LifeLock 2013 Annual Report Download - page 49

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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, and promotional. 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.
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Technology and development expenses consist primarily of personnel costs incurred in product development, maintenance and testing of our websites,
enhancing our existing services and developing new services, internal information systems and infrastructure, data privacy and security systems, third-party
development, and other internal-use software systems. Our development costs are primarily incurred in the United States and directed at enhancing our
existing service offerings and developing new service offerings. In order to continue to grow our business and enhance our services, we plan to continue to
commit resources to technology and development. In addition, ID Analytics has historically spent a higher portion of its revenue on technology and
development. As a result, we expect our technology and development expenses will continue to increase in absolute dollars for the foreseeable future.
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General and administrative expenses consist primarily of personnel costs, professional fees, and facility-related expenses associated with our executive,
finance, human resources, legal, and governmental affairs organizations. Our professional fees principally consist of outside legal, auditing, accounting, and
other consulting fees. Legal costs included within our general and administrative expenses also include costs incurred to litigate and settle various legal matters.
We expect our general and administrative expenses will increase in absolute dollars for the foreseeable future as we hire additional personnel to support our
overall growth and incur additional costs associated with operating as a public company, including costs associated with SEC reporting and Sarbanes-Oxley
Act compliance.
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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 December 31, 2013, we had $ 47.2 million in intangible assets, net of amortization, as a result of our
acquisitions of ID Analytics and Lemon. The intangible assets have useful lives of between one and ten years and we expect to recognize approximately $8.9
million of amortization expense in the year ending December 31, 2014.
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Other income (expense) consists primarily of interest income on our cash and cash equivalents and marketable securities, interest expense on our
indebtedness and unused credit facility, changes in the fair value of our warrant liabilities, and changes in the fair value of our embedded derivative. Gains
and losses on our warrant liabilities result from the re-measurement of the fair v alue of warrants to purchase our convertible redeemable preferred stock, which
we account for as liabilities. Upon the completion of our IPO in October 2012, the warrants to purchase our convertible redeemable preferred stock were
converted to warrants to purchase common stock and, at that time, were reclassified to equity. Accordingly, we are no longer required to re-measure the fair
value of our warrants.
We recorded a liability of $7.9 million for an embedded derivative associated with our Series E-1 convertible redeemable preferred stock issued in
connection with our acquisition of ID Analytics in March 2012. The embedded derivative liability was adjusted to fair value at each reporting period with any
unrealized gain or loss recorded in other income (e xpense). Based on our anticipated IPO price of $9.00 per share, we increased the liability associated with our
embedded derivative to $10.7 million with a corresponding charge of $2.8 million recognized through other income (expense). On October 16, 2012, we paid
to the former holders of our Series E-1 convertible redeemable preferred stock $10.7 million in cash as settlement for the embedded derivative and expect no
additional income or expense related to the embedded derivative.
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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 differed from the
statutory rate for the year ended December 31, 2013 primarily as a result of the release of substantially all of our valuation allowance on our deferred tax assets.
For the years ended December 31, 2012 and 2011, our effective tax rate differed from the statutory rate primarily as a result of our 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 and t he impact of permanent and other
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