S-1/A 1 d361263ds1a.htm AMENDMENT NO. 3 TO FORM S-1 Amendment No. 3 to Form S-1
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As filed with the Securities and Exchange Commission on September 27, 2012

Registration No. 333-183598

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

LifeLock, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware

 

7374

 

56-2508977

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

60 East Rio Salado Parkway

Suite 400

Tempe, Arizona 85281

(480) 682-5100

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Todd Davis

Chairman and Chief Executive Officer

LifeLock, Inc.

60 East Rio Salado Parkway

Suite 400

Tempe, Arizona 85281

(480) 682-5100

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Robert S. Kant, Esq.

Brian H. Blaney, Esq.

Jeremy D. Zangara, Esq.

Greenberg Traurig, LLP

2375 East Camelback Road, Suite 700

Phoenix, Arizona 85016

(602) 445-8000

 

Clarissa Cerda, Esq.

Executive Vice President, Chief Legal Officer, and Secretary

LifeLock, Inc.

60 East Rio Salado Parkway, Suite 400

Tempe, Arizona 85281

(480) 682-5100

 

Andrew S. Williamson, Esq.

Charles S. Kim, Esq.

Cooley LLP

101 California Street

5th Floor

San Francisco, California 94111

(415) 693-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨                  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨                   

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨                   

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  þ (Do not check if a smaller reporting  company)  

Smaller reporting company ¨

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated September 27, 2012.

 

15,700,000 Shares

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of LifeLock, Inc.

We are offering 15,500,000 shares of our common stock. The selling stockholders identified in this prospectus are offering an additional 200,000 shares of our common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. It is currently estimated that the initial public offering price per share will be between $9.50 and $11.50. We have applied to list our common stock on the New York Stock Exchange under the symbol “LOCK”.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements.

See “Risk Factors” beginning on page 14 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                            $                

Underwriting discount

   $         $     

Proceeds, before expenses, to LifeLock

   $         $     

Proceeds, before expenses, to the selling stockholders

   $         $     

To the extent that the underwriters sell more than 15,700,000 shares of common stock, the underwriters have the option to purchase up to an additional 2,355,000 shares from us at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on             , 2012.

 

Goldman, Sachs & Co.   BofA Merrill Lynch   Deutsche Bank Securities
RBC Capital Markets   Canaccord Genuity   Needham & Company

 

 

Prospectus dated                     , 2012.


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TABLE OF CONTENTS

 

    

Page

 

Prospectus Summary

     1   

Risk Factors

     14   

Special Note Regarding Forward-Looking Statements

     44   

Market, Industry, and Other Data

     45   

Use of Proceeds

     46   

Dividend Policy

     47   

Capitalization

     48   

Dilution

     51   

Selected Consolidated Financial and Other Data

     54   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     61   

Business

     102   

Management

     118   

Executive Compensation

     128   

Certain Relationships and Related Party Transactions

     146   

Principal and Selling Stockholders

     149   

Description of Capital Stock

     152   

Shares Eligible for Future Sale

     158   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     160   

Underwriting (Conflicts of Interest)

     164   

Legal Matters

     170   

Experts

     170   

Where You Can Find Additional Information

     170   

Unaudited Pro Forma Condensed Combined Financial Statements

     P-1   

Index to Financial Statements

     F-1   

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                     , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should read this entire prospectus carefully, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes. Unless the context otherwise requires, references in this prospectus to the “company,” “LifeLock,” “we,” “us,” and “our” refer to LifeLock, Inc. and, where appropriate, its subsidiaries.

Company Overview

We are a leading provider of proactive identity theft protection services for consumers and identity risk assessment and fraud protection services for enterprises. We protect our consumer subscribers, whom we refer to as 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 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 stop the transaction or otherwise rapidly 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.

We offer our consumer services on a monthly or annual subscription basis, with pricing ranging from $10 per month, or $110 per year, for our basic LifeLock identity theft protection service, to $25 per month, or $275 per year, for our premium LifeLock Ultimate service, subject to wholesale pricing and discounts. As of June 30, 2012, we served nearly 2.3 million paying members. Our cumulative ending member base grew 21.5%, and our annual member retention rate increased from 80.4% to 85.4%, each over the 12-month period ended June 30, 2012. Our enterprise customers pay us based on their monthly volume of transactions with us. As of June 30, 2012, we served more than 250 enterprise customers, including six of the top ten U.S. financial institutions, three of the top four U.S. wireless service providers, and eight of the top ten U.S. credit card issuers.

We have a predictable subscription revenue model, a strong customer retention rate, and a scalable infrastructure to support our growth. We generated revenue of $193.9 million during 2011 and $125.5 million during the six months ended June 30, 2012. We continue to make substantial investments in customer acquisition and business expansion. We recorded a net loss of $4.3 million for the year ended December 31, 2011. We recorded net income of $11.6 million for the six months ended June 30, 2012, which included a $14.3 million income tax benefit resulting from our acquisition of ID

 

 

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Analytics. We generated cash flow from operating activities of $24.3 million during 2011 and $23.1 million during the six months ended June 30, 2012.

On March 14, 2012, we acquired ID Analytics, Inc., a provider of enterprise identity risk assessment and fraud protection services and a strategic technology partner of ours since 2009. This acquisition 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.

Industry Overview

Identity theft and identity fraud are significant problems that often lead to both financial losses and reputational harm for consumers and enterprises. Identity theft typically occurs when an unauthorized party gains access to an individual’s personally identifiable information, such as the individual’s social security number, name, address, phone number, or date of birth. Identity fraud is the actual misuse of the personally identifiable information for financial gain, including purchasing products or services, making withdrawals, modifying existing accounts, or creating false accounts.

As consumers and enterprises become increasingly interconnected and engage in a large number of daily activities that involve personal or financial information, the risk of identity theft significantly increases. Even seemingly harmless activities, such as sharing personally identifiable information with merchants, employers, doctors, dentists, schools, banks, or insurance companies, can lead to identity theft, as professional thieves now have more sophisticated and creative methods and a broader variety of places from which to steal personal and financial information.

Identity theft has been the most reported consumer complaint in the United States for the past 12 years, according to the Federal Trade Commission, or the FTC. Javelin Strategy & Research estimates that 11.6 million adults in the United States, representing 4.9% of the adult population, were victims of identity fraud in 2011. Javelin Strategy & Research also estimates that the total cost of identity fraud to consumers and enterprises in 2011 was approximately $18 billion in the United States.

A number of trends are contributing to an increased risk of identity theft and identity fraud, including the following:

 

  Ÿ  

Increasing number of data breaches.    Enterprises that act as custodians of personally identifiable information are increasingly subject to hacking, data breaches, and loss of mobile devices with stored personal information. Javelin Strategy & Research estimates that 15% of U.S. consumers received data breach notifications in 2011 and that consumers who received such breach notifications were 9.5 times more likely to be victims of identity fraud.

 

  Ÿ  

Increase in e-commerce and Internet-based transactions.    The increasingly simple nature of online transactions and the ease of e-commerce and online banking allow identity thieves to conduct numerous fraudulent transactions using the same personally identifiable information across a large number of enterprises in a short time span.

 

  Ÿ  

Use of social networks.    Social networking users often share their birthdays, e-mail addresses, and other information about themselves or their family members that can be accessed easily by identity thieves and used to answer knowledge-based authentication questions, crack passwords, compromise identity security, or gain access to accounts.

 

  Ÿ  

Proliferation of mobile devices.    The rapid adoption of mobile devices is increasing the risk of identity theft because these devices often contain personally identifiable information, are easy to steal or misplace, and are typically not password protected.

 

 

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Challenges in Effectively Protecting Against Identity Theft and Identity Fraud

Consumers and enterprises have historically struggled to protect themselves effectively against identity theft and identity fraud. The most commonly used service by consumers is credit monitoring provided by credit bureaus, which was originally developed to help consumers monitor their credit ratings by tracking changes to their credit profiles. Additionally, some enterprises have attempted to develop their own identity risk assessment capabilities, but these internally developed systems are often based solely on the enterprise’s own records of personally identifiable information and customer transactions, sometimes supplemented by credit reports and other third-party information. We believe that in order to provide the most proactive and comprehensive protection against identity theft and identity fraud, solutions must overcome the following limitations that are common in the market:

 

  Ÿ  

Reactive response.    Credit monitoring services are not proactive and can sometimes take days, weeks, or even a month to alert consumers that their identities have been compromised; however, damage from identity theft may occur either within minutes or hours of the identity theft or sometimes years later.

 

  Ÿ  

Credit focus.    Traditional solutions that rely on credit monitoring or credit reports do not identify non-credit-related fraud, such as bank fraud, tax fraud, phone or utilities fraud, and employment-related fraud.

 

  Ÿ  

Limited visibility.    Traditional solutions lack the visibility into transaction data across multiple industries and direct linkage to consumers in real time.

 

  Ÿ  

Lack of predictive intelligence.    Traditional solutions lack the capability to analyze the connections between consumers, transactions happening across enterprises, and historical fraudulent activities and, therefore, cannot accurately predict the likelihood that an identity theft or identity fraud has occurred or may occur.

 

  Ÿ  

Ineffective remediation.    Traditional solutions often do not offer consumers effective remediation services in the event of an identity theft, leaving consumers on their own during the time-consuming, frustrating, and sometimes expensive remediation process.

Market Opportunity

We believe that there is a significant, underpenetrated market opportunity for proactive identity theft protection services for consumers and identity risk assessment and fraud protection services for enterprises. Based on our research indicating that two-thirds of U.S. adults are concerned about identity theft, we believe the total addressable market for our consumer identity theft protection services is approximately 148 million adults in the United States alone. We focus our efforts on adults with a household income in excess of $50,000 per year and who are concerned about identity theft, of which we estimate there are approximately 78 million in the United States. In addition, we believe the total addressable market for our enterprise identity risk assessment and fraud protection services includes approximately 2.5 billion transactions per year, based on our analysis of industry research, public filings, industry trade publications, and U.S. government studies.

Our Competitive Strengths

We believe that the LifeLock ecosystem enables us to provide the most proactive and comprehensive identity theft and fraud protection services available and provides us with numerous competitive strengths that differentiate us and that are critical to our success, including the following:

 

  Ÿ  

Breadth and depth of our data repositories.    The LifeLock ecosystem includes data repositories that contain over 750 billion identity elements, including personally identifiable

 

 

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information, transaction data, and fraud instances across multiple industries. In addition, our enterprise customers provide us with an average of 45 million new identity elements per day.

 

  Ÿ  

Strong network effects.    Transactions that flow through our enterprise business generate actionable alerts for our members. Our members are then able to confirm back to us whether or not they are participating in the identified transactions. This feedback loop strengthens our data repositories and creates a network effect that improves the precision and sophistication of our algorithms.

 

  Ÿ  

Patented and proprietary analytics.    We use patented and proprietary predictive analytics to analyze the data in our repositories in order to provide our enterprise customers with a sub-second assessment of risks associated with a transaction based on identity information presented to them.

 

  Ÿ  

Most comprehensive service offerings.    The LifeLock ecosystem has enabled us to develop what we believe to be the most proactive and comprehensive identity theft protection, identity risk assessment, and fraud protection services available.

 

  Ÿ  

Leadership position.    We believe that we have the leading brand in the identity theft protection services industry. We believe our solutions lead the market for identity theft protection, identity risk assessment, and fraud protection services.

Our Strategy

Our goal is to be the leading provider of proactive identity theft protection services for consumers and identity risk assessment and fraud protection services for enterprises. The key elements of our strategy to achieve this goal include the following:

 

  Ÿ  

Extend our leadership position through continued enhancement of our services.    We intend to grow our business by introducing new services and expanding the services we offer. We believe there are many additional areas in which protection and authentication of personally identifiable information is important, and we intend to explore and consider these markets.

 

  Ÿ  

Expand our data repositories and analytics.    We intend to expand our data repositories with valuable and differentiated data from our members, enterprise customers, and other third- party data sources. We intend to continue to enhance our algorithms to apply more sophisticated analytics to more types of consumer transactions.

 

  Ÿ  

Grow our customer base.    We plan to expand and enhance our marketing activities and leverage our existing and new strategic partners as well as the relationships with our enterprise customers to grow our membership base. We also intend to add new enterprise customers.

 

  Ÿ  

Continue our focus on customer retention.    We plan to invest in increasing member retention by expanding our services and the number of value-added, proactive alerts we send to our members. We also plan to invest in making our services easy to integrate into enterprise business processes and expanding the types of risk assessment services we provide to our enterprise customers.

 

  Ÿ  

Increase sales to existing customers.    We believe a substantial opportunity exists to increase the penetration of our premium-level consumer services as well as offer new services to our members. In our enterprise business, we believe we have the opportunity to attain deeper penetration of our existing customers’ organizations by expanding across various departments and adding new services.

 

 

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Risk Factors

Our business is subject to numerous risks and uncertainties, including those highlighted in “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

  Ÿ  

we have incurred significant losses since our inception, and our business will be harmed and our stock price could decline if we cannot achieve and maintain annual profitability;

 

  Ÿ  

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

 

  Ÿ  

any harm to our brand and reputation or the failure to maintain and enhance our brand and reputation may materially and adversely affect our business;

 

  Ÿ  

we face intense competition in our business, and we may not be able to compete effectively, which could reduce demand for our services and adversely affect our business;

 

  Ÿ  

we could lose our access to data sources, which could cause us competitive harm and have a material adverse effect on our reputation and business;

 

  Ÿ  

we are subject to certain compliance requirements and injunctive provisions under orders that we entered into with the FTC and 35 states’ attorneys general in March 2010, the violation of which could negatively impact our business;

 

  Ÿ  

if we are unable to protect our intellectual property, or if our services infringe the intellectual property rights of others, our business may be adversely affected and we may be required to pay unexpected litigation costs or damages or prevented from selling our services; and

 

  Ÿ  

our directors, executive officers, and principal stockholders will continue to have substantial control over us after this offering and will be able to exert significant control over matters subject to stockholder approval, including the election of directors and the approval of significant corporate transactions.

Corporate Information

We were incorporated in Delaware in April 2005. Our principal executive offices are located at 60 East Rio Salado Parkway, Suite 400, Tempe, Arizona 85281, and our telephone number is (480) 682-5100. Our website address is www.lifelock.com. The information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. We refer to the Jumpstart Our Business Startups Act of 2012 in this prospectus as the “JOBS Act,” and references in this prospectus to “emerging growth company” shall have the meaning ascribed to it in the JOBS Act.

“LifeLock,” our logo, and other trade names, trademarks, and service marks of LifeLock appearing in this prospectus are the property of LifeLock. Other trade names, trademarks, and service marks appearing in this prospectus are the property of their respective holders.

 

 

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THE OFFERING

 

Common stock offered by LifeLock

15,500,000 shares

 

Common stock offered by the selling stockholders

200,000 shares

 

Common stock to be outstanding after this offering

83,379,068 shares

 

Option to purchase additional shares of common stock

2,355,000 shares

 

Use of proceeds

We estimate that our net proceeds from this offering will be approximately $147.7 million, assuming an initial public offering price of $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.

 

  We intend to use approximately $62.6 million of the net proceeds from this offering to repay the outstanding balance under our term loan incurred in connection with our acquisition of ID Analytics. In addition, if the anticipated initial public offering price is below $15.7552 per share, we intend to use a portion of the net proceeds from this offering to pay the amounts that will be payable to the holders of our Series E-1 preferred stock. We intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including supporting our revenue growth, enhancing our sales and marketing activities, entering new markets, and developing new service offerings. We also may use a portion of the net proceeds from this offering to acquire businesses, products, services, or technologies that we believe to be complementary to our business. We will not receive any of the proceeds from the sale of shares to be offered by the selling stockholders. See “Use of Proceeds” for additional information.

 

Conflicts of interest

As described under “Use of Proceeds,” each of Bank of America, N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, an underwriter in this offering, and Royal Bank of Canada, an affiliate of RBC Capital Markets, LLC, an underwriter in this offering, is a lender under the term loan portion of our senior credit facility and may receive more than five percent of the net proceeds of this offering. Thus, both Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBC Capital Markets, LLC have a “conflict of interest” under the applicable provisions of Rule 5121 of the Conduct Rules of the Financial Industry Regulatory Authority, Inc., or FINRA. Accordingly, this offering will be made in compliance with the applicable provisions of Rules 5110 and 5121 of the Conduct Rules regarding the underwriting of securities of a company with a member that has a conflict of interest within the

 

 

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meaning of those rules. Deutsche Bank Securities Inc. has agreed to serve as a “qualified independent underwriter” as defined by FINRA and performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this prospectus forms a part. No underwriter with a conflict of interest will execute sales in discretionary accounts without the prior written specific approval of the customers. See “Underwriting—Conflicts of Interest.”

 

Risk factors

See “Risk Factors” immediately following this prospectus summary and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed New York Stock Exchange symbol

“LOCK”

The number of shares of our common stock to be outstanding after this offering is based on 67,879,068 shares of our common stock outstanding as of June 30, 2012, and excludes the following:

 

  Ÿ  

11,633,596 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2012 at a weighted average exercise price of $3.66 per share;

 

  Ÿ  

5,055,451 shares of our common stock reserved for future issuance under our Amended and Restated 2006 Incentive Compensation Plan, or our 2006 Plan, as of June 30, 2012; provided, however, that upon the closing of this offering, any remaining shares available for issuance under our 2006 Plan will be added to the shares reserved under our 2012 Incentive Compensation Plan, or our 2012 Plan, and we will cease granting awards under our 2006 Plan;

 

  Ÿ  

4,200,000 additional shares of common stock reserved for future issuance under our 2012 Plan, which will become effective upon the closing of this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under our 2012 Plan;

 

  Ÿ  

2,000,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, which will become effective upon the closing of this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan; and

 

  Ÿ  

2,727,702 shares of our common stock issuable upon the exercise of warrants outstanding as of June 30, 2012 at a weighted average exercise price of $1.0779 per share.

Unless otherwise indicated, all information in this prospectus reflects and assumes the following:

 

  Ÿ  

the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 48,391,142 shares of our common stock immediately prior to the closing of this offering(1);

 

  Ÿ  

the automatic conversion of warrants to purchase 2,267,357 shares of our Series A preferred stock into warrants to purchase 2,334,044 shares of our common stock immediately prior to the closing of this offering;

 

  Ÿ  

the automatic conversion of warrants to purchase 71,177 shares of our Series D preferred stock into warrants to purchase 71,177 shares of our common stock immediately prior to the closing of this offering;

 

 

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  Ÿ  

the automatic termination of warrants to purchase 3,442,991 shares of our Series E and Series E-2 preferred stock upon the closing of this offering;

 

  Ÿ  

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering;

 

  Ÿ  

no exercise of options or warrants outstanding as of June 30, 2012; and

 

  Ÿ  

no exercise of the underwriters’ option to purchase up to an additional 2,355,000 shares of our common stock.

 

(1) The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series E and Series E-2 preferred stock depends in part on the anticipated initial public offering price of our common stock. The anticipated public offering price will be determined in good faith by our board of directors shortly before the pricing of this offering. The terms of our Series E and Series E-2 preferred stock provide that the ratio at which each share of these series of preferred stock automatically convert into shares of our common stock in connection with this offering will increase if the anticipated initial public offering price is below $13.3919 per share, which would result in additional shares of our common stock being issued upon conversion of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series E and Series E-2 preferred stock would convert into an aggregate of 17,564,757 shares of our common stock immediately prior to the closing of this offering. A $1.00 increase in the anticipated initial public offering price of $10.50 per share would decrease by 1,525,933 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price reaches $13.3919 per share, each share of our Series E and Series E-2 preferred stock would convert into one share of our common stock immediately prior to the closing of this offering. A $1.00 decrease in the anticipated initial public offering price of $10.50 per share would increase by 1,848,197 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. However, if the volume weighted average price (VWAP) of our common stock during the ten trading days immediately following the effectiveness of the registration statement of which this prospectus forms a part is greater than the anticipated initial public offering price of $10.50 per share, we will have the right to repurchase from each holder of our Series E and Series E-2 preferred stock a number of shares of our common stock equal to the positive difference between the number of shares of our common stock into which such holder’s Series E and Series E-2 preferred stock converted immediately prior to the closing of this offering and the shares of our common stock into which such holder’s Series E and Series E-2 preferred stock would have converted based on the VWAP of our common stock. The repurchase price for these shares of our common stock will be $0.001 per share. A $1.00 increase in the VWAP above the anticipated initial public offering price of $10.50 per share will give us the right to repurchase 1,525,933 shares of our common stock from the holders of our Series E and Series E-2 preferred stock. If the VWAP equals or exceeds $13.3919 per share, we will have the right to repurchase a maximum of 3,792,798 shares of our common stock from the holders of our Series E and Series E-2 preferred stock. If the anticipated initial public offering price is $9.50 per share, the outstanding shares of our Series E and Series E-2 preferred stock will convert into an aggregate of 19,412,954 shares of our common stock immediately prior to the closing of this offering; if the anticipated initial public offering price is $10.50 per share, the outstanding shares of our Series E and Series E-2 preferred stock will convert into an aggregate of 17,564,757 shares of our common stock immediately prior to the closing of this offering; and if the anticipated initial public offering price is $11.50 per share, the outstanding shares of our Series E and Series E-2 preferred stock will convert into an aggregate of 16,038,824 shares of our common stock immediately prior to the closing of this offering. For illustrative purposes only, the table below shows the number of shares of our common stock that would remain outstanding following the exercise of our repurchase right described above based on (i) various estimated anticipated initial public offering prices, and (ii) various estimated ten-day volume weighted average prices of our common stock:

 

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Summary Consolidated Financial and Other Data

The following tables summarize our consolidated financial and other data and should be read together with “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes included elsewhere in this prospectus.

We have derived the consolidated statements of operations data for the years ended December 31, 2009, 2010, and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated statements of operations data for the six months ended June 30, 2011 and 2012 and the consolidated balance sheet data as of June 30, 2012 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year or any other period.

On March 14, 2012, we completed our acquisition of ID Analytics. Accordingly, the consolidated statements of operations data for the six months ended June 30, 2012 only includes the results for ID Analytics since that date. The audited consolidated financial statements of ID Analytics as of and for the years ended December 31, 2010 and 2011, and the unaudited pro forma condensed combined financial statements for the year ended December 31, 2011 and for the six months ended June 30, 2012 are included elsewhere in this prospectus.

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2009     2010     2011     2011     2012  
    (in thousands, except per share data)  
          (unaudited)  

Consolidated Statements of Operations Data:

         

Revenue:

         

Consumer revenue

  $ 131,368     $ 162,279     $ 193,949     $ 90,996      $ 118,324   

Enterprise revenue

    —          —          —          —          7,171   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    131,368       162,279       193,949       90,996        125,495   

Cost of services

    43,109       51,445       62,630       31,140        37,965   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    88,259       110,834       131,319       59,856        87,530   

Expenses:

         

Sales and marketing

    77,815       78,844       91,217       43,749        61,505   

Technology and development

    19,925       21,338       17,749       9,010        12,993   

General and administrative

    45,900       23,306       17,510       8,770        9,537   

Amortization of acquired intangible assets

    —          —          —          —          2,325  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    143,640       123,488       126,476       61,529        86,360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (55,381     (12,654     4,843       (1,673     1,170   

Other income (expense):

         

Interest expense

    (1,385     (1,368     (231     (198     (1,285

Interest income

    110       28       8       7       2   

Change in fair value of warrant liabilities

    (1,919     (1,333     (8,658     (4,124     (2,941

Change in fair value of embedded derivative

    —          —          —          —          714   

Other

    (49     (41     (5     —          (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (3,243     (2,714     (8,886     (4,315     (3,512
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Year Ended December 31,     Six Months Ended
June 30,
 
    2009     2010     2011     2011     2012  
    (in thousands, except per share data)  
          (unaudited)  

Loss before provision for income taxes

    (58,624     (15,368     (4,043     (5,988     (2,342

Income tax (benefit) expense

    39       8       214       82       (13,897
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (58,663     (15,376     (4,257     (6,070     11,555   

Accretion of convertible redeemable preferred stock

    (10,299     (16,145     (18,926     (10,360     (4,752

Net income allocable to convertible redeemable preferred stockholders

    —          —          —          —          (4,517
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholders

  $ (68,962   $ (31,521   $ (23,183   $ (16,430   $ 2,286   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

         

Basic

  $ (3.86   $ (1.74   $ (1.24   $ (0.88   $ 0.12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (3.86   $ (1.74   $ (1.24   $ (0.88   $ 0.10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute net income available (loss attributable) per share to common stockholders:

         

Basic

    17,843       18,068       18,725       18,573      
19,453
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    17,843       18,068       18,725       18,573      
52,212
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income available (loss attributable) per share to common stockholders(1)(2) (unaudited):

         

Basic

      $ (0.02     $ (0.00
     

 

 

     

 

 

 

Diluted

      $ (0.02     $ (0.00
     

 

 

     

 

 

 

Pro forma weighted average shares used to compute pro forma net income available (loss attributable) per share to common stockholders(1)(2) (unaudited):

         

Basic

        74,120          74,848   
     

 

 

     

 

 

 

Diluted

        74,120          74,848   
     

 

 

     

 

 

 

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011     2011     2012  
     (in thousands)  
           (unaudited)  

Consolidated Statements of Cash Flows Data:

          

Net cash provided by (used in):

          

Operating activities

   $ (23,396   $ (14,510   $ 24,344      $ 11,822      $ 23,099   

Investing activities

   $ (5,094   $ (1,484   $ (1,531   $ (984   $ (159,510

Financing activities

   $ 22,636      $ 27,964      $ (11,544   $ (13,049   $ 170,397   

 

 

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     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011     2011     2012  
     (in thousands, except percentages and per member data)   
    
(unaudited)
  

Other Financial and Operational Data:

          

Cumulative ending members(3)

     1,621       1,748       2,075       1,878        2,282   

Gross new members(4)

     618       517       704       326        377   

Member retention rate(5)

     79.3     79.1     82.7     80.4     85.4

Average cost of acquisition per member(6)

   $ 126     $ 152     $ 130     $ 134     $ 157  

Monthly average revenue per member(7)

   $ 7.30      $ 7.94      $ 8.54      $ 8.40      $ 9.00   

Enterprise transactions(8)

     75,763       108,707       184,012       80,633        105,479   

Adjusted EBITDA(9)

   $ (49,402   $ (5,189   $ 11,868     $ 1,737      $ 7,936   

Free cash flow(10)

   $ (28,488   $ (15,995   $ 22,313     $ 10,588      $ 21,019   

 

(1) Pro forma net income available (loss attributable) per share to common stockholders has been calculated to give effect to the following transactions as if they occurred on January 1, 2011: (a) the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 48,391,142 shares of our common stock immediately prior to the closing of this offering, (b) the number of shares whose proceeds will be used to repay $65.2 million of the outstanding balance as of June 30, 2012 under our term loan incurred in connection with our acquisition of ID Analytics, and (c) the number of shares whose proceeds will be used to pay $8.3 million to the holders of our Series E-1 preferred stock, assuming the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus. See the reconciliation on pages P-2 and P-3.

 

     The following is a reconciliation of pro forma basic and diluted weighted average shares used to compute pro forma net income available (loss attributable) per share to common stockholders:

 

     Year Ended
December 31,
2011
     Six Months
Ended
June 30,
2012
 
     (unaudited)   

Shares used to compute basic net income available (loss attributable) per share to common stockholders

     18,725         19,453   

Adjustment for assumed automatic conversion of preferred stock

     48,391         48,391   

Adjustment for shares used to repay outstanding balance of term loan

     6,210         6,210   

Adjustment for shares used to pay holders of our Series E-1 preferred stock

     794         794   
  

 

 

    

 

 

 

Basic pro forma weighted average shares used to compute pro forma net income available (loss attributable) per share to common stockholders

     74,120         74,848   

Dilutive effect of securities

     —           —     
  

 

 

    

 

 

 

Diluted pro forma weighted average shares used to compute pro forma net income available (loss attributable) per share to common stockholders

     74,120         74,848   
  

 

 

    

 

 

 

 

(2)

The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series E and Series E-2 preferred stock depends in part on the anticipated initial public offering price of our common stock. The anticipated public offering price will be determined in good faith by our board of directors shortly before the pricing of this offering. The terms of our Series E and Series E-2 preferred stock provide that the ratio at which each share of these series of preferred stock automatically convert into shares of our common stock in connection with this offering will increase if the anticipated initial public offering price is below $13.3919 per share, which would result in additional shares of our common stock being issued upon conversion of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series E and Series E-2 preferred stock would convert into an aggregate of 17,564,757 shares of our common stock immediately prior to the closing of this offering. A $1.00 increase in the anticipated initial public offering price of $10.50 per share would decrease by 1,525,933 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price reaches $13.3919 per share, each share of our Series E and Series E-2 preferred stock would convert into one share of our common stock immediately prior to the closing of this offering. A $1.00 decrease in the anticipated initial public offering price of $10.50 per share would increase by 1,848,197 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. However, if the volume weighted average price (VWAP) of our common stock during the ten trading days immediately following the effectiveness of the registration statement of which this

 

 

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prospectus forms a part is greater than the anticipated initial public offering price of $10.50 per share, we will have the right to repurchase from each holder of our Series E and Series E-2 preferred stock a number of shares of our common stock equal to the positive difference between the number of shares of our common stock into which such holder’s Series E and Series E-2 preferred stock converted immediately prior to the closing of this offering and the shares of our common stock into which such holder’s Series E and Series E-2 preferred stock would have converted based on the VWAP of our common stock. The repurchase price for these shares of our common stock will be $0.001 per share. A $1.00 increase in the VWAP above the anticipated initial public offering price of $10.50 per share will give us the right to repurchase 1,525,933 shares of our common stock from the holders of our Series E and Series E-2 preferred stock. If the VWAP equals or exceeds $13.3919 per share, we will have the right to repurchase a maximum of 3,792,798 shares of our common stock from the holders of our Series E and Series E-2 preferred stock.

(3) We calculate cumulative ending members as the total number of members at the end of the relevant period. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Cumulative ending members.”
(4) We calculate gross new members as the total number of members who enroll in one of our consumer services during the relevant period. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Gross new members.”
(5) 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. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Member retention rate.”
(6) 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. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Average cost of acquisition per member.”
(7) 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. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Monthly average revenue per member.”
(8) We calculate enterprise transactions as the total number of transactions processed for either an identity risk or credit risk score during the relevant period. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Enterprise transactions.” Our enterprise transactions are processed by ID Analytics, which we acquired on March 14, 2012. Accordingly, the enterprise transactions data includes transactions processed by ID Analytics before the acquisition.
(9) 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, other income (expense) (which consists primarily of gains and losses on disposal of fixed assets), provision for income taxes, and share-based compensation. For more information about adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP, see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Adjusted EBITDA.”
(10) Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less net cash used in investing activities for acquisitions of property and equipment. For more information about free cash flow and a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Selected Consolidated Financial and Other Data —Non-GAAP Financial Measures—Free Cash Flow.”

Share-based compensation included in the statements of operations data above was as follows:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
     2009      2010      2011      2011      2012  
     (in thousands)  
                          (unaudited)  

Cost of services

   $ 171       $ 262       $ 309       $ 161       $ 251   

Sales and marketing

     543         690         655         308         413   

Technology and development

     394         845         783         370         710   

General and administrative

     1,033         1,454         1,538         741         989   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation

   $ 2,141       $ 3,251       $ 3,285       $ 1,580       $ 2,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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     As of June 30, 2012  
     Actual     Pro
Forma(1)
     Pro Forma
As
Adjusted(2)(3)(4)
 
     (in thousands)  
     (unaudited)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 62,836      $ 62,836       $ 136,954   

Property and equipment, net

     6,252        6,252         6,252   

Working capital, excluding deferred revenue

     36,700        36,700         126,218   

Total assets

     271,882        271,882         344,500   

Deferred revenue

     89,060        89,060         89,060   

Long-term debt, including current portion

     65,210        65,210         —     

Convertible redeemable preferred stock

     263,668        —           —     

Total stockholders’ equity (deficit)

     (204,943     84,234         229,282   

 

(1) The pro forma column reflects (a) the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 48,391,142 shares of our common stock immediately prior to the closing of this offering, (b) the automatic conversion of outstanding warrants to purchase preferred stock into warrants to purchase 2,405,221 shares of our common stock immediately prior to the closing of this offering, and (c) the automatic termination of warrants to purchase 3,442,991 shares of our Series E and Series E-2 preferred stock upon the closing of this offering. The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series E and Series E-2 preferred stock depends in part on the anticipated initial public offering price of our common stock in this offering. The anticipated public offering price will be determined in good faith by our board of directors shortly before the pricing of this offering. The terms of our Series E and Series E-2 preferred stock provide that the ratio at which each share of these series of preferred stock automatically convert into shares of our common stock in connection with this offering will increase if the anticipated initial public offering price is below $13.3919 per share, which would result in additional shares of our common stock being issued upon conversion of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series E and Series E-2 preferred stock would convert into an aggregate of 17,564,757 shares of our common stock immediately prior to the closing of this offering. A $1.00 increase in the anticipated initial public offering price of $10.50 per share would decrease by 1,525,933 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price reaches $13.3919 per share, each share of our Series E and Series E-2 preferred stock would convert into one share of our common stock immediately prior to the closing of this offering. A $1.00 decrease in the anticipated initial public offering price of $10.50 per share would increase by 1,848,197 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. However, if the volume weighted average price (VWAP) of our common stock during the ten trading days immediately following the effectiveness of the registration statement of which this prospectus forms a part is greater than the anticipated initial public offering price of $10.50 per share, we will have the right to repurchase from each holder of our Series E and Series E-2 preferred stock a number of shares of our common stock equal to the positive difference between the number of shares of our common stock into which such holder’s Series E and Series E-2 preferred stock converted immediately prior to the closing of this offering and the shares of our common stock into which such holder’s Series E and Series E-2 preferred stock would have converted based on the VWAP of our common stock. The repurchase price for these shares of our common stock will be $0.001 per share. A $1.00 increase in the VWAP above the anticipated initial public offering price of $10.50 per share will give us the right to repurchase 1,525,933 shares of our common stock from the holders of our Series E and Series E-2 preferred stock. If the VWAP equals or exceeds $13.3919 per share, we will have the right to repurchase a maximum of 3,792,798 shares of our common stock from the holders of our Series E and Series E-2 preferred stock.
(2) The pro forma as adjusted column reflects the pro forma adjustments described in footnote (1) above, as well as (a) the sale by us of 15,500,000 shares of common stock in this offering at an assumed initial public offering price of $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, (b) the repayment of $65.2 million outstanding as of June 30, 2012 under our term loan incurred in connection with our acquisition of ID Analytics, and (c) the payment of $8.3 million for amounts payable to the holders to our Series E-1 preferred stock, assuming the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus. For every $0.01 the anticipated initial public offering price is below $15.7552 per share, we are obligated to pay $0.01 per share in cash to the holders of outstanding shares of our Series E-1 preferred stock. As of the date of this prospectus, there were 1,586,778 shares of our Series E-1 preferred stock outstanding. See “Use of Proceeds” for additional information.
(3) A $1.00 increase (decrease) in the assumed initial public offering price of $10.50 per share would increase (decrease) each of cash and cash equivalents, working capital (excluding deferred revenue), total assets, and stockholders’ equity by $14.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.
(4) A $1.00 increase (decrease) in the anticipated initial public offering price of $10.50 per share (up to $15.7552 per share) would increase (decrease) each of cash and cash equivalents, working capital (excluding deferred revenue), total assets, and stockholders’ equity by $1.6 million.

 

 

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RISK FACTORS

Investing in shares of our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information appearing elsewhere in this prospectus, including our financial statements and related notes, before deciding whether to purchase shares of our common stock. Any of the following risks could materially and adversely affect our business, operating results, financial condition, or prospects and cause the market price of our common stock to decline, which could cause you to lose all or part of your investment.

Risks Related to Our Business and Industry

We have incurred significant net losses since our inception and may not be able to achieve or maintain profitability on an annual basis in the future.

We have incurred significant net losses since our inception. For the years ended December 31, 2009, 2010, and 2011, we had net losses of $58.7 million, $15.4 million, and $4.3 million, respectively, and had an accumulated deficit of $224.9 million as of June 30, 2012. We cannot predict if we will achieve or maintain annual profitability in the near future or at all. Our recent growth, including our growth in revenue and customer base, may not be sustainable or may decrease, and we may not generate sufficient revenue to achieve or maintain annual profitability. Moreover, we expect to continue to make significant expenditures to maintain and expand our business, operate as a consolidated entity with our newly acquired subsidiary, ID Analytics, and transition to operating as a public company. These increased expenditures will make it more difficult for us to achieve and maintain future annual profitability. Our ability to achieve and maintain annual profitability depends on a number of factors, including our ability to attract and service customers on a profitable basis. If we are unable to achieve or maintain annual profitability, we may not be able to execute our business plan, our prospects may be harmed, and our stock price could be materially and adversely affected.

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

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

 

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consumer awareness of this issue and may embolden individuals or groups to target our systems or those of our strategic partners or enterprise customers.

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

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

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

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

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

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

 

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the efficacy of our marketing efforts;

 

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

 

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the quality and perceived value of our services;

 

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

 

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positive or negative publicity, including material on the Internet;

 

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regulatory and other governmental related developments; and

 

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litigation related developments.

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

 

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

 

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

 

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

 

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

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

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

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

We operate in a highly competitive business environment. Our primary competitors are the credit bureaus that include Experian, Equifax, and TransUnion, as well as others, such as Affinion, Early

 

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Warning Systems, Intersections, and LexisNexis. Some of our competitors have substantially greater financial, technical, marketing, distribution, and other resources than we possess and that afford them competitive advantages. As a result, they may be able to devote greater resources to the development, promotion, and sale of services, to deliver competitive services at lower prices or for free, and to introduce new solutions and respond to market developments and customer requirements more quickly than we can. In addition, some of our competitors may have data that we do not have or cannot obtain without difficulty. Any of these factors could reduce our growth, revenue, access to valuable data, or market share.

Our ability to compete successfully in our markets depends on a number of factors, both within and outside our control. Some of these factors include the following:

 

 

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access to a breadth of identity and consumer transaction data;

 

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

 

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brand recognition;

 

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technology;

 

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effectiveness and cost-efficiency of customer acquisition;

 

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customer satisfaction;

 

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price;

 

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quality and reliablity of customer service; and

 

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accurate identification of appropriate target markets for our business.

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

We could lose our access to data sources, which could cause us competitive harm and have a material adverse effect on our business, operating results, and financial condition.

Our services depend extensively upon continued access to and receipt of data from external sources, including data received from customers and fulfillment partners. Our data providers could stop providing data, provide untimely data, or increase the costs for their data for a variety of reasons, including a perception that our systems are insecure as a result of a data security breach, budgetary constraints, a desire to generate additional revenue, or for competitive reasons. In addition, upon the termination of the contracts we have with certain of our enterprise customers, we are required to remove from our repositories the data contributed by and through those customers. We could also become subject to legislative, regulatory, or judicial restrictions or mandates on the collection, disclosure, or use of such data, in particular if such data is not collected by our providers in a way that allows us to legally use the data. If we were to lose access to a substantial number of data sources or certain key data sources or certain data already in the LifeLock ecosystem, or if our access or use were restricted or became less economical or desirable, our ability to provide our services and the efficacy and attractiveness of the LifeLock ecosystem could be negatively affected, and this would adversely affect us from a competitive standpoint. This would also adversely affect our business, operating results, and financial condition. We may not be successful in maintaining our relationships with these external data source providers and may not be able to continue to obtain data from them on

 

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acceptable terms or at all. Furthermore, we cannot provide assurance that we will be able to obtain data from alternative or additional sources if our current sources become unavailable.

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

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

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

The number of people who access services through devices other than personal computers, including mobile phones, smartphones, handheld computers, and tablets, has increased dramatically in recent years. We have limited experience to date in developing services for users of these alternative devices, and versions of our services developed for these devices may not be attractive to customers. As new devices, platforms, and technologies are continually being released, it is difficult to predict the problems we may encounter in developing versions of our services for use with these devices, platforms, and technologies and we may need to devote significant resources to the creation, support, and maintenance of such offerings. If we are slow to develop services and technologies that are compatible with these devices, platforms, and technologies, or if our competitors are able to achieve those results more quickly than us, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business.

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

Our revenue and operating results depend significantly on our ability to retain our existing customers. In our consumer business from which we derive a significant majority of our revenue, we

 

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

 

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

 

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the quality, breadth, and prices of our services;

 

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our general reputation and events impacting that reputation;

 

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the services and related pricing offered by our competitors;

 

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our customer service and responsiveness to any customer complaints;

 

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

 

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

 

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our guarantee may not meet our customers’ expectations; and

 

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

If we do not retain our existing customers, our revenue may grow more slowly than expected or decline, and our operating results and gross margins will be harmed. In addition, our business and operating results may be harmed if we are unable to increase our retention rates.

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

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

We have derived, and intend to continue to derive, a significant portion of our revenue from members who subscribe to our consumer services through one of our strategic partners. In 2011, we derived approximately 45% of our gross new members from our strategic partner distribution channels. These distribution channels involve various risks, including the following:

 

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

 

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

 

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

 

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our strategic partners may terminate their relationships with us;

 

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

 

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our strategic partners, some of which already compete with us, may present increased competition for us in the future.

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

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

Some of our strategic partners possess significant resources and advanced technical abilities. Some offer services that are competitive with ours and more may do so in the future, either alone or in collaboration with other competitors. Those strategic partners could give a higher priority to competing services or decide not to continue to offer our services at all. If any of our strategic partners discontinue or reduce the sale or marketing of our services, promote competitive services, or, either independently or jointly with others, develop and market services that compete with our services, our business and operating results may be harmed. In addition, some of our strategic partners may experience financial or other difficulties, causing our revenue through those strategic partners to decline, which would adversely affect our operating results.

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

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

ID Analytics has historically derived, and continues to derive, a significant portion of its revenue from a limited number of enterprise customers. For example, in 2010, 2011, and the six months ended June 30, 2012, sales derived through ID Analytics’ top ten customers accounted for 77%, 70%, and 66%, respectively, of ID Analytics’ revenue for those periods. In addition, some of these customers provide services that compete with our consumer services and, accordingly, may seek alternative identity risk assessment and fraud protection services in the future. The loss of several of our enterprise customers, or of any of our large enterprise customers, could have a material adverse effect on our revenue and results of operations, as well as the efficacy and attractiveness of the LifeLock ecosystem.

In addition, new customer acquisition in our enterprise business is often a lengthy process requiring significant up-front investment. Accordingly, we may devote substantial resources in an effort

 

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to attract new enterprise customers that may not result in customer engagements or lead to an increase in revenue, which could have a material adverse effect on our business.

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

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

We rely on our network and data center infrastructure and internal technology systems for many of our development, operational, support, sales, accounting, and financial reporting activities, the failure of which could disrupt our business operations and result in a loss of revenue and damage to our reputation.

We rely on our network and data center infrastructure and internal technology systems for many of our development, operational, support, sales, accounting, and financial reporting activities. We routinely invest resources to update and improve these systems and environments with the goal of better meeting the existing, as well as the growing and changing requirements of our customers. If we experience prolonged delays or unforeseen difficulties in updating and upgrading our systems and architecture, we may experience outages and may not be able to deliver certain service offerings and develop new service offerings and enhancements that we need to remain competitive. Such improvements and upgrades often are complex, costly, and time consuming. In addition, such improvements can be challenging to integrate with our existing technology systems or may result in problems with our existing technology systems. Unsuccessful implementation of hardware or software updates and improvements could result in outages, disruption in our business operations, loss of revenue, or damage to our reputation. Our systems and data are hosted by a third-party data center. If the third-party data center experiences any disruptions, outages, or catastrophes, it could disrupt our business and result in a loss of customers, loss of revenue, or damage to our reputation. We recently experienced an outage in one of our data centers in our enterprise business, which interrupted our business. We are planning to replace this facility with a more modern facility in a different location, but the relocation could be more time consuming, expensive, and complicated than anticipated and there is no guarantee that we will not experience outages in the future.

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

Our enterprise business headquarters and the back up data center for our enterprise business are located in San Diego, California, which is situated on or near earthquake fault lines. Our primary data center for our enterprise business is located in Atlanta, Georgia, although we expect to relocate this data center to Las Vegas, Nevada in the fall of 2012. In our consumer business, we have data centers in Rancho Cordova, California and Scottsdale, Arizona. Any of our or our strategic partners’ or service providers’ facilities may be harmed or rendered inoperable by natural or man-made disasters,

 

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including earthquakes, tornadoes, hurricanes, wildfires, floods, nuclear disasters, acts of terrorism or other criminal activities, infectious disease outbreaks, and power outages, which may render it difficult or impossible for us or our strategic partners or service providers to operate our respective businesses for some period of time. Our and our strategic partners’ or service providers’ facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time. Any disruptions in our or our strategic partners’ or service providers’ operations could negatively impact our business and results of operations, and harm our reputation. In addition, we and our strategic partners or service providers may not carry business insurance or may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on our business, results of operations, and financial condition.

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

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

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

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

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

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

 

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We have identified a material weakness in our internal control over financial reporting, and we cannot provide assurance that additional material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

In connection with the filing of the registration statement of which this prospectus forms a part, we identified a material weakness in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness related to our calculation of earnings per share for the three months ended March 31, 2012. We have developed a plan to remediate this material weakness. We are implementing a process for documenting and reviewing all of our equity instruments and the effect of those instruments on our calculation of earnings per share. As a public company, we also plan to hire additional accounting personnel. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating this material weakness.

When we become a public company, we will be subject to reporting obligations under Section 404 of the Sarbanes-Oxley Act that will require us to include a management report on our internal control over financial reporting in our annual report, which will contain management’s assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply to our annual report on Form 10-K for the year ending December 31, 2013. We are in the process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation. This process is time consuming, costly, and complicated. Our management may conclude that our internal control over financial reporting is not effective.

In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 10-K following the later of the year following our first annual report required by the Securities and Exchange Commission, or the SEC, and the date on which we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated, or reviewed, or if it interprets the relevant requirements differently from us. Material weaknesses may be identified during the audit process or at other times. During the course of the evaluation, documentation, or attestation, we or our independent registered public accounting firm may identify weaknesses and deficiencies that we may not be able to remedy in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with Section 404.

Our reporting obligations as a public company will place a significant strain on our management, operational, and financial resources and systems for the foreseeable future. Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. If we fail to timely achieve and maintain the adequacy of

 

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our internal control over financial reporting, we may not be able to produce reliable financial reports or help prevent fraud. Our failure to achieve and maintain effective internal control over financial reporting could prevent us from filing our periodic reports on a timely basis, which could result in the loss of investor confidence in the reliability of our financial statements, harm our business, and negatively impact the trading price of our common stock.

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

We have experienced rapid growth in a relatively short period of time. Our revenue grew from $18.9 million in 2007 to $193.9 million in 2011, and our members increased from approximately 30,000 on December 31, 2006 to approximately 2.1 million on December 31, 2011. In addition, our acquisition of ID Analytics in March 2012 increased our revenue, facilities, and number of employees, and we will likely hire additional employees as we transition into a public company. We must successfully manage our growth to achieve our objectives. Our ability to effectively manage any significant growth of our business will depend on a number of factors, including our ability to do the following:

 

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

 

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

 

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satisfy existing and attract new customers;

 

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hire, train, retain, and motivate additional employees;

 

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enhance our operational, financial, and management systems;

 

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enhance our intellectual property rights;

 

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effectively manage and maintain our corporate culture; and

 

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

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

Any future acquisitions that we undertake could disrupt our business, harm our operating results, and dilute stockholder value.

From time to time, we may review opportunities to acquire other businesses or other assets that would expand the breadth of services that we offer, strengthen our distribution channels, enhance our intellectual property and technological know-how, augment the LifeLock ecosystem and our data repositories, or otherwise offer potential growth opportunities. For example, in March 2012, we completed our acquisition of ID Analytics. We may in the future be unable to identify suitable acquisition candidates or to complete the acquisition of candidates that we identify. Increased competition for acquisition candidates or increased asking prices by acquisition candidates may increase purchase prices for acquisitions to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria. Acquisitions also may become more

 

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difficult in the future as we or others, including our competitors, acquire the most attractive candidates. Unforeseen expenses, difficulties, and delays that we may encounter in connection with rapid expansion through acquisitions could inhibit our growth and negatively impact our operating results.

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

 

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the availability of suitable acquisition candidates at attractive purchase prices;

 

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the ability to compete effectively for available acquisition opportunities;

 

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

 

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diversion of management’s attention to acquisition efforts; and

 

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the ability to obtain any requisite governmental or other approvals.

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

Any borrowings made to finance future acquisitions could make us more vulnerable to a downturn in our operating results, a downturn in economic conditions, or increases in interest rates on borrowings. If our cash flow from operating activities is insufficient to meet our debt service requirements, we could be required to sell additional equity securities, refinance our obligations, or dispose of assets in order to meet our debt service requirements. Adequate financing may not be available if and when we need it or may not be available on terms acceptable to us. The failure to obtain sufficient financing on favorable terms and conditions could have a material adverse effect on our growth prospects and our business, financial condition, and operating results.

If we finance any future acquisitions in whole or in part through the issuance of common stock or securities convertible into or exercisable for common stock, existing stockholders will experience dilution in the voting power of their common stock and earnings per share could be negatively impacted. The extent to which we will be able or willing to use our common stock for acquisitions will depend on the market price of our common stock from time to time and the willingness of potential sellers to accept our common stock as full or partial consideration for the sale of their businesses. Our inability to use our common stock as consideration, to generate cash from operations, or to obtain additional funding through debt or equity financings in order to pursue an acquisition program could materially limit our growth.

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

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

Our experience in acquiring other businesses is limited. Our only acquisition to date has been the acquisition of ID Analytics in March 2012. We may not realize all of the benefits anticipated with that

 

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acquisition and may experience unanticipated detriments as a result of that acquisition. We are still in the process of analyzing, planning, and implementing our integration with ID Analytics, a process that may take months to complete. As with any acquisition, we may be unable to complete effectively an integration of the management, operations, facilities, and accounting and information systems of the acquired business with our own; to manage efficiently the combined operations of the acquired business with our operations; to achieve our operating, growth, and performance goals for the acquired business; to achieve additional revenue as a result of our expanded operations; or to achieve operating efficiencies or otherwise realize cost savings as a result of anticipated acquisition synergies. The integration of acquired businesses, including our acquisition of ID Analytics, involves numerous risks, including the following:

 

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integrating the different businesses, operations, locations, and technologies;

 

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

 

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the potential disruption of our core businesses;

 

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

 

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diversion of management’s attention from our core businesses;

 

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adverse effects on existing business relationships with suppliers and customers;

 

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

 

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adjusting to changes in key personnel post-combination;

 

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adjusting to increased governmental regulations;

 

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

 

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

 

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

 

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potential unknown liabilities associated with the acquired company;

 

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

 

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failure of acquired businesses to achieve expected results;

 

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

 

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

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

 

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

Our business and the information we use in our business, augmented by our recent acquisition of ID Analytics, is subject to a wide variety of federal, state, and local laws and regulations, including the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, the FTC Act and comparable state laws that are patterned after the FTC Act, and other laws governing credit information, consumer privacy and marketing, and servicing of consumer products and services. In addition, our business is subject to the FTC Stipulated Final Judgment and Order for Permanent Injunction and Other Equitable Relief, as well as the companion orders with 35 states’ attorneys general that we entered into in March 2010. These laws, regulations, and consent decrees cover, among other things, advertising, automatic subscription renewal, broadband residential Internet access, consumer protection, content, copyrights, credit card processing procedures, data protection, distribution, electronic contracts, member privacy, pricing, sales and other procedures, tariffs, and taxation. In addition, it is unclear how existing laws and regulations governing issues such as property ownership, sales and other taxes, and personal privacy apply to the Internet. We incur significant costs to operate our business and monitor our compliance with these laws, regulations, and consent decrees. Any of these laws and regulations are subject to revision, and we cannot predict the impact of such changes on our business. Any changes to the existing applicable laws or regulations, or any determination that other laws or regulations are applicable to us, could increase our costs or impede our ability to provide our services to our customers, which could have a material adverse effect on our business, operating results, financial condition, and prospects.

In addition, various governmental agencies have the authority to commence investigations and enforcement actions under these laws, regulations, and consent decrees, and private citizens also may bring actions, including class action litigation, under some of these laws and regulations. Responding to such investigations and actions may cause us to incur significant expenses and could divert our management and key personnel from our business operations. Any determination that we have violated any of these laws, regulations, or consent decrees may result in liability for fines, damages, or other penalties or require us to make changes to our services and business practices, and cause us to lose customers, any of which could have a material adverse impact on our business, operating results, financial condition, and prospects.

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

We market our consumer services through a variety of marketing channels, including mass media, direct mail campaigns, online display advertising, paid search and search-engine optimization, and inbound customer service and account activation calls. These channels are subject to both federal and state laws and regulations. Federal and state laws and regulations may limit our ability to market to new members or offer additional services to existing members, which may have a material adverse effect on our ability to sell our services.

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

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted to reform the practices in the financial services industry. Title X of the Dodd-Frank Act established the Bureau of Consumer Financial Protection, or the CFPB, to protect consumers from abusive financial services practices. Among other things, the CFPB has broad authority to write rules affecting the business of credit reporting companies as well as to supervise, conduct examinations of, and enforce compliance as to federal consumer financial protection laws and regulations with respect

 

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to certain “non-depository covered persons” determined by the CFPB to be “larger participants” that offer consumer financial products and services.

The CFPB has broad regulatory, supervisory, and enforcement powers and may exercise authority with respect to our services, or the marketing and servicing of those services, by overseeing our financial institution or credit reporting agency customers and suppliers, or by otherwise exercising its supervisory, regulatory, or enforcement authority over consumer financial products and services. On February 16, 2012, the CFPB issued a proposed rule that would include our credit reporting agency customers and suppliers under the CFPB nonbank supervision program. Further, we believe that the CFPB has commenced review of certain of our financial institution customers, including their offering of some or all fee-based products. These or other actions by the CFPB could cause our credit agency customers and suppliers and financial institution customers to limit or change their business activities, which could have a material adverse effect on our operating results. It is not certain whether the CFPB has, or will seek to exercise, supervisory or other authority directly over us or our services. Supervision and regulation of us or our enterprise customers by the CFPB could have a material adverse impact on our business and operating results, including the costs to make changes that may be required by us, our enterprise customers, or our strategic partners, and the costs of responding to examinations by the CFPB. In addition, the costs of responding to or defending against any enforcement action that may be brought by the CFPB, and any liability that we may incur, may have a material adverse impact on our business, results of operations, and financial condition.

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

There has been increasing public concern about the use of personally identifiable information. As a result, many federal, state, and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, disclosure, and use of personally identifiable information. In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that apply to us. Because the interpretation and application of privacy and data protection laws are still uncertain, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our services. If this is the case, in addition to the possibility of fines, lawsuits, and other claims, we could be required to fundamentally change our business activities and practices or modify our service offerings, which could have a material adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, affect our ability to attract new customers and maintain relationships with our existing customers, and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our enterprise customers and strategic partners may limit the use and adoption of, and reduce the overall demand for, our services. Privacy concerns, whether valid or not, may inhibit market adoption of our services.

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

The Fair Credit Reporting Act provides consumers the ability to receive one free consumer credit report per year from each major consumer credit reporting agency and requires each major consumer credit reporting agency to provide the consumer a credit score along with the consumer’s credit report for a reasonable fee as determined by the FTC. In addition, the Fair Credit Reporting Act and state laws give consumers other rights with respect to the protection of their credit files at the credit reporting

 

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agencies. For example, the Fair Credit Reporting Act gives consumers the right to place “fraud alerts” at the credit reporting agencies, and the laws in approximately 40 states give consumers the right to place “freezes” to block access to their credit files. The rights of consumers to obtain free annual credit reports and credit scores from consumer reporting agencies, and to place fraud alerts and credit freezes directly with them, could cause consumers to perceive that the value of our services is reduced or replaced by those benefits, which could have a material adverse effect on our business.

The FTC Stipulated Final Judgment and Order for Permanent Injunction and Other Equitable Relief, as well as the companion orders with 35 states’ attorneys general, imposes on us injunctive provisions that could subject us to additional injunctive and monetary remedies.

In March 2010, we and Todd Davis, our Chairman and Chief Executive Officer, entered into a Stipulated Final Judgment and Order for Permanent Injunction and Other Equitable Relief with the FTC, which we refer to as the FTC Order. The FTC Order was the result of a settlement of the allegations by the FTC that certain of our advertising and marketing practices constituted deceptive acts or practices in violation of the FTC Act, which settlement made no admission as to the allegations related to such practices. The FTC Order imposes on us and Mr. Davis certain injunctive provisions relating to our advertising and marketing of our identity theft protection services, such as enjoining us from making any misrepresentation of “the means, methods, procedures, effects, effectiveness, coverage, or scope of” our identity theft protection services. However, the bulk of the more specific injunctive provisions have no direct impact on the advertising and marketing of our current services because we have made significant changes in the nature of the services we offer to consumers since the investigation by the FTC in 2007 and 2008, including our adoption of new technology that permits us to provide proactive protection against identity theft and identity fraud. The FTC investigation of our advertising and marketing activities occurred during the time that we relied significantly on the receipt of fraud alerts from the credit reporting agencies for our members. The FTC believed that such alerts had inherent limitations in terms of coverage, scope, and timeliness. Many of the allegations in the FTC complaint, which accompanied the FTC Order, related to the inherent limitations of using credit report fraud alerts as the foundation for identity theft protection. Because the injunctive provisions in the FTC Order are tied to these complaint allegations, these injunctive provisions similarly relate significantly to our previous reliance on credit report fraud alerts as reflected in our advertising and marketing claims. The FTC Order also imposes on us and Mr. Davis certain injunctive provisions relating to our data security for members’ personally identifiable information. At the same time, we also entered into companion orders with 35 states’ attorneys general that impose on us similar injunctive provisions as the FTC Order relating to our advertising and marketing of our identity theft protection services.

Our or Mr. Davis’ failure to comply with these injunctive provisions could subject us to additional injunctive and monetary remedies as provided for by federal and state law. In addition, the FTC Order imposes on us and Mr. Davis certain compliance requirements, including the delivery of an annual compliance report. We and Mr. Davis have timely submitted these annual compliance reports, but the FTC has not accepted or approved them to date. If the FTC were to find that we or Mr. Davis have not complied with the requirements in the FTC Order, we could be subject to additional penalties and our business could be negatively impacted.

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

 

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

From time to time, we have been, and in the future may become, subject to litigation, claims, and regulatory proceedings, including class action litigation. We cannot predict the outcome of any actions or proceedings, and the cost of defending such actions or proceedings could be material. Furthermore, defending such actions or proceedings could divert our management and key personnel from our business operations. If we are found liable in any actions or proceedings, we may have to pay substantial damages or change the way we conduct our business, either of which may have a material adverse effect on our business, operating results, financial condition, and prospects. There may also be negative publicity associated with litigation or regulatory proceedings that could harm our reputation or decrease acceptance of our services. Moreover, we utilize contractors and third parties for various services, including certain advertising, which may increase these risks. A former service provider has informed us that she may claim that she was misclassified as an independent contractor, and we may be subject to other claims of this nature from time to time. These claims may be costly to defend and may result in imposition of damages, adverse tax consequences, and harm to our reputation.

We do not believe the nature of any pending legal proceeding will have a material adverse effect on our business, operating results, and financial condition. However, our assessment may change at any time based upon the discovery of facts or circumstances that are presently not known to us. Therefore, there can be no assurance that any pending or future litigation will not have a material adverse effect on our business, reputation, operating results, and financial condition.

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

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

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

 

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

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

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

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

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

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

In addition, the current global financial crisis, which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit and substantial reductions or fluctuations in equity and currency values worldwide, may make it difficult for us to raise additional capital or obtain additional credit, when needed, on acceptable terms or at all.

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

 

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

We may experience significant fluctuations in our revenue, expenses, and operating results in future periods. Our operating results may fluctuate in the future as a result of a number of factors,

 

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

 

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

 

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our ability to generate revenue from existing customers;

 

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our ability to establish and maintain relationships with strategic partners;

 

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our expense and capital expenditure levels;

 

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

 

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pricing and availability of competitive services;

 

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our ability to address competitive factors successfully;

 

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

 

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changes or anticipated changes in economic conditions; and

 

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changes in legislation and regulatory requirements related to our business.

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

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

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

Our revenue may be adversely affected if we are required to collect sales taxes in additional jurisdictions or collect other taxes for our services.

We collect or have imposed upon us sales or other taxes related to the services we sell in certain states and other jurisdictions. In May 2012, we entered into a settlement agreement with the New York State Department of Taxation and Finance regarding our collection of sales tax in the state of New York. We recently began collecting sales tax in the state of New York related to the sale of our

 

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

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

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

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

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

As of June 30, 2012, we had indebtedness of $65.2 million. We may incur additional indebtedness in the future, including any additional borrowings available under our senior credit facility with Bank of America. Any substantial indebtedness and the fact that a substantial portion of our cash flow from operating activities could be needed to make payments on this indebtedness could have adverse consequences, including the following:

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

limiting our ability to borrow additional funds;

 

  Ÿ  

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

 

  Ÿ  

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

Our ability to borrow any funds needed to operate and expand our business will depend in part on our ability to generate cash. Our ability to generate cash is subject to the performance of our business

 

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

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

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

 

  Ÿ  

incurring additional indebtedness;

 

  Ÿ  

granting additional liens;

 

  Ÿ  

making certain investments and distributions;

 

  Ÿ  

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

 

  Ÿ  

prepaying and modifying debt instruments; and

 

  Ÿ  

entering into transactions with affiliates.

These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions, or pursue available business opportunities. Our senior credit facility also requires us to maintain specified financial ratios and satisfy financial condition tests at the end of each fiscal quarter. Our ability to meet these financial ratios and tests can be affected by events beyond our control, and we may not meet those tests. We may be required to take action to reduce our indebtedness or to act in a manner contrary to our business objectives to meet these ratios and satisfy these covenants. We could also incur additional indebtedness in the future having even more restrictive covenants.

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

We will incur increased costs as a result of being a public company, and our management will be required to devote substantial time to new compliance matters.

We will incur significant legal, accounting, and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act, and the listing requirements of the stock exchange on which our securities are listed. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, despite recent reforms made possible by the JOBS Act, the reporting requirements, rules, and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly, particularly after we

 

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are no longer an “emerging growth company.” Any changes that we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.

We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, particularly to serve on our audit and compensation committees, or as executive officers.

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

As of December 31, 2011, we had $141.6 million of federal and $153.2 million of state net operating loss carry-forwards. As of December 31, 2011, ID Analytics had $23.5 million of federal and $26.5 million of state net operating loss carry-forwards. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation’s ability to use its pre-change net operating loss carry-forwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. At this time, we have not performed an analysis under Section 382 of the Internal Revenue Code to determine if an ownership change has occurred. However, with our initial public offering and other transactions that have occurred over the past three years, we may trigger or have already triggered an “ownership change” limitation. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carry-forwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.

Risks Related to this Offering and Ownership of Our Common Stock

Our stock price may be volatile, and you may not be able to resell your shares at or above the initial public offering price or at all.

Prior to this offering, there has been no public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. The price of our common stock in any such market may be higher or lower than the price that you pay in this offering. If you purchase shares of our common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters, which may not be indicative of prices that will prevail in the trading market. There is no guarantee that our common stock will appreciate in value or even maintain the price at which you purchase shares, and you could incur substantial losses or lose your entire investment. The trading price of our common stock may be volatile and subject to wide price fluctuations in response to various factors, many of which are beyond our control, including, in addition to the other matters described in this “Risk Factors” section, the following:

 

  Ÿ  

actual or anticipated fluctuations in our quarterly or annual financial results;

 

  Ÿ  

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

 

  Ÿ  

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

 

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  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

short selling of our common stock by investors;

 

  Ÿ  

additions or departures of key personnel;

 

  Ÿ  

announcements of technological innovations by us or by our competitors;

 

  Ÿ  

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

 

  Ÿ  

regulatory or political developments;

 

  Ÿ  

litigation and governmental or regulatory investigations;

 

  Ÿ  

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

 

  Ÿ  

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

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the price or liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, we could incur substantial costs defending the lawsuit or paying for settlements or damages. Such a lawsuit could also divert the time and attention of our management from our business.

Participants in our directed share program who have executed a lock-up agreement with the underwriters must hold their shares for a minimum of 180 days following the date of the prospectus related to this offering and accordingly will be subject to market risks not imposed on other investors in the offering.

At our request, the underwriters have reserved up to 785,000 shares of the common stock offered hereby for sale to our directors, officers, employees, and certain other parties who are otherwise associated with us. Purchasers of these shares who have entered into a lock-up agreement with the underwriters will not, subject to exceptions, be able to offer, sell, contract to sell, or otherwise dispose of or hedge any such shares for a period of 180 days after the date of the final prospectus relating to this offering, subject to certain specified extensions. As a result of such restriction, such purchasers may face risks not faced by other investors who have the right to sell their shares at any time following the offering (including other participants in the directed share program who have not executed a lock-up agreement with the underwriters). These risks include the market risk of holding our shares during the period that such restrictions are in effect.

Future sales of our common stock in the public market by our existing stockholders, or the perception that such sales might occur, could depress the market price of our common stock.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and even the perception that these sales could occur may depress the market price. Based on shares outstanding as of June 30, 2012, we will have 83,379,068 shares of common stock outstanding after this offering, assuming the anticipated

 

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initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, with respect to the conversion of the outstanding shares of our Series E and Series E-2 preferred stock into shares of our common stock immediately prior to the closing of this offering. See footnote 1 in “Prospectus Summary—The Offering.” Of these shares, the common stock sold in this offering will be freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. The holders of substantially all of the remaining 67,879,068 shares of common stock have agreed with the underwriters or otherwise agreed, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the 180-day period beginning on the date of this prospectus, except with the prior written consent of the representatives of the underwriters. The 180-day restricted period referred to in the preceding sentence may be extended under the circumstances described in the “Underwriting” section of this prospectus. After the expiration of the lock-up period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with the volume restrictions of Rule 144. In addition, shares issued or issuable upon the exercise of options and warrants as of the expiration of the 180-day restricted period will be eligible for sale at that time. Sales of stock by these stockholders could have a material adverse effect on the trading price of our common stock.

Stockholders owning 53,854,411 shares (assuming the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, with respect to the conversion of the outstanding shares of our Series E and Series E-2 preferred stock into shares of our common stock immediately prior to the closing of this offering) are entitled, under contracts providing for registration rights, to require us to register our securities owned by them for public sale, subject to the 180-day restricted period described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

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

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

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

We are an “emerging growth company” and as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act, and we intend 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

 

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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. 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 we are no longer an emerging growth company. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

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.

Certain underwriters have interests in this offering beyond customary underwriting discounts and have conflicts of interest with respect to this offering.

Bank of America, N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, or Merrill Lynch, an underwriter in this offering, serves as administrative agent and is a lender under the term loan portion of our senior credit facility. Royal Bank of Canada, an affiliate of RBC Capital Markets, LLC, an underwriter in this offering, also is a lender under the term loan. Because each of Merrill Lynch and RBC Capital Markets, LLC is an underwriter and may receive more than 5% of the net proceeds of this offering as a result of our intention to repay borrowings under the term loan, each of them has a “conflict of interest” under the applicable provisions of Rule 5121 of the Conduct Rules of FINRA. Accordingly, this offering will be made in compliance with the applicable provisions of Rules 5110 and 5121 of the Conduct Rules regarding the underwriting of securities of a company with a member that has a conflict of interest within the meaning of those rules. Pursuant to Rule 5121, Deutsche Bank Securities Inc. has served as the “qualified independent underwriter,” as defined by FINRA. Although the qualified independent underwriter, in that capacity, has performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this prospectus forms a part, we cannot assure you that this will adequately address any potential conflicts of interest. See “Underwriting—Conflicts of Interest.” In addition, we have agreed to indemnify Deutsche Bank Securities Inc. for acting as qualified independent underwriter against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that Deutsche Bank Securities Inc. may be required to make for those liabilities.

You will incur immediate and substantial dilution in your investment because our earlier investors paid substantially less than the initial public offering price when they purchased their shares.

If you purchase shares in this offering, you will incur immediate and substantial dilution of $9.97 in net tangible book value per share as of June 30, 2012, based on an assumed initial public offering price of $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, because the price that you pay will be substantially greater than the net tangible book value per share of the shares acquired. This dilution arises because investors that purchased shares prior to this offering paid substantially less than the initial public offering price when they purchased

 

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their shares of our capital stock. Furthermore, as of June 30, 2012, there were outstanding options to purchase 11,633,596 shares of our common stock at a weighted average exercise price of $3.66 per share and warrants to purchase 2,727,702 shares of our common stock at a weighted average exercise price of $1.0779 per share. To the extent such options or warrants are exercised in the future, there may be further dilution to new investors. For additional information, see “Dilution.”

In addition, immediately prior to the closing of this offering, each outstanding share of our preferred stock will automatically be converted into shares of our common stock at the applicable conversion rate then in effect. The conversion rate for our Series A preferred stock is currently 1 for 1.03, and the conversion rate for our other series of preferred stock is currently 1 for 1. However, the number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series E and Series E-2 preferred stock depends in part on the anticipated initial public offering price of our common stock. The anticipated public offering price will be determined in good faith by our board of directors shortly before the pricing of this offering. The terms of our Series E and Series E-2 preferred stock provide that the ratio at which each share of these series of preferred stock automatically convert into shares of our common stock in connection with this offering will increase if the anticipated initial public offering price is below $13.3919 per share, which would result in additional shares of our common stock being issued upon conversion of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series E and Series E-2 preferred stock would convert into an aggregate of 17,564,757 shares of our common stock immediately prior to the closing of this offering. A $1.00 increase in the anticipated initial public offering price of $10.50 per share would decrease by 1,525,933 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price reaches $13.3919 per share, each share of our Series E and Series E-2 preferred stock would convert into one share of our common stock immediately prior to the closing of this offering. A $1.00 decrease in the anticipated initial public offering price of $10.50 per share would increase by 1,848,197 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. However, if the volume weighted average price (VWAP) of our common stock during the ten trading days immediately following the effectiveness of the registration statement of which this prospectus forms a part is greater than the anticipated initial public offering price of $10.50 per share, we will have the right to repurchase from each holder of our Series E and Series E-2 preferred stock a number of shares of our common stock equal to the positive difference between the number of shares of our common stock into which such holder’s Series E and Series E-2 preferred stock converted immediately prior to the closing of this offering and the shares of our common stock into which such holder’s Series E and Series E-2 preferred stock would have converted based on the VWAP of our common stock. The repurchase price for these shares of our common stock will be $0.001 per share. A $1.00 increase in the VWAP above the anticipated initial public offering price of $10.50 per share will give us the right to repurchase 1,525,933 shares of our common stock from the holders of our Series E and Series E-2 preferred stock. If the VWAP equals or exceeds $13.3919 per share, we will have the right to repurchase a maximum of 3,792,798 shares of our common stock from the holders of our Series E and Series E-2 preferred stock.

Our directors, executive officers, and principal stockholders will continue to have substantial control over us after this offering and will be able to exert significant control over matters subject to stockholder approval.

As of June 30, 2012, our directors, executive officers, and holders of more than 5% of our common stock, together with their affiliates, beneficially owned, in the aggregate, approximately 70% of our outstanding common stock and, upon the closing of this offering, that same group will beneficially own, in the aggregate, approximately 57% of our outstanding common stock, assuming no exercise of

 

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the underwriters’ option to purchase additional shares from us. These amounts compare to approximately 19% of our outstanding common stock represented by the shares sold in this offering, also assuming no exercise of the underwriters’ option to purchase additional shares from us. As a result, these stockholders, acting together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

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

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

Our amended and restated certificate of incorporation and bylaws that will be in effect upon the closing of this offering will include provisions that:

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

prohibit cumulative voting in the election of directors;

 

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provide that our directors may be removed only for cause;

 

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

 

  Ÿ  

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

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

 

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

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

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

We will have broad discretion over the use of the proceeds we receive in this offering and may not apply the proceeds in ways that increase the value of your investment.

We will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management may not apply the net proceeds of this offering in ways that increase the value of your investment. We intend to use approximately $62.6 million of the net proceeds from this offering to repay the outstanding balance under our term loan incurred in connection with our acquisition of ID Analytics. In addition, if the anticipated initial public offering price is below $15.7552 per share, we intend to use a portion of the net proceeds from this offering to pay the amounts that will be payable to the holders of our Series E-1 preferred stock. We intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including supporting our revenue growth, enhancing our sales and marketing activities, entering new markets, and developing new service offerings. We also may use a portion of the net proceeds from this offering to acquire businesses, products, services, or technologies that we believe to be complementary to our business; however, we do not have any agreements or commitments to do so at this time. However, except as described above, we have not allocated the net proceeds from this offering for any specific purposes. Until we use the net proceeds from this offering, we plan to invest them in short-term, investment-grade, interest-bearing securities, and these investments may not yield a favorable rate of return. You will not have the opportunity to influence our decisions on how to use the net proceeds from this offering.

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

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains forward-looking statements. All statements other than statements of historical fact contained in this prospectus, including statements regarding our future operating results and financial position, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar expressions.

The forward-looking statements contained in this prospectus reflect our views as of the date of this prospectus about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, without limitation, those factors described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of the key factors that could cause actual results to differ from our expectations include the following:

 

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our ability to achieve or maintain profitability on an annual basis;

 

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our ability to protect our customers’ confidential information;

 

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our ability to maintain and enhance our brand recognition and reputation;

 

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the competitive nature of the industries in which we conduct our business;

 

  Ÿ  

our ability to maintain access to data sources;

 

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our ability to retain our existing customers and attract new customers, including our large enterprise customers;

 

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our ability to improve our services and develop and introduce new services with broad appeal;

 

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our ability to maintain existing and secure new relationships with strategic partners;

 

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the impact of failures or interruptions in our telecommunications and information technology infrastructure or failures in our network and data center infrastructure and internal technology systems;

 

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the effects of natural or man-made disasters or similar events;

 

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the impact of the economic climate on our business;

 

  Ÿ  

our ability to effectively manage our growth in an evolving industry;

 

  Ÿ  

our ability to successfully acquire businesses or other assets and to successfully integrate them into our business;

 

  Ÿ  

the effects of laws, regulations, and enforcement;

 

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our ability to comply with injunctive provisions;

 

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the outcome of any litigation or regulatory proceeding;

 

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the attraction and retention of skilled management and other key personnel;

 

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  Ÿ  

the quality of our insurance coverage;

 

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our ability to appropriately and timely address a high volume of identity-related events at the same time;

 

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our ability to raise additional capital to finance our business;

 

  Ÿ  

our ability to protect our intellectual property and not infringe on the intellectual property of others;

 

  Ÿ  

our ability to service our debt obligations; and

 

  Ÿ  

our ability to effectively transition to operating as a public company, including implementing and maintaining effective internal control over financial reporting.

Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this prospectus are based on information available to us on the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as otherwise required by law.

MARKET, INDUSTRY, AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity, and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources, and on our knowledge of the markets for our services. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions, and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by third parties and by us.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of our common stock in this offering will be approximately $147.7 million, assuming an initial public offering price of $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $170.7 million after deducting the underwriting discount and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of common stock by the selling stockholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $10.50 per share would increase (decrease) the net proceeds to us from this offering by $14.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

We intend to use approximately $62.6 million of the net proceeds from this offering to repay the outstanding balance under our term loan incurred in connection with our acquisition of ID Analytics. As of June 30, 2012, the interest rate on the term loan, which is scheduled to mature on February 7, 2016, was 4.49%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Obligations—Senior Credit Facility” for more information.

If the anticipated initial public offering price is below $15.7552 per share, we intend to use a portion of the net proceeds from this offering to pay the amounts that will be payable to the holders of our Series E-1 preferred stock. For every $0.01 the anticipated initial public offering price is below $15.7552 per share, we are obligated to pay $0.01 per share in cash to the holders of our Series E-1 preferred stock. As of the date of this prospectus, there were 1,586,778 shares of our Series E-1 preferred stock outstanding.

We intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including supporting our revenue growth, enhancing our sales and marketing activities, entering new markets, and developing new service offerings. We also may use a portion of the net proceeds from this offering to acquire businesses, products, services, or technologies that we believe to be complementary to our business. However, we do not have agreements or commitments for any specific acquisitions at this time.

Our plans for the proceeds of this offering are subject to change due to unforeseen events and opportunities, and the amounts and timing of our actual expenditures depend on several factors, including our expansion plans and the amount of cash generated or used by our operations. Other than as described above, we cannot specify with certainty the particular uses for the net proceeds to be received upon the closing of this offering. Accordingly, we will have broad discretion in using the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities such as money market funds, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government.

Each of Bank of America, N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, an underwriter in this offering, and Royal Bank of Canada, an affiliate of RBC Capital Markets, LLC, an underwriter in this offering, is a lender under the term loan portion of our senior credit facility and may receive more than five percent of the net proceeds of this offering. Thus, both Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBC Capital Markets, LLC have a “conflict of interest” under the applicable provisions of Rule 5121 of the Conduct Rules of FINRA. Accordingly, this offering will be made in compliance with the applicable provisions of Rules 5110 and 5121 of the Conduct Rules

 

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regarding the underwriting of securities of a company with a member that has a conflict of interest within the meaning of those rules. Deutsche Bank Securities Inc. has agreed to serve as a “qualified independent underwriter” as defined by FINRA and performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this prospectus forms a part. No underwriter with a conflict of interest will execute sales in discretionary accounts without the prior written specific approval of the customers. See “Underwriting—Conflicts of Interest.”

DIVIDEND POLICY

We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our operating results, financial condition, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant. Our existing senior credit facility restricts our ability to pay cash dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2012:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to reflect (a) the filing of our amended and restated certificate of incorporation and the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 48,391,142 shares of our common stock immediately prior to the closing of this offering, (b) the automatic conversion of outstanding warrants to purchase preferred stock into warrants to purchase 2,405,221 shares of our common stock immediately prior to the closing of this offering, and (c) the automatic termination of warrants to purchase 3,442,991 shares of our Series E and Series E-2 preferred stock upon the closing of this offering(1); and

 

  Ÿ  

on a pro forma as adjusted basis to further reflect (a) the sale by us of 15,500,000 shares of common stock in this offering at an assumed initial public offering price of $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, (b) the repayment of $65.2 million outstanding as of June 30, 2012 under our term loan incurred in connection with our acquisition of ID Analytics, and (c) the payment of $8.3 million for amounts payable to the holders to our Series E-1 preferred stock, assuming the anticipated public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus(2)(3)(4).

 

(1) The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series E and Series E-2 preferred stock depends in part on the anticipated initial public offering price of our common stock. The anticipated public offering price will be determined in good faith by our board of directors shortly before the pricing of this offering. The terms of our Series E and Series E-2 preferred stock provide that the ratio at which each share of these series of preferred stock automatically convert into shares of our common stock in connection with this offering will increase if the anticipated initial public offering price is below $13.3919 per share, which would result in additional shares of our common stock being issued upon conversion of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series E and Series E-2 preferred stock would convert into an aggregate of 17,564,757 shares of our common stock immediately prior to the closing of this offering. A $1.00 increase in the anticipated initial public offering price of $10.50 per share would decrease by 1,525,933 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price reaches $13.3919 per share, each share of our Series E and Series E-2 preferred stock would convert into one share of our common stock immediately prior to the closing of this offering. A $1.00 decrease in the anticipated initial public offering price of $10.50 per share would increase by 1,848,197 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. However, if the volume weighted average price (VWAP) of our common stock during the ten trading days immediately following the effectiveness of the registration statement of which this prospectus forms a part is greater than the anticipated initial public offering price of $10.50 per share, we will have the right to repurchase from each holder of our Series E and Series E-2 preferred stock a number of shares of our common stock equal to the positive difference between the number of shares of our common stock into which such holder’s Series E and Series E-2 preferred stock converted immediately prior to the closing of this offering and the shares of our common stock into which such holder’s Series E and Series E-2 preferred stock would have converted based on the VWAP of our common stock. The repurchase price for these shares of our common stock will be $0.001 per share. A $1.00 increase in the VWAP above the anticipated initial public offering price of $10.50 per share will give us the right to repurchase 1,525,933 shares of our common stock from the holders of our Series E and Series E-2 preferred stock. If the VWAP equals or exceeds $13.3919 per share, we will have the right to repurchase a maximum of 3,792,798 shares of our common stock from the holders of our Series E and Series E-2 preferred stock.

 

(2) For every $0.01 the anticipated initial public offering price is below $15.7552 per share, we are obligated to pay $0.01 per share in cash to the holders of outstanding shares of our Series E-1 preferred stock. As of the date of this prospectus, there were 1,586,778 shares of our Series E-1 preferred stock outstanding. See “Use of Proceeds” for additional information.

 

(3)

A $1.00 increase (decrease) in the assumed initial public offering price of $10.50 per share would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total capitalization, and stockholders’ equity by $14.4 million,

 

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assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

 

(4) A $1.00 increase (decrease) in the anticipated initial public offering price of $10.50 per share (up to $15.7552 per share) would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total capitalization, and stockholders’ equity by $1.6 million.

You should read this table together with “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2012  
     Actual     Pro Forma     Pro Forma
As
Adjusted
 
     (in thousands, except share data)  
           (unaudited)        

Cash and cash equivalents

   $ 62,836      $ 62,836      $ 136,954   
  

 

 

   

 

 

   

 

 

 

Long-term debt, including current portion

   $ 65,210      $ 65,210      $ —     

Convertible redeemable preferred stock, $0.001 par value; 50,194,865 shares authorized, 44,409,268 shares issued and outstanding, actual; no shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     263,668        —          —     

Stockholders’ equity:

      

Preferred stock, $0.001 par value; no shares authorized, no shares issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     —          —          —     

Common stock, $0.001 par value; 100,000,000 shares authorized, 19,487,926 shares issued and outstanding, actual; 300,000,000 shares authorized, pro forma and pro forma as adjusted; 67,879,068 shares issued and outstanding, pro forma; 83,379,068 shares issued and outstanding, pro forma as adjusted

     19        64        80   

Additional paid-in capital

     19,912        306,823        454,474   

Accumulated deficit

     (224,874     (222,653     (225,272
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (204,943     84,234        229,282   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 123,935      $ 149,444      $ 229,282   
  

 

 

   

 

 

   

 

 

 

The number of shares of our common stock to be outstanding after this offering is based on 67,879,068 shares of our common stock outstanding as of June 30, 2012, and excludes the following:

 

  Ÿ  

11,633,596 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2012 at a weighted average exercise price of $3.66 per share;

 

  Ÿ  

5,055,451 shares of our common stock reserved for future issuance under our 2006 Plan as of June 30, 2012; provided, however, that upon the closing of this offering, any remaining shares available for issuance under our 2006 Plan will be added to the shares reserved under our 2012 Plan, and we will cease granting awards under our 2006 Plan;

 

  Ÿ  

4,200,000 additional shares of common stock reserved for future issuance under our 2012 Plan, which will become effective upon the closing of this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under our 2012 Plan;

 

  Ÿ  

2,000,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, which will become effective upon the closing of this offering, as well as any

 

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automatic increases in the number of shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan; and

 

  Ÿ  

2,727,702 shares of our common stock issuable upon the exercise of warrants outstanding as of June 30, 2012 at a weighted average exercise price of $1.0779 per share.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Our pro forma net tangible book value as of June 30, 2012 was $(100.5) million, or $(1.48) per share. Our pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of common stock, after giving effect to the pro forma adjustments referenced under “Capitalization.”

After giving effect to (i) the pro forma adjustments referenced under “Capitalization,” (ii) receipt of the net proceeds from our sale of 15,500,000 shares of common stock in this offering at an assumed initial public offering price of $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us, and (iii) the application of the net proceeds we will receive in this offering in the manner described in “Use of Proceeds,” our pro forma as adjusted net tangible book value as of June 30, 2012 would have been approximately $44.6 million, or $0.53 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $2.01 per share to our existing stockholders and an immediate dilution of $9.97 per share to investors purchasing common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

     $ 10.50   

Pro forma net tangible book value per share as of June 30, 2012

   $ (1.48  

Increase in pro forma net tangible book value per share attributable to new investors purchasing shares in this offering

     2.01     
  

 

 

   

Pro forma net tangible book value per share after giving effect to this offering

       0.53   
    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     $ 9.97   
    

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $10.50 per share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $0.20 per share and the dilution to new investors by $0.20 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares in this offering is exercised in full, the pro forma net tangible book value, as adjusted to give effect to this offering, would be $0.79 per share and the dilution to new investors would be $9.71 per share.

The table below summarizes as of June 30, 2012, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration, and the average price per share (i) paid to us by our existing stockholders, the value of common and preferred stock issued to employees and non-employees, and the value of preferred stock issued in our acquisition of ID Analytics, and (ii) to be paid to us by new investors purchasing our common stock in this offering at an assumed initial public offering price of $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting the underwriting discount and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
      Number      Percent     Amount      Percent    
    

(in thousands, except per share data and percentages)

 

Existing stockholders

     67,879         81   $ 215,875         57   $ 3.18   

New investors

     15,500         19     162,750         43   $ 10.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     83,379         100.0   $ 378,625         100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $10.50 per share would increase (decrease) total consideration paid by new investors by $14.4 million and increase (decrease) the percent of total consideration paid by new investors by 10%, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

If the underwriters’ option to purchase additional shares in this offering is exercised in full, the percentage of shares of our common stock held by existing stockholders will be reduced to 79% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will increase to 17,855,000 shares, or 21% of the total number of shares of our common stock outstanding after this offering.

The sale by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 67,679,068 shares, or 81% of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to 15,700,000 shares, or 19% of the total number of shares outstanding after this offering.

The total number of shares of our common stock reflected in the discussion and tables above is based on 67,879,068 shares of our common stock outstanding as of June 30, 2012, and excludes the following:

 

  Ÿ  

11,633,596 shares of our common stock issuable upon the exercise of stock options outstanding as of June 30, 2012 at a weighted average exercise price of $3.66 per share;

 

  Ÿ  

5,055,451 shares of our common stock reserved for future issuance under our 2006 Plan as of June 30, 2012; provided, however, that upon the closing of this offering, any remaining shares available for issuance under our 2006 Plan will be added to the shares reserved under our 2012 Plan, and we will cease granting awards under our 2006 Plan;

 

  Ÿ  

4,200,000 additional shares of common stock reserved for future issuance under our 2012 Plan, which will become effective upon the closing of this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under our 2012 Plan;

 

  Ÿ  

2,000,000 shares of common stock reserved for issuance under our 2012 Employee Stock Purchase Plan, which will become effective upon the closing of this offering, as well as any automatic increases in the number of shares of common stock reserved for future issuance under our 2012 Employee Stock Purchase Plan; and

 

  Ÿ  

2,727,702 shares of our common stock issuable upon the exercise of warrants outstanding as of June 30, 2012 at a weighted average exercise price of $1.0779 per share.

To the extent that any outstanding options or warrants are exercised, new options are issued under our equity incentive plan, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all of these options and warrants outstanding at June 30, 2012 were exercised, then our existing stockholders, including the holders of these options and warrants, would own 84% and our new investors would own 16% of the total number of shares of our common stock outstanding upon the closing of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options and warrants, would be approximately $261 million, or 62%, the total consideration paid by our new investors would be $163 million, or 38%, the average price per share paid by our existing stockholders would be $3.18, and the average price per share paid by our new investors would be $10.50.

 

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The discussion in this “Dilution” section does not take into consideration the impact changes in the anticipated initial public offering price from the assumed anticipated initial public offering price of $10.50 per share may have on (a) the number of shares of our common stock issuable upon conversion the outstanding shares of our Series E and Series E-2 preferred stock (if the initial public offering price is below $13.3919 per share) and (b) the price per share paid for shares of our Series E-1 preferred stock as adjusted to give effect to any amounts paid to the holders of our Series E-1 preferred stock (if the initial public offering price is below $15.7552 per share).

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial and other data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

We have derived the consolidated statements of operations data for the years ended December 31, 2009, 2010, and 2011 and the consolidated balance sheet data as of December 31, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the consolidated statements of operations data for the years ended December 31, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007, 2008, and 2009 from our audited consolidated financial statements not included in this prospectus. We have derived the consolidated statements of operations data for the six months ended June 30, 2011 and 2012 and the consolidated balance sheet data as of June 30, 2012 from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year or any other period.

On March 14, 2012, we completed our acquisition of ID Analytics. Accordingly, the consolidated statements of operations data for the six months ended June 30, 2012 only includes the results for ID Analytics since that date. The audited consolidated financial statements of ID Analytics as of and for the years ended December 31, 2010 and 2011, and the unaudited pro forma condensed combined financial statements for the year ended December 31, 2011 and for the six months ended June 30, 2012 are included elsewhere in this prospectus.

 

    Year Ended December 31,     Six Months
Ended June 30,
 
    2007     2008     2009     2010     2011     2011     2012  
    (in thousands, except per share data)  
                                  (unaudited)  

Consolidated Statements of Operations Data:

             

Revenue:

             

Consumer revenue

  $ 18,874      $ 91,253      $ 131,368      $ 162,279      $ 193,949      $ 90,996      $ 118,324   

Enterprise revenue

    —          —          —          —          —          —          7,171   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    18,874        91,253        131,368        162,279        193,949        90,996        125,495   

Cost of services

    7,582        30,701        43,109        51,445        62,630        31,140        37,965   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    11,292        60,552        88,259        110,834        131,319        59,856        87,530   

Expenses:

             

Sales and marketing

    30,915        80,903        77,815        78,844        91,217        43,749        61,505   

Technology and development

    3,485        10,557        19,925        21,338        17,749        9,010        12,993   

General and administrative

    7,481        26,556        45,900        23,306        17,510        8,770        9,537   

Amortization of acquired intangible assets

    —          —          —          —            —          2,325   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    41,881        118,016        143,640        123,488        126,476        61,529        86,360   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (30,589     (57,464     (55,381     (12,654     4,843        (1,673     1,170   

Other income (expense):

             

Interest expense

    (69     (606     (1,385     (1,368     (231     (198     (1,285

Interest income

    233        175        110        28        8        7        2   

Change in fair value of warrant liabilities

    (4,852     (331     (1,919     (1,333     (8,658     (4,124     (2,941

Change in fair value of embedded derivative

    —          —          —          —          —          —          714   

Other

    (10     1        (49     (41     (5     —          (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended December 31,     Six Months
Ended June 30,
 
    2007     2008     2009     2010     2011     2011     2012  
    (in thousands, except per share data)  
                                  (unaudited)  

Total other expense

    (4,698     (761     (3,243     (2,714     (8,886     (4,315     (3,512
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (35,287     (58,225     (58,624     (15,368     (4,043     (5,988     (2,342

Income tax expense (benefit)

    —          26        39        8        214        82        (13,897
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (35,287     (58,251     (58,663     (15,376     (4,257     (6,070     11,555   

Accretion of convertible redeemable preferred stock

    (1,151     (6,550     (10,299     (16,145     (18,926     (10,360     (4,752

Net income allocable to convertible redeemable preferred stockholders

    —          —          —          —          —          —          (4,517
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available (loss attributable) to common stockholders

  $ (36,438   $ (64,801   $ (68,962   $ (31,521   $ (23,183   $ (16,430   $ 2,286   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

             

Basic

  $ (1.99   $ (3.64   $ (3.86   $ (1.74   $ (1.24   $ (0.88   $ 0.12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (1.99   $ (3.64   $ (3.86   $ (1.74   $ (1.24   $ (0.88   $ 0.10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute net income available (loss attributable) per share to common stockholders:

             

Basic

    18,328        17,825        17,843        18,068        18,725        18,573       
19,453
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    18,328        17,825        17,843        18,068        18,725        18,573        52,212   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income available (loss attributable) per share to common stockholders(1)(2) (unaudited):

             

Basic

          $ (0.02     $ (0.00
         

 

 

     

 

 

 

Diluted

          $ (0.02     $ (0.00
         

 

 

     

 

 

 

Pro forma weighted average shares used to compute pro forma net income available (loss attributable) per share to common stockholders(1)(2) (unaudited):

             

Basic

            74,120          74,848   
         

 

 

     

 

 

 

Diluted

            74,120          74,848   
         

 

 

     

 

 

 
    Year Ended December 31,     Six Months Ended
June 30,
 
    2007     2008     2009     2010     2011     2011     2012  
    (in thousands)  
                                  (unaudited)  

Consolidated Statements of Cash Flows Data:

             

Net cash provided by (used in):

             

Operating activities

  $ (4,904   $ (25,488   $ (23,396   $ (14,510   $ 24,344      $ 11,822      $ 23,099   

Investing activities

  $ (5,787   $ (3,443   $ (5,094   $ (1,484   $ (1,531   $ (984   $ (159,510

Financing activities

  $ 14,545      $ 34,249      $ 22,636      $ 27,964      $ (11,544   $ (13,049   $ 170,397   
    Year Ended December 31,     Six Months
Ended
June 30,
 
    2007     2008     2009     2010     2011     2011     2012  
    (in thousands, except percentages and per member data)  
   

(unaudited)

 

Other Financial and Operational Data:

             

Cumulative ending members(3)

    497        1,331        1,621        1,748        2,075        1,878        2,282   

Gross new members(4)

    478        924        618        517        704        326        377   

Member retention rate(5)

    89.9     89.8     79.3     79.1     82.7     80.4     85.4

Average cost of acquisition per member(6)

  $ 65      $ 88      $ 126      $ 152      $ 130      $ 134      $ 157   

Monthly average revenue per member(7)

  $ 7.17      $ 7.38      $ 7.30      $ 7.94      $ 8.54      $ 8.40      $ 9.00   

Enterprise transactions(8)

    97,929        76,083        75,763        108,707        184,012        80,633        105,479   

Adjusted EBITDA(9)

  $ (29,585   $ (54,004   $ (49,402   $ (5,189   $ 11,868      $ 1,737      $ 7,936   

Free cash flow(10)

  $ (7,278   $ (30,598   $ (28,488   $ (15,995   $ 22,313      $ 10,588      $ 21,019   

 

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(1) Pro forma net income available (loss attributable) per share to common stockholders has been calculated to give effect to the following transactions as if they occurred on January 1, 2011: (a) the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 48,391,142 shares of our common stock immediately prior to the closing of this offering, (b) the number of shares whose proceeds will be used to repay $65.2 million of the outstanding balance as of June 30, 2012 under our term loan incurred in connection with our acquisition of ID Analytics, and (c) the number of shares whose proceeds will be used to pay $8.3 million to the holders of our Series E-1 preferred stock, assuming the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus. See the reconciliation on pages P-2 and P-3.

 

     The following is a reconciliation of pro forma basic and diluted weighted average shares used to compute pro forma net income available (loss attributable) per share to common stockholders:
     Year Ended
December 31,
2011
     Six Months
Ended
June 30,
2012
 
     (unaudited)  

Shares used to compute basic net income available (loss attributable) per share to common stockholders

     18,725         19,453   

Adjustment for assumed automatic conversion of preferred stock

     48,391         48,391   

Adjustment for shares used to repay outstanding balance of term loan

     6,210         6,210   

Adjustment for shares used to pay holders of our Series E-1 preferred stock

     794         794   
  

 

 

    

 

 

 

Basic pro forma weighted average shares used to compute pro forma net income available (loss attributable) per share to common stockholders

     74,120         74,848   

Dilutive effect of securities

               
  

 

 

    

 

 

 

Diluted pro forma weighted average shares used to compute pro forma net income available (loss attributable) per share to common stockholders

     74,120         74,848   
  

 

 

    

 

 

 

 

(2) The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series E and Series E-2 preferred stock depends in part on the anticipated initial public offering price of our common stock. The anticipated public offering price will be determined in good faith by our board of directors shortly before the pricing of this offering. The terms of our Series E and Series E-2 preferred stock provide that the ratio at which each share of these series of preferred stock automatically convert into shares of our common stock in connection with this offering will increase if the anticipated initial public offering price is below $13.3919 per share, which would result in additional shares of our common stock being issued upon conversion of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price is equal to $10.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series E and Series E-2 preferred stock would convert into an aggregate of 17,564,757 shares of our common stock immediately prior to the closing of this offering. A $1.00 increase in the anticipated initial public offering price of $10.50 per share would decrease by 1,525,933 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. If the anticipated initial public offering price reaches $13.3919 per share, each share of our Series E and Series E-2 preferred stock would convert into one share of our common stock immediately prior to the closing of this offering. A $1.00 decrease in the anticipated initial public offering price of $10.50 per share would increase by 1,848,197 shares the number of shares of our common stock issuable upon conversion of the outstanding shares of our Series E and Series E-2 preferred stock immediately prior to the closing of this offering. However, if the volume weighted average price (VWAP) of our common stock during the ten trading days immediately following the effectiveness of the registration statement of which this prospectus forms a part is greater than the anticipated initial public offering price of $10.50 per share, we will have the right to repurchase from each holder of our Series E and Series E-2 preferred stock a number of shares of our common stock equal to the positive difference between the number of shares of our common stock into which such holder’s Series E and Series E-2 preferred stock converted immediately prior to the closing of this offering and the shares of our common stock into which such holder’s Series E and Series E-2 preferred stock would have converted based on the VWAP of our common stock. The repurchase price for these shares of our common stock will be $0.001 per share. A $1.00 increase in the VWAP above the anticipated initial public offering price of $10.50 per share will give us the right to repurchase 1,525,933 shares of our common stock from the holders of our Series E and Series E-2 preferred stock. If the VWAP equals or exceeds $13.3919 per share, we will have the right to repurchase a maximum of 3,792,798 shares of our common stock from the holders of our Series E and Series E-2 preferred stock.
(3) We calculate cumulative ending members as the total number of members at the end of the relevant period. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Cumulative ending members.”
(4) We calculate gross new members as the total number of members who enroll in one of our consumer services during the relevant period. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Gross new members.”

 

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(5) 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. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Member retention rate.”
(6) 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. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Average cost of acquisition per member.”
(7) 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. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Monthly average revenue per member.”
(8) We calculate enterprise transactions as the total number of transactions processed for either an identity risk or credit risk score during the relevant period. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics—Key Operating Metrics—Enterprise transactions.” Our enterprise transactions are processed by ID Analytics, which we acquired on March 14, 2012. Accordingly, the enterprise transactions data includes transactions processed by ID Analytics before the acquisition.
(9) 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, other income (expense) (which consists primarily of gains and losses on disposal of fixed assets), provision for income taxes, and share-based compensation. For more information about adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures—Adjusted EBITDA.”
(10) Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less net cash used in investing activities for acquisitions of property and equipment. For more information about free cash flow and a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, see “Non-GAAP Financial Measures—Free Cash Flow.”

Share-based compensation included in the statements of operations data above was as follows:

 

     Year Ended December 31,      Six Months
Ended
June 30,
 
     2007      2008      2009      2010      2011      2011      2012  
     (in thousands)  
                                        (unaudited)  

Cost of services

   $ 42       $ 107       $ 171       $ 262       $ 309       $ 161       $ 251   

Sales and marketing

     72         266         543         690         655         308         413   

Technology and development

     216         254         394         845         783         370         710   

General and administrative

     218         375         1,033         1,454         1,538         741         989   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation

   $ 548       $ 1,002       $ 2,141       $ 3,251       $ 3,285       $ 1,580       $ 2,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

    As of December 31,     As of
June 30,
2012
 
    2007     2008     2009     2010     2011    
    (in thousands)  
          (unaudited)  

Consolidated Balance Sheet Data:

           

Cash and cash equivalents

  $ 6,147     $ 11,465     $ 5,611     $ 17,581     $ 28,850     $ 62,836   

Property and equipment, net

    3,951       7,448       8,624       6,534       4,049       6,252   

Working capital (deficit), excluding deferred revenue

    (3,967     (9,832     (26,541     (10,915     13,947        36,700   

Total assets

    15,445       23,929       20,793       31,360       42,060       271,882   

Deferred revenue

    18,344       37,879       49,433       56,580       70,020       89,060   

Long-term debt, including current portion

    7,903       17,081       218       13,010              65,210   

Convertible redeemable preferred stock

    11,404       43,278       93,069       126,281       145,207       263,668   

Total stockholders’ deficit

    (38,376     (102,107     (168,302     (196,121     (214,267     (204,943

 

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Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed adjusted EBITDA, which is a non-GAAP financial measure, in the “Other Financial and Operational Data” table above and elsewhere within this prospectus. We have provided a reconciliation below of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors 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 our management and board of directors. We believe that it is useful to exclude non-cash charges for depreciation and amortization, change in fair value of warrant liabilities and embedded derivative, 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.

More specifically, we believe that it is useful to exclude depreciation and amortization from net income (loss) because depreciation is a function of our capital expenditures, while amortization reflects other asset acquisitions and their associated costs. In analyzing the performance of our business currently, we believe it is helpful to also consider the business without taking into account costs or benefits accruing from historical decisions on infrastructure and capacity. While these expense and related investments affect the overall financial health of our company, we evaluate them separately and they relate to historic decisions. Further, depreciation and amortization do not result in ongoing cash expenditures. Investors should note that the use of assets being depreciated or amortized contributed to revenue earned during the periods presented and will continue to contribute to future period revenue. This depreciation and amortization expense will recur in future periods for GAAP purposes.

We believe that it is useful to exclude change in fair value of warrant liabilities and embedded derivative associated with the revaluation of warrants and embedded derivative from EBITDA. These items vary significantly in size and amount and are excluded by our management when evaluating and predicting earnings trends because these charges are based on many subjective inputs at a point in time and many of these inputs are not necessarily directly related to the performance of our business. Due to subjective assumptions that underlie valuation methodologies used in the calculation, as well as the impact of non-operational factors such as the fair value of our common stock on the magnitude of this expense, we exclude these gains or losses when evaluating the ongoing performance of our business.

We believe it is appropriate to exclude share-based compensation expense from EBITDA because non-cash equity grants made at a certain price and point in time do not reflect how our business is performing at any particular time. While we believe that stockholders should have information about any dilutive effect of outstanding options and the cost of that compensation, we also believe that stockholders should have the ability to view the non-GAAP financial measures that exclude these costs that management uses to evaluate our business. The determination of share-based compensation expense is based on many subjective inputs at a point in time and many of these inputs are not necessarily directly related to the performance of our business. Therefore, excluding this cost gives us a clearer view of the

 

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operating performance of our business. Because of varying available valuation methodologies, subjective assumptions, and the variety of award types that companies may use under the Financial Accounting Standards Board, or FASB, ASC Topic 718, which governs the accounting treatment for share-based compensation, as well as the impact of non-operational factors such as the fair value of our common stock on the magnitude of this expense, management believes that providing non-GAAP financial measures that exclude share-based compensation expense allows investors to make meaningful comparisons between our operating results with those of other companies. Share-based compensation has been a significant non-cash recurring expense in our business and has been used as a key incentive offered to our employees. We believe such compensation contributed to the revenue earned during the periods presented and also believe it will contribute to the generation of future period revenue. Share-based compensation expense will recur in future periods for GAAP purposes.

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:

 

  Ÿ  

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;

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

adjusted EBITDA does not reflect cash interest income or expense;

 

  Ÿ  

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

 

  Ÿ  

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:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2007     2008     2009     2010     2011         2011             2012      
     (in thousands)  

Reconciliation of Net Income (Loss) to Adjusted EBITDA:

              

Net income (loss)

   $ (35,287   $ (58,251   $ (58,663   $ (15,376   $ (4,257   $ (6,070   $ 11,555   

Depreciation and amortization

     456        2,458        3,838        4,214        3,740        1,830        4,403   

Interest expense

     69        606        1,385        1,368        231        198        1,285   

Interest income

     (233     (175     (110     (28     (8     (7     (2

Change in fair value of warrant liabilities

     4,852        331        1,919        1,333        8,658        4,124        2,941   

Change in fair value of embedded derivative

     —          —          —          —          —          —          (714

Other income (expense)

     10        (1     49        41        5        —          2   

Income tax (benefit) expense

     —          26        39        8        214        82        (13,897

Share-based compensation

     548        1,002        2,141        3,251        3,285        1,580        2,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (29,585   $ (54,004   $ (49,402   $ (5,189   $ 11,868      $ 1,737      $ 7,936   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Free Cash Flow

Our management uses free cash flow as a measure of our operating performance; for planning purposes, including the preparation of our annual operating budget; to allocate resources to enhance the financial performance of our business; to evaluate the effectiveness of our business strategies; to provide consistency and comparability with past financial performance; to determine capital requirements; to facilitate a comparison of our results with those of other companies; and in communications with our board of directors concerning our financial performance.

We use free cash flow to evaluate our business because, although it is similar to net cash provided by (used in) operating activities, we believe it typically presents a more conservative measure of cash flow as purchases of property and equipment are necessary components of ongoing operations. We believe that this non-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:

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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 (used in) 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 (used in) operating activities for each of the periods indicated:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2007     2008     2009     2010     2011     2011     2012  
     (in thousands)  

Reconciliation of Net Cash Provided By (Used In) Operating Activities to Free Cash Flow:

              

Net cash provided by (used in) operating activities

   $ (4,904   $ (25,488   $ (23,396   $ (14,510   $ 24,344      $ 11,822      $ 23,099   

Acquisitions of property and equipment

     (2,374     (5,110     (5,092     (1,485     (2,031     (1,234     (2,080
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (7,278   $ (30,598   $ (28,488   $ (15,995   $ 22,313      $ 10,588      $ 21,019   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in “Risk Factors” or in other parts of this prospectus.

Overview

We are a leading provider of proactive identity theft protection services for consumers and identity risk assessment and fraud protection 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 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 stop the transaction or otherwise rapidly 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.

Since our founding in April 2005 and the enrollment of our first member in our basic LifeLock identity theft protection service in June 2005, we have experienced 29 consecutive quarters of sequential growth in both revenue and cumulative ending members. We enrolled our one millionth member in 2008, surpassed two million members in 2011, and as of June 30, 2012, served nearly 2.3 million paying members. Our consumer identity theft protection services have expanded during this time with the introduction of our LifeLock Command Center service in December 2009 and LifeLock Ultimate service in December 2011.

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. ID Analytics was founded in 2002, launched its identity risk assessment service in 2003, was granted its first patent in 2008, and as of June 30, 2012, served more than 250 enterprise customers. In 2011, ID Analytics processed an identity risk or credit risk score for over 184 million transactions. 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.

 

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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 June 30, 2012, almost two-thirds 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. 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. 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. In 2009, 2010, and 2011, our total advertising expense was $47.2 million, $42.7 million, and $54.6 million, respectively. We also pay internal and external sale commissions, which we record as a sales and marketing expense. We generally spend more in the first three quarters of each year on sales and marketing than in the fourth quarter due to the peak advertising rates during the holiday season. As a result, we typically enroll the least number of members in the fourth quarter.

Our revenue grew from $162.3 million in 2010 to $193.9 million in 2011 and from $91.0 million in the six months ended June 30, 2011 to $125.5 million in the six months ended June 30, 2012 (including revenue of $7.2 million contributed by ID Analytics since our March 2012 acquisition). We expect to continue to devote substantial resources to customer acquisition and to the introduction of new services and the enhancement of our existing services. In addition, we expect to invest in our operations to support anticipated growth and public company reporting and compliance obligations.

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.

 

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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.

Key Operating Metrics

The following table summarizes our key operating metrics for the years ended December 31, 2009, 2010, and 2011 and the six months ended June 30, 2011 and 2012:

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011     2011     2012  
     (in thousands, except percentages and per member data)  

Cumulative ending members

     1,621        1,748        2,075        1,878        2,282   

Gross new members

     618        517        704        326        377   

Member retention rate

     79.3     79.1     82.7     80.4     85.4

Average cost of acquisition per member

   $ 126      $ 152      $ 130      $ 134      $ 157   

Monthly average revenue per member

   $ 7.30      $ 7.94      $ 8.54      $ 8.40      $ 9.00   

Enterprise transactions

     75,763        108,707        184,012        80,633        105,479   

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 a third-party enterprise that pays 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.

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.

 

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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.

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 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.

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 never changed, our average revenue per member increased by over 7% in both 2010 and 2011. This growth was primarily driven by increased adoption of our higher priced premium services by a greater percentage of our members, a trend we expect will continue. We monitor monthly average revenue per member because it is a strong indicator of revenue in our consumer business and of the performance of our premium services.

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 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.

 

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Key Financial Metrics

The following table summarizes our key financial metrics for the years ended December 31, 2009, 2010, and 2011 and the six months ended June 30, 2011 and 2012:

 

     Year Ended December 31,      Six Months Ended
June 30,
 
     2009     2010     2011      2011      2012  
     (in thousands)  

Consumer revenue

   $ 131,368      $ 162,279      $ 193,949       $ 90,996       $ 118,324   

Enterprise revenue

     —          —          —           —           7,171   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total revenue

     131,368        162,279        193,949         90,996         125,495   

Adjusted EBITDA

     (49,402     (5,189     11,868         1,737         7,936   

Free cash flow

     (28,488     (15,995     22,313         10,588         21,019   

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, other income (expense) (which consists primarily of gains and losses on disposal of fixed assets), provision for income taxes, and share-based compensation. We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made. For more information about adjusted EBITDA and a reconciliation of adjusted EBITDA to net income (loss), see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Adjusted EBITDA.”

Free cash flow.    Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less net cash used in investing activities for acquisitions of property and equipment. We believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net cash provided by (used in) operating activities prepared in accordance with GAAP to analyze our operating results. Users of this financial information should consider the types of events and transactions for which adjustments have been made. For more information about free cash flow and a reconciliation of free cash flow to net cash provided by (used in) operating activities, see “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Free Cash Flow.”

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 is dependent on a number of factors, including the effectiveness of our marketing campaigns, changes in cost of media, the competitive environment in our markets, the prevalence of identity theft issues in the media, publicity about our company, and the level of differentiation of our services. For example, in 2010, our average cost of acquisition per member increased over 2009 as adverse publicity related to our FTC settlement and an ineffective marketing campaign slowed new member growth. 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

 

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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 early 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, 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 from 79.1% in 2010 to 82.7% in 2011 to 85.4% for the six months ended June 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 10% of the 2011 revenue of ID Analytics, or approximately 2% of our overall pro forma 2011 revenue, was derived from direct competitors to our consumer business. 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, the continued enhancement of our existing services, and the relocation of one of our data centers, which is expected to occur in the fall of 2012, 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. For example, we entered into a settlement agreement with the New York State Department of Taxation and Finance regarding our collection of sales tax in the state of New York. We recently began collecting sales tax in the state of New York related to the sale of our consumer services, and also recently began collecting sales tax in specific states related to our credit monitoring services. Additional states or other jurisdictions may seek to impose sales tax collection obligations on us in the future, which could result in substantial tax liabilities for past sales and discourage current members and other consumers from purchasing our services.

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

 

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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 latter of cash receipt, activation of a member’s account, or expiration of free trial periods to the end of the subscription period.

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

We derive revenue in our enterprise segment from fees paid by our enterprise customers for 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.

 

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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.

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

 

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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 June 30, 2012, we had $55.2 million in intangible assets as a result of our acquisition of ID Analytics. The intangible assets have useful lives of between five and ten years and we expect to recognize $7.9 million of amortization expense per year over the next five years.

Other Income (Expense)

Other income (expense) consists primarily of interest income on our cash and cash equivalents, interest expense on our indebtedness, and changes in the fair value of our warrant liabilities. Gains and losses on our warrant liabilities result from the re-measurement of the fair value of warrants to purchase our preferred stock, which we account for as liabilities. Until the holders of warrants to purchase our preferred stock exercise their warrants or the underlying preferred stock is converted into common stock, we expect the change in the fair value of warrant liabilities to generate losses as the fair value of our preferred stock increases as a result of the growth of our business. We expect the warrant liabilities to be reclassified to equity if the underlying preferred stock is converted into common stock, which will occur upon the closing of this offering. When the warrants are reclassified to equity, we will no longer be required to remeasure the fair value of our warrants.

We recorded a liability of $7.9 million for an embedded derivative associated with our Series E-1 preferred stock issued in connection with our acquisition of ID Analytics in March 2012. The embedded derivative liability will be adjusted to fair value at each reporting period with any unrealized gain or loss recorded in other income (expense). Over the next year, we expect future changes in the fair value of the embedded derivative to result in a gain because we expect the fair value of our common stock to increase over that period, thereby reducing the fair value of the embedded derivative liability. The fair value of the embedded derivative will be remeasured through the date it will be settled, at which time it will be extinguished through the payment of cash to the holders of our Series E-1 preferred stock. Upon the closing of this offering, we will be required to pay the holders of our Series E-1 preferred stock an amount equal to $0.01 per share in cash for every $0.01 the anticipated initial public offering price is below $15.7552.

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 of December 31, 2011, we had $141.6 million of federal and $153.2 million of state net operating loss carry-forwards, which may be available to reduce future taxable income. The federal net operating loss carry-forwards begin to expire in 2027, and the state net operating loss carry-forwards begin to expire in 2012. Our ability to use our net operating loss carry-forwards to offset any future

 

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taxable income could be subject to limitations attributable to equity transactions that would result in a change of ownership as defined by Section 382 of the Internal Revenue Code.

As of December 31, 2011, we had total deferred tax assets of $61.6 million, primarily comprised of our accumulated net operating loss carry-forwards. We provided a full valuation allowance against our net deferred tax assets as we believed that sufficient uncertainty existed regarding our ability to realize our deferred tax assets. Our net deferred tax assets consist primarily of net operating loss carry-forwards. Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and our cumulative net losses in all periods prior to the fourth quarter of 2011, we have provided a full valuation allowance against our deferred tax assets. We intend to maintain a valuation allowance until sufficient evidence exists to support the reversal of the valuation allowance. We believe it is possible our future operating results will yield sufficient evidence to support the conclusion that it is more likely than not we will realize the tax benefit of our net operating losses. If that becomes the case, subject to review of other qualitative factors and uncertainties, we would expect to begin reversing some or all of our remaining deferred tax asset valuation allowance. For the periods following the recognition of this tax benefit and to the extent we are profitable, we will record a tax provision for which the actual payment may be offset against our accumulated net operating loss carry-forwards. However, our tax rate may increase significantly in future periods.

On March 14, 2012, we acquired ID Analytics. As of December 31, 2011, ID Analytics had $23.5 million of federal and $26.5 million of state net operating loss carry-forwards, which may be available to reduce future taxable income. The federal net operating loss carry-forwards begin to expire in 2023, and the state net operating loss carry-forwards begin to expire in 2013. ID Analytics also had federal and state research tax credit carry-forwards of $0.2 million and $0.1 million, respectively, as of December 31, 2011. These carry-forwards will begin to expire, if unused, in 2022 except as they pertain to California tax credit carry-forwards, which continue to carry forward indefinitely. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of ID Analytics’ net operating loss carry-forwards and credit carry-forwards may be limited as a result of any future changes in ownership.

As of December 31, 2011, ID Analytics had net deferred tax assets of $9.5 million, primarily comprised of accumulated net operating loss carry-forwards. A full valuation allowance was provided against the net deferred tax assets as ID Analytics believed that sufficient uncertainty existed regarding its ability to realize its deferred tax assets.

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 statement of operations for the six months ended June 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 six months ended June 30, 2012 are not necessarily indicative of our results for the full year or for any other period.

 

     Year Ended December 31,     Six Months Ended
June 30,
 
     2009     2010     2011     2011     2012  
     (in thousands)  

Consolidated Statement of Operations Data:

          

Revenue:

          

Consumer revenue

   $ 131,368      $ 162,279      $ 193,949      $ 90,996      $ 118,324   

Enterprise revenue

     —          —          —          —          7,171   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     131,368        162,279        193,949        90,996        125,495   

Cost of services

     43,109        51,445        62,630        31,140        37,965   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     88,259        110,834        131,319        59,856        87,530   

Expenses:

          

Sales and marketing

     77,815        78,844        91,217        43,749        61,505   

Technology and development

     19,925        21,338        17,749        9,010        12,993   

General and administrative

     45,900        23,306        17,510        8,770        9,537   

Amortization of acquired intangible assets

     —          —          —          —          2,325   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     143,640        123,488        126,476        61,529        86,360   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (55,381     (12,654     4,843        (1,673     1,170   

Other income (expense):

          

Interest expense

     (1,385     (1,368     (231     (198     (1,285

Interest income

     110        28        8        7        2   

Change in fair value of warrant liabilities

     (1,919     (1,333     (8,658     (4,124     (2,941

Change in fair value of embedded derivative

     —          —          —          —          714   

Other

     (49     (41     (5     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (3,243     (2,714     (8,886     (4,315     (3,512
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (58,624     (15,368     (4,043     (5,988     (2,342

Income tax (benefit) expense

     39        8        214        82        (13,897
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (58,663   $ (15,376   $ (4,257   $ (6,070   $ 11,555   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

71


Table of Contents
     Year Ended December 31,     Six Months Ended
June 30,
 
         2009             2010             2011             2011             2012      
     (as a percentage of total revenue)  

Consolidated Statement of Operations Data:

          

Revenue:

          

Consumer revenue

     100.0     100.0     100.0     100.0     94.3

Enterprise revenue

     —          —          —          —          5.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0        100.0        100.0        100.0        100.0   

Cost of services

     32.8        31.7        32.3        34.2        30.3