Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations (MD&A) should be read in conjunction with our consolidated financial statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a variety of factors, including but not limited to those discussed in “Risk Factors” and “Forward-Looking Statements” in this Annual Report on Form 10-K.
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A discussion of our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 is presented below. A discussion of our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Form 10-K filed with the SEC on March 23, 2023.
Overview
Life360 is a leading technology platform used to locate the people, pets and things that matter most to families. Life360 is creating a new category at the intersection of family, technology, and safety to help keep families connected and safe. The Company’s core offering, the Life360 mobile application, includes features that range from communications to driving safety and location sharing. The Life360 mobile application operates under a “freemium” model where its core offering is available to users at no charge, with three membership subscription options that are available but not required. Our platform recently entered a new era of location tracking services with the successful acquisitions of Jiobit and Tile. By offering devices and integrated software to members, we have expanded our addressable market to provide members of all ages with a vertically integrated, cross-platform solution of scale.
For the years ended December 31, 2023 and 2022, Life360 generated:
•Total revenues of $304.5 million and $228.3 million, respectively, representing year-over-year growth of 33%;
•Subscription revenues of $220.8 million and $153.3 million, respectively, representing year-over-year growth of 44%;
•Hardware revenues of $58.2 million and $47.9 million, respectively, representing year-over-year growth of 21%;
•Other revenues of $25.5 million and $27.1 million, respectively, representing year-over-year decline of 6%;
•Gross profit of $222.6 million and $148.6 million, respectively, representing year-over-year growth of 50%; and
•Net loss of $28.2 million and $91.6 million, respectively.
Key Factors Affecting Our Performance
As we focus on growing our customers and revenue, and achieving profitability while investing for the future and managing risk, expenses and capital, the following factors and others identified in the section of this Annual Report on Form 10-K titled “Item 1A. Risk Factors” have been important to our business and we expect them to impact our operations in future periods:
Ability to Retain Trusted Brand. We strongly believe in our vision to become the indispensable safety membership for families, with a suite of safety services that span every life stage of the family. Our business model and future success are dependent on the value and reputation of the Life360, Jiobit and Tile brands. Our brand is trusted by approximately 61 million members as of December 31, 2023, and because we know the value of trust is immeasurable, we will continue to work tirelessly to ensure that we provide useful, reliable, trustworthy and innovative products and services.
Attract, Retain and Convert Members. Our business model is based on attracting new members to our platform, converting free members to subscribers, and retaining and expanding subscriptions over time. Our continued success depends in part on our ability to offer compelling new products and features to our members, and to continue providing a quality user experience to convert and retain paying subscribers. We will also seek to increase brand awareness and customer adoption of our platform through various programs and digital and broad-scale advertising.
Maintaining Efficient Member Acquisition. Our investment in developing effective services and devices creates an efficient member acquisition model which drives strong unit economics. Our member acquisition model is complemented by our word-of-mouth and freemium models. We accelerate our organic member acquisition with strategic and targeted paid marketing spend. We expect to continue to invest in product and marketing, while balancing growth with strong unit economics. As we continue to expand internationally, we may increase our targeted marketing investments.
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Ability to Attract New and Repeat Purchasers of Our Hardware Tracking Devices. Attracting new and repeat purchasers depends on our ability to design and release compelling smart trackers and market them effectively. Additionally we face increasing competition from better funded global companies. We pioneered the finding category and we continue to invest in the development of hardware products assessing new and existing technologies with a priority on providing a great member finding experience.
Growth in Average Revenue Per Paying Circle. Our business model is dependent upon our ability to grow and maintain a large member base, including growing the number of Paying Circles. We have a sophisticated understanding of our members, and as a result, the services we provide are core to families and hard to switch. We continue to develop new monetization features leveraging our core technologies to offer additional services, expand into more stages of families and enter new verticals to increase adoption. Many factors will affect the ARPPC including the number of Paying Circles, mix of monetization offerings on our platform, as well as demographic shifts and geographic differences across these variables.
Expanding the Offerings on Our Platform. We are continually evaluating new product offerings that are aligned with our core competencies and the needs of families across the life stage continuum. For example, our acquisition of Tile gives our members the ability to seamlessly leverage Bluetooth-enabled smart trackers, which can equip nearly any item—such as wallets, keys or remotes—with location-based finding technology. Likewise, our acquisition of Jiobit allows subscribers to track family members and pets wearing Jiobit devices via GPS-enabled trackers on the Jiobit app. We will continue to invest in and launch products where we see opportunities to grow our platform.
Attracting and Retaining Talent. We compete for talent in the technology industry. Our business relies on the ability to attract and retain talent, including engineers, data scientists, designers and software developers. As of December 31, 2023, we had approximately 508 employees and contractors. Our core values are aimed at simplifying safety for families and we believe there are people who want to work at a values-driven company like Life360. We believe that our ability to recruit talent is aided by our reputation.
Seasonality. We experience seasonality in our user growth, engagement, Paying Circles growth and monetization on our platform. Life360 has historically experienced member and subscription growth seasonality in the third quarter of each calendar year, which includes the return to school for many of our members. Hardware sales have historically experienced comparatively higher seasonal growth in the fourth quarter of each calendar year, which includes the important selling periods in November (Black Friday and Cyber Monday) and December (Christmas and Hanukkah) in large part due to seasonal holiday demand. As the majority of revenue is generated within the United States, our seasonality primarily relates to U.S. events. Accordingly, an unexpected decrease in sales over those traditionally high-volume selling periods may impact our revenue, result in surplus inventory and could have a disproportionate effect on our operating results for the entire fiscal year. Seasonality in our business can also be affected by introductions of new or enhanced products and services, including the costs associated with such introductions.
International Expansion. We believe our global opportunity is significant, and to address this opportunity, we intend to continue to invest in sales and marketing efforts and infrastructure and personnel to support our international expansion, including undertaking initiatives such as the international launch of our subscription offerings in United Kingdom for the year ended December 31, 2023. Our growth will depend in part on the adoption and sales of our products and services in international markets.
Key Components of Our Results of Operations
The following discussion describes certain line items in our Consolidated Statements of Operations and Comprehensive Loss.
The Company currently operates as one reportable and operating segment because its chief operating decision maker (“CODM”), which is its Chief Executive Officer, reviews its financial information on a consolidated basis for purposes of making decisions regarding allocating resources and assessing performance. The Company has no segment managers who are held accountable by the CODM for operations, operating results, and planning for levels of components below the consolidated unit level.
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Revenue
Subscription Revenue
We generate revenue from sales of subscriptions on our platforms. Revenue is recognized ratably over the related contractual term generally beginning on the date that our platform is made available to a customer. Our subscription agreements typically have monthly or annual contractual terms. Our agreements are generally non-cancellable during the contract term. We typically bill in advance for monthly and annual contracts. Amounts that have been billed are initially recorded as deferred revenue until the revenue is recognized.
Hardware Revenue
We generate our hardware revenue from the sale of hardware tracking devices and related accessories. For hardware and accessories, revenue is recognized at the time products are delivered. We sell hardware tracking devices and accessories through a number of channels including our websites, brick and mortar retail and online retail.
Other Revenue
We also generate revenue through data monetization arrangements with certain third parties through data acquisition and license agreements for data collected from our member base for purposes of targeted advertising, research, analytics, attribution, and other commercial purposes. In January 2022, we executed a new partnership agreement with a key data partner, a prominent provider of aggregated analytics for the retail ecosystem. The agreement includes fixed monthly revenue amounts for access to aggregated data for the duration of the three-year agreement. Other revenue also includes partnership revenue.
Cost of Revenue and Gross Margin
Cost of Subscription Revenue
Cost of subscription revenue primarily consists of expenses related to hosting our services and providing support to our free and paying subscribers. These expenses include personnel-related costs associated with our cloud-based infrastructure and our customer support organization, third-party hosting fees, software, and maintenance costs, outside services associated with the delivery of our subscription services, amortization of acquired intangibles and allocated overhead, such as facilities, including rent, utilities, depreciation on equipment shared by all departments, credit card and transaction processing fees, and shared information technology costs. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation for operations personnel.
We plan to continue increasing the capacity and enhancing the capability and reliability of our infrastructure to support user growth and increased use of our platform. We expect that cost of revenue will increase in absolute dollars in future periods.
Cost of Hardware Revenue
Cost of hardware revenue consists of product costs, including hardware production, contract manufacturers for production, shipping and handling, packaging, fulfillment, personnel-related expenses, manufacturing and equipment depreciation, warehousing, tariff costs, customer support costs, credit card and transaction processing fees, warranty replacement, and write-downs of excess and obsolete inventory. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation for operations personnel.
Cost of Other Revenue
Cost of other revenue includes cloud-based hosting costs, as well as costs of product operations functions and personnel-related costs associated with our data platform. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation for operations personnel.
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Gross Profit and Gross Profit Margin
Our gross profit has been, and may in the future be, influenced by several factors, including timing of capital expenditures and related depreciation expense, increases in infrastructure costs, component costs, contract manufacturing and supplier pricing, and foreign currency exchange rates. Gross profit and gross profit margin may fluctuate over time based on the factors described above.
Operating Expenses
Our operating expenses consist of research and development, selling and marketing, and general and administrative expenses.
Research and Development
Our research and development expenses consist primarily of personnel-related costs for our engineering, product, and design teams, material costs of building and developing prototypes for new products, mobile app development and allocated overhead. We believe that continued investment in our platform is important for our growth. We intend to continue to invest in research and development to bring new customer experiences and devices to market and expand our platform capabilities.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs, brand marketing costs, lead generation costs, sales incentives, sponsorships and amortization of acquired intangibles. Revenue-share payments to third parties in connection with annual subscription sales of the Company’s mobile application on third-party store platforms are considered to be incremental and recoverable costs of obtaining a contract with a customer and are deferred and typically amortized over an estimated period of benefit of two to three years depending on the subscription type.
We plan to continue to invest in sales and marketing to grow our member base and increase our brand awareness, including marketing efforts to continue to drive our business model. We expect that sales and marketing expenses will increase in absolute dollars in future periods and will fluctuate as a percentage of revenue. The trend and timing of sales and marketing expenses will depend in part on the timing of marketing campaigns.
General and Administrative
Our general and administrative expenses consist primarily of employee-related costs for our legal, finance, human resources, and other administrative teams, as well as certain executives. In addition, general and administrative expenses include allocated overhead, outside legal, accounting and other professional fees, change in fair value of contingent consideration for business combinations, and non-income-based taxes. We expect our general and administrative expenses will increase in absolute dollars as our business grows.
Convertible Notes Fair Value Adjustment
The Company issued convertible notes to investors in July 2021 (the “July 2021 Convertible Notes”), and as part of the purchase consideration related to the Company’s acquisition of Jiobit (the “Jiobit Acquisition”) in September 2021 (the “September 2021 Convertible Notes” and together with the July 2021 Convertible Notes, the “Convertible Notes”). The September 2021 Convertible Notes are recorded at fair value and are revalued at each reporting period.
Derivative Liability Fair Value Adjustment
Derivative liability fair value adjustment relates to the change in the fair value of the embedded conversion and redemption features associated with the July 2021 Convertible Notes.
Other Income (Expense), net
Other income (expense), net consists of interest income earned on our cash and cash equivalents balances, foreign currency exchange (losses)/gains related to the remeasurement of certain assets and liabilities of our foreign subsidiaries that are denominated in currencies other than the functional currency of the subsidiary and foreign exchange transactions gains/(losses) and interest expense primarily related to the Convertible Notes.
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Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists of U.S. federal and state income taxes in jurisdictions in which we conduct business. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.
Results of Operations
The following tables set forth our consolidated statement of operations and comprehensive loss for the years ended December 31, 2023, 2022, and 2021. We have derived this data from our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The results of historical periods are not necessarily indicative of the results of operations for any future period.
Year Ended December 31,
(in thousands)
Operating expenses(1):
Other income (expense):
Convertible notes fair value adjustment (684) 1,786 (511)
Derivative liability fair value adjustment (116) 1,295 (733)
Provision for (benefit from) income taxes 616 312 (127)
Change in foreign currency translation adjustment 15 (6) —
____________________
(1)Includes stock-based compensation expense as follows:
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Year Ended December 31,
(in thousands)
Cost of revenue
Subscription costs $ 651 $ 684 (5) %
Total stock-based compensation expense $ 38,512 $ 34,680 11 %
The following table sets forth our results of operations as a percentage of revenue:
Year Ended December 31,
Subscription revenue 73 % 67 % 77 %
Hardware revenue 19 % 21 % 1 %
Other revenue 8 % 12 % 22 %
Cost of subscription revenue 10 % 13 % 16 %
Cost of hardware revenue 16 % 20 % 1 %
Cost of other revenue 1 % 2 % 3 %
Total cost of revenue(1) 27 % 35 % 20 %
Operating expenses(1):
Research and development 33 % 45 % 45 %
Sales and marketing 33 % 40 % 42 %
General and administrative 17 % 21 % 21 %
Total operating expenses 83 % 106 % 108 %
Loss from operations (10) % (41) % (29) %
Other income (expense):
Convertible notes fair value adjustment — % 1 % — %
Derivative liability fair value adjustment — % 1 % (1) %
Other income, net 1 % — % — %
Total other income, net 1 % 1 % (1) %
Loss before income taxes (9) % (40) % (30) %
Provision for (benefit from) income taxes — % — % — %
Net loss (9) % (40) % (30) %
Change in foreign currency translation adjustment — % — % — %
Total comprehensive loss (9) % (40) % (30) %
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(1)Includes stock-based compensation expense as follows:
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Comparison of the years ended December 31, 2023 and 2022:
Revenue
Year Ended December 31, Change
(in thousands)
Total revenue increased $76.2 million, or 33%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Subscription revenue increased $67.5 million, or 44%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to an increase in the number of paid subscriptions. Additionally, subscription revenue in the current period benefited from the impact of the monthly subscription price increases (over 50%) for U.S. Life360 subscriptions, which were implemented beginning in August 2022.
Hardware revenue increased $10.3 million, or 21%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, due to an increased number of net hardware units shipped, lower returns, and benefits of bundled Life360 subscription and hardware offerings.
Other revenue decreased $1.6 million, or 6%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, due to the short-term impacts of our strategic shift to focus on a single aggregated data partner and the terms associated with the arrangement.
Cost of Revenue, Gross Profit, and Gross Margin
Year Ended December 31, Change
(in thousands)
Gross margin:
Subscription 86 % 80 %
Hardware 19 % 5 %
Cost of subscription revenue increased $0.3 million, or 1%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily related to increases of $1.2 million in technology expenses, $1.0 million in contractor expenses, and $0.1 million in depreciation and amortization associated with our growth. The increases were partially offset by a decrease of $1.5 million in personnel-related and stock-based compensation costs attributable to our integration with Tile and the restructuring of the combined workforce. We also saw a decrease of $1.8 million in membership offering costs as a result of the discontinuation of certain battery replacement related membership benefits, partially offset by a $1.3 million increase in other membership offering costs in line with the increase in revenue.
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Subscription gross margin increased to 86% during the year ended December 31, 2023 from 80% during the year ended December 31, 2022, primarily due to the subscription price increases for U.S. Life360 subscriptions, which were implemented beginning in August 2022, and a decrease in membership offering costs related to the discontinuation of certain battery related membership benefits.
Cost of hardware revenue increased by $1.9 million, or 4%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to an increase of $4.4 million in product, freight and battery expenses in line with the increased number of units sold. We also saw an increase of $0.8 million in personnel-related and stock-based compensation costs attributable to the increased volume of stock-based awards granted throughout the year ended December 31, 2023, and an increase of $0.3 million in professional and outside services and contractor spend to support our growth. The increases were offset by a $2.3 million decrease in fulfillment, logistics, and other expenses largely reflecting the efficiencies achieved post Tile Acquisition, a $1.1 million decrease in technology expenses related to improved efficiencies post-acquisition with Tile, and a $0.4 million decrease in membership offering costs related to the discontinuation of certain battery related membership benefits. The remaining increase of $0.2 million is attributable to other cost of hardware revenue associated with our growth.
Hardware gross margin increased to 19% during the year ended December 31, 2023 from 5% during the year ended December 31, 2022, primarily due to efficiencies achieved within the Company as decreased fulfillment and logistics costs were incurred as a percentage of revenue during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The improvement in hardware gross margin was also due to a release of reserve for hardware returns recorded in the three months ended June 30, 2023.
Cost of other revenue decreased by $0.1 million, or 2%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to a decrease of $0.3 million in personnel-related expenses and stock-based compensation costs associated with the reduction in workforce which took place during the three months ended March 31, 2023. The decrease was partially offset by an increase of $0.2 million in technology expenses, to support the existing customer base.
Other gross margin decreased slightly to 86% during the year ended December 31, 2023 from 87% during the year ended December 31, 2022, primarily due to costs outpacing the decreased other revenue.
Research and Development
Year Ended December 31, Change
(in thousands)
Research and development expenses decreased $1.5 million, or 1%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease was primarily due to decreases of $2.6 million in technology expenses, $1.8 million in professional and outside services spend, and $1.1 million in contractor spend, due to our decreased need as a result of the Tile and Jiobit businesses being fully integrated. These decreases were offset by an increase of $2.8 million in personnel-related and stock-based compensation, primarily related to an increased volume of stock grants awarded to employees and an increase of $0.9 million related to a raw materials inventory write-off. The remaining increase of $0.3 million is attributable to other research and development expenses.
Sales and Marketing
Year Ended December 31, Change
(in thousands)
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Sales and marketing expenses increased $6.7 million, or 7%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increase was primarily due to a $10.1 million increase in marketing expenses consisting of increases of $11.3 million in Channel Partner commission charges due to increased subscription sales and $2.1 million in paid user acquisition spend, partially offset by a $3.3 million decrease in other marketing spend. The increases were partially offset by a decrease of $2.4 million in professional and outside services and contractor spend due to our decreased need as a result of the Tile and Jiobit businesses being fully integrated. We also saw a decrease of $0.7 million in personnel and related costs and stock-based compensation primarily due to the reduction in workforce which took place during the three months ended March 31, 2023. The remaining decrease of $0.3 million is attributable to other sales and marketing expenses.
General and Administrative
Year Ended December 31, Change
(in thousands)
General and administrative expense increased $4.5 million, or 9%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increase was primarily due to a $5.3 million gain on revaluation of contingent consideration related to the Jiobit Acquisition recorded during the year ended December 31, 2022 and a $0.1 million increase in technology costs. The increase was partially offset by a $0.3 million decrease in personnel and related costs and stock-based compensation primarily due to the reduction in workforce which took place during the three months ended March 31, 2023, and a decrease of $1.6 million in professional and outside services due to continued operational efficiencies. The remaining increase of $1.0 million is attributable to other general and administrative expenses.
Convertible Notes Fair Value Adjustment
For the years ended December 31, 2023 and 2022, the Company recorded a loss associated with the convertible notes fair value adjustment of $0.7 million and a gain of $1.8 million, respectively. The changes in fair value are primarily driven by the share price volatility and reduction in time to convert.
Derivative Liability Fair Value Adjustment
For the years ended December 31, 2023 and 2022, the Company recorded a loss associated with the derivative liability fair value adjustment of $0.1 million and a gain of $1.3 million, respectively. The changes are due to the revaluation of the derivative liability at each reporting period and are related to embedded redemption features bifurcated from the July 2021 Convertible Notes issued to investors.
Other Income (Expense), Net
Other income (expense), net increased $3.2 million, or 24,731%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increase was driven by an increase in dividend income earned due to a higher average gross yield and favorable currency revaluation impacts in the current periods compared to the same periods in the prior year. Other income (expense) includes interest income, dividend income, foreign exchange losses, and interest expense associated with the July 2021 Convertible Notes.
Provision for (Benefit from) Income Taxes
The provision for (benefit from) income taxes increased $0.3 million, or 97%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022.
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Key Performance Indicators
We review several operating metrics, including the following key performance indicators, to evaluate our business, measure our performance, identify trends affecting our business, develop financial forecasts and make strategic decisions. We believe these key performance indicators are useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and they may be used by investors to help analyze the health of our business. Key operating metrics are presented in millions, except ARPPC, Average Revenue per Paying Subscription (“ARPPS”) and Average Sales Price (“ASP”), however percentage changes are calculated based on actual results. As a result, percentage changes may not recalculate based on figures presented due to rounding. Please refer to “Results of Operations” for additional metrics management reviews in conjunction with the consolidated financial statements.
Key Operating Metrics
As of and for the years ended December 31,
(in millions, except ARPPC, ARPPS and ASP)
Net hardware units shipped2 4.0 3.6 12 %
__________
1 Metrics presented as of and for the periods ended December 31, 2022 have been recast to reflect the calculations under a revised metric definition. We previously calculated Subscriptions and Paying Circles by including subscribers who had been billed as well as whose billing status was pending as of the end of the period. We have since revised our definition of these metrics to exclude subscribers whose billing status was pending as of the end of the period. Although the difference between the two methodologies does not result in any material changes, we have changed the definition of the metric because we believe it provides a better reflection of our results during a given period.
2 Metrics presented for the year ended December 31, 2022 are adjusted to include pre-acquisition data for Tile related to periods before the acquisition of Tile on January 5, 2022.
Annualized Monthly Revenue
We use Annualized Monthly Revenue (“AMR”) to identify the annualized monthly value of active customer agreements at the end of a reporting period. AMR includes the annualized monthly value of subscription, data and partnership agreements. All components of these agreements that are not expected to recur are excluded. This does not represent revenue under GAAP on an annualized basis, as the operating metric can be impacted by start and end dates and renewal rates. AMR as of December 31, 2023, and 2022 was $274.1 million and $224.4 million, respectively, representing an increase of 22% year-over-year.
Monthly Active Users
We have a large and growing global member base as of December 31, 2023. A Life360 monthly active user (“MAU”) is defined as a unique user who engages with our Life360 branded services each month, which includes both paying and non-paying members. As of December 31, 2023 and 2022, we had approximately 61.4 million and 48.6 million MAUs on the Life360 Platform, respectively, representing an increase of 26% year-over-year. We believe this has been driven by continued strong new user growth and retention.
Paying Circles
We define a Paying Circle as a group of Life360 users with a paying subscription who has been billed as of the end of period. Each subscription covers all members in the payor’s Circle so everyone in the Circle can utilize the benefits of a Life360 Membership, including access to premium location, driving, digital and emergency safety insights and services.
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As of December 31, 2023 and 2022, we had approximately 1.8 million and 1.5 million paid subscribers to services under our Life360 brand, respectively, representing an increase of 21% year-over-year. We grow the number of Paying Circles by increasing our free member base, converting free members to subscribers, and retaining them over time with the provision of high-quality family and safety services. Below is a comparison of Paying Circles as of December 31, 2022 using the current and prior definitions (in millions).
Paying Circles (current definition) 1.49
Paying Circles (prior definition) 1.52
% Change (1.8) %
Average Revenue per Paying Circle
We define Average Revenue per Paying Circle (“ARPPC”) as subscription revenue derived from the Life360 mobile application, excluding certain revenue adjustments related to bundled Life360 subscription and hardware offerings, for the reported period divided by the Average Paying Circles during the same period. Average Paying Circles are calculated based on adding the number of Paying Circles as of the beginning of the period to the number of Paying Circles as of the end of the period, and then dividing by two.
For the years ended December 31, 2023 and 2022, our ARPPC was $121.09 and $96.95, respectively, representing a 25% increase year-over-year. The year-over-year increase in ARPPC is a result of subscription price increases for U.S. Life360 subscriptions, which were implemented beginning in August 2022.
ARPPC is a key indicator utilized by Life360 to determine the effective penetration of our tiered product offering for Paying Circles. The increase in pricing for new Paying Circles beginning in August 2022 has led to subscribers signing up for higher price products over time, increasing ARPPC.
Below is a comparison of ARPPC for the year ended December 31, 2022 using the current definitions.
ARPPC (current definition) $ 96.59
ARPPC (prior definition) $ 95.40
% Change 1.2 %
Subscriptions
We define Subscriptions as the number of paying subscribers associated with the Life360, Tile and Jiobit brands who have been billed as of the end of the period. As of December 31, 2023 and 2022, we had approximately 2.4 million and 2.1 million paid subscribers to services under Life360, Tile, and Jiobit brands, respectively, representing an increase of 17% year-over-year. We grow the number of Subscriptions by selling hardware units and increasing our free member base, converting free members to subscribers, and retaining them over time with the provision of location tracking and high-quality family and safety services.
Below is a comparison of Subscriptions as of December 31, 2022 using the current and prior definitions (in millions).
Subscriptions (current definition) 2.07
Subscriptions (prior definition) 2.10
% Change (1.3) %
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Average Revenue per Paying Subscription
We define ARPPS as total subscription revenue recognized, excluding certain revenue adjustments related to bundled Life360 subscription and hardware offerings, for the reported period divided by the average number of paying subscribers during the same period. The average number of paying subscribers is calculated by adding the number of paying subscribers as of the beginning of the period to the number of paying subscribers as of the end of the period, and then dividing by two. Paying subscribers represent subscribers who have been billed as of the end of the period.
ARPPS for the years ended December 31, 2023 and 2022 was $99.53 and $80.63, respectively, representing an increase of 23% year-over-year. ARPPS has increased year-over-year as a result of the U.S. Life360 subscription price increases, which were implemented beginning in August 2022.
Below is a comparison of ARPPS as of December 31, 2022 using the current and prior definitions.
ARPPS (current definition) $ 80.63
ARPPS (prior definition) $ 79.75
% Change 1.1 %
Net Hardware Units Shipped
Net hardware units shipped represents the number of tracking devices sold during a period, excluding certain hardware units related to bundled Life360 subscription and hardware offerings, net of returns by our retail partners and directly to consumers. Selling units contributes to hardware revenue and ultimately increases the number of users eligible for a Tile or Jiobit subscription. For the year ended December 31, 2023, Life360 sold approximately 4.0 million units, up approximately 12% as compared to the 3.6 million units sold during the year ended December 31, 2022, reflecting higher sales and lower returns compared to the prior period.
Net Average Sales Price
To determine the net average sales price (“ASP”) of a unit, we divide hardware revenue recognized, excluding certain revenue adjustments related to bundled Life360 subscriptions and hardware offerings, for the reported period by the number of net hardware units shipped during the same period. ASP is largely driven by the price we charge customers, including the price we charge our retail partners, net of customer allowances, and directly to consumers. For the year ended December 31, 2023, the net ASP of a unit was $13.48, which is largely flat compared to $13.47 during the year ended December 31, 2022.
Liquidity and Capital Resources
As of December 31, 2023, we had cash and cash equivalents of $69.0 million and restricted cash of $1.7 million. As of December 31, 2022, we had cash and cash equivalents of $75.4 million and restricted cash of $14.9 million.
We believe our existing cash and cash equivalents and cash provided by sales of our subscriptions and hardware devices will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors and as a result, we may be required to seek additional capital. If we are unable to raise additional capital on terms acceptable to us or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, financial condition and results of operations.
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On March 10, 2023, we had a banking relationship with SVB. As of the closure of SVB on March 10, 2023, we held $6.1 million in direct deposits with SVB, which represented approximately 6.4% of our total cash and cash equivalents as of that date. We also held $75.4 million in shares of money market mutual funds managed by Morgan Stanley, Blackrock and Western Asset, for which SVB acted as custodian. SVB was closed on March 10, 2023 by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. On March 12, 2023, the U.S. Treasury, Federal Reserve, and FDIC announced that SVB depositors will have access to all of their money starting March 13, 2023. On March 13, 2023, we regained access to our funds held in SVB accounts. On May 1, 2023 JPMorgan Chase acquired the substantial majority of assets and assumed certain liabilities of SVB from the FDIC. While we did not experience any losses in such accounts, the recent failure of SVB exposed us to credit risk as it relates to our direct deposits in excess of the FDIC insured limits, prior to the completion by the FDIC of the resolution of SVB in a manner that fully protected all depositors. We have transferred more than 80% of our accounts to one or more alternate depository institutions, the financial position of which management believes does not expose our company to credit risk or jeopardize our liquidity. Additionally, we may be impacted by adverse developments which affect financial institutions, transactional counterparties, other companies in the financial services industry, or the financial services industry generally, which have in the past and may in the future threaten our ability to access our existing cash and cash equivalents and could have a material adverse effect on our business and financial condition.
Our cash flow activities were as follows for the periods presented:
Year Ended December 31,
(in thousands)
Operating Activities
Our largest source of operating cash is cash collections from our paying users for subscriptions to our platform and hardware device sales. Our primary uses of cash from operating activities are for employee-related expenditures, inventory, infrastructure-related costs, commissions and other marketing expenses. Net cash provided by (used in) operating activities is impacted by our net loss adjusted for certain non-cash items, including depreciation and amortization expenses, amortization of costs capitalized to obtain contracts, change in fair value of convertible notes, derivative liability, and contingent consideration, and stock-based compensation, as well as the effect of changes in operating assets and liabilities.
A number of our users pay in advance for annual subscriptions, while a majority pay in advance for monthly subscriptions. Deferred revenue consists of the unearned portion of customer billings, which is recognized as revenue in accordance with our revenue recognition policy. As of December 31, 2023 and 2022, we had deferred revenue of $35.8 million and $32.8 million, respectively, of which $33.9 million and $30.1 million is expected to be recorded as revenue in the next 12 months, respectively, provided all other revenue recognition criteria have been met.
For the year ended December 31, 2023, net cash provided by operating activities was $7.5 million. The primary factors affecting our operating cash flows during this period were our net loss of $28.2 million, impacted by $49.1 million of non-cash adjustments, and $13.4 million of cash used by changes in our operating assets and liabilities. The non-cash adjustments primarily consisted of $38.5 million of stock-based compensation expense and $9.1 million of depreciation and amortization. The cash used by changes in our operating assets and liabilities was primarily due to an increase of $9.1 million in accounts receivable, net, a decrease of $7.9 million in accounts payable, and an increase of $6.7 million in prepaid expenses and other assets. These amounts were partially offset by a decrease of $5.8 million in inventory, an increase of $4.6 million in deferred revenue, and an increase of $2.2 million in accrued expenses and other liabilities due to increasing activity in line with the Company growth.
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For the year ended December 31, 2022, net cash used in operating activities was $57.1 million. The primary factors affecting our operating cash flows during this period were our net loss of $91.6 million, impacted by $37.3 million of non-cash charges, and $2.8 million of cash provided by changes in our operating assets and liabilities. The non-cash charges primarily consisted of $34.7 million in stock-based compensation, $9.2 million of depreciation and amortization, $5.3 million gain on revaluation of contingent consideration, $2.9 million of amortization of costs capitalized to obtain contracts, $1.8 million gain in convertible notes fair value adjustment, $1.5 million non-cash revenue from affiliate, and $1.3 million gain in derivative liability fair value adjustment. The cash provided by changes in our operating assets and liabilities was primarily due to a $10.6 million decrease in prepaid expenses and other assets, a $6.5 million decrease in accounts receivable, net, and a $4.7 million increase in deferred revenue. These amounts were partially offset by a $12.7 million decrease in accounts payable, a $7.7 million decrease in accrued expenses and other liabilities, a $3.3 million increase in costs capitalized to obtain contracts, a $0.5 million increase in inventory, and a $0.3 million increase in other noncurrent liabilities.
Investing Activities
For the year ended December 31, 2023, net cash used in investing activities was $2.2 million, which primarily relates to $1.7 million of capitalization of internal use software costs in accordance with ASC 350-40, Intangibles - Goodwill and Other, Internal-Use Software and $0.5 million of purchases of property and equipment.
For the year ended December 31, 2022, net cash used in investing activities was $111.6 million, which relates to $110.9 million of cash paid for the Tile Acquisition, net of cash acquired and $0.7 million related to the capitalization of internal use software costs.
Financing Activities
For the year ended December 31, 2023, net cash used by financing activities was $25.0 million, which primarily relates to the $13.1 million of released funds placed in an indemnity escrow fund for general representations and warranties related to the Tile acquisition, $14.0 million of taxes paid related to net settlement of equity awards, and $3.9 million of repayment of notes due to affiliates; offset by $5.8 million of proceeds from the exercise of options.
For the year ended December 31, 2022, net cash provided by financing activities was $27.7 million, which primarily relates to $32.2 million of proceeds from a capital raise, $2.4 million of proceeds from the exercise of options, and $0.6 million of proceeds from the repayment of notes due from affiliates, partially offset by $4.1 million of taxes paid related to net settlement of equity awards and $3.5 million of repayment of convertible notes.
Obligations and Other Commitments
Our principal commitments consist of obligations under our convertible notes, operating leases for office space, and other purchase commitments. Our obligations under our convertible notes are described in Note 6, "Fair Value Measurements" and Note 9, "Convertible Notes" to our consolidated financial statements. Information regarding our non-cancellable lease and other purchase commitments as of December 31, 2023, can be found in Note 8, "Balance Sheet Components" and Note 11, "Commitments and Contingencies" to our consolidated financial statements.
Critical Accounting Policies and Significant Management Estimates
We prepare our consolidated financial statements in accordance with GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that of our significant accounting policies, which are described in Note 2, "Summary of Significant Accounting Policies" to our consolidated financial statements, the following accounting policies and specific estimates involve a greater degree of judgement and complexity.
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Revenue Recognition
We derive revenue from subscription fees (which include support fees), the sale of hardware tracking devices and accessories, and other revenue. We sell subscriptions to our platform through arrangements that are generally monthly to annual in length. Our arrangements are generally non-cancellable and non-refundable. Our subscription arrangements do not provide customers with the right to take possession of the software supporting the platform and, as a result, are accounted for as service arrangements.
While most of our sales arrangements contain standard terms and conditions, certain arrangements contain non-standard terms and conditions and include promises to transfer multiple goods or services. As a result, significant interpretation and judgment are sometimes required to determine the appropriate accounting for these transactions, including: (1) whether related performance obligations are considered distinct and should be accounted for separately versus together, (2) how the price should be allocated among separate performance obligations, and when to recognize revenue for each performance obligation; (3) developing an estimate of the stand-alone selling price (“SSP”), of each distinct performance obligation; and (4) estimating and accounting for variable consideration, which may include sales incentives and investment.
Some of our contracts with customers contain multiple performance obligations, primarily hardware and subscription services for hardware tracking devices. For arrangements with multiple performance obligations where the contracted price differs from the SSP for any distinct good or service, we may be required to allocate the transaction price to each performance obligation using our best estimates for the SSP. Our process for determining the SSP considers multiple factors including consumer behaviors, our internal pricing model, and cost-plus margin, and may vary depending upon the facts and circumstances related to each performance obligation. For business-to-business hardware sales, we will estimate the expected consideration amount after credits and discounts.
We provide our customers with incentives through various programs including promotional agreements and marketing development agreements. Sales incentives are considered variable consideration, which we estimate and record as a reduction to revenue. Incentives are influenced by historical experience, projected sales data and contractual terms.
Any change in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" to our consolidated financial statements included in Item 8 of Part II hereof for a discussion of recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
As of December 31, 2023 and December 31, 2022, we had $69.0 million and $75.4 million, respectively, of cash equivalents invested in cash and cash equivalents and money market funds. Our cash and cash equivalents are held for working capital purposes. As of December 31, 2023 and December 31, 2022, a hypothetical 10% relative change in interest rates would not have a material impact on our consolidated financial statements.
Foreign Currency Exchange Risk
Our reporting currency and functional currency is the U.S. dollar. The majority of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which is primarily in the United States. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any active hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. We do not believe that a hypothetical 1,000 basis-point increase or decrease in the relative value of the U.S. dollar to other currencies would have a material effect on our operating results.
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Inflation Risk
We do not believe that inflation has had a material effect on our business, results of operations, or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations, or financial condition.
Fair Value Risk
As of December 31, 2023 and December 31, 2022, we had $3.7 million and $7.0 million of liabilities that are measured at fair value, respectively. Fair value measurements include significant assumptions that are driven by market conditions and macroeconomic factors at measurement dates. Our consolidated results of operations are therefore subject to market fluctuations and may be affected in the future as a result of these fair value changes.
In September 2021 in connection with the acquisition of Jiobit, we issued convertible notes with a fair value of $11.6 million. We will repay the remaining one third of the unconverted principal balance plus accrued interest to the holders of such notes on the third annual anniversary of the issuance date, and they may be converted to common stock at any time at a fixed conversion price of $22.50 per share. Interest is accrued at the U.S. Prime rate plus 0.25%. We have elected the fair value option and remeasure the September 2021 Convertible Notes at their fair value at each reporting date to reflect the changes in fair value in earnings. Refer to Note 9, "Convertible Notes" to our consolidated financial statements for more information.
Generally, the fair market value of the September 2021 Convertible Notes will increase as interest rates rise and decrease as interest rates fall. In addition, the fair value of the September 2021 Convertible Notes fluctuates when the market price of our common stock fluctuates. The estimated fair value of the September 2021 Convertible Notes is determined using a combination of the present value of the cash flows and the Black-Scholes option pricing model. Changes in the interest rate environment could have an effect on our future cash flows and earnings, depending on whether the debt is held to maturity or converted to shares of our common stock.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Page
Financial Statements
Consolidated Balance Sheets 77
Consolidated Statements of Operations and Comprehensive Loss 78
Consolidated Statements of Stockholders’ Equity 79
Consolidated Statements of Cash Flows 81
Notes to Consolidated Financial Statements 83
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Life360, Inc.
San Mateo, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Life360, Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes to the consolidated financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We served as the Company's auditor from 2018 to 2023.
San Francisco, California
March 23, 2023
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Report of Independent Registered Public Accounting Firm
To the stockholders and the Board of Directors of Life360, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Life360, Inc. and subsidiaries (the "Company") as of December 31, 2023, the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows, for the year ended December 31, 2023 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Subscription revenue — Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company derives a significant amount of its revenue from subscription sales. Subscriptions are considered single combined performance obligations and the subscription fees are fixed and recognized on a straight-line basis over the non-cancellable contractual term of the agreement. During the year ended December 31, 2023, the Company recognized subscription revenue of $220.8 million.
We identified subscription revenue as a critical audit matter given the significant volume of transactions. This required an increased extent of audit effort in performing procedures and evaluating audit evidence relating to the accuracy and occurrence of subscription revenue.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company's subscription revenue included the following, among others:
•We tested the effectiveness of controls relating to the subscription revenue recognition process, including controls over the accuracy and occurrence of subscription revenue recognized.
•We tested the internal listing of subscriptions sold used by the Company to calculate subscription revenue by comparing the subscriptions sold to third-party information and cash receipts.
•We recalculated the amount of subscription revenue recorded using the internal listing of subscriptions sold.
/s/ Deloitte & Touche LLP
San Francisco, California
February 29, 2024
We have served as the Company's auditor since 2023.
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Life360, Inc.
Consolidated Balance Sheets
(Dollars in U.S. $, in thousands, except share and per share data)
Assets
Current Assets:
Restricted cash, current — 13,274
Costs capitalized to obtain contracts, net 1,010 1,438
Prepaid expenses and other current assets 15,174 8,548
Property and equipment, net 730 393
Costs capitalized to obtain contracts, noncurrent 834 626
Prepaid expenses and other assets, noncurrent 6,848 7,134
Operating lease right-of-use asset 1,014 802
Liabilities and Stockholders’ Equity
Current Liabilities:
Accrued expenses and other current liabilities 27,538 27,015
Derivative liability, noncurrent 217 101
Other liabilities, noncurrent 723 576
Commitments and Contingencies (Note 11)
Stockholders’ Equity
Notes due from affiliates — (314)
Accumulated other comprehensive income (loss) 9 (6)
Total Liabilities and Stockholders’ Equity $ 321,717 $ 339,630
See accompanying notes to the consolidated financial statements.
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Life360, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(Dollars in U.S. $, in thousands, except share and per share data)
Year Ended December 31,
Operating expenses:
Other income (expense):
Convertible notes fair value adjustment (684) 1,786 (511)
Derivative liability fair value adjustment (116) 1,295 (733)
Provision for (benefit from) income taxes 616 312 (127)
Net loss per share, basic $ (0.42) $ (1.47) $ (0.65)
Net loss per share, diluted (Note 18) $ (0.42) $ (1.50) $ (0.65)
Comprehensive loss
Change in foreign currency translation adjustment 15 (6) —
See accompanying notes to the consolidated financial statements.
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Life360, Inc.
Consolidated Statements of Stockholders’ Equity
(Dollars in U.S. $, in thousands, except share and per share data)
Shares Amount
Exercise of warrants 37,410 — — — — — —
Vesting of restricted stock units 547,882 1 (1) — — — —
Taxes paid related to net settlement of equity awards — — (4,725) — — — (4,725)
Issuance of warrants with convertible note (Note 9) — — 844 — — — 844
Vested option awards assumed in connection with an acquisition — — 533 — — — 533
Stock-based compensation expense — — 11,754 — — — 11,754
Interest accrued relating to notes due from affiliates — — — (24) — — (24)
Exercise of warrants 87,795 — 1 — — — 1
Vesting of restricted stock units 762,488 1 (1) — — — —
Taxes paid related to net settlement of equity awards — — (4,077) — — — (4,077)
Repayment of notes due from affiliate — — 648 648 — — 1,296
Stock-based compensation expense — — 34,680 — — — 34,680
Interest accrued relating to notes due from affiliates — — — (11) — — (11)
Cancellation of revesting stock (75,920) — — — — — —
Change in foreign currency translation adjustment — — — — — (6) (6)
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Life360, Inc.
Vesting of restricted stock units 1,980,980 2 (2) — — — —
Repayment of notes due from affiliate — — 78 274 — — 352
Stock-based compensation expense — — 38,512 — — — 38,512
Interest accrued relating to notes due from affiliates — — — 40 — — 40
Change in foreign currency translation adjustment — — — — — 15 15
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Life360, Inc.
Consolidated Statements of Cash Flows
(Dollars in U.S. $, in thousands)
Year Ended December 31,
Cash Flows from Operating Activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of costs capitalized to obtain contracts 2,125 2,928 4,014
Amortization of operating lease right-of-use asset 842 — —
Compensation expense in connection with revesting notes 73 (87) 184
Convertible notes fair value adjustment 684 (1,786) 511
Derivative liability fair value adjustment 116 (1,295) 733
(Gain)/loss on revaluation of contingent consideration — (5,279) 3,600
Non-cash revenue from investment (1,608) (1,504) —
Inventory write-off 916 — —
Adjustment in connection with membership benefit (2,172) — —
Changes in operating assets and liabilities, net of acquisitions:
Costs capitalized to obtain contracts, net (1,905) (3,343) (1,713)
Accrued expenses and other current liabilities 2,193 (7,722) 4,720
Net cash provided by (used in) operating activities 7,524 (57,055) (12,153)
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired — (110,933) (2,983)
Internal use software (1,715) (701) —
Purchase of property and equipment (506) — (81)
Cash advance on convertible note receivable — — (4,000)
Cash Flows from Financing Activities:
Indemnity escrow payment in connection with an acquisition (13,128) — —
Taxes paid related to net settlement of equity awards (14,033) (4,077) (4,725)
Proceeds from repayment of notes due from affiliates 314 648 —
Payments on borrowings — — (41)
Repayment of convertible notes (3,919) (3,471) —
Cash received in advance of the issuance of convertible notes — — 2,110
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Life360, Inc.
Supplemental disclosure:
Cash paid during the period for taxes 697 — 33
Cash paid during the period for interest 640 514 24
Non-cash investing and financing activities:
Fair value of warrants held as investment — 5,474 —
Fair value of stock issued in settlement of contingent consideration — 4,221 —
Right of use asset recognized in connection with lease modification 1,054 — —
Fair value of vested options assumed in connection with an acquisition — — 533
Relative fair value of warrants issue with convertible debt — — 844
Beneficial conversion feature related to convertible debt — — 603
Fair value of bifurcated derivative related to convertible debt — — 663
Total non-cash investing and financing activities: $ 2,108 $ 25,104 $ 37,984
The following table provides a table of cash, cash and cash equivalents, and restricted cash reported within the balance sheets totaling the same such amounts shown above:
Restricted cash, current — 13,274 —
See accompanying notes to the consolidated financial statements.
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Life360, Inc.
Notes to Consolidated Financial Statements
1. Nature of Business
Life360, Inc. is a leading technology platform used to locate the people, pets and things that matter most to families. The Company was incorporated in the State of Delaware in 2007. The Company’s core offering, the Life360 mobile application, includes features that range from communications to driving safety and location sharing. The Company operates under a “freemium” model where its core offering is available to users at no charge, with three membership subscription options that are available but not required. The Company also generates revenue through Jiobit and Tile subscription services and hardware tracking devices and monetization arrangements with certain commercial third parties (“Data Revenue Partners”) through Lead Generation and license agreements including aggregated insights into the data collected from the Company’s user base.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States, or (“GAAP”), are presented in U.S. dollars unless otherwise stated, and include the accounts of Life360, Inc. and subsidiaries, Jiobit, Tile, Tile Europe Ltd and Tile Network Canada ULC. All inter-company transactions and balances have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Significant estimates made by management include, but are not limited to, the determination of revenue recognition, including the determination of selling prices for distinct performance obligations sold in multiple-performance obligation arrangements, the period over which revenue is recognized for certain arrangements, and estimated delivery dates for orders with title transfer upon delivery, allowance for credit losses, product returns, promotional and marketing allowances, inventory valuation, average useful customer life, stock-based compensation, legal contingencies, assessment of possible impairment of long-lived assets and goodwill, valuation of contingent consideration, convertible notes and embedded derivatives, useful lives of long lived assets and income taxes including valuation allowances on deferred tax assets. The Company bases its estimates and judgments on historical experience and on various assumptions that it believes are reasonable under the circumstances. Actual results could differ significantly from those estimates.
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the use of the expected credit losses over the life impairment model of a broad scope of financial instruments including financial assets measured at amortized cost which includes loans, held-to-maturity debt securities and trade receivables, net investment in leases and certain off balance sheet credit exposures.The guidance requires immediate recognition of estimated expected credit losses over the life of the financial instrument. The Company adopted ASU 2016-13 in January 1, 2023. The adoption of ASU 2016-13 did not have a material impact on its consolidated financial statements and related disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. The guidance should be applied prospectively to acquisitions occurring on or after the effective date. The guidance is effective for the Company beginning January 1, 2024, and interim periods therein. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. The Company elected to early adopt ASU 2021-08 on September 1, 2021, and the Company has recorded the acquired deferred revenue based on historical carrying value rather than fair value in the consolidated financial statements and related disclosures.
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Life360, Inc.
Notes to Consolidated Financial Statements
In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes from GAAP the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share, which will result in increased dilutive securities as the assumption of cash settlement of the notes will not be available for the purpose of calculating earnings per share. The provisions of ASU 2020-06 are effective for reporting periods beginning after December 15, 2021, with early adoption permitted for reporting periods beginning after December 15, 2020 and can be adopted on either a fully retrospective or modified retrospective basis. On January 1, 2022, the Company adopted ASU 2020-06, and the standard did not have a material impact on its consolidated financial statements and related disclosures.
Accounting pronouncements not yet adopted
In July 2023, the FASB issued ASU No. 2023-07 – Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, to improve the disclosures about a public entity’s reportable segments and address requests from investors for additional, more detailed information about a reportable segment’s expenses. The ASU 2023-07 introduces a new requirement to disclose significant segment expenses regularly provided to the chief operating decision maker (CODM) and extends certain annual disclosures to interim periods. The ASU improve reportable segment disclosure requirement through enhanced disclosures about significant segment expenses. The effective date for this amendment is for the fiscal year beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. This guidance will be applied retrospectively and effective for the Company starting in its annual disclosures for 2024 and interim periods starting 2025. The Company does not expect adoption of this ASU will have a material impact on its financial position or results of operations.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The updates in this ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The Company does not expect adoption of this ASU will have a material impact on its financial position or results of operations.
Revenue Recognition
The Company recognizes revenue upon transfer of control of promised goods or services to customers at transaction price, an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. Transaction price is calculated as selling price net of variable consideration which may include estimates for future returns and sales incentives related to current period revenue. The Company determines revenue recognition through the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
Subscription Revenue
The Company’s subscription revenue includes related support and is comprised of Life360 mobile application subscriptions as well as subscription service plans for hardware tracking devices. The Company’s subscription contracts with customers are established at the point of mobile application download and purchase as indicated through acceptance of the Company’s Terms of Use. The Company’s subscription agreements generally have monthly or annual contractual terms and are billed and paid in advance.
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Notes to Consolidated Financial Statements
The cloud-based subscriptions are considered single combined performance obligations, consisting of multiple features that can be purchased separately, but which are bundled together and delivered to the customer as a combined output. The Company provides its customers with technical support along with unspecified updates and upgrades to the platform on an if and when available basis.
The subscription service plan for hardware tracking device is a distinct and separate performance obligation from the hardware. Subscription fees are fixed and recognized on a straight-line basis over the non-cancellable contractual term of the agreement, generally beginning on the date that the Company’s service is made available to the customer. The Company recognizes revenues on a straight-line basis because the customer receives and consumes the benefits of the service ratably throughout the contractual period. The Company’s contracts are generally non-cancelable and do not provide for refunds to customers in the event of cancellations.
Hardware Revenue
The Company derives hardware revenue from sale of hardware tracking devices and related accessories. For hardware and accessories, revenue is recognized when control is transferred to the customer. The Company offers limited rights of return and estimates reserves based on historical experience and records the reserves as a reduction of revenue and an accrued liability. Amounts billed to customers for shipping and handling are classified as revenue, and the Company’s related shipping and handling costs incurred are classified as cost of revenue. The customers are billed upon shipment of hardware tracking devices. Sales taxes collected from customers and remitted to respective governmental authorities are recorded as liabilities and are not included in revenue.
The Company’s hardware and the embedded operating system are one distinct performance obligation and are separate and distinct from the subscription service plans for hardware tracking device. The Company’s embedded operating system is a component of the hardware that is integral to the functionality of the hardware and only together produce the essential functionality of the hardware.
Other Revenue
In January 2022, Life360 announced a new partnership agreement with a key Data Partner, a prominent provider of aggregated analytics for the retail ecosystem, in which executives of the Company have an immaterial ownership interest through a passive investment vehicle. As part of this partnership, the Data Partner will provide data processing and analytics services to Life360 and will have the right to commercialize aggregated data related to place visits during the term of the agreement. The partnership agreement includes fixed monthly revenue amounts for access to aggregated data for the duration of the three-year agreement. The Company has a stand ready obligation to provide aggregated user data over the term of the partnership agreement and recognizes revenue ratably based on the fixed monthly amounts. In connection with the agreement, the Data Partner issued the Company a warrant to purchase up to 5,100,167 shares of Series C Preferred Stock of the Data Partner at an exercise price of $4.90 per share (the “Investment”). The Company estimates and includes variable consideration related to the Investment, in the transaction price at contract inception to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The partnership agreement has standard payment terms that require payment within 30 days.
The grant of the warrant is considered non-cash consideration, which the Company measured at fair value on the date of issuance. The warrant was valued using a Black-Scholes option pricing model, and the fair value of approximately $5.4 million has been included as variable consideration in the transaction price of the data partnership agreement, and was included in prepaid expenses and other assets, noncurrent on the Company’s consolidated balance sheets. The warrant is amortized over the life of the agreement.
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Notes to Consolidated Financial Statements
The Company’s data revenue also includes Life360 data monetization arrangements with certain third parties established through Data Master Service Agreements (collectively, “Data MSAs”), which outline specific terms governing the access and use of data and related fees. The Company determines a contract to exist upon the mutual execution of a Data MSA. Those customers historically had the ability to access certain portions of the Company’s user data over the contract term, in which certain customers pay a fee based on average active monthly users. In 2023, the Company has fully moved from Data MSAs to a single aggregated data sales model. The Company recognized fees for legacy data MSAs over time based on the fee per average active monthly user as the customer simultaneously received and consumed the benefit of the services that the Company provided over the term of the agreement.
Data revenue was $21.6 million, $23.2 million, and $18.7 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Partnership revenue includes agreements with third parties to provide access to advertising on the Company’s mobile platform. The Company receives a percentage of the advertising spend as a fee, which is recognized as revenue on a net basis. The variable amounts earned under partnership revenue arrangements are allocable to the month in which the advertising is placed, which is reset on a monthly basis. As such, the Company will recognize revenue monthly based on the advertising placed.
Partnership revenue was $3.9 million, $3.9 million, and $6.4 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Performance Obligations
Some of the Company’s contracts with customers contain multiple performance obligations, primarily hardware and subscription services for hardware tracking devices and hardware bundles (bundled Life360 subscription and hardware offerings). For these contracts, the Company accounts for individual performance obligations separately if they are distinct and distinct within the context of the contract. The transaction price is allocated to the separate performance obligations on a relative stand-alone selling price (“SSP”) basis with the amounts allocated to ongoing services deferred and recognized over a period of time and amounts allocated to hardware tracking devices recognized at a point-in time with a portion of the consideration being allocated to application usage (maintenance) and support. The Company determines SSP based on observable, if available, prices for those related goods and services when sold separately. When such observable prices are not available, the Company determines SSP based on multiple factors including consumer behaviors, the Company’s internal pricing model, and relative costs incurred plus a normal margin. The factors may vary depending upon the facts and circumstances related to each performance obligation.
Our hardware sales arrangements typically contain multiple performance obligations, consisting of the hardware sale, application usage, hardware support, and in some cases, subscriptions. The Company provides warranties of up to twelve months for products with manufacturing defects or hardware failures. As part of Tile Premium subscriptions, the Company offers warranties to end-users covering the contractual service period (up to 3 years) for products with manufacturing defects or hardware failures. The warranties are not sold separately and do not represent separate performance obligations. Payment terms and conditions vary by contract type and are billed either in advance or have a standard payment term generally requiring payment within 30 to 60 days. Therefore, such warranties are accounted for under ASC 460, Guarantees, and the estimated costs of warranty claims are generally accrued as cost of revenue in the period the related revenue is recorded.
Variable Consideration
The Company recognizes hardware revenue at the net sales price, which includes certain estimates for variable consideration with its customers. The Company’s variable consideration is primarily in the form of promotional agreements and marketing development fund agreements in relation to the hardware tracking devices.
These agreements are designed to enhance the sale of the Company’s products and consist of incentives to the Company’s customers. The Company estimates variable consideration using the expected value method. All forms of variable consideration are recorded as contra-revenue and a corresponding liability in its consolidated balance sheets. These estimates are based on the Company’s incentive program experience, historical and projected sales data and current contractual terms. The remaining portion of this liability is based on contractual amounts and does not require estimation.
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Notes to Consolidated Financial Statements
Remaining Performance Obligations
Remaining performance obligations represent the amount of contracted future revenue not yet recognized as the amounts relate to undelivered performance obligations, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. Revenue allocated to remaining performance obligations was $67.9 million as of December 31, 2023, of which the Company expects 85% to be recognized over the next twelve months.
Cost of Revenue
Cost of subscription revenue includes all direct costs to deliver the Company’s subscription services. These costs include personnel-related costs associated with the Company’s cloud-based infrastructure and the Company’s customer support organization, third-party hosting fees, software, and maintenance costs, outside services associated with the delivery of the Company’s subscription services, travel-related costs, amortization of acquired intangibles and allocated overhead, such as facilities, including rent, utilities, depreciation on equipment shared by all departments, credit card and transaction processing fees, and shared information technology costs. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation for operations personnel.
Cost of hardware revenue consists of product costs, including hardware production, contract manufacturers for production, shipping and handling, packaging, fulfillment, personnel-related expenses, manufacturing and equipment depreciation, warehousing, tariff costs, customer support costs, credit card and transaction processing fees, warranty replacement, and write-downs of excess and obsolete inventory. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation for operations personnel.
Cost of other revenue consists of cloud-based hosting costs, as well as costs of product operations functions and personnel-related costs associated with the Company’s data platform. Personnel-related expenses include salaries, bonuses, benefits, and stock-based compensation for operations personnel.
Costs Capitalized to Obtain Contracts
Costs capitalized to obtain contracts comprise of revenue-share payments in connection with annual subscription sales of the Company’s mobile application on each respective third-party store platform as well as sales commissions paid to employees on hardware sales. Costs that are incremental and directly related to new customer sales contracts are accrued and capitalized upon execution of a non-cancelable customer contract, and subsequently expensed over an estimated period of benefit, which is currently estimated to be two to three years depending on the subscription type. The Company has elected the practical expedient under ASC 340-40 to expense incremental costs of obtaining a contract if the amortization periods is one year or less.
Accounts Receivable and Allowances
Accounts receivable are recorded at the invoiced amount, net of allowance for credit losses. The allowance for credit losses is based on the Company’s assessment of the collectibility of accounts by considering the age of each outstanding invoice, the collection history of each customer, and an evaluation of current expected risk of credit loss based on current economic conditions and reasonable and supportable forecasts of future economic conditions over the life of the receivable. The Company assesses collectibility by reviewing accounts receivable on an aggregated basis where similar characteristics exist and on an individual basis when specific customers with collectibility issues are identified.
The allowance for credit losses as of December 31, 2023 and December 31, 2022 and total bad debt expense for the years ended December 31, 2023, 2022 and 2021 was immaterial.
Inventory and Contract Manufacturing
Inventory is comprised of raw materials and finished goods related to hardware tracking devices and accessories. Inventory is stated at the lower of cost or net realizable value on a weighted average basis. The Company assesses the valuation of inventory and writes down the value for estimated excess and obsolete inventory based upon estimates of future demand and market conditions.
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Notes to Consolidated Financial Statements
The Company outsources a significant portion of its manufacturing to independent contract manufacturers in Asia. A significant portion of its cost of revenue consists of inventory purchased from these manufacturers. The Company’s inventory is held at third party warehouses and contract manufacturer premises. The Company’s manufacturers procure components and manufacture the Company’s products based on the demand forecasts provided. These forecasts are based on estimates of future demand for the Company’s products, which are in turn based on historical trends and an analysis from the Company’s sales and marketing organizations, adjusted for overall market conditions. Shipments of inventory from the contract manufacturer are recorded as finished goods inventory upon shipment when title and the significant risks and reward of ownership have passed to the Company.
Concentrations of Risk and Significant Customers
The Company’s business, operations, and financial results are subject to various risks and uncertainties including adverse global economic conditions, and competition in the Company’s industry that could adversely affect the Company’s business, financial conditions, results of operations and cash flows. These important factors, among others, could cause actual results to differ materially from any future results.
Cash Deposits in Excess of Federally Insured Limits
The Company currently maintains its cash balances at multiple financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31, 2023, the Company’s cash balances exceeded amounts insured by the FDIC. As a result, the Company may be impacted by adverse developments within the financial services industry which have in the past and may in the future threaten our ability to access our existing cash and cash equivalents and could have a material adverse effect on our business and financial condition. While the Company has not experienced any losses in such accounts, the recent failure of Silicon Valley Bank (“SVB”) exposed the Company to significant credit risk prior to the completion by the FDIC of the resolution of SVB in a manner that fully protected all depositors. As of December 31, 2023, the Company has transferred the majority of its accounts to one or more alternate depository institutions, the financial position of which management believes does not expose the Company to significant credit risk.
Major Customers
The Company’s customers primarily consist of individual consumers, who subscribe to the Company’s product offerings through market exchanges operated by our third-party platform providers (“Channel Partners”), data revenue customers and retail partners, who purchase hardware tracking devices from the Company and resell them directly to individual consumers. Any changes in customer preferences and trends or changes in terms of use of Channel Partners’ platforms could have an adverse impact on its results of operations and financial condition.
The Company derives its accounts receivable from revenue earned from customers located in the United States and internationally. Channel and retail partners account for the majority of the Company’s revenue and accounts receivable for all periods presented.
The following tables set forth the information about the Company’s Channel Partners that processed our overall revenue transactions and retail partners who represented greater than 10% of our revenue and accounts receivable, respectively:
Percentage of Revenue
Year Ended December 31,
Channel Partner A 53 % 49 % 57 %
Channel Partner B 16 % 15 % 18 %
Retail Partner A * 13 % *
* Represents less than 10%
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Notes to Consolidated Financial Statements
Percentage of Gross Accounts Receivable
As of December 31,
Channel Partner A 50 % 33 %
Data Partner A * 11 %
Retail Partner A 17 % 23 %
* Represents less than 10%
Supplier Concentration
The Company currently outsources the manufacturing of its hardware devices to a sole contract manufacturer. Although there are a limited number of manufacturers, management believes that other suppliers could provide similar manufacturing services on comparable terms.
Research and Development Costs
The Company charges costs related to research and development which primarily consist of personnel-related costs for our engineering, product, and design teams, material costs of building and developing prototypes for new products, mobile app development and allocated overhead.
Sales and Marketing Costs
Our sales and marketing expenses consist primarily of personnel-related costs, brand marketing costs, lead generation costs, sales incentives, sponsorships and amortization of acquired intangibles. Revenue-share payments to Channel Partners in connection with annual subscription sales of the Company’s mobile application on Channel Partner store platforms are considered to be incremental and recoverable costs of obtaining a contract with a customer and are deferred and typically amortized over an estimated period of benefit of two to three years depending on the subscription type.
Advertising Expense
Advertising expenses are recorded in the period in which cost is incurred, and are presented within sales and marketing expense on the consolidated statements of operations. Advertising expense was $28.6 million, $17.0 million, and $7.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include deposit and money market funds. Money market mutual funds are valued using quoted market prices and therefore are classified within Level 1 of the fair value hierarchy.
Restricted Cash
Deposits of $1.7 million and $14.9 million were restricted from withdrawal as of December 31, 2023 and December 31, 2022, respectively. In April 2023, the Company released and paid $13.1 million of restricted cash which was previously held in indemnity escrow as part of the acquisition of Tile in January 2022 (the “Tile Acquisition”) for general representations and warranties, fifteen months after the acquisition date. Refer to Note 8, "Balance Sheet Components" for further details.
The restricted cash, noncurrent balance of $1.7 million as of December 31, 2023 relates to the letters of credit issued on behalf of the Company for indebtedness to trade creditors incurred in the ordinary course of business. The restricted cash, noncurrent balance of $1.6 million as of December 31, 2022 relates to funds placed in an indemnity escrow fund after the acquisition of Jiobit, and facility lease agreements.
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Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
The Company measures its financial assets at fair value each reporting period using a fair value hierarchy that prioritizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The three levels of Inputs that may be used to measure fair value are as follows:
Level 1 – Observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuations based on unobservable inputs to the valuation methodology and including data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.
The recorded carrying amounts of cash and cash equivalents, prepaid expenses, accounts payable, and accounts receivable as of December 31, 2023 and December 31, 2022, approximate fair value due to their short-term nature. Refer to Note 6, "Fair Value Measurements" for further details.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Equipment, computer software, furniture, and product manufacturing equipment, which includes construction-in-process that is capitalized and depreciated when placed into service, have estimated useful lives ranging from three to ten years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life or the term of the lease with expected renewals.
Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reported in other income (expense), net in the period realized.
Internal Use Software
For development costs related to internal use software projects, the Company capitalizes costs incurred during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life of three years. The Company capitalized $1.7 million and $0.7 million during the years ended December 31, 2023 and 2022, respectively. Capitalized costs are included within intangible assets, net on the consolidated balance sheet.
Lease Obligations
Operating lease right-of-use assets and lease liabilities are recognized at the present value of the future lease payments at commencement date. The interest rate implicit in the Company’s operating leases is not readily determinable, and therefore an incremental borrowing rate is estimated to determine the present value of future payments. The estimated incremental borrowing rate factors in a hypothetical interest rate on a collateralized basis with similar terms, payments, and economic environments. Operating lease right-of-use assets also include any prepaid lease payments and lease incentives.
Certain operating lease agreements contain rent concession, rent escalation, and option to renew provisions. Rent concession and rent escalation provisions are considered in determining the straight-line single lease cost to be recorded over the lease term. Single lease cost is recognized on a straight-line basis over the lease term commencing on the date the Company has the right to use the leased property. The lease terms may include options to extend or terminate the lease. The Company generally uses the base, non-cancellable, lease term when recognizing the lease assets and liabilities, unless it is reasonably certain that the renewal option will be exercised.
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Notes to Consolidated Financial Statements
In addition, certain of the Company’s operating lease agreements contain tenant improvement allowances from its landlords. These allowances are accounted for as lease incentives and decrease the Company’s right-of-use asset and reduce single lease cost over the lease term. Refer to Note 8, "Balance Sheet Components" for additional lease disclosures.
Restructuring and Other Charges
Restructuring generally includes significant actions involving employee-related severance charges, facilities consolidation and contract termination costs. Employee-related severance charges are largely based upon substantive severance plans, while some are mandated requirements in certain foreign jurisdictions. Severance costs generally include severance payments, outplacement services, health insurance coverage and legal costs. These charges are reflected in the period when both the actions are probable, at the balance sheet date, and the amounts are reasonably estimable. Right-of-use asset impairments are recognized on the date the premises have been vacated or the Company have ceased-use of the leased facilities.
On January 12, 2023, the Company announced a workforce restructure which resulted in a reduction of the Company’s workforce of approximately 14%. The Company incurred $4.0 million in non-recurring personnel and severance related expenses in connection with the restructuring during the year ended December 31, 2023. As of December 31, 2023, all expenses incurred had been paid.
The restructuring costs are recognized in the consolidated statements of operations for the year ended December 31, 2023 as follows (in thousands):
Personnel and Severance Related Expenses
Cost of subscription revenue $ 64
Cost of hardware revenue 94
Research and development 1,824
Sales and marketing 872
General and administrative 1,170
Business Combinations
The Company uses best estimates and assumptions to assign a fair value to the tangible and intangible assets acquired and liabilities assumed in business combinations as of the acquisition date. These estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.
Goodwill
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwill amounts are not amortized but are tested for impairment at least annually during the fourth quarter, or more frequently if indicators of impairment exist. The Company tests for goodwill impairment annually as of October 31 of each year. There was no impairment of goodwill during the years ended December 31, 2023, 2022 and 2021.
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Notes to Consolidated Financial Statements
Intangible Assets, net
Intangible assets, including acquired, trade names, customer relationships, acquired developed technology, and internal use software are carried at cost and amortized on a straight-line basis over their estimated useful lives. The Company determines the appropriate useful life of the Company’s intangible assets by measuring the expected cash flows of acquired assets. There was no impairment of intangible assets recorded during the years ended December 31, 2023, 2022 and 2021.
Impairment of Long-Lived Assets
The Company assesses the impairment of long-lived assets, such as property and equipment subject to depreciation and acquired intangibles subject to amortization, when events or changes in circumstances indicate that their carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
The Company reviews long-lived assets for impairment at least annually, or more frequently if events or changes in circumstances would more likely than not reduce the fair value of its single reporting unit below its carrying value. There was no impairment of long-lived assets recognized during the years ended December 31, 2023, 2022 and 2021.
Deferred Revenue
Deferred revenue consists primarily of payments received and accounts receivable recorded in advance of revenue recognition under the Company’s subscription arrangements. The Company primarily invoices its customers for its subscription services arrangements in advance. Amounts anticipated to be recognized within one year of the balance sheet date are recorded as deferred revenue, current; the remaining portion is recorded as deferred revenue, noncurrent in the consolidated balance sheets.
Investment
Investment relates to non-marketable equity securities held in a privately held company without a readily determinable market value. Non-marketable equity securities consist of warrants held to purchase shares of preferred stock of a Data Revenue Partner, refer to “Revenue Recognition” section above for additional information regarding the Company’s Data Revenue Partner. Investments in non-public businesses that do not have readily determinable pricing, and for which the Company does not have control or does not exert significant influence, are carried at cost less impairments, if any, plus or minus changes in observable prices for those investments. Gains or losses resulting from changes in the carrying value of these investments are included as a non-operating expense to the Company’s consolidated statements of operations and comprehensive loss. There have been no adjustments to the basis of the Company’s Investment to date. The carrying value of the Company’s Investment is included in prepaid expenses and other assets, noncurrent in the consolidated balance sheets. As of December 31, 2023 and 2022, the Company’s Investment was $5.5 million and $5.5 million, respectively.
Common Stock Warrants
The Company has issued freestanding warrants to purchase shares of common stock in connection with certain debt financing transactions. The warrants are recorded as equity instruments at the grant date fair value using the Black-Scholes option pricing model and are not subject to revaluation at each balance sheet date.
In addition, the Company has issued warrants in connection with the convertible note agreements. The warrants are recorded as equity instruments at the grant date fair value using the Black-Scholes option pricing model. The fair value has been recorded as a debt discount that is being amortized to interest expense under the straight-line method over the term of respective convertible notes.
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