# Life360, Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Life360, Inc.](/companies/lif.md) (CIK 1581760)
- Form: 10-Q
- Filed: 2023-08-14
- Accepted by EDGAR: Aug 14, 2023, 16:26 ET
- Period: 2023-06-30
- Accession: 0001581760-23-000101
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1581760/000158176023000101/lifx-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1581760/000158176023000101/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $70.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $138.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $16.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $34.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $54.8m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $104.6m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-04-01 to 2023-06-30 | $23.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-01-01 to 2023-06-30 | $50.4m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | −$4.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | −$19.1m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $267.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $375.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | −$4.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$18.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.28 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | −$0.07 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$0.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 66,467,200 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 66,032,405 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$5.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $26.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-06-30 | $62.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $117.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $311.8m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $68.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $74.1m | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $8.0m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-06-30 | $237.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,152 characters.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that are based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q and Part I, Item 1A in our Annual Report.

### 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. Our 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.

### Key Factors Affecting Our Performance

We believe that our results of operations are affected by a number of factors, such as: the ability to remain a trusted brand; attracting, retaining, and converting members; maintaining efficient member acquisition; the ability to attract new and repeat purchasers of our hardware tracking devices; growth in average revenue per paying circle; expanding offerings on our platform; attracting and retaining talent; seasonality; and international expansion. We discuss each of these factors in more detail under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations” in our Form 10-K for the year ended December 31, 2022. While we do not have control of all factors affecting our results from operations, we work diligently to influence and manage those factors which we can impact to enhance our results of operations.

### Components of Our Results of Operations

#### 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 a majority of our hardware revenue from the sale of the Tile and Jiobit 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.

#### 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 expect our research and development expenses will increase in absolute dollars as our business grows.

#### 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 personnel-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 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.

#### 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 condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2023 and 2022 (in thousands, except percentages).

|  | Three Months Ended June 30, 2023 | 2022 | % Change | Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $52,727 | $36,006 | 46% | $104,391 | $69,068 | 51% |
| Hardware revenue | 11,585 | 6,816 | 70% | 21,569 | 16,463 | 31% |
| Other revenue | 6,476 | 6,022 | 8% | 12,971 | 14,283 | (9)% |
| Total revenue | 70,788 | 48,844 | 45% | 138,931 | 99,814 | 39% |
| Cost of subscription revenue(1) | 6,388 | 7,903 | (19)% | 14,433 | 14,974 | (4)% |
| Cost of hardware revenue(1) | 8,736 | 10,773 | (19)% | 18,162 | 18,579 | (2)% |
| Cost of other revenue(1) | 881 | 880 | —% | 1,723 | 1,855 | (7)% |
| Total cost of revenue | 16,005 | 19,556 | (18)% | 34,318 | 35,408 | (3)% |
| Gross Profit | 54,783 | 29,288 | 87% | 104,613 | 64,406 | 62% |
| **Operating expenses(1):** |  |  |  |  |  |  |
| Research and development | 23,182 | 27,031 | (14)% | 50,379 | 52,768 | (5)% |
| Sales and marketing | 23,347 | 22,895 | 2% | 47,663 | 46,137 | 3% |
| General and administrative | 12,497 | 12,830 | (3)% | 25,706 | 26,076 | (1)% |
| Total operating expenses | 59,026 | 62,756 | (6)% | 123,748 | 124,981 | (1)% |
| Loss from operations | (4,243) | (33,468) | (87)% | (19,135) | (60,575) | (68)% |
| **Other income (expense):** |  |  |  |  |  |  |
| Convertible notes fair value adjustment | (266) | 532 | (150)% | (194) | 2,107 | (109)% |
| Derivative liability fair value adjustment | (254) | 415 | (161)% | (240) | 1,328 | (118)% |
| Other income (expense), net | 617 | (511) | (221)% | 1,460 | (1,056) | (238)% |
| Total other income, net | 97 | 436 | (78)% | 1,026 | 2,379 | (57)% |
| **Loss before income taxes** | (4,146) | (33,032) | (87)% | (18,109) | (58,196) | (69)% |
| Provision for (benefit from) income taxes | 267 | (47) | (668)% | 375 | 11 | 3,309% |
| **Net loss** | (4,413) | (32,985) | (87)% | (18,484) | (58,207) | (68)% |
| Change in foreign currency translation adjustment | 2 | (14) | (114)% | 26 | 15 | 73% |
| **Total comprehensive loss** | $(4,411) | $(32,999) | (87)% | $(18,458) | $(58,192) | (68)% |

(1) Includes stock-based compensation expense as follows (in thousands, except percentages):

| Cost of revenue | Three Months Ended June 30, 2023 | 2022 | % Change | Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription costs | $154 | $239 | (36)% | $279 | $438 | (36)% |
| Hardware costs | 243 | 240 | 1% | 449 | 289 | 55% |
| Other costs | 10 | 30 | (67)% | 21 | 83 | (75)% |
| Total cost of revenue | 407 | 509 |  | 749 | 810 |  |
| Research and development | 5,301 | 5,305 | —% | 10,086 | 8,923 | 13% |
| Sales and marketing | 560 | 1,324 | (58)% | 1,487 | 2,174 | (32)% |
| General and administrative | 3,001 | 3,291 | (9)% | 5,902 | 4,617 | 28% |
| Total stock-based compensation expense | $9,269 | $10,429 | (11)% | $18,224 | $16,524 | 10% |

32

The following table sets forth our results of operations as a percentage of total revenue:

|  | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Subscription revenue | 74% | 74% | 75% | 69% |
| Hardware revenue | 16% | 14% | 16% | 16% |
| Other revenue | 9% | 12% | 9% | 14% |
| Total revenue | 100% | 100% | 100% | 100% |
| Cost of subscription revenue | 9% | 16% | 10% | 15% |
| Cost of hardware revenue | 12% | 22% | 13% | 19% |
| Cost of other revenue | 1% | 2% | 1% | 2% |
| Total cost of revenue | 23% | 40% | 25% | 35% |
| Gross Profit | 77% | 60% | 75% | 65% |
| **Operating expenses:** |  |  |  |  |
| Research and development | 33% | 55% | 36% | 53% |
| Sales and marketing | 33% | 47% | 34% | 46% |
| General and administrative | 18% | 26% | 19% | 26% |
| Total operating expenses | 83% | 128% | 89% | 125% |
| Loss from operations | (6)% | (69)% | (14)% | (61)% |
| **Other income (expense):** |  |  |  |  |
| Convertible notes fair value adjustment | —% | 1% | —% | 2% |
| Derivative liability fair value adjustment | —% | 1% | —% | 1% |
| Other income (expense), net | 1% | (1)% | 1% | (1)% |
| Total other income, net | —% | 1% | 1% | 2% |
| **Loss before income taxes** | (6)% | (68)% | (13)% | (58)% |
| Provision for (benefit from) income taxes | —% | —% | —% | —% |
| **Net loss** | (6)% | (68)% | (13)% | (58)% |
| Change in foreign currency translation adjustment | —% | —% | —% | —% |
| **Total comprehensive loss** | (6)% | (68)% | (13)% | (58)% |

#### Revenue

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Subscription revenue | $52,727 | $36,006 | $16,721 | 46% |
| Hardware revenue | 11,585 | 6,816 | 4,769 | 70% |
| Other revenue | 6,476 | 6,022 | 454 | 8% |
| Total revenue | $70,788 | $48,844 | $21,944 | 45% |

Subscription revenue increased $16.7 million, or 46%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, due to a 14% growth in total subscriptions, including 17% growth in Paying Circles and a full quarter’s impact of the price increases for U.S. iOS Life360 subscriptions which were implemented during the three months ended December 31, 2022 and for existing Android Life360 subscriptions which were fully implemented during the three months ended June 30, 2023.

Hardware revenue increased $4.8 million, or 70%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, primarily due to an increased number of net hardware units shipped and an increase in net average sales price per unit.

Other revenue increased $0.5 million, or 8%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, due to our strategic shift to focus on a single aggregated data arrangement and the terms associated with the arrangement.

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Subscription revenue | $104,391 | $69,068 | $35,323 | 51% |
| Hardware revenue | 21,569 | 16,463 | 5,106 | 31% |
| Other revenue | 12,971 | 14,283 | (1,312) | (9)% |
| Total revenue | $138,931 | $99,814 | $39,117 | 39% |

Subscription revenue increased $35.3 million, or 51%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, due to a 14% growth in total subscriptions, including 17% growth in Paying Circles and a full six month impact of the price increases for Life360 subscriptions which were implemented during the three months ended December 31, 2022 and for existing Android Life360 subscriptions, which were fully implemented during the three months ended June 30, 2023.

Hardware revenue increased $5.1 million, or 31%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to an increased number of net hardware units shipped and an increase in net average sales price per unit.

Other revenue decreased $1.3 million, or 9%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, due to our strategic shift to focus on a single aggregated data and the terms associated with the arrangement.

#### Cost of Revenue, Gross Profit, and Gross Margin

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of subscription revenue | $6,388 | $7,903 | $(1,515) | (19)% |
| Cost of hardware revenue | 8,736 | 10,773 | (2,037) | (19)% |
| Cost of other revenue | 881 | 880 | 1 | —% |
| Total cost of revenue | 16,005 | 19,556 | (3,551) |  |
| Gross Profit | $54,783 | $29,288 | $25,495 |  |
| Gross margin: |  |  |  |  |
| Subscription | 88% | 78% |  |  |
| Hardware | 25% | (58)% |  |  |
| Other | 86% | 85% |  |  |

Cost of subscription revenue decreased by $1.5 million, or 19%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, primarily related to a $1.8 million decrease in membership offerings as a result of the discontinuation of certain battery related membership benefits, partially offset by a $0.6 million increase in other membership offerings in line with the increase in revenue. The Company also saw a decrease of $0.6 million in personnel-related costs and stock-based compensation costs attributable to the Company’s integration with Tile and the recategorization of the combined workforce. These decreases were partially offset by an increase of $0.3 million in contractor spend associated with Company growth.

Subscription gross margin increased to 88% during the three months ended June 30, 2023 from 78% during the three months ended June 30, 2022, primarily due to the subscription price increases implemented by the Company during the fourth quarter of the year ended December 31, 2022 and a decrease in membership offering costs related to the discontinuation of certain battery related membership benefits.

Cost of hardware revenue decreased by $2.0 million, or 19%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, primarily due to a decrease of $1.4 million in hardware costs relating to fulfillment, logistics, product, and other hardware expenses, a decrease of $0.3 million in membership offerings related to the discontinuation of certain battery related membership benefits and a decrease of $0.3 million in personnel-related costs and stock-based compensation costs associated with the Company’s reduction in force which took place during the three months ended March 31, 2023.

Hardware gross margin increased to 25% during the three months ended June 30, 2023 from (58)% during the three months ended June 30, 2022, primarily due to higher net average sales price per unit sold during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. The increase in gross margin is also partially attributable to the negative impacts of an increased number of product returns, increased fulfillment, logistics and product costs as well as additional personnel-related costs and stock-based compensation costs which were incurred during the three months ended June 30, 2022.

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of subscription revenue | $14,433 | $14,974 | $(541) | (4)% |
| Cost of hardware revenue | 18,162 | 18,579 | (417) | (2)% |
| Cost of other revenue | 1,723 | 1,855 | (132) | (7)% |
| Total cost of revenue | 34,318 | 35,408 | (1,090) |  |
| Gross Profit | $104,613 | $64,406 | $40,207 |  |
| Gross margin: |  |  |  |  |
| Subscription | 86% | 78% |  |  |
| Hardware | 16% | (13)% |  |  |
| Other | 87% | 87% |  |  |

Cost of subscription revenue decreased by $0.5 million, or 4%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily related to a $1.8 million decrease in membership offerings as a result of the discontinuation of certain battery related membership benefits, partially offset by a $1.3 million increase in other membership offerings in line with the increase in revenue. The Company also saw a decrease of $1.1 million in personnel-related costs and stock-based compensation costs attributable to the Company’s integration with Tile and the recategorization of the combined workforce. These decreases were partially offset by increases of $0.4 million in professional and outside services, $0.4 million in other facilities and related expenses, and $0.3 million in technology expenses associated with Company growth.

Subscription gross margin increased to 86% during the six months ended June 30, 2023 from 78% during the six months ended June 30, 2022, primarily due to the subscription price increases implemented by the Company during the fourth quarter of the year ended December 31, 2022 and a decrease in membership offering costs related to the discontinuation of certain battery related membership benefits.

Cost of hardware revenue decreased by $0.4 million, or 2%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to a decrease of $0.7 million in fulfillment and logistics expenses largely reflecting the alignment of accounting policies and a decrease of $0.3 million in membership offerings related to the discontinuation of certain battery related membership benefits offset by an increase of $0.6 million in hardware product costs.

Hardware gross margin increased to 16% during the six months ended June 30, 2023 from (13)% during the six months ended June 30, 2022, primarily due to higher net average sales price per unit sold during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 as well as an increased number of product returns received during the six months ended June 30, 2022.

#### Research and Development

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research and development | $23,182 | $27,031 | $(3,849) | (14)% |

Research and development expenses decreased by $3.8 million, or 14%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. The decrease was primarily due to a decrease of $1.7 million in personnel-related costs and stock-based compensation related to the Company’s reduction in workforce which took place during the three months ended March 31, 2023. The Company also saw decreases of $1.1 million, $0.7 million, and $0.3 million related to contractor, technology and other, and professional and outside services spend, respectively, as a result of the Tile and Jiobit businesses being substantially fully integrated.

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research and development | $50,379 | $52,768 | $(2,389) | (5)% |

Research and development expenses decreased by $2.4 million, or 5%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The decrease was primarily due to a $2.1 million decrease in contractor spend and a $1.0 million decrease in professional and outside services spend as a result of the Tile and Jiobit businesses being substantially fully integrated. These decreases were offset by a $1.1 million increase in personnel-related costs and stock-based compensation, primarily related to an increased volume of stock grants awarded to employees. The Company also saw an increase of $0.9 million related to a raw materials inventory write-off and decreases of $0.7 million related to technology and $0.6 million related to facilities and other spend as a result of the Tile and Jiobit businesses being substantially fully integrated.

#### Sales and Marketing

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales and marketing | $23,347 | $22,895 | $452 | 2% |

Sales and marketing expenses increased $0.5 million, or 2%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. This increase was primarily due to a $2.4 million increase in marketing expenses consisting of an increase of $4.1 million in channel partner commission charges offset by decreases of $1.5 million and $0.2 million in other marketing and paid user acquisition spend, respectively. This increase was offset by a decrease of $1.4 million in personnel and related costs and stock-based compensation primarily due to the Company’s reduction in workforce which took place during the three months ended March 31, 2023 and a decrease of $0.5 million in professional and outside services, contractor, and other spend due to the Company’s decreased need as a result of the Tile and Jiobit businesses being substantially fully integrated.

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales and marketing | $47,663 | $46,137 | $1,526 | 3% |

36

Sales and marketing expenses increased $1.5 million, or 3%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. This increase was primarily due to a $3.3 million increase in marketing expenses consisting of increases of $6.1 million in channel partner commission charges and $0.4 million in paid user acquisition spend, partially offset by a $3.2 million decrease in other marketing spend. The increase was offset by a decrease of $0.7 million in personnel and related costs and stock-based compensation primarily due to the Company’s reduction in workforce which took place during the three months ended March 31, 2023. The Company also saw a decrease of $1.1 million in professional and outside services, contractor, and other spend due to the Company’s decreased need as a result of the Tile and Jiobit businesses being substantially fully integrated.

#### General and Administrative

*(in thousands, except percentages)*

|  | Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $12,497 | $12,830 | $(333) | (3)% |

General and administrative expenses decreased $0.3 million, or 3%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. This decrease was primarily due to a decrease of $1.5 million in professional and outside services associated with expenses related to accounting, legal and advisory services in connection with the Company’s Form 10 filing and the Tile Acquisition which took place during 2022, partially offset by an increase of $1.3 million gain on revaluation of contingent consideration related to the Jiobit Acquisition incurred during the three months ended June 30, 2022. The remaining decrease of $0.1 million relates to a decrease in other expenses as a result of the Tile and Jiobit businesses being substantially fully integrated.

*(in thousands, except percentages)*

|  | Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| General and administrative | $25,706 | $26,076 | $(370) | (1)% |

General and administrative expenses decreased $0.4 million, or 1%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. This decrease was primarily due to a reduction of $5.3 million in professional and outside services associated with expenses related to accounting, legal and advisory services in connection with the Company’s Form 10 filing and the Tile Acquisition which took place during 2022, offset by an increase of $5.3 million gain on revaluation of contingent consideration related to the Jiobit Acquisition incurred during the six months ended June 30, 2022. The remaining decrease of $0.4 million relates to a decrease in other expenses as a result of the Tile and Jiobit businesses being substantially fully integrated.

#### Convertible Notes Fair Value Adjustment

For the three months ended June 30, 2023 and 2022, the Company recorded a loss and a gain associated with the convertible notes fair value adjustment of $0.3 million and $0.5 million, respectively. For the six months ended June 30, 2023 and 2022, the Company recorded a loss and a gain associated with the convertible notes fair value adjustment of $0.2 million and $2.1 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 three months ended June 30, 2023 and 2022, the Company recorded a loss and a gain associated with the derivative liability fair value adjustment of $0.3 million and $0.4 million, respectively. For the six months ended June 30, 2023 and 2022, the Company recorded a loss and a gain associated with the derivative liability fair value adjustment of $0.2 million and $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 $1.1 million, or 221%, during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. Other income (expense), net increased $2.5 million, or 238%, during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The increase was driven by an increase in dividend income earned due to a higher average gross yield 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 Convertible Notes.

### Key Performance Indicators

In addition to the measures presented in our condensed consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, develop financial forecasts, and make strategic decisions. Key operating metrics are presented in millions, except Average Revenue per Paying Circle (“ARPPC”), Average Revenue per Paying Subscription (“ARPPS”) and Average Selling 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

*(in millions, except ARPPC, ARPPS and ASP)*

|  | As of and for the Three Months Ended June 30, 2023 | 2022 | % Change | As of and for the Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| AMR | $248.7 | $174.4 | 43% | 248.7 | 174.4 | 43% |
| MAUs | 54.0 | 42.0 | 29% | 54.0 | 42.0 | 29% |
| Paying Circles1 | 1.6 | 1.4 | 17% | 1.6 | 1.4 | 17% |
| ARPPC1 | $119.25 | $90.88 | 31% | $120.18 | $89.34 | 35% |
| Subscriptions1, 2 | 2.2 | 1.9 | 14% | 2.2 | 1.9 | 14% |
| ARPPS1, 2 | $97.83 | $76.38 | 28% | $98.01 | $75.27 | 30% |
| Net hardware units shipped2 | 0.7 | 0.5 | 42% | 1.2 | 1.2 | 7% |
| ASP2 | $15.76 | $14.48 | 9% | $16.44 | $14.85 | 11% |

1 Metrics presented as of and for the periods ended June 30, 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 three and six months ended June 30, 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. AMR as of June 30, 2023, and 2022 was $248.7 million and $174.4 million, respectively, representing an increase of 43% year-over-year.

#### Monthly Active Users

We have a large and growing global member base as of June 30, 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 June 30, 2023 and 2022, we had approximately 54.0 million and approximately 42.0 million MAUs on the Life360 Platform, respectively, representing an increase of 29% 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 and 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.

As of June 30, 2023 and 2022, we had approximately 1.6 million and 1.4 million paid subscribers to services under our Life360 brand, respectively, representing an increase of 17% 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 June 30, 2022 using the current and prior definitions (in millions).

|  | As of June 30, 2022 |
| --- | ---: |
| Paying Circles (current definition) | 1.4 |
| Paying Circles (prior definition) | 1.4 |
| % 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 three months ended June 30, 2023 and 2022, our ARPPC was $119.25 and $90.88, respectively, representing a 31% increase year-over year . For the six months ended June 30, 2023 and 2022, our ARPPC was $120.18 and $89.34, respectively, representing a 35% increase year-over-year.

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 three months ended June 30, 2022 using the current and prior definitions.

|  | Three Months Ended June 30, 2022 |
| --- | ---: |
| ARPPC (current definition) | $90.88 |
| ARPPC (prior definition) | $89.34 |
| % Change | 1.7% |

#### 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 June 30, 2023 and 2022, we had approximately 2.2 million and 1.9 million paid subscribers to services under the Life360, Tile, and Jiobit brands, respectively, representing an increase of 14% 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 item tracking and high-quality family and safety services.

Below is a comparison of Subscriptions as of June 30, 2022 using the current and prior definitions (in millions).

|  | As of June 30, 2022 |
| --- | ---: |
| Subscriptions (current definition) | 1.9 |
| Subscriptions (prior definition) | 2.0 |
| % Change | (1.3)% |

#### 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 three months ended June 30, 2023 and 2022 was $97.83 and $76.38, respectively, representing an increase of 28% year over year. ARPPS for the six months ended June 30, 2023 and 2022, was $98.01 and $75.27, representing an increase of 30% year over year.

ARPPS has increased year over year as a result of the growth in subscriptions and subscription price increases implemented by the Company during the fourth quarter of the year ended December 31, 2022.

Below is a comparison of ARPPS as of June 30, 2022 using the current and prior definitions.

|  | Three Months Ended June 30, 2022 |
| --- | ---: |
| ARPPS (current definition) | $76.38 |
| ARPPS (prior definition) | $75.45 |
| % Change | 1.2% |

#### Net Hardware Units Shipped

Net hardware units shipped represents the number of tracking devices sold during a period, 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 three months ended June 30, 2023, Life360 sold approximately 0.7 million units, up approximately 42% as compared to the 0.5 million units sold during the three months ended June 30, 2022, reflecting a decreased number of returns in the current period and the backdrop of weaker consumer electronics category demand in the prior period. For the six months ended June 30, 2023, Life360 sold approximately 1.2 million units, up approximately 7% as compared to the 1.2 million units sold during the six months ended June 30, 2022, also reflecting a decreased number of returns in the current period and the backdrop of weaker consumer electronics category demand in the prior period.

#### Net Average Sales Price

To determine the net ASP of a unit, we divide hardware revenue recognized, excluding certain revenue adjustments related to bundled Life360 subscription and hardware offerings, for the reported period by the number of net hardware units shipped (“ASP”) 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 three months ended June 30, 2023, the net ASP of a unit was $15.76, an increase of 9% compared to $14.48 during the three months ended June 30, 2022. For the six months ended June 30, 2023, the net ASP of a unit was $16.44, an increase of 11% compared to $14.85 during the six months ended June 30, 2022. Both changes reflecting a change in product mix and reduced promotional activity.

### Liquidity and Capital Resources

As of June 30, 2023, we had cash and cash equivalents of $62.4 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.

On March 10, 2023, we had a banking relationship with Silicon Valley Bank (“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 other institutions 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 would have access to all of their money starting March 13, 2023, and on March 13, 2023, we regained access to our funds held in SVB accounts. While we did not experience any losses in such accounts, the recent failure of SVB exposed us to credit risk prior to the completion by the FDIC of the resolution of SVB in a manner that fully protected all depositors. As of March 31, 2023, First Citizens BancShares’ had announced the acquisition of SVB’s assets and we have transferred a portion of our accounts to alternate depository institutions, the financial position of which management believes does not expose our Company to significant credit risk or jeopardize our liquidity. However, 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.

#### Cash Flows

Our cash flow activities were as follows for the periods presented:

*(in thousands)*

|  | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(5,528) | $(38,528) |
| Net cash used in investing activities | (891) | (113,797) |
| Net cash (used in)/provided by financing activities | (19,796) | 300 |
| Net Decrease in Cash, Cash Equivalents, and Restricted Cash | $(26,215) | $(152,025) |

#### Operating Activities

Our largest sources of operating cash are cash collections from our paying users for subscriptions to our platform and hardware device sales. Our primary uses of cash for operating activities are for employee-related expenditures, costs to acquire inventory, costs to acquire customers, including user acquisition costs and commissions paid to channel partners, infrastructure-related costs, and other marketing expenses.

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 June 30, 2023 and December 31, 2022, we had deferred revenue of $32.8 million and $32.8 million, respectively, of which $31.1 million and $30.1 million is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

For the six months ended June 30, 2023, net cash used in operating activities was $5.5 million. The primary factors affecting our operating cash flows during this period were our net loss of $18.5 million, impacted by $22.7 million of non-cash charges, and $9.8 million of cash used by changes in our operating assets and liabilities. The non-cash charges primarily consisted of stock-based compensation, depreciation and amortization, and an adjustment to our battery reserve related to a change in membership benefit offerings. The cash used by changes in our operating assets and liabilities was primarily due to decreases in accounts payable and accrued expenses and other liabilities.

For the six months ended June 30, 2022, net cash used in operating activities was $38.5 million. The primary factors affecting our operating cash flows during this period were our net loss of $58.2 million, impacted by $13.6 million of non-cash charges and $6.1 million of cash provided by changes in our operating assets and liabilities. The non-cash charges primarily consisted of stock-based compensation and depreciation and amortization offset by a gain on revaluation of contingent consideration. The cash provided by changes in our operating assets and liabilities was primarily due to decreases in accounts receivable and prepaid expenses and other assets offset by a decreases in accounts payable and accrued expenses and other liabilities.

#### Investing Activities

For the six months ended June 30, 2023, net cash used in investing activities was $0.9 million, which primarily relates to the capitalization of internal use software costs in accordance with ASC 350-40, Intangibles - Goodwill and Other, Internal-Use Software.

For the six months ended June 30, 2022, net cash used in investing activities was $113.8 million, which primarily related to cash paid for the Tile Acquisition, net of cash acquired.

#### Financing Activities

For the six months ended June 30, 2023, net cash used by financing activities was $19.8 million, which primarily relates to the release of funds placed in an indemnity escrow fund for general representations and warranties related to the Tile Acquisition and taxes paid for the net settlement of equity awards offset by proceeds from the exercise of options and repayment of notes due from affiliates.

For the six months ended June 30, 2022, net cash provided by financing activities was $0.3 million, which primarily related to proceeds from the exercise of options, partially offset by taxes paid for related to the net settlement of equity awards.

### 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 condensed consolidated financial statements. Information regarding our non-cancellable lease and other purchase commitments as of June 30, 2023, can be found in Note 8, “Balance Sheet Components,” and Note 11, “Commitments and Contingencies,” to our condensed consolidated financial statements. As of June 30, 2023, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

### Critical Accounting Policies and Significant Management Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We base our estimates on historical experiences and on various other assumptions we believe to be reasonable under the circumstances. Actual results could differ materially from the estimates made by our management. Our significant accounting policies are discussed in Note 2, “Summary of Significant Accounting Policies” in our Annual Report on Form 10-K. There were no significant changes to these policies during the six months ended June 30, 2023.

## Market risk

As filed, 4,028 characters.

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 June 30, 2023 and December 31, 2022, we had $62.4 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 June 30, 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.

#### 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 June 30, 2023 and December 31, 2022, we had $7.5 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, the Company, in connection with the acquisition of Jiobit, issued convertible notes with a fair value of $11.6 million. The Company will repay one third of the unconverted principal balance plus accrued interest to the holders of such notes, 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%. The Company has elected the fair value option and remeasures the September 2021 Convertible Notes at their fair value at each reporting date and reflects the changes in fair value in earnings. Refer to Note 9, “Convertible Notes” to our condensed 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.

## Controls and procedures

As filed, 6,508 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023 pursuant to Rule 13a‑15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of material weaknesses in our internal control over financial reporting identified in connection with the preparation and audit of our consolidated financial statements for the year ended December 31, 2022 as discussed below, our disclosure controls and procedures were not effective as of June 30, 2023.

Notwithstanding the material weaknesses, management has concluded the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows of the Company for the periods presented in conformity with U.S. GAAP.

### Material Weakness and Remediation Plan

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.

In connection with the audit of our Consolidated Financial Statements as of and for the year ended December 31, 2022, our management identified a material weakness related to management’s risk assessment process over information technology general controls, including certain controls over logical access, segregation of duties and change management, and certain process level controls including information used in the execution of those controls that impacted our financial reporting processes. The material weakness did not result in any identified misstatements in the financial statements, and there were no changes to previously issued financial results. However, the material weakness creates a reasonable possibility that a material misstatement to our consolidated financial statements would not be prevented or detected on a timely basis.

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated. The remediation actions include:

- broadening the scope and improving the effectiveness of existing information technology general controls for access management, segregation of duties, change management and computer operations.
- enhancing documentation of our IT controls for systems key to our financial reporting process.
- providing training relating to the importance and execution of IT general controls for key systems that support financial reporting.
- developing enhanced risk assessment procedures and controls to address IT risks related to key systems that support financial reporting.
- performing an in-depth analysis of the roles and accesses within key financial reporting systems and redesigning roles and accesses to support a stronger control environment.
- engaging internal and external resources to assist us with remediation and monitoring remediation progress.

While we believe these efforts will remediate the material weakness, the material weakness cannot be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

### Changes in Internal Control over Financial Reporting

Except for the changes intended to remediate the material weaknesses described above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three or six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Limitations on the Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. The inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

## Risk factors

As filed, 648 characters.

Our business is subject to numerous risks and uncertainties. These risks and uncertainties may cause our operations to vary materially from those contemplated by our forward-looking statements. Readers should carefully consider the information in this Form 10-Q in connection with the risk factors disclosed within Item 1A “Risk Factors” in the 2022 Annual Report on Form 10-K, as supplemented by the risk factor previously in our Quarterly Report on Form 10-Q for the period ended March 31, 2023. There have been no material changes to our risk factors from those described in the Quarterly Report on Form 10-Q for the period ended March 31, 2023.

Filed Aug 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001581760-23-000101. Last ingested by Listed: Nov 10, 2026, 02:20 ET. No prices; not investment advice.