,707   
  

 

 

   

 

 

 

Total assets

   $ 397,952      $ 339,588   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 2,922      $ 1,151   

Accrued expenses and other liabilities

     33,589        27,329   

Deferred revenue

     115,816        90,877   
  

 

 

   

 

 

 

Total current liabilities

     152,327        119,357   

Other non-current liabilities

     4,006        265   
  

 

 

   

 

 

 

Total liabilities

     156,333        119,622   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.001 par value, 300,000,000 shares authorized at September 30, 2013 and December 31, 2012 and 90,318,922 and 86,561,320 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

     90        87   

Preferred stock, $0.001 par value, 10,000,000 authorized and no shares issued and outstanding at September 30, 2013 and December 31, 2012

     —         —    

Additional paid-in capital

     462,330        439,883   

Accumulated other comprehensive loss

     (43     —    

Accumulated deficit

     (220,758     (220,004
  

 

 

   

 

 

 

Total stockholders’ equity

     241,619        219,966   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 397,952      $ 339,588   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


Table of Contents

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,
 
     2013     2012     2013     2012  

Revenue:

        

Consumer revenue

   $ 88,386      $ 65,579      $ 246,053      $ 183,903   

Enterprise revenue

     7,353        6,538        21,300        13,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     95,739        72,117        267,353        197,612   

Cost of services

     24,935        19,762        73,965        57,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     70,804        52,355        193,388        139,885   

Costs and expenses:

        

Sales and marketing

     40,609        29,926        125,651        91,431   

Technology and development

     10,734        7,943        30,128        20,936   

General and administrative

     11,837        6,297        32,160        15,834   

Amortization of acquired intangible assets

     1,966        1,966        5,898        4,291   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     65,146        46,132        193,837        132,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     5,658        6,223        (449     7,393   

Other income (expense):

        

Interest expense

     (82     (854     (228     (2,139

Interest income

     29        4        75        6   

Change in fair value of warrant liabilities

     —         6,058        —         3,117   

Change in fair value of embedded derivative

     —         (3,499     —         (2,785

Other

     (7     (1     (11     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (60     1,708        (164     (1,804
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     5,598        7,931        (613     5,589   

Income tax expense (benefit)

     171        63        142        (13,834
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     5,427        7,868        (755     19,423   

Accretion of convertible redeemable preferred stock

     —         (4,207     —         (8,959

Net income allocable to convertible redeemable preferred stockholders

     —         (2,550     —         (7,067
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholders

   $ 5,427      $ 1,111      $ (755   $ 3,397   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) per share to common stockholders:

        

Basic

   $ 0.06      $ 0.06      $ (0.01   $ 0.17   

Diluted

   $ 0.06      $ (0.16   $ (0.01   $ 0.07   

Weighted-average common shares outstanding:

        

Basic

     89,318        19,501        87,841        19,469   

Diluted

     96,395        19,501        87,841        52,993   

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

LIFELOCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

(unaudited)

 

     For the Three Months
Ended September 30,
     For the Nine  Months
Ended September 30,
 
     2013     2012      2013     2012  

Net income (loss)

   $ 5,427      $ 7,868       $ (755   $ 19,423   

Other comprehensive loss, net of tax:

         

Unrealized loss on marketable securities

     (43     —          (43     —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

   $ 5,384      $ 7,868       $ (798   $ 19,423   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

LIFELOCK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Nine Months
Ended September 30,
 
     2013     2012  

Operating activities

    

Net income (loss)

   $ (755   $ 19,423   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     9,484        7,487   

Share-based compensation

     10,270        3,994   

Provision for (recovery of) doubtful accounts

     220        (10

Change in fair value of warrant liabilities

     —         (3,117

Change in fair value of embedded derivative

     —         2,785   

Deferred income tax benefit

     (19     (14,310

Other

     28        3   

Change in operating assets and liabilities:

    

Trade and other receivables

     (3,698     (2,344

Prepaid expenses and other current assets

     413        2,039   

Other non-current assets

     380        (1,184

Accounts payable

     831        5,822   

Accrued expenses and other liabilities

     5,993        959   

Deferred revenue

     24,939        19,388   

Other non-current liabilities

     3,741        (214
  

 

 

   

 

 

 

Net cash provided by operating activities

     51,827        40,721   

Investing activities

    

Acquisition of ID Analytics, net of cash acquired

     —         (157,430

Acquisition of property and equipment

     (5,264     (3,506

Purchases of marketable securities

     (24,247     —    

Decrease in restricted cash

     —         1,748   
  

 

 

   

 

 

 

Net cash used in investing activities

     (29,511     (159,188

Financing activities

    

Proceeds from:

    

Term loan

     —         68,000   

Issuance of convertible redeemable preferred stock, net of offering costs

     —         102,165   

Issuance of warrants

     —         4,373   

Stock based compensation plans

     11,815        222   

Payments for:

    

Term loan

     —         (5,440

Initial public offering costs

     —         (1,530

Debt issuance costs related to credit facilities

     (440     (1,511
  

 

 

   

 

 

 

Net cash provided by financing activities

     11,375        166,279   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     33,691        47,812   

Cash and cash equivalents at beginning of period

     134,197        28,850   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 167,888      $ 76,662   
  

 

 

   

 

 

 

Supplemental information for non-cash financing activities:

    

Convertible redeemable preferred stock issued as part of purchase price for ID Analytics

     —         11,542   

Preferred stock embedded derivative issued as part of purchase price for ID Analytics

     —         7,934   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

LIFELOCK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

(unaudited)

1. Description of Business and Basis of Presentation

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

We were incorporated in Delaware on April 12, 2005 and are headquartered in Tempe, Arizona. On March 14, 2012, we acquired ID Analytics, Inc. and its wholly owned subsidiary IDA Inc. (collectively, “ID Analytics”), each of which is incorporated in Delaware.

We completed our initial public offering (“IPO”) in October 2012 and our common stock is listed on the New York Stock Exchange under the symbol “LOCK.”

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with 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, 2012.

The condensed consolidated balance sheet as of December 31, 2012 included herein was derived from the audited financial statements as of that date, but does not include all disclosures including notes required by 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 result of operations to be anticipated for the entire year ending December 31, 2013 or any future period.

Basis of Consolidation

The condensed consolidated financial statements include our accounts and those of our wholly-owned subsidiary, ID Analytics. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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

2. Summary of Significant Accounting Policies

Significant Accounting Policies

There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Marketable Securities

We hold investments in marketable securities consisting of corporate debt securities, municipal debt securities, and certificates of deposit. We determine the appropriate classification of marketable securities at the time of purchase and reevaluate such determination at each balance sheet date. Based on our intentions regarding our marketable securities, all marketable securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses recorded as a separate component of other comprehensive income, net of income taxes on the condensed consolidated statements of comprehensive income (loss). Realized gains and losses and declines in fair value determined to be other-than-temporary are determined using the specific-identification method and are reflected as a component of other income (expense) in the condensed consolidated statements of operations. We periodically review our marketable securities for other-than-temporary declines in fair value and write down such marketable securities when an other-than-temporary decline has occurred. No such impairments of marketable securities have been recorded to date.

 

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Table of Contents

Recently Issued Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, which supersedes and replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 and 2011-12. The amendment requires that an entity must report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 was effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. We adopted the amended standards beginning January 1, 2013. As there were no amounts reclassified out of other comprehensive income during the periods ended September 30, 2013 or 2012 or the years ended December 31, 2012 or 2011, there was no impact on our financial position, results of operations, or cash flows.

In March 2013, the FASB issued ASU 2013-04, which provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The update requires an entity to measure obligations resulting from joint and several liability obligations for which the total amount of the obligation within the scope of the update is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments in ASU 2013-04 are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2013 and must be applied retrospectively. We do not expect the adoption of ASU 2013-04 in the first quarter of 2014 to have an impact on our financial position, results of operations, or cash flows.

3. Acquisition of ID Analytics

In the first quarter of 2012, we acquired ID Analytics, a provider of enterprise identity risk assessment and fraud protection services and a strategic technology partner of ours since 2009. The aggregate purchase price consisted of approximately $166,474 of cash paid at the closing (cash paid net of cash acquired was $157,430) and 1,586,778 shares of Series E-1 convertible redeemable preferred stock with a fair value of approximately $19,476 as of the acquisition date. We accounted for the acquisition using the acquisition method. Accordingly, we allocated the total purchase price to the tangible and identifiable intangible assets acquired and the net liabilities assumed based on their respective fair values on the acquisition date. As a result of the acquisition, we recorded goodwill in the amount of $129,428, identifiable definite-lived intangible assets of $57,500, which was comprised of $4,000 related to trade name and trademarks, $33,000 related to technology, and $20,500 related to customer relationships, and net liabilities assumed of $978. The overall weighted-average life of the identifiable definite-lived intangible assets acquired was 7.6 years, which will be amortized on a straight-line basis over their respective useful lives. The condensed consolidated financial statements for the nine-month period ended September 30, 2012 include the results of operations of ID Analytics from the date of acquisition.

4. Marketable Securities

The following is a summary of marketable securities designated as available-for-sale as of September 30, 2013:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair  Value
 

Corporate bonds

   $ 23,147       $ —        $ (43   $ 23,104   

Municipal bonds

     696         —          —         696   

Certificate of deposit

     248         —          —         248   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable securities

   $ 24,091       $ —        $ (43   $ 24,048   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

As of September 30, 2013, 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.

 

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Table of Contents

The following is a summary of amortized cost and estimated fair value of marketable securities as of September 30, 2013, by maturity:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized

Losses
    Estimated
Fair  Value
 

Due in one year or less

   $ 21,505       $ —        $ (34   $ 21,471   

Due after one year

     2,586         —          (9     2,577   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable securities

   $ 24,091       $ —        $ (43   $ 24,048   
  

 

 

    

 

 

    

 

 

   

 

 

 

We did not hold any marketable securities as of December 31, 2012.

5. Financing Arrangements

Credit Agreement

On January 9, 2013, we refinanced our existing credit agreement and entered into a new credit agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent, swing line lender and L/C issuer, Silicon Valley Bank as syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated as sole lead arranger and sole book manager, and the lenders from time to time party thereto. We refer to the Credit Agreement and related documents as the “Senior Credit Facility.” The Senior Credit Facility provides for an $85,000 revolving line of credit, which we can increase to $110,000 subject to the conditions set forth in the Credit Agreement. The revolving line of credit also includes a letter of credit subfacility of $10,000 and a swing line loan subfacility of $5,000. The Senior Credit Facility has a maturity date of January 9, 2018. As of September 30, 2013, we had no outstanding debt under our Senior Credit Facility. We paid unused commitment fees of $55 and $154 for the three- and nine-month periods ended September 30, 2013, respectively, which is included in interest expense in the condensed consolidated statements of operations.

Borrowings under the Senior Credit Facility bear interest at a per annum rate equal to, at our option, either (a) a base rate equal to the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” and (iii) the eurodollar rate for base rate loans plus 1.00%, plus an applicable rate ranging from 0.50% to 1.25%, or (b) the eurodollar rate for eurodollar rate loans plus an applicable rate ranging from 1.50% to 2.25%. The initial applicable rate is 0.50% for base rate loans and 1.50% for eurodollar rate loans, subject to adjustment from time to time based upon our achievement of a specified consolidated leverage ratio.

In addition to paying interest on the outstanding principal under the Senior Credit Facility, we are also required to pay a commitment fee to the administrative agent at a rate per annum equal to the product of (a) an applicable rate ranging from 0.25% to 0.50% multiplied by (b) the actual daily amount by which the aggregate revolving commitments exceed the sum of (1) the outstanding amount of revolving borrowings, and (2) the outstanding amount of letter of credit obligations. The initial applicable rate is 0.25%, subject to adjustment from time to time based upon our achievement of a specified consolidated leverage ratio.

We also will pay a letter of credit fee to the administrative agent for the account of each lender in accordance with its applicable percentage of a letter of credit for each letter of credit, which fee will be equal to the applicable rate then in effect, multiplied by the daily maximum amount available to be drawn under the letter of credit. The initial applicable rate for the letter of credit is 1.50%, subject to adjustment from time to time based upon our achievement of a specified consolidated leverage ratio.

6. Operating Leases

On May 17, 2013, we entered into a Second Amendment to Office Lease (the “Second Amendment”) with PKY Fund II Phoenix II, LLC, as successor-in-interest to Hayden Ferry Lakeside, LLC (“Lessor”), which amended that certain Office Lease dated May 18, 2007 and that certain First Amendment to Office Lease dated March 7, 2008 (as amended, the “Lease”). Pursuant to the Second Amendment, the term of the Lease was extended through December 31, 2024 and we leased additional space in the building in which our principal executive offices are located. In the event that Lessor is unable to deliver certain portions of the additional space to be leased under the Second Amendment by November 1, 2013, we may choose to terminate the Lease in its entirety and elect to hold over in the then-occupied Premises (as defined in the Lease) for an additional 12 to 24 months following such election.

On September 13, 2013, we entered into a Third Amendment to Office Lease with the Lessor, which added new terms related to the delivery of additional space under the Lease and defined the dates on which the Base Rent (as defined in the Lease) rates take effect. In the event that Lessor is unable to deliver certain portions of the additional space to be leased by November 1, 2013, we will receive a credit for every calendar day the additional space is delivered after November 1, 2013.

The Lease contains rent abatements that provide rent-free monthly rent and rent escalations that increase monthly rent payments over the term of the Lease. We record rental expense on a straight-line basis over the base, non-cancelable term of the Lease. We recognize any difference between the calculated expense and amount actually paid as deferred rent. We reflect deferred rent as a current or non-current liability, depending on its expected date of reversal.

 

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Associated with the Lease, we have received tenant improvement allowances from the Lessor. We record the value of these improvements as fixed assets and amortize the assets over the shorter of the estimated useful life of the asset or the lease term. We record an offsetting obligation as deferred rent and amortize it as a reduction to rent expense on a straight-line basis over the lease term.

The following summarizes the future minimum lease payments for all outstanding lease agreements as of September 30, 2013:

 

2013

   $ 536   

2014

     3,207   

2015

     4,377   

2016

     4,431   

2017

     4,551   

2018

     3,792   

Thereafter

     16,575   
  

 

 

 
   $ 37,469   
  

 

 

 

7. Stockholders’ Equity

Share-Based Compensation

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013      2012      2013      2012  

Cost of services

   $ 210       $ 186       $ 622       $ 437   

Sales and marketing

     573         299         1,292         712   

Technology and development

     1,054         498         2,393         1,208   

General and administrative

     2,172         648         5,963         1,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 4,009       $ 1,631       $ 10,270       $ 3,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Unrecognized share-based compensation expenses totaled $47,516 as of September 30, 2013, which we expect to recognize over a weighted-average time period of 3.3 years.

Stock Warrants

As of September 30, 2013, we had the following warrants to purchase common stock outstanding:

 

            Exercise  

Expiration Date

   Shares      Price  

October 3, 2014

     2,334,044       $ 0.70   

December 19, 2014

     166,666         4.50   

8. Fair Value Measurements

As of September 30, 2013 and December 31, 2012, the fair value of our financial assets and liabilities was as follows:

 

     Level 1      Level 2      Level 3      Total  

September 30, 2013

           

Assets:

           

Commercial paper (1)

   $ —        $ 45,086       $ —        $ 45,086   

Money market funds (1)

     25,753         —          —          25,753   

Corporate bonds (2)

     —          23,104         —          23,104   

Municipal bonds (2)

     —          696         —          696   

Certificate of deposit (2)

     —          248         —          248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ 25,753       $ 69,134       $ —        $ 94,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

           

Assets:

           

Commercial paper (1)

   $ —        $ 35,023       $ —        $ 35,023   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ —        $ 35,023       $ —        $ 35,023   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Classified in cash and cash equivalents
(2) Classified in marketable securities

 

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9. Net Income (Loss) Per Share

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013      2012     2013     2012  

Net income (loss)

   $ 5,427       $ 7,868      $ (755   $ 19,423   

Less:

  

Accretion of convertible redeemable preferred stock redemption premium

     —          (4,207     —         (8,959

Net income allocable to convertible redeemable preferred stockholders

     —          (2,550     —         (7,067
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholders

     5,427         1,111        (755     3,397   

Less:

  

Change in fair value of warrant liabilities

     —          (6,058     —         (4,382

Accretion of convertible redeemable preferred stock redemption premium for shares assumed issued in exercise of warrants

     —          (722     —         (1,091

Add back:

  

Net income allocable to convertible redeemable preferred stockholders

     —          2,550        —         6,036   
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted net income available (loss attributable) to common stockholders

   $ 5,427       $ (3,119   $ (755   $ 3,960   
  

 

 

    

 

 

   

 

 

   

 

 

 

Denominator (basic):

         

Weighted average common shares outstanding

     89,318,125         19,501,172        87,841,146        19,469,225   

Denominator (diluted):

         

Weighted average common shares outstanding

     89,318,125         19,501,172        87,841,146        19,469,225   

Dilutive stock options and awards outstanding

     4,767,105         —         —         3,935,545   

Weighted average common shares from preferred stock

     —          —         —         29,239,607   

Weighted average common shares from warrants

     2,310,137         —         —         348,487   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net weighted average common shares outstanding

     96,395,367         19,501,172        87,841,146        52,992,864   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) per share to common stockholders:

         

Basic

   $ 0.06       $ 0.06      $ (0.01   $ 0.17   

Diluted

   $ 0.06       $ (0.16   $ (0.01   $ 0.07   

For the three- and nine-month periods ended September 30, 2013 and 2012, potentially dilutive securities are not included in the calculation of diluted net income available (loss attributable) per share as their impact would be anti-dilutive. The following weighted-average number of outstanding stock options, warrants to purchase common and preferred stock, and convertible redeemable preferred stock were excluded from the computation of diluted net income available (loss attributable) per share for the three- and nine-month periods ended September 30:

 

                                                                   
     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013      2012      2013      2012  

Common equivalent shares from convertible preferred stock

     —          44,598,344         —          11,266,811   

Common equivalent shares from stock options

     —          4,930,876         5,167,483         —    

Common equivalent shares from stock warrants

     —          5,906,231         2,300,773         4,662,578   
  

 

 

    

 

 

    

 

 

    

 

 

 
     —          55,435,451         7,468,256         15,929,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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10. Segment Reporting

Following our acquisition of ID Analytics on March 14, 2012, we began operating our business and reviewing and assessing 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 our members on an annual or monthly subscription basis. In our enterprise segment, we offer identity risk assessment and fraud protection services to our enterprise customers.

Financial information about our segments during the three-month period ended September 30, 2013 and as of September 30, 2013 was as follows:

 

     Consumer      Enterprise     Eliminations     Total  

Revenue

         

External customers

   $ 88,386       $ 7,353      $ —       $ 95,739   

Intersegment revenue

     —          1,357        (1,357     —    

Income (loss) from operations

     8,406         (2,748     —         5,658   

Goodwill

     69,891         59,537        —         129,428   

Total assets

     275,890         122,520        (458     397,952   

Loss from operations in our enterprise segment for the three-month period ended September 30, 2013 includes amortization of acquired intangibles of $1,966.

Financial information about our segments during the nine-month period ended September 30, 2013 was as follows:

 

     Consumer      Enterprise     Eliminations     Total  

Revenue

         

External customers

   $ 246,053       $ 21,300      $ —       $ 267,353   

Intersegment revenue

     —          3,901        (3,901     —    

Income (loss) from operations

     8,536         (8,985     —         (449

Loss from operations in our enterprise segment for the nine-month period ended September 30, 2013 includes amortization of acquired intangibles of $5,898.

Financial information about our segments during the three-month period ended September 30, 2012 and as of December 31, 2012 was as follows:

 

     Consumer      Enterprise     Eliminations     Total  

Revenue

         

External customers

   $ 65,579       $ 6,538      $ —       $ 72,117   

Intersegment revenue

     —          1,122        (1,122     —    

Income (loss) from operations

     8,021         (1,798     —         6,223   

Goodwill

     69,891         59,537        —         129,428   

Total assets

     213,564         129,245        (3,221     339,588   

Loss from operations in our enterprise segment for the three-month period ended September 30, 2012 includes amortization of acquired intangibles of $1,966.

Financial information about our segments during the nine-month period ended September 30, 2012 was as follows:

 

     Consumer      Enterprise     Eliminations     Total  

Revenue

         

External customers

   $ 183,903       $ 13,709      $ —       $ 197,612   

Intersegment revenue

     —          2,328        (2,328     —    

Income (loss) from operations

     11,617         (4,224     —         7,393   

Loss from operations in our enterprise segment for the nine-month period ended September 30, 2012 includes amortization of acquired intangibles of $4,291.

All of our revenue is derived from sales in the United States and all our long-lived assets are located in the United States.

11. 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 from operations for the three- and nine-month periods ended September 30, 2013 was $171 and $142, respectively. We recognized an income tax benefit of $13,834 for the nine-month period ended September 30, 2012, primarily due to a benefit of $14,310 resulting from the release of our valuation allowance on the acquisition of ID Analytics.

 

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12. Contingencies

As part of our consumer services, we offer 24x7x365 member service support. If a member’s identity has been compromised, our member service team and remediation specialists will assist the member until the issue has been resolved. This includes our $1 million service guarantee, which is backed by an identity theft insurance policy, under which we will cover certain third-party costs and expenses incurred in connection with the remediation, such as legal and investigatory fees. This insurance also covers certain out-of-pocket expenses, such as loss of income, replacement of fraudulent withdrawals, child and elderly care, travel expenses, and replacement of documents. While we have reimbursed members for claims under this guarantee, the amounts in aggregate for the three- and nine-month periods ended September 30, 2013 and 2012 were not material.

In January 2010, Neal Duncan, one of our stockholders, filed a breach of contract claim against us in the Superior Court of Maricopa County, Arizona. In his complaint, Mr. Duncan alleged that we breached a purported contract with him and sought an ownership interest in our company equal to 7.5%. The parties participated in a private mediation on December 21, 2011, but the dispute was not resolved. We filed motions for summary judgment on November 2, 2011 and January 12, 2012. Oral argument was heard on our motions for summary judgment on April 4, 2012. Immediately following oral argument, the presiding judge ruled from the bench in our favor and granted both motions for summary judgment. We filed an application for an award of fees and costs on April 20, 2012. On June 5, 2012, the judge once again ruled in our favor and awarded fees and costs in excess of $250. On July 2, 2012, Mr. Duncan filed a notice of appeal. On September 30, 2012, we received Mr. Duncan’s opening brief. We filed our response brief on November 13, 2012. Mr. Duncan filed his reply brief on December 10, 2012. The Arizona Court of Appeals issued a Memorandum Decision on July 2, 2013, in our favor, affirming the Superior Court’s grant of summary judgment and its award of attorneys’ fees and costs. Mr. Duncan had the option of filing a motion for reconsideration or submitting a Petition for Review to the Arizona Supreme Court. His deadline for filing a motion for reconsideration was July 17, 2013. That deadline passed. However, Mr. Duncan filed a Petition for Review on July 31, 2013. The Company is not required to respond to Mr. Duncan’s Petition until and unless the Arizona Supreme Court issues an order requesting a response. We continue to await an order from the Arizona Supreme Court stating whether it will entertain Mr. Duncan’s Petition for Review.

Because Mr. Duncan did not post the required supersedeas bond at the start of his appeal, we brought garnishment proceedings in Maricopa County Superior Court to recover stock previously issued to him. We are proceeding with a debtor’s examination of Mr. Duncan and other collection procedures in an effort to locate additional assets that will reduce or extinguish the judgment amount.

On September 25, 2012, Denise Richardson filed a complaint against our company and Todd Davis, our Chairman and Chief Executive Officer, in the United States District Court for the Southern District of Florida. Ms. Richardson performed services for us as an independent contractor under a series of Independent Contractor Services Agreements, the most recent of which expired on December 31, 2011. The gravamen of Ms. Richardson’s claims is that (1) Ms. Richardson was improperly classified as an independent contractor instead of an employee and (2) we breached the terms of an alleged employment agreement and were obligated to Ms. Richardson under that agreement until June 30, 2013. Ms. Richardson asserts claims against us in the complaint for alleged violation of ERISA fiduciary duties, unlawful interference with attainment of ERISA benefits, ERISA retaliation, unlawful misclassification and denial of ERISA benefits, retroactive benefits under ERISA plans, failure to pay overtime in violation of the Fair Labor Standards Act (“FLSA”), breach of employment contract, unjust enrichment, fraud and punitive damages, and intentional infliction of emotional distress. In the complaint, Ms. Richardson alleges entitlement to equitable relief, compensatory damages, liquidated damages, statutory penalties, punitive damages, interest, costs, and attorneys’ fees. On October 15, 2012, Ms. Richardson filed an amended complaint that did not include any substantive changes to her claims. On November 1, 2012, we filed a motion to dismiss Ms. Richardson’s amended complaint or, in the alternative, to transfer venue - challenging on a variety of grounds all of the claims asserted against us in the amended complaint. In addition, on January 16, 2013, Todd Davis filed a motion to dismiss Ms. Richardson’s amended complaint or, in the alternative, to transfer venue, directed to the single count of the amended complaint asserted against Mr. Davis and that joined our motion in several applicable respects and made additional arguments regarding Ms. Richardson’s claim against Mr. Davis. Ms. Richardson responded to that motion on January 30, 2013 and Mr. Davis filed a reply brief on February 11, 2013. On January 23, 2013, pursuant to an order of the court, Ms. Richardson filed a statement of her alleged FLSA claim in which she summarized the FLSA damages to which she claims to be entitled and asserted that those damages amount to at least $179. On April 9, 2013, the Florida district court entered an order transferring Ms. Richardson’s case, in its entirety, to the United States District Court for the District of Arizona, as we and Mr. Davis sought. To date, no substantive proceedings have occurred in the matter following the transfer. On May 20, 2013, both we and Mr. Davis filed a renewed motion to dismiss that, following the transfer of the case, brought before the Arizona district court the issues raised in our and Mr. Davis’ motions to dismiss. Ms. Richardson responded to that motion on June 25, 2013 and we and Mr. Davis filed a reply brief on July 12, 2013. That motion now is fully briefed and the parties are awaiting the court’s decision.

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 the proceedings disclosed above, we believe, based upon the information available at this time, that a material adverse outcome related to the matters is neither probable nor estimable.

 

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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 the fiscal year ended December 31, 2012. 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. Furthermore, such forward-looking statements speak only as of the date of this report. 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 identity risk and credit worthiness assessment services for enterprises. We protect our members by constantly monitoring identity-related events, such as new account openings and credit-related applications. If we detect that a member’s personally identifiable information is being used, we offer notifications and alerts, including proactive, near real-time, actionable alerts, that provide our members peace of mind that we are monitoring use of their identity 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 proactively take actions designed to protect the member’s identity. We also provide remediation services to our members in the event that an identity theft actually occurs. We protect our enterprise customers by delivering on-demand identity risk and authentication information about consumers. Our enterprise customers utilize this information in real time to make decisions about opening or modifying accounts and providing products, services, or credit to consumers to reduce financial losses from identity fraud.

The foundation of our differentiated services is the LifeLock ecosystem. This ecosystem combines large data repositories of personally identifiable information and consumer transactions, proprietary predictive analytics, and a highly 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. As a result of our combination of scale, reach, and technology, we believe that we have the most proactive and comprehensive identity theft protection services available, as well as the most recognized brand in the identity theft protection services industry.

On March 14, 2012, we acquired ID Analytics, a provider of enterprise identity risk assessment and fraud protection services and a strategic technology partner of ours since 2009, for a total purchase price of $186.0 million. Our acquisition of ID Analytics marked our entry into the enterprise market and enhanced the LifeLock ecosystem by expanding our data repositories and providing direct ownership of certain intellectual property related to our services. We began recognizing revenue from our enterprise customers immediately following the closing of our acquisition of ID Analytics on March 14, 2012.

We derive the substantial majority of our revenue from member subscription fees. We also derive revenue from transaction fees from our enterprise customers.

We offer our consumer identity theft protection services on a monthly or annual, automatically renewing subscription basis. As of September 30, 2013, approximately 60% of our members subscribed to our consumer services on an annual basis. We currently offer our consumer services under our basic LifeLock, LifeLock Command Center, and premium LifeLock Ultimate services, with retail list prices of $10, $15, and $25 per month and $110, $165, and $275 per year, respectively. In April 2013, we released our LifeLock Junior service, which monitors personal information with proactive protection features designed specifically for children, with a retail list price of $6 per month and $65 per year. 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, our strategic partners 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.

 

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We also offer special discounts and promotions from time to time to incentivize 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.

Our enterprise customers pay us based on their monthly volume of transactions with us, with approximately half of them 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 aggressively 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 sale commissions, which we record as a sales and marketing expense.

Since our founding in April 2005, we have experienced 34 consecutive quarters of sequential growth in both total revenue and cumulative ending members primarily due to the success of our marketing efforts, the introduction of premium services, and our strong member retention rate. In general, increases in revenue and cumulative ending members occur during and after periods of significant and effective direct retail marketing efforts.

For the three-month period ended September 30, 2013, we recorded revenue of $95.7 million, an increase of 33% from the three-month period ended September 30, 2012. Revenue in our consumer segment was $88.4 million for the three-month period ended September 30, 2013, a 35% increase from $65.6 million for the three-month period ended September 30, 2012. We generated income from operations of $5.7 million and net income of $5.4 million for the three-month period ended September 30, 2013. For the nine-month period ended September 30, 2013, we recorded revenue of $267.4 million, an increase of 35% from the nine-month period ended September 30, 2012, which only included enterprise revenue subsequent to our acquisition of ID Analytics. Revenue in our consumer segment was $246.1 million for the nine-month period ended September 30, 2013, a 34% increase from $183.9 million for the nine-month period ended September 30, 2012. We generated a loss from operations of $0.4 million and a net loss of $0.8 million for the nine-month period ended September 30, 2013.

Our Business Model

In our consumer business, 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 of the acquisition of 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.

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. We incur minimal third-party data expenses, as our enterprise customers typically provide us with their customer transaction data as part of our service. New customer acquisition is often a lengthy process requiring significant investment in the sales team, including costs related to detailed retrospective data analysis to demonstrate the return on investment to prospective customers had our services been deployed over a specific period of time. Since most of the expenses in our enterprise business are fixed in nature, as we add new enterprise customers, there are typically modest incremental costs 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.

 

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Key Operating Metrics

The following table summarizes our key operating metrics for the three- and nine-month periods ended September 30:

 

     Three Months     Nine Months  
     Ended September 30,     Ended September 30,  
     2013     2012     2013     2012  
     (in thousands, except percentages and per member data)  
     (Unaudited)  

Cumulative ending members

     2,864        2,376        2,864        2,376   

Gross new members

     218        187        698        564   

Member retention rate

     87.6     85.9     87.6     85.9

Average cost of acquisition per member

   $ 173      $ 147      $ 168      $ 153   

Monthly average revenue per member

   $ 10.48      $ 9.39      $ 10.17      $ 9.18   

Enterprise transactions

     53,042        57,295        159,850        162,774   

Cumulative ending members. We calculate cumulative ending members as the total number of members at the end of the relevant period. Most of our members are paying subscribers who have enrolled in our consumer services directly with us on a monthly or annual basis. A small percentage of our members receive our consumer services through third-party enterprises that pay us directly, often as a result of a breach within the enterprise or by embedding our service within a broader third-party offering. We monitor cumulative ending members because it provides an indication of the revenue and expenses that we expect to recognize in the future.

 

LOGO

As of September 30, 2013, we had approximately 2.9 million cumulative ending members, an increase of 21% from September 30, 2012. This increase was driven by several factors, including the success of our marketing campaigns, increased awareness of breaches, media coverage of identity theft, and our continued retention improvements.

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. We monitor gross new members because it provides an indication of the revenue and expenses that we expect to recognize in the future. For the three-month period ended September 30, 2013, we enrolled 218,000 gross new members, up from 187,000 for the three-month period ended September 30, 2012. For the nine-month period ended September 30, 2013, we enrolled 698,000 gross new members, up from 564,000 for the nine-month period ended September 30, 2012. This increase was driven by the success of our marketing campaigns, the continued success of our LifeLock Ultimate service, which accounted for more than 40% our gross new members during the three- and nine-month periods ended September 30, 2013, and increased awareness of breaches and identity theft.

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, or for quarterly presentations, 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 number of members enrolled on an annual subscription, increases in the number of alerts a member receives, increases in the number of members enrolled in our premium services, and increases in the number of members enrolled through strategic partners with which the member has a strong association. Conversely, factors reducing our member retention rate may include increases in the number of members enrolled on a monthly subscription, increases in the number of members enrolled in our basic LifeLock service, and the end of programs in our embedded product and breach channels. We monitor our member retention rate because it provides a measure of member satisfaction and the revenue that we expect to recognize in the future.

 

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LOGO

As of September 30, 2013, our member retention rate was 87.6%, an increase of 1.7% points from September 30, 2012. This continued improvement was due to a variety of factors, including consumer awareness, media coverage of identity theft, and our focus on customer service and operational efficiencies.

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 cost of acquisition per member increases in the short term with the expectation that it will decrease over the long term. In addition, when we introduce new partnerships in our embedded product channel, such as when we launched our partnership with AOL in the fourth quarter of 2011, our average cost of acquisition per member decreases due to the volume of members that enroll in our consumer services in a relatively short period of time. We monitor average cost of acquisition per member to evaluate the efficiency of our marketing programs in acquiring new members. For the three-month period ended September 30, 2013, our average cost of acquisition per member was $173, up from $147 for the three-month period ended September 30, 2012. For the nine-month period ended September 30, 2013, our average cost of acquisition per member was $168, up from $153 for the nine-month period ended September 30, 2012. Although our average cost of acquisition per member increased period-over-period, the continued improvements in our member retention rate and the increasing monthly average revenue per member, primarily from the continued penetration of our LifeLock Ultimate service, results in a higher lifetime value of a member relationship which enables us to absorb a higher average cost of acquisition per member.

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, our average revenue per member increased approximately 12% in the three-month period ended September 30, 2013, from the three-month period ended September 30, 2012. 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. The increase in our monthly average revenue per member resulted primarily from the continued success of our LifeLock Ultimate service, which accounted for more than 40% of our gross new members for the three- and nine-month periods ended September 30, 2013, and accounting for over 20% of our base members as of September 30, 2013.

 

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Our monthly average revenue per member for the three-month period ended September 30, 2013 was $10.48, an increase of 12% from the three-month period ended September 30, 2012. Our monthly average revenue per member for the nine-month period ended September 30, 2013 was $10.17, an increase of 11% from the nine-month period ended September 30, 2012.

Enterprise transactions. We calculate enterprise transactions as the total number of enterprise transactions processed for either an identity risk or credit risk score during the relevant period. Our enterprise transactions are processed by ID Analytics, which we acquired on March 14, 2012. Accordingly, the enterprise transactions data for 2012 includes transactions processed by ID Analytics before the acquisition. 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.

We processed 53.0 million and 159.8 million enterprise transactions for the three- and nine-month periods ended September 30, 2013, respectively, a decrease of 7% and 2% from the three- and nine-month periods ended September 30, 2012, respectively. The decrease was primarily driven by a large telecommunications customer who had previously obtained scores for all their incoming subscribers through all channels such as wireless, landline, and bundled internet services. After process and technical modifications were made, the customer made the decision to stop obtaining scores for in-home service customers due to the fraud risk associated with these segments being lower than the wireless segment. Going forward, this customer will now only be obtaining scores for customers coming in from the mobile portion of their business where the fraud risk is much higher. Due to the low per transaction price for this customer, this change had an immaterial impact to our enterprise revenue for the quarter. We do not expect to experience a similar decrease with other existing telecommunication customers. In addition, we have seen a reduction in enterprise transactions as we gave notice of non-renewal to several customers in our consumer segment and we have allowed such contracts to lapse as a result. We expect the transaction volume to decrease as these enterprise customers churn over time. We do not expect this to have a material impact on our total revenue.

Key Financial Metrics

The following table summarizes our key financial metrics for the three- and nine-month periods ended September 30:

 

     Three Months      Nine Months  
     Ended September 30,      Ended September 30,  
     2013      2012      2013      2012  
     (in thousands)  

Consumer revenue

   $ 88,386       $ 65,579       $ 246,053       $ 183,903   

Enterprise revenue

     7,353         6,538         21,300         13,709   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 95,739       $ 72,117       $ 267,353       $ 197,612   

Adjusted net income

   $ 11,402       $ 8,906       $ 15,413       $ 13,066   

Adjusted EBITDA

   $ 12,791       $ 10,938       $ 19,305       $ 18,874   

Free cash flow

   $ 16,629       $ 16,196       $ 46,563       $ 37,215   

Adjusted Net Income

Adjusted net income is a non-GAAP financial measure that we calculate as net income (loss) excluding amortization of acquired intangible assets, change in fair value of warrant liabilities, change in fair value of embedded derivatives, share-based compensation, and income tax benefits resulting from the acquisition of ID Analytics. We have included adjusted net income in this Quarterly Report on Form 10-Q because it is a key measure used by us to understand and evaluate our core 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.

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 it is useful to exclude amortization of acquired intangible assets, change in fair value of warrant liabilities, change in fair value of embedded derivatives, share-based compensation, and income tax benefits from our acquisition of ID Analytics from net income (loss) because (i) the amount of such non-cash expenses in any specific period may not directly correlate to the underlying operational performance of our business, and (ii) such expenses 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 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 changes in, or cash requirements for, our working capital needs;

 

   

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

 

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adjusted net income does not reflect the income tax benefit from the release of the valuation allowance due to increased deferred tax liabilities resulting from our acquisition of ID Analytics; and

 

   

other companies, including companies in our industry, may calculate adjusted net income 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 cash flow metrics, net income (loss), and our other GAAP results. The following table presents a reconciliation of adjusted net income to net income (loss) for each of the periods indicated:

 

     Three Months     Nine Months  
     Ended September 30,     Ended September 30,  
     2013      2012     2013     2012  
     (in thousands)  

Reconciliation of Net Income (Loss) to Adjusted Net Income:

         

Net income (loss)

   $ 5,427       $ 7,868      $ (755   $ 19,423   

Amortization of acquired intangible assets

     1,966         1,966        5,898        4,291   

Change in fair value of warrant liabilities

     —            (6,058     —           (3,117

Change in fair value of embedded derivative

     —            3,499        —           2,785   

Share-based compensation

     4,009         1,631        10,270        3,994   

Tax benefit from acquisition

     —            —           —           (14,310
  

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted net income

   $ 11,402       $ 8,906      $ 15,413      $ 13,066   
  

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss) excluding depreciation and amortization, interest expense, interest income, change in fair value of warrant liabilities, change in fair value of embedded derivatives, other income (expense) (which consists primarily of gains and losses on disposal of fixed assets), income taxes, and share-based compensation. We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by us 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. 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 it is useful to exclude non-cash charges for depreciation and amortization, change in fair value of warrant liabilities, change in fair value of embedded derivatives, and share-based compensation from net income (loss) because (i) the amount of such non-cash expenses in any specific period may not directly correlate to the underlying operational performance of our business, and (ii) such expenses 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 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 changes in, or cash requirements for, our working capital needs;

 

   

adjusted EBITDA does not consider the potentially dilutive impact of share-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; 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 cash flow metrics, net income (loss), and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA to net income (loss) for each of the periods indicated:

 

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     Three Months     Nine Months  
     Ended September 30,     Ended September 30,  
     2013     2012     2013     2012  
     (in thousands)  

Reconciliation of Net Income (Loss) to Adjusted EBITDA:

        

Net income (loss)

   $ 5,427      $ 7,868      $ (755   $ 19,423   

Depreciation and amortization

     3,124        3,084        9,484        7,487   

Interest expense

     82        854        228        2,139   

Interest income

     (29     (4     (75     (6

Change in fair value of warrant liabilities

     —           (6,058     —           (3,117

Change in fair value of embedded derivative

     —           3,499        —           2,785   

Other

     7        1        11        3   

Income tax expense (benefit)

     171        63        142        (13,834

Share-based compensation

     4,009        1,631        10,270        3,994   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 12,791      $ 10,938      $ 19,305      $ 18,874   
  

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

Free cash flow is a non-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. 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 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-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 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, facilitates period-to-period comparisons of operations, and also facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

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 GAAP. Some of these limitations including 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 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.

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 GAAP results. The following table presents a reconciliation of free cash flow to net cash provided by operating activities for each of the periods indicated:

 

 

     Three Months     Nine Months  
     Ended September 30,     Ended September 30,  
     2013     2012     2013     2012  
     (in thousands)  

Reconciliation of Net Cash Provided By Operating Activities to Free Cash Flow:

        

Net cash provided by operating activities

   $ 18,241      $ 17,622      $ 51,827      $ 40,721   

Acquisitions of property and equipment

     (1,612     (1,426     (5,264     (3,506
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 16,629      $ 16,196      $ 46,563      $ 37,215   
  

 

 

   

 

 

   

 

 

   

 

 

 

Factors Affecting Our Performance

Customer acquisition costs. 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

 

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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 continued success of our LifeLock Ultimate service since its launch in the fourth quarter of 2011, 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 channel in which our members enroll on a monthly basis. We also have seen an increase in the number of LifeLock Ultimate members as a percentage of our gross new members.

Customer retention. We have continued to improve the retention of our members and, as a result, the anticipated lifetime value of our members. Our member retention rate improved to 87.6% as of September 30, 2013 from 85.9% as of September 30, 2012. Our ability to continue to improve our 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, 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, we believe approximately 17% of our enterprise revenue for the nine-month period ended September 30, 2013, or approximately 1% of our overall revenue for the nine-month period ended September 30, 2013, 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 percentage may decline over time.

Investments to grow our business. We will continue to invest to grow our business. Investments in the development and marketing of new services and the continued enhancement of our existing services 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, and local authorities. Any changes to the existing applicable laws, regulations, or rules; 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 impact our operating results. We recently began collecting and remitting sales tax in several states related to the sale of our consumer services. Additional states or other jurisdictions may 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 for past sales, discourage current members and other consumers from purchasing our services, or otherwise substantially harm our business and operating results.

For additional factors and risks facing our business, see “Risk Factors”.

Basis of Presentation and Key Components of Our Results of Operations

Following our acquisition of ID Analytics on March 14, 2012, we began operating our business and reviewing and assessing 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, and total assets. 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 later of cash receipt, activation of a member’s account, or expiration of free trial periods to the end of the subscription period.

 

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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 identity and credit risk assessment and fraud protection services, which we 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 half 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.

Cost of services in our enterprise segment includes the costs related to data analytics and data management, primarily consisting of wages and benefits of personnel and facility costs directly associated with the data analytics and data management.

We expect our cost of services to increase if 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. 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, as can 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, our gross margin has also been negatively impacted by sales taxes we paid on behalf of our members and settlements with state tax authorities. Conversely, operating efficiencies in our member services organization can improve our gross margin. We expect that our gross margin may 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. Advertising costs are expensed as incurred and historically have occurred unevenly across periods. Our sales and marketing expenses also include payments related to our sponsorship, promotional, and public relations efforts. 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, we expect our sales and marketing expenses will continue to increase in absolute dollars for the foreseeable future and vary as a percentage of revenue depending on the timing of those expenses.

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 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.

 

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General and Administrative

General and administrative expenses consist primarily of personnel costs, professional fees, and facility-related expenses associated with our executive, finance, human resources, legal, and governmental affairs organizations. 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. We expect our general and administrative expenses will increase in absolute dollars for the foreseeable future as we hire additional personnel to support our overall growth and incur additional costs associated with operating as a public company, including costs associated with SEC reporting and Sarbanes-Oxley Act compliance.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets is the amortization expense associated with core technology, customer relationships, and trade names and trademarks resulting from business acquisitions. As of September 30, 2013, we had $45.3 million in net intangible assets as a result of our acquisition of ID Analytics. The intangible assets have useful lives of between five and nine years and we expect to recognize $7.9 million of amortization expense for the year ending December 31, 2013 and for each of the next three years thereafter.

Other Income (Expense)

Other income (expense) consists primarily of interest income on our cash and cash equivalents and interest expense on our indebtedness. Prior to our IPO in October 2012, other income (expense) included changes in the fair value of our warrant liabilities and an embedded derivative.

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 differs from the statutory rate primarily as a result of the valuation allowance on our deferred taxes, state taxes, and non-deductible expenses. For periods subsequent to the date on which we fully reverse our deferred tax asset valuation allowance, we expect our effective tax rate will approximate the U.S. federal statutory tax rate plus the impact of state taxes.

As a result of the acquisition of ID Analytics, we recorded a deferred tax liability related to the book and tax basis difference resulting from our purchase accounting. The recognition of this deferred tax liability offset $8.5 million of the acquired gross deferred tax assets. A valuation allowance was established in the purchase price allocation for the remaining $1.0 million of acquired gross deferred tax assets. This resulted in the recognition of a net deferred tax liability which has been recognized in our purchase price allocation. As a result of the recognition of this net deferred tax liability, we concluded that the deferred tax assets we had recognized prior to the acquisition for which we had previously recorded a valuation allowance were more likely than not of being realized. Accordingly, we reduced our valuation allowance for these deferred tax assets, which is recorded as an income tax benefit of $14.3 million in our condensed consolidated statements of operations for the nine-month period ended September 30, 2012.

 

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Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of our financial results is not necessarily indicative of our financial results in future periods, and our results for the three- and nine-month periods ended September 30, 2013 are not necessarily indicative of our results for the full year or for any other period.

 

     Three Months     Nine Months  
     Ended September 30,     Ended September 30,  
     2013     2012     2013     2012  
     (in thousands)  

Consolidated Statements of Operations Data:

        

Revenue:

        

Consumer revenue

   $ 88,386      $ 65,579      $ 246,053      $ 183,903   

Enterprise revenue

     7,353        6,538        21,300        13,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     95,739        72,117        267,353        197,612   

Cost of services

     24,935        19,762        73,965        57,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     70,804        52,355        193,388        139,885   

Costs and expenses:

        

Sales and marketing

     40,609        29,926        125,651        91,431   

Technology and development

     10,734        7,943        30,128        20,936   

General and administrative

     11,837        6,297        32,160        15,834   

Amortization of acquired intangible assets

     1,966        1,966        5,898        4,291   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     65,146        46,132        193,837        132,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     5,658        6,223        (449     7,393   

Other income (expense):

        

Interest expense

     (82     (854     (228     (2,139

Interest income

     29        4        75        6   

Change in fair value of warrant liabilities

     —         6,058        —         3,117   

Change in fair value of embedded derivative

     —         (3,499     —         (2,785

Other

     (7     (1     (11     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (60     1,708        (164     (1,804
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     5,598        7,931        (613     5,589   

Income tax expense (benefit)

     171        63        142        (13,834
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 5,427      $ 7,868      $ (755   $ 19,423   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Three Months
Ended September 30,
    Nine Months
Ended September 30,
 
     2013     2012     2013     2012  
     (as a percentage of revenue)  

Consolidated Statements of Operations Data:

        

Revenue:

        

Consumer revenue

     92.3     90.9     92.0     93.1

Enterprise revenue

     7.7     9.1     8.0     6.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0     100.0     100.0     100.0

Cost of Services

     26.0     27.4     27.7     29.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     74.0     72.6     72.3     70.8

Costs and expenses:

        

Sales and marketing

     42.4     41.5     47.0     46.3

Technology and development

     11.2     11.0     11.3     10.6

General and administrative

     12.4     8.7     12.0     8.0

Amortization of acquired intangible assets

     2.1     2.7     2.2     2.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     68.1     63.9     72.5     67.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     5.9     8.7     -0.2     3.7

Other income (expense):

        

Interest expense

     -0.1     -1.2     -0.1     -1.1

Interest income

     0.0     0.0     0.0     0.0

Change in fair value of warrant liabilities

     —          8.4     —          1.6

Change in fair value of embedded derivative

     —          -4.9     —          -1.4

Other

     0.0     0.0     0.0     -0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     -0.1     2.3     -0.1     -0.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     5.8     11.0     -0.3     2.8

Income tax expense (benefit)

     0.2     0.1     0.1     -7.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     5.6     10.9     -0.4     9.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Three- and Nine-month Periods Ended September 30, 2013 and 2012

Total Revenue

 

     Three Months            Nine Months         
     Ended September 30,      %     Ended September 30,      %  
     2013      2012      Change     2013      2012      Change  
     (in thousands)            (in thousands)         

Consumer revenue

   $ 88,386       $ 65,579         34.8   $ 246,053       $ 183,903         33.8

Enterprise revenue

     7,353         6,538         12.5     21,300         13,709         55.4
  

 

 

    

 

 

      

 

 

    

 

 

    

Total revenue

   $ 95,739       $ 72,117         32.8   $ 267,353       $ 197,612         35.3
  

 

 

    

 

 

      

 

 

    

 

 

    

Consumer revenue for the three-month period ended September 30, 2013 was $88.4 million, an increase of $22.8 million, or 34.8%, over consumer revenue for the three-month period ended September 30, 2012. Consumer revenue for the nine-month period ended September 30, 2013 was $246.1 million, an increase of $62.2 million, or 33.8%, over consumer revenue for the nine-month period ended September 30, 2012. The increase in our consumer revenue related primarily to an increase in the number of our members, which grew from 2.4 million as of September 30, 2012 to 2.9 million as of September 30, 2013, an increase of 21%. In addition, our monthly average revenue per member increased 12% to $10.48 for the three-month period ended September 30, 2013 and 11% to $10.17 for the nine-month period ended September 30, 2013, each from the same period in the prior year. The increase in members and monthly average revenue per member resulted from our continued product development and enhancements and our advertising and marketing campaigns designed to increase the overall awareness of our services and identity theft. In addition, the increase in our monthly average revenue per member resulted primarily from the increased penetration of our LifeLock Ultimate service, which was launched in the fourth quarter of 2011 and represented over 20% of our member base as of September 30, 2013.

Enterprise revenue for the three-month period ended September 30, 2013 was $7.4 million, an increase of $0.9 million, or 12.5%, over enterprise revenue for the three-month period ended September 30, 2012. Although enterprise transactions decreased in the three-month period ended September 30, 2013 when compared with the three-month period ended September 30, 2012, the enterprise revenue increased as the lower revenue per transaction volume from a large telecommunication customer was replaced by higher revenue per transactions from other enterprise customers.

 

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Enterprise revenue for the nine-month period ended September 30, 2013 was $21.3 million. We acquired ID Analytics on March 14, 2012 and, accordingly, our enterprise revenue for the nine-month period ended September 30, 2012 only includes the revenue contributed by ID Analytics since that date.

Cost of Services and Gross Profit

 

     Three Months
Ended September 30,
    %     Nine Months
Ended September 30,
    %  
     2013     2012     Change     2013     2012     Change  
     (in thousands)           (in thousands)        

Cost of services

   $ 24,935      $ 19,762        26.2   $ 73,965      $ 57,727        28.1

Percentage of revenue

     26.0     27.4       27.7     29.2  

Gross profit

   $ 70,804      $ 52,355        35.2   $ 193,388      $ 139,885        38.2

Percentage of revenue

     74.0     72.6       72.3     70.8  

Gross profit for the three-month period ended September 30, 2013 was $70.8 million, or 74.0% of revenue, an increase of $18.4 million, or 35.2%, over gross profit of $52.4 million, or 72.6% of revenue, for the three-month period ended September 30, 2012. The increase in our gross profit resulted primarily from increased revenue associated with the growth in the number of our members and increased monthly average revenue per member. The increase in our gross margin resulted primarily from scalability within certain third party fulfillment contracts as our member base continues to grow. Share-based compensation expenses included in cost of services were $0.2 million for each of the three-month periods ended September 30, 2013 and 2012.

Gross profit for the nine-month period ended September 30, 2013 was $193.4 million, or 72.3% of revenue, an increase of $53.5 million, or 38.2%, over gross profit of $139.9 million, or 70.8% of revenue, for the nine-month period ended September 30, 2012. The increase in our gross profit resulted primarily from increased revenue associated with the growth in the number of our members and increased monthly average revenue per member. The increase in our gross margin resulted primarily from scalability within certain third party fulfillment contracts as our member base continues to grow and efficiencies in our member services organization, partially offset by higher fulfillment expenses due to enhancements to our service offerings. Gross margin also increased for the nine-month period ended September 30, 2013 due to our acquisition of ID Analytics on March 14, 2012, which added revenue from the enterprise segment at a higher gross margin percentage than our traditional consumer segment. Share-based compensation expenses included in cost of services were $0.6 million and $0.4 million for the nine-month periods ended September 30, 2013 and 2012, respectively.

Sales and Marketing

 

     Three Months
Ended September 30,
    %     Nine Months
Ended September 30,
    %  
     2013     2012     Change     2013     2012     Change  
     (in thousands)           (in thousands)        

Sales and marketing

   $ 40,609      $ 29,926        35.7   $ 125,651      $ 91,431        37.4

Percentage of revenue

     42.4     41.5       47.0     46.3  

Sales and marketing expenses for the three-month period ended September 30, 2013 were $40.6 million, or 42.4% of revenue, compared with $29.9 million, or 41.5% of revenue, for the three-month period ended September 30, 2012. Sales and marketing expenses for the nine-month period ended September 30, 2013 were $125.7 million, or 47.0% of revenue, compared with $91.4 million, or 46.3% of revenue, for the nine-month period ended September 30, 2012. The increase in our sales and marketing expenses resulted primarily from increases in our advertising expenses and external sales commissions. The increase in our sales and marketing expenses reflected our investment to drive new membership growth as well as continued advertising of our LifeLock Ultimate service, efforts to highlight the growing identity theft issue, and consumer education. Sales and marketing expenses also increased for the nine-month period ended September 30, 2013 due to our acquisition of ID Analytics in March 2012. Share-based compensation expenses included in sales and marketing expenses were $0.6 million and $0.3 million for the three-month periods ended September 30, 2013 and 2012, respectively, and $1.3 million and $0.7 million for the nine-month periods ended September 30, 2013 and 2012, respectively.

Technology and Development

 

     Three Months
Ended  September 30,
    %     Nine Months
Ended September 30,
    %  
     2013     2012     Change     2013     2012     Change  
     (in thousands)           (in thousands)        

Technology and development

   $ 10,734      $ 7,943        35.1   $ 30,128      $ 20,936        43.9

Percentage of revenue

     11.2     11.0       11.3     10.6  

 

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Technology and development expenses for the three-month period ended September 30, 2013 were $10.7 million, or 11.2% of revenue, compared with $7.9 million, or 11.0% of revenue, for the three-month period ended September 30, 2012. Technology and development expenses for the nine-month period ended September 30, 2013 were $30.1 million, or 11.3% of revenue, compared with $20.9 million, or 10.6% of revenue, for the nine-month period ended September 30, 2012. The increase in our technology and development expenses was due to technology and development expenses from ID Analytics from the date of acquisition, as well as from increases in our personnel costs as we continue to invest in the development and enhancement of our service offering. Share-based compensation expenses included in technology and development expenses were $1.1 million and $0.5 million for the three-month periods ended September 30, 2013 and 2012, respectively, and $2.4 million and $1.2 million for the nine-month periods ended September 30, 2013 and 2012, respectively.

General and Administrative

 

     Three Months
Ended  September 30,
    %     Nine Months
Ended September 30,
    %  
     2013     2012     Change     2013     2012     Change  
     (in thousands)           (in thousands)        

General and administrative

   $ 11,837      $ 6,297        88.0   $ 32,160      $ 15,834        103.1

Percentage of revenue

     12.4     8.7       12.0     8.0  

General and administrative expenses for the three-month period ended September 30, 2013 were $11.8 million, or 12.4% of revenue, compared with $6.3 million, or 8.7% of revenue, for the three-month period ended September 30, 2012. General and administrative expenses increased due to additional costs associated with our public company compliance, and additional personnel costs, primarily non-cash share-based compensation. In addition, in the three-month period ended September 30, 2012, we received a favorable legal settlement of $0.9 million related to insurance claims that we incurred in 2008 and 2009. Share-based compensation expenses included in general and administrative expenses were $2.2 million and $0.6 million for the three-month periods ended September 30, 2013 and 2012, respectively.

General and administrative expenses for the nine-month period ended September 30, 2013 were $32.2 million, or 12.0% of revenue, compared with $15.8 million, or 8.0% of revenue, for the nine-month period ended September 30, 2012. General and administrative expenses increased due to the general and administrative expenses from ID Analytics, additional costs associated with our public company compliance, and additional personnel costs, primarily non-cash share-based compensation. In addition, for the nine-month period ended September 30, 2012, we received a favorable legal settlement of $3.6 million related to insurance claims for legal costs that we incurred in 2008 and 2009. Share-based compensation expenses included in general and administrative expenses were $6.0 million and $1.6 million for the nine-month periods ended September 30, 2013 and 2012, respectively.

Amortization of Acquired Intangible Assets

 

     Three Months
Ended  September 30,
    %     Nine Months
Ended  September 30,
    %  
     2013     2012     Change     2013     2012     Change  
     (in thousands)           (in thousands)        

Amortization of acquired intangible assets

   $ 1,966      $ 1,966        0.0   $ 5,898      $ 4,291       37.4

Percentage of revenue

     2.1     2.7       2.2     2.2  

Amortization of acquired intangible assets was $2.0 million for the three-month periods ended September 30, 2013 and 2012. Amortization of acquired intangible assets was $5.9 million for the nine-month period ended September 30, 2013, an increase of 37.4% from the nine-month period ended September 30, 2012, and resulted from our amortization of the intangible assets acquired in our acquisition of ID Analytics in March 2012.

Other Income (Expense)

 

     Three Months
Ended  September 30,
    %     Nine Months
Ended  September 30,
    %  
     2013     2012     Change     2013     2012     Change  
     (in thousands)           (in thousands)        

Other income (expense):

            

Interest expense

   $ (82   $ (854     90.4   $ (228   $ (2,139     89.4

Interest income

     29        4        716.1     75        6        1,196.6

Change in fair value of warrant liabilities

     —         6,058        -100.0     —         3,117        100.0

Change in fair value of embedded derivative

     —         (3,499     100.0     —         (2,785     -100.0

Other

     (7     (1     -449.3     (11     (3     -200.7
  

 

 

   

 

 

     

 

 

   

 

 

   

Total other income (expense)

   $ (60   $ 1,708        -103.5   $ (164   $ (1,804     90.9
  

 

 

   

 

 

     

 

 

   

 

 

   

 

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Other expense for the three-month period ended September 30, 2013 was $0.1 million compared with other income of $1.7 million for the three-month period ended September 30, 2012. The other income for the three-month period ended September 30, 2012 related to an unrealized gain on warrant liabilities of $6.1 million, which was partially offset by interest expense of $0.9 million related to a term loan which was repaid with the proceeds from our IPO and a non-cash unrealized loss on our embedded derivative of $3.5 million.

Other expense for the nine-month period ended September 30, 2013 was $0.2 million compared with other expense of $1.8 million for the nine-month period ended September 30, 2012. The other expense for the nine-month period ended September 30, 2012 related primarily to an unrealized loss on our embedded derivative of $2.8 million and interest expense of $2.1 million related to a term loan which was repaid with the proceeds from our IPO, which were offset by an unrealized gain on warrant liabilities of $3.1 million.

Income tax expense (benefit)

 

     Three Months
Ended  September 30,
    %     Nine Months
Ended  September 30,
    %  
     2013     2012     Change     2013     2012     Change  
     (in thousands)           (in thousands)        

Income tax expense (benefit)

   $ 171      $ 63       169.2   $ 142      $ (13,834 )     -101.0

Effective tax rate

     3.1     0.8       -23.2     NM     

Income tax expense for the three-month period ended September 30, 2013 was $0.2 million compared with an income tax expense of $0.1 million for the three-month period ended September 30, 2012. Income tax expense for the nine-month period ended September 30, 2013 was $0.1 million compared with an income tax benefit of $13.8 million for the nine-month period ended September 30, 2012. As a result of our acquisition of ID Analytics in the first quarter of 2012, we recorded a deferred tax liability related to the book and tax basis difference resulting from our purchase accounting. The increase in our deferred tax liability resulted in a reduction of our valuation allowance for net deferred tax assets, which is recorded as an income tax benefit of $14.3 million for the nine-month period ended September 30, 2012.

Liquidity and Capital Resources

The following table sets forth the major sources and uses of cash for the nine-month periods ended September 30:

 

     2013     2012  
     (in thousands)  

Cash and cash equivalents

   $ 167,888      $ 76,662   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 51,827      $ 40,721   

Net cash used in investing activities

     (29,511     (159,188

Net cash provided by financing activities

     11,375        166,279   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 33,691      $ 47,812   
  

 

 

   

 

 

 

As of September 30, 2013, we had $167.9 million in cash and cash equivalents, which consisted of cash, open commercial paper, and money market funds, and we had no outstanding debt. We believe that our existing cash and cash equivalents together with cash generated from operations will be sufficient to fund our operations for at least the next 12 months.

Operating Activities

For the nine-month period ended September 30, 2013, operating activities generated $51.8 million in cash as a result of a net loss of $0.8 million, adjusted by non-cash items such as depreciation and amortization of $9.5 million and share-based compensation of $10.3 million. An increase in deferred revenue related to the overall growth of our business provided operating cash of $24.9 million and we had an increase in operating cash as a result of changes in other operating assets and liabilities of $7.9 million.

For the nine-month period ended September 30, 2012, operating activities generated $40.7 million in cash as a result of net income of $19.4 million, adjusted by non-cash items such as depreciation and amortization of $7.5 million, share-based compensation of $4.0 million, a deferred income tax benefit of $14.3 million, an unrealized gain on warrant liabilities of $3.1 million, and an unrealized loss of $2.8 million on the preferred stock embedded derivative. An increase in deferred revenue related to the overall growth of our business provided operating cash of $19.4 million and we had an increase in operating cash as a result of changes in other operating assets and liabilities of $5.1 million.

Investing Activities

For the nine-month period ended September 30, 2013, we invested $24.2 in marketable securities and used $5.3 million of cash to acquire property and equipment, primarily attributable to investments in infrastructure to enable continued scalable growth.

 

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Table of Contents

For the nine-month period ended September 30, 2012, we used $157.4 million of cash to acquire ID Analytics and $3.5 million of cash to acquire property and equipment, primarily related to the establishment of an additional data center for ID Analytics. These were offset by a $1.7 million decrease in restricted cash, resulting from a change in our letters of credit, which are no longer required to be fully funded.

Financing Activities

For the nine-month period ended September 30, 2013, financing activities generated net cash of $11.4 million as a result of cash received from the exercise of stock options of $11.8 million offset by cash used of $0.4 million related to the payments of debt issuance costs associated with the refinancing of our credit agreement.

For the nine-month period ended September 30, 2012, financing activities generated net cash of $166.3 million related to proceeds of $102.2 million from the issuance of our Series E and E-2 preferred stock, $4.4 million from the issuance of warrants to acquire Series E and E-2 preferred stock, and $68.0 million in term loan borrowings under our new senior credit facility, net of payments of $5.4 million, offset by payments of $1.5 million for debt issuance costs and $1.5 million of payments related to our IPO that occurred in October 2012.

Debt Obligations

Credit Agreement

On January 9, 2013, we refinanced our existing credit agreement and entered into the Senior Credit Facility.

The Senior Credit Facility provides for an $85.0 million revolving line of credit, which we can increase to $110.0 million subject to the conditions set forth in the Credit Agreement. The revolving line of credit also includes a letter of credit subfacility of $10.0 million and a swing line loan subfacility of $5.0 million. The Senior Credit Facility has a maturity date of January 9, 2018. As of September 30, 2013, we had no debt outstanding under our Senior Credit Facility. For the nine-month period ended September 30, 2013, we paid an unused commitment fee of $0.2 million, which is included in interest expense in the condensed consolidated statements of operations.

Borrowings under the Senior Credit Facility bear interest at a per annum rate equal to, at our option, either (a) a base rate equal to the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” and (iii) the eurodollar rate for base rate loans plus 1.00%, plus an applicable rate ranging from 0.50% to 1.25%, or (b) the eurodollar rate for eurodollar rate loans plus an applicable rate ranging from 1.50% to 2.25%. The initial applicable rate is 0.50% for base rate loans and 1.50% for eurodollar rate loans, subject to adjustment from time to time based upon our achievement of a specified consolidated leverage ratio.

In addition to paying interest on the outstanding principal under the Senior Credit Facility, we are also required to pay a commitment fee to the administrative agent at a rate per annum equal to the product of (a) an applicable rate ranging from 0.25% to 0.50% multiplied by (b) the actual daily amount by which the aggregate revolving commitments exceed the sum of (1) the outstanding amount of revolving borrowings, and (2) the outstanding amount of letter of credit obligations. The initial applicable rate is 0.25%, subject to adjustment from time to time based upon our achievement of a specified consolidated leverage ratio.

We also will pay a letter of credit fee to the administrative agent for the account of each lender in accordance with its applicable percentage of a letter of credit for each letter of credit, which fee will be equal to the applicable rate then in effect, multiplied by the daily maximum amount available to be drawn under the letter of credit. The initial applicable rate for the letter of credit is 1.50%, subject to adjustment from time to time based upon our achievement of a specified consolidated leverage ratio.

As of September 30, 2013, we had an outstanding letter of credit issued in connection with the revolving line of credit in the total amount of $0.1 million.

Prior Senior Credit Facility

On February 7, 2012, we entered into a credit agreement (“prior senior credit facility”), which we amended on March 14, 2012, April 30, 2012, and May 29, 2012. The prior senior credit facility provided for a $68.0 million term loan and a $2.0 million revolving line of credit. The revolving line of credit also included a letter of credit sub-facility, which, together with outstanding revolving borrowings, could not exceed $2.0 million. The prior senior credit facility had a maturity date of February 7, 2016. On October 12, 2012, we repaid the amount owing under our term loan. As of December 31, 2012, there were no amounts outstanding on the revolving line of credit. As described above, on January 9, 2013, we refinanced the prior senior credit facility and entered into a new credit agreement.

Borrowings under the prior senior credit facility carried a per annum interest rate equal to, at our option, either (a) a base rate equal to the highest of (i) the Federal Funds Rate, plus .50%, (ii) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate,” and (iii) the eurodollar rate for base rate loans, plus 1.00%, plus an applicable rate ranging from 2.75% to 3.75%, or (b) the eurodollar rate for eurodollar rate loans, plus an applicable rate ranging from 3.75% to 4.75%. The initial applicable rate was 3.75% for base rate loans and 4.75% for eurodollar rate loans, subject to adjustment from time to time based upon our achievement of a specified consolidated leverage ratio.

 

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In addition to paying interest on the outstanding principal under the prior senior credit facility, we were also required to pay a commitment fee to the administrative agent at a rate per annum equal to the product of (a) 0.50% multiplied by (b) the actual daily amount by which the aggregate revolving commitments exceed the sum of (1) the outstanding amount of revolving borrowings, and (2) the outstanding amount of letter of credit obligations.

We also paid a letter of credit fee to the administrative agent for the account of each lender in accordance with its applicable percentage of a letter of credit for each letter of credit, which fee was equal to the applicable rate then in effect, multiplied by the daily maximum amount available to be drawn under the letter of credit. The initial applicable rate for the letter of credit fee was 4.75%, subject to adjustment from time to time based upon our achievement of a specified consolidated leverage ratio.

We had the right to prepay our borrowings under the prior senior credit facility from time to time in whole or in part, without premium or penalty, subject to the procedures set forth in the prior senior credit facility.

Prior Line of Credit

On September 23, 2008, we entered into a $12.0 million loan and security agreement with Silicon Valley Bank. The agreement consisted of a revolving line of credit, or LOC, in the initial amount of $12.0 million with the right for us to increase the LOC to $17.0 million and $20.0 million. The LOC had an original maturity date of September 23, 2010, which was subsequently extended to March 21, 2011. In conjunction with entering into the LOC in 2008, we issued a warrant to purchase 56,193 shares of Series D convertible redeemable preferred stock with an exercise price of $5.34 per share. The relative fair value of the warrant was recorded as a debt issuance cost and was amortized over the remaining term of the LOC.

On July 24, 2009 and February 8, 2010, we exercised our rights under the LOC, or the LOC Rights, to increase the LOC to $17.0 million and $20.0 million, respectively. In conjunction with our exercise of the LOC Rights, we issued a warrant to purchase 9,365 and 5,619 shares of Series D convertible redeemable preferred stock in 2010 and 2009, respectively, with an exercise price of $5.34 per share. The relative fair value of the warrants was recorded as a debt issuance cost and was amortized over the remaining term of the LOC.

On March 18, 2011, we entered into an amendment to the LOC to increase the LOC to $25.0 million and extend the maturity date to March 21, 2013. On March 14, 2012, the LOC was terminated in connection with our prior senior credit facility.

The average monthly balance of the LOC bore interest at Silicon Valley Bank’s prime rate plus a percentage ranging from 0.0% to 1.0% for the year ended December 31, 2011, depending on our liquidity ratio. The actual interest rates ranged from 3.25% to 4.25% for the year ended December 31, 2011. The rate was 3.25% as of December 31, 2011. A commitment fee payable quarterly at the rate of 0.125% accrued on any unused amount of the LOC.

Letters of Credit

As of December 31, 2012, we had $1.3 million in letters of credit issued against the $2.0 million revolving line of credit provided in our prior senior credit facility. The restrictions on the cash used to fully collateralize the standby letters of credit were released in July 2012.

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.

Contractual Obligations

Other than the renewal of our office space lease with respect to our corporate headquarters as disclosed in Note 6 to the condensed consolidated financial statements and as noted in “Financing Activities” above, there were no material changes in our commitments under contractual obligations to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed 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.

 

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We believe that the assumptions and estimates associated with revenue recognition for payments and other fees, income taxes, and share-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 the our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our primary market risk exposures or how those exposures are managed from the information disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. For further discussion of quantitative and qualitative disclosures about market risk, reference is made to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has 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. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2013.

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 materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, 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. Over time, 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.

For a description of our material legal proceedings, see Note 12 —“Contingencies” in the Notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and all information set forth in this Quarterly Report on Form 10-Q. 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.

There have been no material changes to the Risk Factors described under “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, other than:

 

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We will no longer qualify as an “emerging growth company” after December 31, 2013, and as a result, we will have to comply with increased disclosure and governance requirements.

While we are currently an “emerging growth company” as defined in the JOBS Act, we will no longer qualify as an “emerging growth company” after December 31, 2013. As an “emerging growth company,” we have been able to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Under Section 107(b) of the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

As an “emerging growth company,” we cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until December 31, 2013 when we are no longer an “emerging growth company”. There are no assurances that investors will find our common stock more attractive, or that there will be a more active trading market for our common stock or that our stock price will be less volatile, when are no longer an “emerging growth company”.

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

Use of Proceeds from Public Offering of Common Stock

In October 2012, our registration statement on Form S-1 (File No. 333-183598) was declared effective for our IPO. There have been no changes regarding the use of proceeds from our IPO from the disclosure in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

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Item 6. Exhibits.

 

10.8C    Third Amendment to Office Lease, dated as of September 13, 2013, between LifeLock, Inc. and PKY Fund II Phoenix II, LLC (1)
10.20    Employment Agreement, dated July 29, 2013, between LifeLock, Inc. and Velislav Iltchev
31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1    Section 1350 Certification of Chief Executive Officer
32.2    Section 1350 Certification of Chief Financial Officer
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

 

(1) Filed as Exhibit 10.8C to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 16, 2013, and incorporated herein by reference.
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise are not subject to liability under those sections.

 

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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: October 30, 2013     By:  

/s/ Todd Davis

    Name:   Todd Davis
    Title:   Chairman and Chief Executive Officer
      (Principal Executive Officer)
Date: October 30, 2013     By:  

/s/ Chris Power

    Name:   Chris Power
    Title:   Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

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