LifeLock 2013 Annual Report Download - page 76

The following were the identified intangible assets acquired at their preliminary fair value and the respective preliminary estimated periods over which
such assets will be amortized:
 
 
 
   
Trade name and trademarks $ 60 1.0
Customer relationships 530 1.0
Technology 3,290 7.0
$ 3,880
The preliminary total weighted-average amortization period for the identifiable intangible assets acquired from Lemon is 6.0 years. We expect to
recognize amortization expense over the next seven years.
The goodwill resulting from the acquisition of Lemon is not deductible for income tax purposes. The preliminary goodwill is primarily attributable to
the assembled workforce and expanded market opportunity when integrating Lemon’s mobile applicati on with our existing identity theft protection services.
In determining the preliminary purchase price allocation, we considered, among other factors, how a market participant would likely use the acquired
assets and the historical and estimated future demand for Lemon’s services. The preliminary estimated fair value of intangible assets was based on the income
approach. The income approach requires a projection of the cash flow that the asset is expected to generate in the future. The projected cash flow is discounted
to its present value using a rate of return, or discount rate, which accounts for the time value of money and the degree of risk inherent in the asset. The
expected future cash flow that is projected should include all of the economic benefits attributable to the asset, including the tax savings associated with the
amortization of the intangible asset value over the tax life of the asset. The income approach may take the form of a “relief-from-royalty” methodology, a cost
savings methodology, a “with and without” methodology, or excess earnings methodology, depending on the specific asset under consideration.
The “relief-from-royalty” method was used to value the trade names and trademarks and technology acquired from Lemon . The “relief-from-royalty”
method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be required to pay royalties or license fees on revenues
earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets.
Typically, revenue is projected over the expected remaining useful life of the intangible asset. The royalty rate is then applied to estimate the royalty savings.
The key assumptions used in valuing the existing trade names and trademarks acquired were as follows: royalty rate of 1.5%, discount rate of 18.5%, tax
rate of 39.3%, and an economic useful life of one year. The key assumptions used in valuing the technology acquired were as follows: royalty rate of 12.75%,
discount rate of 18.5%, tax rate of 39.3%, and an economic life of seven years.
The customer relationships were valued using a form of the income approach utilizing the excess earnings method. Inherent in the excess earnings
method is the recognition that, in most cases, all of the assets of the business, both tangible and intangible, contribute to the generation of the cash flow of the
business and the net cash flows attributable to the subject asset must recognize the support of the other assets which contribute to the realization of the cash
flows. The contributory asset charges are based on the fair value of the contributory assets and either pre-tax or after-tax cash flows are assessed charges
representing “returns on” the contributory assets. A contributory asset charge for the use of the technology was assessed on pre-tax cash flows, while
contributory asset charges for the use of the working capital, fixed assets, and assembled work force have been deducted from the after-tax cash flow in each
year to determine the net future cash flow attributable to the relationships. This future cash flow was then discounted using an estimated required rate of return
for the asset to determine the present value of the future cash flows attributable to the asset. The key assumptions used in valuing the customer relationships
acquired were as follows: discount rate of 18.5%, tax rate of 39.3%, and estimated weighted-average economic life of one year.
Acquisition related costs recognized for the year ended December 31, 2013 included transaction costs of $1,068, which we have classified primarily in
general and administrative expense in our consolidated statements of operations. Transaction costs included expenses such as legal, accounting, valuation, and
other professional services.
For the year ended December 31, 2013, Lemon contributed immaterial revenue and net loss to our operating results.
Had the acquisition of Lemon occurred on January 1, 2012, our pro forma consolidated revenue for the year ended December 31, 2013 would have been
$370,409 (unaudited), and our pro forma net income for the year ended December 31, 2013 would have been $48,966 (unaudited).
Had the acquisition of Lemon occurred on January 1, 2012, our pro forma consolidated revenue for the year ended December 31, 2012 would have
been $276,623 (unaudited), and our pro forma net income for the year ended December 31, 2012 would have been $17,567 (unaudited).
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