SmartRent, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 48 Consolidated Balance Sheets 49 Consolidated Statements of Operations and Comprehensive Loss 50 Consolidated Statements of Stockholders’ Equity 51 Consolidated Statements of Cash Flows 52 Notes to Consolidated Financial Statements 54 47 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of SmartRent, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of SmartRent, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three 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 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 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 financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits 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 audits 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 audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Tempe, Arizona March 8, 2023 We have served as the Company's auditor since 2020. 48 SMARTRENT, INC. Consolidated BALANCE SHEETS (in thousands, except per share amounts) As of December 31, 2022 2021 ASSETS Current assets Cash and cash equivalents $ 210,409 $ 430,841 Restricted cash, current portion 7,057 1,268 Accounts receivable, net 62,442 45,486 Inventory 75,725 33,208 Deferred cost of revenue, current portion 13,541 7,835 Prepaid expenses and other current assets 9,182 17,369 Total current assets 378,356 536,007 Property and equipment, net 2,069 1,874 Deferred cost of revenue 22,508 18,334 Goodwill 117,268 12,666 Intangible assets, net 31,123 3,590 Other long-term assets 9,521 7,212 Total assets $ 560,845 $ 579,683 LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 18,360 $ 6,149 Accrued expenses and other current liabilities 34,396 22,234 Deferred revenue, current portion 80,020 42,185 Total current liabilities 132,776 70,568 Deferred revenue 59,928 53,412 Other long-term liabilities 3,941 6,201 Total liabilities 196,645 130,181 Commitments and contingencies (Note 12) Convertible preferred stock, $ 0.0001 par value; 50,000 shares authorized as of December 31, 2022 and December 31, 2021; no shares of preferred stock issued and outstanding as of December 31, 2022 and December 31, 2021 - - Stockholders' equity Common stock, $ 0.0001 par value; 500,000 shares authorized as of December 31, 2022 and December 31, 2021, respectively; 198,525 and 193,864 shares issued and outstanding as of December 31, 2022 and December 31, 2021 20 19 Additional paid-in capital 615,281 604,077 Accumulated deficit ( 250,925 ) ( 154,603 ) Accumulated other comprehensive (loss) income ( 176 ) 9 Total stockholders' equity 364,200 449,502 Total liabilities, convertible preferred stock and stockholders' equity $ 560,845 $ 579,683 See accompanying Notes to Consolidated Financial Statements. 49 SMARTRENT, INC. Consolidated Statements of Operations AND COMPREHENSIVE LOSS (in thousands, except per share amounts) Years Ended December 31, 2022 2021 2020 Revenue Hardware $ 87,372 $ 69,629 $ 31,978 Professional services 32,301 22,732 12,304 Hosted services 48,148 18,276 8,252 Total revenue 167,821 110,637 52,534 Cost of revenue Hardware 83,289 70,448 35,225 Professional services 59,547 38,189 16,176 Hosted services 23,637 12,073 5,430 Total cost of revenue 166,473 120,710 56,831 Operating expense Research and development 29,422 21,572 9,406 Sales and marketing 20,872 14,017 5,429 General and administrative 55,305 25,990 16,584 Total operating expense 105,599 61,579 31,419 Loss from operations ( 104,251 ) ( 71,652 ) ( 35,716 ) Interest income (expense), net 1,946 ( 249 ) ( 559 ) Other income (expense), net 595 55 ( 685 ) Loss before income taxes ( 101,710 ) ( 71,846 ) ( 36,960 ) Income tax benefit (expense) 5,388 ( 115 ) ( 149 ) Net loss ( 96,322 ) ( 71,961 ) ( 37,109 ) Other comprehensive loss Foreign currency translation adjustment ( 185 ) ( 226 ) 235 Comprehensive loss $ ( 96,507 ) $ ( 72,187 ) $ ( 36,874 ) Net loss per common share Basic and diluted $ ( 0.49 ) $ ( 0.96 ) $ 4.32 Weighted-average number of shares used in computing net loss per share Basic and diluted 195,575 74,721 8,598 See accompanying Notes to Consolidated Financial Statements. 50 SMARTRENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) Convertible Preferred Stock Common Stock Shares Amount (Par Value $0.0001) Shares Amount (Par Value $0.0001) Additional Paid In Capital Accumulated Deficit Accumulated other comprehensive income (loss) Total Stockholders' Equity (Deficit) Balance, December 31, 2019 15,181 $ 46,206 996 $ - $ 1,104 $ ( 45,533 ) $ - $ ( 44,429 ) Retroactive application of exchange ratio 58,978 - 3,869 - - - - - Balance, December 31, 2019 as adjusted 74,159 46,206 4,865 - 1,104 ( 45,533 ) - ( 44,429 ) Issuance of Series C Preferred Stock for cash, net of offering costs 26,946 57,439 - - - - - - Exercise of warrants - - 15 - - - - - Conversion of Convertible Note to Series C-1 Preferred Stock 3,717 7,787 - - - - - - Issuance of common stock in connection with acquisition - - 1,373 - 813 - - 813 Stock-based compensation - - 4,123 - 1,759 - - 1,759 Common stock warrants related to marketing expense - - - - 481 - - 481 Net loss - - - - - ( 37,109 ) - ( 37,109 ) Other comprehensive loss - - - - - - 235 235 Balance, December 31, 2020 104,822 111,432 10,376 - 4,157 ( 82,642 ) 235 ( 78,250 ) Issuance of Series C Preferred Stock for cash, net of offering costs 16,404 34,793 - - - - - - Exercise of warrants - - 2,457 - 5 - - 5 Conversion of Convertible Preferred Stock to Common Stock ( 121,226 ) ( 146,225 ) 121,226 13 146,212 - - 146,225 Reverse recapitalization, net of transaction costs - - 59,657 6 444,641 - - 444,647 Stock-based compensation - - - - 8,131 - - 8,131 Redemption of warrants - - 148 - - - - - Common stock warrants issued to customers as consideration - - - - 121 - - 121 Common stock warrants related to marketing expense - - - - 810 - - 810 Net loss - - - - - ( 71,961 ) - ( 71,961 ) Other comprehensive loss - - - - - - ( 226 ) ( 226 ) Balance, December 31, 2021 ( 0 ) - 193,864 19 604,077 ( 154,603 ) 9 449,502 Stock-based compensation - - - - 13,716 - - 13,716 Tax withholdings related to net share settlement of equity awards - - ( 907 ) - ( 4,045 ) - - ( 4,045 ) Issuance of common stock upon vesting of equity awards - - 3,026 1 - - - 1 Common stock warrants issued to customers as consideration - - - - 72 - - 72 Common stock warrants related to marketing expense - - - - 217 - - 217 Reverse recapitalization, net of transaction costs - - - - ( 70 ) - - ( 70 ) Exercise of options - - 465 - 219 - - 219 Net settlement related to exercise of options - - ( 5 ) - ( 33 ) - - ( 33 ) Exercise of warrants - - 1,874 - 3 - - 3 ESPP purchases - - 208 - 1,125 - - 1,125 Net loss - - - - - ( 96,322 ) - ( 96,322 ) Other comprehensive loss - - - - - - ( 185 ) ( 185 ) Balance, December 31, 2022 ( 0 ) $ - 198,525 $ 20 $ 615,281 $ ( 250,925 ) $ ( 176 ) $ 364,200 See accompanying Notes to Consolidated Financial Statements. 51 SMARTRENT, INC. Consolidated Statements of CASH FLOWS (in thousands, except per share amounts) Years Ended December 31, 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 96,322 ) $ ( 71,961 ) $ ( 37,109 ) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 4,262 463 295 Amortization of debt discount - 14 8 Asset Impairment 4,441 - - Non-employee warrant expense 289 931 481 Provision for warranty expense ( 784 ) 7,634 3,370 Loss on extinguishment of debt - 27 164 Non-cash lease expense 1,405 621 461 Stock-based compensation related to acquisition 811 812 707 Stock-based compensation 12,905 7,319 1,052 Compensation expense related to acquisition 5,042 - 3,353 Change in fair value of earnout related to acquisition 310 - - Deferred tax benefit ( 5,720 ) - - Non-cash interest expense 107 11 100 Provision for excess and obsolete inventory 117 ( 39 ) 778 Provision for doubtful accounts 242 226 512 Change in operating assets and liabilities Accounts receivable ( 15,943 ) ( 23,969 ) ( 13,526 ) Inventory ( 42,811 ) ( 15,778 ) ( 11,090 ) Deferred cost of revenue ( 9,880 ) ( 9,315 ) ( 8,584 ) Prepaid expenses and other assets 2,366 ( 11,284 ) 1,014 Accounts payable 12,446 3,811 ( 72 ) Accrued expenses and other liabilities 3,243 1,605 ( 3,209 ) Deferred revenue 43,691 38,945 32,841 Lease liabilities ( 1,254 ) ( 449 ) ( 36 ) Net cash used in operating activities ( 81,037 ) ( 70,376 ) ( 28,490 ) CASH FLOWS FROM INVESTING ACTIVITIES Payments for Zenith acquisition, net of cash acquired - - ( 2,382 ) Payments for SightPlan acquisition, net of cash acquired ( 129,676 ) - - Payments for iQuue acquisition, net of cash acquired - ( 5,902 ) - Purchase of property and equipment ( 1,113 ) ( 1,471 ) ( 298 ) Payment for loan receivable - ( 2,000 ) - Net cash used in investing activities ( 130,789 ) ( 9,373 ) ( 2,680 ) CASH FLOWS FROM FINANCING ACTIVITIES Payments from revolving line of credit - - 7,179 Payments on revolving line of credit - - ( 11,981 ) Payments on term loan - ( 4,861 ) ( 139 ) Payments of senior revolving facility transaction costs - ( 658 ) - Payments on note payable related to acquisition - - ( 4,327 ) Proceeds from warrant exercise 3 5 - Proceeds from convertible notes - - 50 Proceeds from options exercise 186 - - Proceeds from ESPP purchases 1,125 - - Taxes paid related to net share settlements of stock-based compensation awards ( 4,045 ) - - Convertible preferred stock issued - 35,000 57,500 Payments of convertible stock transaction costs - ( 207 ) ( 61 ) Proceeds from business combination and private offering - 500,628 - Payments for business combination and private offering transaction costs ( 70 ) ( 55,981 ) - Net cash (used in) provided by financing activities ( 2,801 ) 473,926 48,221 Effect of exchange rate changes on cash and cash equivalents ( 264 ) ( 191 ) 143 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 214,891 ) 393,986 17,194 Cash, cash equivalents, and restricted cash - beginning of period 432,604 38,618 21,424 Cash, cash equivalents, and restricted cash - end of period $ 217,713 $ 432,604 $ 38,618 Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets Cash and cash equivalents $ 210,409 $ 430,841 $ 38,618 Restricted cash, current portion 7,057 1,268 - Restricted cash, included in other long-term assets 247 495 - Total cash, cash equivalents, and restricted cash $ 217,713 $ 432,604 $ 38,618 See accompanying Notes to Consolidated Financial Statements. 52 SMARTRENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (in thousands) For the years ended December 31, 2022 2021 2020 Supplemental disclosure of cash flow information Interest paid $ 146 $ 254 $ 459 Cash paid for income taxes 197 14 83 Schedule of non-cash investing and financing activities Accrued property and equipment at period end 110 25 32 Contingent consideration - 5,230 - Acquisition consideration held in escrow - 1,021 - Conversion of convertible debt to preferred stock - - 7,787 Common stock issued as consideration for acquisition - - 813 Conversion of convertible preferred stock to common stock - 146,225 - See accompanying Notes to Consolidated Financial Statements. 53 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) NOTE 1. DESCRIPTION OF BUSINESS SmartRent Inc., and its wholly owned subsidiaries (collectively the "Company"), is an enterprise real estate technology company that provides comprehensive management software and applications designed for property owners, managers and residents. Its suite of products and services, which includes both smart building hardware and cloud-based software-as-a-service ("SaaS") solutions, provides seamless visibility and control over real estate assets. The Company’s platform lowers operating costs, increases revenues, mitigates operational friction and protects assets for owners and operators, while providing a differentiated, elevated living experience for residents. The Company is headquartered in Scottsdale, Arizona. The Company, formerly known as Fifth Wall Acquisition Corp. I (“FWAA”), was originally incorporated in Delaware on November 23, 2020, as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses. On February 9, 2021, the Company consummated its initial public offering (the “IPO”), following which its shares began trading on the Nasdaq National Market (“Nasdaq”). On April 21, 2021, FWAA entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with SmartRent.com, Inc. (“Legacy SmartRent”) and Einstein Merger Corp. I, a wholly owned subsidiary of FWAA (“Merger Sub”). On August 24, 2021, the transactions contemplated by the Merger Agreement (the “Business Combination”) were consummated. In connection with the closing of the Business Combination, FWAA changed its name to SmartRent, Inc. and its shares began trading on the New York Stock Exchange (“NYSE”) under the symbol “SMRT.” As a result of the Business Combination, SmartRent, Inc. became the owner, directly or indirectly, of all of the equity interests of Legacy SmartRent and its subsidiaries. The Business Combination The Company entered into the Merger Agreement in April 2021 and consummated the Business Combination in August 2021. Upon the closing of the Business Combination, Merger Sub merged with and into Legacy SmartRent, with Legacy SmartRent continuing as the surviving company and changing its name to “SmartRent Technologies, Inc.” In connection with the consummation of the Business Combination, the Company changed its name from “Fifth Wall Acquisition Corp. I” to “SmartRent, Inc.” and changed its trading symbol and securities exchange from “FWAA” on Nasdaq to “SMRT” on the NYSE. Upon the closing of the Business Combination, the Company's certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of capital stock to 550,000 shares, of which 500,000 shares were designated common stock, $ 0.0001 par value per share, and of which 50,000 shares were designated preferred stock, $ 0.0001 par value per share. Upon consummation of the Business Combination, each share of Legacy SmartRent convertible preferred stock and common stock issued and outstanding was canceled and converted into the right to receive approximately 4.8846 shares (the “Exchange Ratio”) of the Company’s Class A common stock, par value $ 0.0001 per share (“Common Stock”). Outstanding stock options and restricted stock units ("RSUs"), whether vested or unvested, to purchase or receive shares of Legacy SmartRent common stock granted under the 2018 Stock Plan (see Note 8) converted into stock options and RSUs to purchase shares of the Company’s Common Stock upon the same terms and conditions that were in effect with respect to such stock options and RSUs immediately prior to the Business Combination, after giving effect to the Exchange Ratio. Outstanding warrants, whether vested or unvested, to purchase shares of Legacy SmartRent common stock (see Note 7) converted into warrants for shares of the Company’s Common Stock upon the same terms and conditions that were in effect with respect to such warrants immediately prior to the Business Combination, after giving effect to the Exchange Ratio. In connection with the Business Combination, • Holders of less than one thousand shares of FWAA’s Class A Common Stock sold in its initial public offering (the “Initial Shares”) properly exercised their right to have such shares redeemed for a full pro rata portion of the trust account holding the proceeds from FWAA’s initial public offering, calculated as of two business days prior to the consummation of the Business Combination. Each such share was redeemed for approximately $ 10.00 per share, or $ 2 in the aggregate; • The shares of FWAA Class B Common Stock held by Fifth Wall Acquisition Sponsor, LLC (“Sponsor”) and FWAA’s independent directors automatically converted to 8,625 shares of Common Stock; and 54 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) • Pursuant to subscription agreements entered into in connection with the Merger Agreement (collectively, the “Subscription Agreements”), certain investors purchased an aggregate of 15,500 newly-issued shares of Common Stock at a purchase price of $ 10.00 per share for an aggregate purchase price of $ 155,000 (the “PIPE Investment”). At the closing of the Business Combination, the Company consummated the PIPE Investment. The Company incurred direct and incremental costs of approximately $ 55,981 in connection with the Business Combination and the related equity issuance, consisting primarily of investment banking, legal, accounting, and other professional fees, which were recorded to additional paid-in capital as a reduction of proceeds. The Company accounted for this transaction as a reverse merger in accordance with U.S. GAAP. Under this method of accounting, FWAA was treated as the “acquired” company for financial reporting purposes. See Note 2 "Significant Accounting Policies" for further details. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy SmartRent issuing stock for the net assets of FWAA, accompanied by a recapitalization. The net assets of FWAA are stated at historical cost, with no goodwill or intangible assets recorded. Prior to the Business Combination, Legacy SmartRent and FWAA filed separate standalone federal, state, and local income tax returns. As a result of the Business Combination, SmartRent, Inc. files a consolidated income tax return. For legal purposes, FWAA acquired Legacy SmartRent, and the transaction represents a reverse acquisition for federal income tax purposes - SmartRent, Inc. is the parent of the consolidated group with SmartRent Technologies, Inc. as a subsidiary, but in the year of the closing of the Business Combination, the consolidated tax return of SmartRent, Inc. included a full year period for Legacy SmartRent and stub-year for FWAA starting the day after the closing of the Business Combination. FWAA filed a short year return for the period prior to the acquisition. Upon closing of the Business Combination, the Company received gross proceeds of $ 500,628 from the Business Combination and PIPE Investment, offset by offerings costs of $ 55,981 . NOTE 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company's financial statements have been prepared on a consolidated basis and as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020 include the consolidated accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements herein. Foreign Currency SmartRent, Inc.'s functional and reporting currency is United States Dollars (“USD”) and its foreign subsidiary has a functional currency other than USD. Financial position and results of operations of the Company's international subsidiary are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at the end of each reporting period. The Company's international subsidiaries statements of operations accounts are translated at the weighted-average rates of exchange prevailing during each reporting period. Translation adjustments arising from the use of differing currency exchange rates from period to period are included in accumulated other comprehensive loss in stockholders’ equity. Gains and losses on foreign currency exchange transactions, as well as translation gains or losses on transactions denominated in currencies other than an entity’s functional currency, are reflected in the Consolidated Statements of Operations and Comprehensive Loss. Liquidity The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liabilities and commitments in the normal course of business. Management believes that currently available resources will provide sufficient funds to enable the Company to meet its obligations for at least one year past the issuance date of these financial statements. The Company may need to raise additional capital through equity or debt financing to fund future operations until it generates positive operating cash flows. There can be no assurance that such additional equity or debt financing will be available on terms acceptable to the Company, or at all. 55 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expense during the reporting period. These estimates made by management include valuing the Company’s inventories on hand, allowance for doubtful accounts, intangible assets, earnout liabilities, warranty liabilities and certain assumptions used in the valuation of equity awards, including the estimated fair value of common stock warrants, stand-alone selling price of items sold and assumptions used to estimate the fair value of stock-based compensation expense. Actual results could differ materially from those estimates. Impact of COVID-19 The extensive impact caused by the COVID-19 pandemic has resulted and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. The COVID-19 pandemic continues to evolve, with pockets of resurgence and the emergence of variant strains contributing to continued uncertainty about its scope, duration, severity, trajectory, and lasting impact. In an effort to mitigate the spread of COVID-19, a number of countries, states, and other jurisdictions have imposed, and may impose in the future, various measures, including travel restrictions and quarantines. These measures have and could continue to contribute to a general slowdown in the global economy, adversely impact the Company's customers, employees, third-party suppliers, logistics providers and other business partners, and otherwise disrupt its operations. The timing of customer orders and the Company’s ability to fulfill orders received was impacted by various COVID-19-related government mandates, resulting in a delay in units sold. The Company has also witnessed certain current and prospective customers delaying purchases based on budget constraints or project delays related to COVID-19. The broader and long-term implications of the COVID-19 pandemic on the Company’s workforce, operations and supply chain, customer demand, results of operations and overall financial performance remain uncertain. The impact of COVID-19, and measures to prevent its spread, have been impactful and continue to affect supply chain. The Company has experienced some production delays as a result of COVID-19, including impacts to the sourcing, manufacturing, and logistics channels. The Company continues to engage with current and potential customers and continues to experience strong demand for its smart home enterprise software solutions. The Company believes some customers may continue to delay purchases because their development programs may also be delayed as a result of COVID-19. The Business Combination The Business Combination is accounted for as a reverse recapitalization as Legacy SmartRent was determined to be the accounting acquirer. The determination is primarily based on the evaluation of the following facts and circumstances: • the equity holders of Legacy SmartRent hold the majority of voting rights in the Company; • the board of directors of Legacy SmartRent represent a majority of the members of the board of directors of the Company or were appointed by Legacy SmartRent; • the senior management of Legacy SmartRent became the senior management of the Company; and • the operations of Legacy SmartRent comprise the ongoing operations of the Company. In connection with the Business Combination, outstanding capital stock of Legacy SmartRent was converted into Common Stock of the Company, par value $ 0.0001 per share, representing a recapitalization, and the net assets of the Company were acquired at historical cost, with no goodwill or intangible assets recorded. Legacy SmartRent was deemed to be the predecessor of the Company, and the consolidated assets and liabilities and results of operations prior to the Closing Date are those of the Legacy SmartRent. The shares and corresponding capital amounts and net loss per share available to common stockholders, prior to the Business Combination, have been retroactively restated as shares reflecting the Exchange Ratio. 56 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Acquisitions In March 2022, the Company purchased all of the outstanding equity interests of SightPlan Holdings, Inc. ("SightPlan") in an acquisition that meets the definition of a business combination, for which the acquisition method of accounting was used (see Note 13). The acquisition was recorded on the date that the Company obtained control over the acquired business. The consideration paid was determined on the acquisition date and the acquisition-related costs, such as professional fees, were excluded from the consideration transferred and were recorded as expense in the period incurred. Assets acquired and liabilities assumed by the Company were recorded at their estimated fair values, while goodwill was measured as the excess of the consideration paid over the fair value of the net identifiable assets acquired and liabilities assumed. In December 2021, the Company purchased all of the outstanding equity interests of iQuue, LLC (“iQuue”) in an acquisition that meets the definition of a business combination, for which the acquisition method of accounting was used (see Note 13). The acquisition was recorded on the date that the Company obtained control over the acquired business. The consideration paid was determined on the acquisition date and the acquisition-related costs, such as professional fees, were excluded from the consideration transferred and were recorded as expense in the period incurred. Assets acquired and liabilities assumed by the Company were recorded at their estimated fair values, while goodwill was measured as the excess of the consideration paid over the fair value of the net identifiable assets acquired and liabilities assumed. In February 2020, Legacy SmartRent purchased all of the outstanding equity interests of Zenith Highpoint, Inc. (“Zenith”) in an acquisition that meets the definition of a business combination, for which the acquisition method of accounting was used, see Note 13 of these Consolidated Financial Statements. The acquisition was recorded on the date that the Company obtained control over the acquired business. The consideration paid was determined on the acquisition date and the acquisition-related costs, such as professional fees, were excluded from the consideration transferred and were recorded as expense in the period incurred. Assets acquired and liabilities assumed by the Company were recorded at their estimated fair values, while goodwill was measured as the excess of the consideration paid over the fair value of the net identifiable assets acquired and liabilities assumed. Net Loss Per Share Attributable to Common Stockholders The Company follows the two-class method to include the dilutive effect of securities that participated in dividends, if and when declared, when computing net income per common share. The two-class method determines net income per common share for each class of common stock and participating securities according to dividends, if and when declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The anti-dilutive effect of potentially dilutive securities is excluded from the computation of net loss per share because inclusion of such potentially dilutive shares on an as-converted basis would have been anti-dilutive. The Company’s participating securities included convertible preferred stock, as the holders were entitled to receive noncumulative dividends on a pari passu basis in the event that a dividend is paid on common stock. The Company also considers any unvested common shares subject to repurchase to be participating securities because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of convertible preferred stock, as well as the holders of unvested common shares subject to repurchase, do not have a contractual obligation to share in losses. In conjunction with the Business Combination all convertible preferred stock converted to common stock. Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, adjusted for outstanding shares that are subject to repurchase and any shares issuable by the exercise of warrants for nominal consideration. Diluted net loss per share is computed by giving effect to all potentially dilutive securities outstanding for the period using the treasury stock method or the if-converted method based on the nature of such securities. For periods in which the Company reports a net loss, the diluted net loss per common share attributable to common stockholders is the same as basic net loss per common share attributable to common stockholders, because inclusion of such potentially dilutive shares on an as-converted basis would have been anti-dilutive. 57 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Cash and Cash Equivalents The Company considers financial instruments with an original maturity of three months or less to be cash and cash equivalents. The Company maintains cash and cash equivalents at multiple financial institutions, and, at times, these balances exceed federally insurable limits. As a result, there is a concentration of credit risk related to amounts on deposit. The Company believes any risks are mitigated through the size and security of the financial institution at which its cash balances are held. Restricted Cash The Company considers cash to be restricted when withdrawal or general use is legally restricted. The Company reports the current portion of restricted cash as a separate item in the Consolidated Balance Sheets and the non-current portion is a component of other long-term assets in the Consolidated Balance Sheets. The Company determines current or non-current classification based on the expected duration of the restriction. Accounts Receivable, net Accounts receivable consist of balances due from customers resulting from the sale of hardware, professional services and hosted services. Accounts receivable are recorded at invoiced amounts, are non-interest bearing and are presented net of the associated allowance for doubtful accounts on the Consolidated Balance Sheets. The allowance for doubtful accounts totaled $ 606 and $ 357 as of December 31, 2022, and 2021, respectively. The provision for doubtful accounts is recorded in general and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss; the provision for doubtful accounts totaled $ 242 , $ 226 and $ 512 for the years ended December 31, 2022 , 2021 and 2020, respectively. There were no material write-offs of accounts receivable deemed uncollectable for the years ended December 31, 2022 and 2021 . During the year ended December 31, 2020, there were $ 381 in write-offs of accounts receivable deemed uncollectable. The Company evaluates the collectability of the accounts receivable balances and has determined the allowance for doubtful accounts based on a combination of factors, which include th e nature of relationship and the prior experience the Company has with the account and an evaluation for current and projected economic conditions as of the Consolidated Balance Sheets date. Accounts receivable determined to be uncollectible are charged against the allowance for doubtful accounts. Actual collections of accounts receivable could differ from management’s estimates. Significant Customers A significant customer represents 10 % or more of the Company’s total revenue or net accounts receivable balance at each respective Consolidated Balance Sheet date. The significant customers of the Company are also limited partners of an investor in the Company with approxima tely 4 % and 22 % ownership as of December 31, 2022 and 2021, respectively. The investor does not exert control or influence on these limited partners and, as such these limited partners do not meet the definition of related parties of the Company. Revenue as a percentage of total revenue and accounts receivable as a percentage of total accounts receivable for each significant customer follows. Accounts Receivable Revenue As of December 31, Years Ended December 31, 2022 2021 2022 2021 2020 Customer A 30 % * 15 % 12 % 28 % Customer B * 15 % * * 23 % Customer C * * 12 % 12 % * * Total less than 10% for the respective period Inventory Inventories, which are comprised of smart home equipment and components are stated at the lower of cost or net realizable value with cost determined under the first-in, first-out method. The Company adjusts the inventory balance based on anticipated obsolescence, usage and historical write-offs. 58 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Goodwill Goodwill represents the excess of cost over net assets of the Company's completed business combinations. The Company tests for potential impairment of goodwill on an annual basis in November to determine if the carrying value is less than the fair value. In testing goodwill for impairment, the Company began with a qualitative test, commonly referred to as "Step 0", and determined performing a quantitative test was not necessary. No goodwill impairment has been recorded as of December 31, 2022. The Company will conduct additional tests between annual tests if there are indications of potential g oodwill impairment. Intangible Assets The Company recorded intangible assets with finite lives, including customer relationships and developed technology, as a result of the iQuue and SightPlan acquisitions. Intangible assets are amortized on a straight-line basis based on their estimated useful lives. The estimated useful life of these intangible assets are as follow s. Estimated useful life (in years) Trade name 5 Customer relationships 10 - 13 Developed technology 1 - 7 Property and Equipment, ne t Property and equipment is stated at cost, net of accumulated depreciation and amortization. Costs of improvements that extend the economic life or improve service potential are capitalized. Expenditures for routine maintenance and repairs are charged to expense as incurred. Repairs and maintenance expense for the years ended December 31, 2022, 2021 and 2020 was $ 50 , $ 15 and $ 18 , respectively, and is included in general and administrative expense in the accompanying Consolidated Statements of Operations and Comprehensive Loss. Depreciation and amortization are included in cost of revenue and general and administrative expenses and are computed using the straight-line basis over estimated useful lives of those assets as follows. Estimated useful life (in years) Computer hardware and software 5 Furniture and fixtures 7 Warehouse equipment 15 Leasehold improvements Shorter of the estimated useful life or lease term Impairment of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, intangible assets and operating lease right of use assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of these assets, or asset groups, is measured by comparing the carrying amounts of such assets or asset groups to the future undiscounted cash flows that such assets or asset groups are expected to generate. If such assets are impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Leases The Company classifies an arrangement as a lease at inception by determining if the arrangement conveys the right to control the use of the identified asset for a period of time in exchange for consideration. If the arrangement is identified as a lease, classification is determined at the commencement of the arrangement. Operating lease liabilities are recognized at the present value of the future lease payments at the lease commencement date. 59 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The Company estimates its incremental borrowing rate to discount future lease payments. The incremental borrowing rate reflects the interest rate that the Company would expect to pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment over a similar term. Operating lease right-of-use (“ROU”) assets are based on the corresponding lease liability adjusted for any lease payments made at or before commencement, initial direct costs and lease incentives. Certain leases also include options to renew or terminate the lease at the election of the Company. The Company evaluates these options at lease inception and on an ongoing basis. Renewal and termination options that the Company is reasonably certain to exercise are included when classifying leases and measuring lease liabilities. Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease costs are expensed as incurred. The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component for all classes of assets. Lease payments for short-term leases with a term of twelve months or less are expensed on a straight-line basis over the lease term. Operating leases are included in other long-term assets, accrued expenses and other current liabilities, and other long-term liabilities. Warranty Allowance The Company provides its customers with limited-service warranties associated with product replacement and related services. The warranty typically lasts one year following the installation of the product. The estimated warranty costs, which are expensed at the time of sale and included in hardware cost of revenue, are based on the results of product testing, industry and historical trends and warranty claim rates incurred and are adjusted for identified current or anticipated future trends as appropriate. Actual warranty claim costs could differ from these estimates. For the years ended December 31, 2022, 2021 and 2020 warranty expense included in cost of hardware revenue was $ 852 and $ 8,305 and $ 3,694 , respectively. As of December 31, 2022, and December 31, 2021, the Company’s warranty allowance was $ 2,277 and $ 6,106 , respectively. During the year ended December 31, 2020, the Company identified a deficiency with batteries contained in certain hardware sold and has included an estimate of the expected cost to remove these batteries, which were acquired from one supplier, in its warranty allowance. During the year ended December 31, 2021, the Company identified additional deficient batteries, and while the number of deficient batteries is less than one percent of the total number of all batteries deployed, the Company has elected to replace all such batteries from previously deployed hardware devices. As of December 31, 2022, and 2021, $ 1,687 and $ 4,732 , respectively, is included in the Company’s warranty allowance related to the remaining cost of replacement for this identified battery deficiency. The Company's aggregate warranty liabilities and changes were as follows: As of December 31, 2022 2021 Warranty reserve beginning balance $ 6,106 $ 3,336 Warranty accrual for battery deficiencies - 6,430 Warranty (reversal) accrual for completed projects ( 784 ) 1,204 Warranty settlements ( 3,045 ) ( 4,864 ) Warranty reserve ending balance $ 2,277 $ 6,106 Convertible Preferred Stock The Company assessed the provisions of Legacy SmartRent’s convertible preferred stock including redemption rights, dividends and voting rights to determine the appropriate classification. The Company determined that Legacy SmartRent’s shares of convertible preferred stock are appropriately classified as mezzanine equity because they were contingently redeemable into cash upon the occurrence of an event not solely within Legacy SmartRent’s control. When it is probable that a convertible preferred share will become redeemable, adjustments are recorded to adjust the carrying values. No such adjustments have been recorded during the years ended December 31, 2022 or 2021. As a result of the Business Combination, each share of Legacy SmartRent convertible preferred stock and common stock was converted into the right to receive approximately 4.8846 shares of the Company’s Common Stock. Refer to Note 7, Convertible Preferred Stock and Equity . 60 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Fair Value of Financial Instruments Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities subject to on-going fair value measurement are categorized and disclosed into one of three categories depending on observable or unobservable inputs employed in the measurement. These two types of inputs have created the following fair value hierarchy. Level 1: Quoted prices in active markets that are accessible at the measurement date for assets and liabilities. Level 2: Observable prices that are based on inputs not quoted in active markets but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. The Company recognizes transfers between levels of the hierarchy based on the fair values of the respective financial measurements at the end of the reporting period in which the transfer occurred. There were no transfers between levels of the fair value hierarchy during the years ended December 31, 2022 or 2021. The carrying amounts of the Company’s accounts receivable, accounts payable and accrued and other liabilities approximate their fair values due to their short maturities. Revenue Recognition The Company derives its revenue primarily from sales of systems that consist of hardware devices, professional services and hosted services to assist property owners and property managers with visibility and control over assets, while providing all-in-one home control offerings for residents. Revenue is recorded when control of these products and services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those products and services. The Company may enter into contracts that contain multiple distinct performance obligations. The transaction price for a typical arrangement includes the price for: smart home hardware devices, professional services, and a subscription for use of the Company's proprietary software (“hosted services”). Included in these contracts are Hub Devices, which integrate the Company’s proprietary enterprise software with third party smart devices. Historically, the Company sold Hub Devices which only functioned with a subscription to its proprietary software (“non-distinct Hub Devices"). During the year ended December 31, 2022, the Company began shipping Hub Devices with features that function independently from its proprietary software subscription (“distinct Hub Devices"). Non-distinct Hub Devices are recognized as a single performance obligation with the Company’s proprietary software in hosted services revenue, while distinct Hub Devices are recognized as a separate performance obligation in hardware revenue. When distinct Hub Devices are included in a contract, the hosted services performance obligation is comprised of only the Company’s proprietary software. The Company considers delivery for each of the hardware, professional services and hosted services to be separate performance obligations. The hardware performance obligation includes the delivery of smart home hardware and distinct Hub Devices. The professional services performance obligation includes the services to install the hardware. The hosted services performance obligation provides a subscription that allows the customer access to software during the contracted-use term when the promised service is provided to the customer. Also included in the hosted service performance obligation are non-distinct Hub Devices that only function with a subscription to the Company’s proprietary software. Payments are received by the Company by credit card, check or automated clearing house (“ACH”) payments and payment terms are determined by individual contracts and generally range from due upon receipt to net 30 days . Taxes collected from customers and remitted to governmental authorities are not included in reported revenue. Payments received from customers in advance of revenue recognition are reported as deferred revenue. The Company has elected the following practical expedients following the adoption of ASC 606 : • Shipping and handling costs: the Company elected to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service and are recorded as hardware cost of revenue. Amounts billed for shipping and handling fees are recorded as revenue. 61 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) • Sales tax collected from customers: the Company elected to exclude from the measurement of transaction price all taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by us from a customer. • Measurement of the transaction price: the Company applies the practical expedient that allows for inclusion of the future auto-renewals in the initial measurement of the transaction price. The Company only applies these steps when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services it transfers to a customer. • Significant financing component: the Company elected not to adjust the promised amount of consideration for the effects of a significant financing component when the period between the transfer of promised goods or services and when the customer pays for the goods or services will be one year or less. Timing of Revenue Recognition is as follows. • Hardware Revenue Hardware revenue results from the direct sale to customers of hardware smart home devices, which devices generally consist of a distinct Hub Device, door-locks, thermostats, sensors, and light switches. These hardware devices provide features that function independently without subscription to the Company's proprietary software, and the performance obligation for hardware revenue is considered satisfied and revenue is recognized at a point in time when the hardware device is shipped to the customer. The Company generally provides a one-year warranty period on hardware devices that are delivered and installed. The cost of the warranty is recorded as a component of cost of hardware revenue. • Professional Services Revenue Professional services revenue results from installing smart home hardware devices, which does not result in significant customization of the product and is generally performed over a period from two to four weeks. Installations can be performed by the Company's employees, contracted out to a third-party with the Company's employees managing the engagement, or the customer can perform the installation themselves. The Company’s professional services contracts are generally arranged on a fixed price basis and revenue is recognized over the period in which the installations are completed. • Hosted Services Revenue Hosted services revenue primarily consists of monthly subscription revenue generated from fees that provide customers’ access to one or more of the Company’s proprietary software applications including access controls, asset monitoring and related services. These subscription arrangements have contractual terms ranging from one-month to ten -years and include recurring fixed plan subscription fees. Arrangements with customers do not provide the customer with the right to take possession of the Company’s software at any time. Customers are granted continuous access to the services over the contractual period. Accordingly, fees collected for subscription services are recognized on a straight-line basis over the contract term beginning on the date the subscription service is made available to the customer. Variable consideration is immaterial. Also included in hosted services revenue are non-distinct Hub Devices. The Company considers those devices and hosting services subscription a single performance obligation and therefore defers the recognition of revenue for those devices upon shipment to the customer. The revenue is then amortized over its average service life. When a non-distinct Hub Device is included in a contract that does not require a long-term service commitment, the customer obtains a material right to renew the service because purchasing a new device is not required upon renewal. If a contract contains a material right, proceeds are allocated to the material right and recognized over the period of benefit, which is generally four years . 62 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Cost of Revenue Cost of revenue consists primarily of direct costs of products and services together with the indirect cost of estimated warranty expense and customer care and support over the life of the service arrangement. • Hardware Cost of hardware revenue consists primarily of direct costs of proprietary products, such as the distinct Hub Device, hardware devices, supplies purchased from third-party providers, and shipping costs together with, indirect costs related to warehouse facilities (including depreciation and amortization of capitalized assets and right-of-use assets), infrastructure costs, personnel-related costs associated with the procurement and distribution of products and warranty expenses together with the indirect cost of customer care and support. • Professional Services Cost of professional services revenue consists primarily of direct costs related to personnel-related expenses for installation and supervision of installation services, general contractor expenses and travel expenses associated with the installation of products and indirect costs that are also primarily personnel-related expenses in connection with training of and ongoing support for customers and residents. • Hosted Services Cost of hosted services revenue consists primarily of the amortization of the direct costs of non-distinct Hub Devices, consistent with the revenue recognition period noted above in "Hosted Services Revenue", and infrastructure costs associated with providing software applications together with the indirect cost of customer care and support over the life of the service arrangement. Deferred Cost of Revenue Deferred cost of revenue includes all direct costs included in cost of revenue for hosted services and non-distinct Hub Devices that have been deferred to future periods. Research and Development These expenses relate to the research and development of new products and services and enhancements to the Company’s existing product offerings. The Company accounts for the cost of research and development by capitalizing qualifying costs, which are incurred during the product development stage, and amortizing those costs over the product’s estimated useful life. The Company expenses preliminary evaluation costs as they are incurred before the product development stage, as well as post development implementation and operation costs, such as training, maintenance and minor upgrades. As of December 31, 2022, the Company has capitalized $ 3,145 of research and development costs in other long-term assets on the Consolidated Balance Sheets, of which $ 3,066 is remaining to be amortized. During the year ended December 31, 2022, $ 79 of amortization expense related to capitalized software was recorded in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss. Advertising Advertising costs are expensed as incurred and recorded as a component of sales and marketing expense. The Company incurred $ 292 , $ 801 and $ 663 of advertising expenses for the years ended December 31, 2022, 2021 and 2020, respectively. Segments The Company has one operating segment and one reportable segment as its chief operating decision maker, who is its Chief Executive Officer, reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company’s principal operations are in the United States and the Company’s long-lived assets are located primarily within the United States. The Company held $ 8,096 and $ 8,629 of assets outside the United States at December 31, 2022 , and 2021, respectively. 63 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Recent Accounting Guidance Recent Accounting Guidance Not Yet Adopted In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments—Credit Losses (Topic 326)” which modifies the measurement of expected credit losses of certain financial instruments. This update is effective for fiscal years beginning after December 15, 2022 and must be applied using a modified-retrospective approach, with early adoption permitted. The adoption of ASU 2016-13 may have an impact on the Company’s accounting for accounts receivable, bad debt expense, and loans receivable included in the accompanying Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Loss. The Company is evaluating the extent of such impact. Recently Adopted Accounting Guidance In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740) ” , which simplifies the accounting for income taxes, primarily by eliminating certain exceptions found in the Accounting Standards Codification, section 740. This standard is effective for fiscal periods beginning after December 15, 2021. The Company adopted ASU No. 2019-12 effective January 1, 2022 , which did no t have a material impact on the Company’s consolidated financial statements . In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). Upon the adoption of this update, contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination will be recognized and measured by the acquirer on the acquisition date in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers as if the acquirer had originated the contracts, which would generally result in an acquirer recognizing and measuring acquired contract assets and contract liabilities consistent with how they were recognized and measured in the acquiree’s financial statements. The Company adopted ASU 2021-08 on October 1, 2021 , prior to the acquisition of iQuue and SightPlan. Therefore, iQuue's and SightPlan’s historical deferred revenue balances, as of their respective acquisition dates, have been included in the purchase price allocations in accordance with ASU 2021-08. NOTE 3. FAIR VALUE MEASUREMENTS AND FAIR VALUE OF INSTRUMENTS The following tables display the carrying values and fair values of financial instruments. As of December 31, 2022 As of December 31, 2021 Assets on the Consolidated Balance Sheets Carrying Value Unrealized Losses Fair Value Carrying Value Unrealized Losses Fair Value Cash and cash equivalents Level 1 $ 210,409 $ - $ 210,409 $ 430,841 $ - $ 430,841 Restricted cash Level 1 7,304 - 7,304 1,763 - 1,763 Total $ 217,713 $ - $ 217,713 $ 432,604 $ - $ 432,604 The Company reports the current portion of restricted cash as a separate item in the Consolidated Balance Sheets and the non-current portion is a component of other long-term assets in the Consolidated Balance Sheets. As of December 31, 2022 As of December 31, 2021 Liabilities on the Consolidated Balance Sheets Carrying Value Fair Value Carrying Value Fair Value Acquisition earnout payment Level 3 $ 5,540 $ 5,540 $ 5,230 $ 5,230 Total liabilities $ 5,540 $ 5,540 $ 5,230 $ 5,230 64 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The Company reports the current portion of the acquisition earnout payment as a component of other current liabilities in the Consolidated Balance Sheets and the non-current portion is a component of other long-term liabilities on the Consolidated Balance Sheets. Earnout payments related to acquisitions are measured at fair value each reporting period using Level 3 unobservable inputs. The changes in the fair value of the Company's Level 3 liabilities for the years ended December 31, 2022 and 2021 are as follows. As of December 31, 2022 2021 Balance at beginning of period $ 5,230 $ - Fair value of earnout payment recorded in connection with the iQuue acquisition - 5,230 Change in fair value of earnout 310 - Balance at end of period $ 5,540 $ 5,230 The fair value of the earnout payment is measured on a recurring basis at each reporting date. The following inputs and assumptions were used in the Monte Carlo simulation model to estimate the fair value of the earnout payment as of December 31, 2022 and 2021. The Company determined there was an increase of $ 310 in the fair value of the earnout due to changes to discount and volatility rates during the year ended December 31, 2022 and therefore, recorded this adjustment in general and administrative expense on the Consolidated Statement of Operations and Comprehensive Loss. See Note 13 for more information regarding the earnout payment. As of December 31, 2022 2021 Discount Rate 9.80 % 3.50 % Volatility 42.00 % 24.80 % NOTE 4. REVENUE AND DEFERRED REVENUE Disaggregation of Revenue In the following tables, revenue is disaggregated by primary geographical market and type of revenue. Years Ended December 31, 2022 2021 2020 Revenue by geography United States $ 165,795 $ 108,072 $ 50,275 International 2,026 2,565 2,259 Total revenue $ 167,821 $ 110,637 $ 52,534 Years Ended December 31, 2022 2021 2020 Revenue by type Hardware $ 87,372 $ 69,629 $ 31,978 Professional services 32,301 22,732 12,304 Hosted services 48,148 18,276 8,252 Total revenue $ 167,821 $ 110,637 $ 52,534 65 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Remaining Performance Obligations Advance payments received from customers are recorded as deferred revenue and are recognized upon the completion of related performance obligations over the period of service. Advance payments for non-distinct Hub Devices are recorded as deferred revenue and recognized over its average in-service life. Advance payments received from customers for subscription services are recorded as deferred revenue and recognized over the term of the subscription. A summary of the change in deferred revenue is as follows. Years Ended December 31, 2022 2021 Deferred revenue balance as of January 1 $ 95,597 $ 53,501 Revenue recognized from balance of deferred revenue at the beginning of the period ( 25,934 ) ( 11,764 ) Revenue deferred during the period 111,861 85,153 Revenue recognized from revenue originated and deferred during the period ( 41,576 ) ( 31,293 ) Deferred revenue balance as of December 31 $ 139,948 $ 95,597 As of December 31, 2022, the Company expects to recognize 52 % of its total deferred revenue within the next 12 months , 21 % of its total deferred revenue between 13 and 36 months , 24 % between 37 and 60 months . Any deferred revenue expected to be recognized beyond five years is immaterial. Contracts may contain termination for convenience provisions that allow the Company, customer, or both parties the ability to terminate for convenience, either at any time or upon providing a specified notice period, without a substantive termination penalty. Included in deferred revenue as of December 31, 2022 are $ 39,932 of prepaid fees related to contracts with termination for convenience provisions which are refundable at the request of the customer. Based on the Company's historical experience, customers do not typically exercise their termination for convenience rights. Deferred cost of revenue includes all direct costs includ ed in cost of revenue that have been deferred to future periods. NOTE 5. OTHER BALANCE SHEET INFORMATION Inventory consisted of the following. As of December 31, 2022 2021 Finished Goods $ 74,276 $ 33,007 Raw Materials 1,449 201 Total inventory $ 75,725 $ 33,208 The Company writes-down inventory for any excess or obsolete inventories or when the Company believes the net realizable value of inventories is less than the carrying value. During the years ended December 31, 2022, 2021 and 2020, the Company recorded write-downs of $ 117 , $ 358 and $ 232 , respectively. Prepaid expenses and other current assets consisted of the following. As of December 31, 2022 2021 Prepaid expenses $ 5,042 $ 15,084 Other current assets 4,140 2,285 Total prepaid expenses and other current assets $ 9,182 $ 17,369 Prepaid expenses decreased during the year ended December 31, 2022 from the previous year, partially due to $ 2,441 of impairment related to prepaid licenses which the Company determined had no future value. Asset impairment is recorded in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss. 66 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Property and equipment, net consisted of the following. As of December 31, 2022 2021 Computer hardware $ 2,192 $ 1,768 Leasehold improvements 698 284 Warehouse and other equipment 632 461 Furniture and fixtures 163 161 Property and equipment 3,685 2,674 Less: Accumulated depreciation ( 1,616 ) ( 800 ) Total property and equipment, net $ 2,069 $ 1,874 Depreciation and amortization expense on all property, plant and equipment was $ 816 , $ 463 and $ 443 during the years ended December 31, 2022, 2021 and 2020, respectively. Intangible assets, net consisted of the following. As of December 31, 2022 2021 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Customer relationships $ 22,990 $ ( 1,778 ) $ 21,212 $ 3,290 $ - $ 3,290 Developed technology 10,600 ( 1,440 ) 9,160 300 - 300 Trade name 900 ( 149 ) 751 - - - Total intangible assets, net $ 34,490 $ ( 3,367 ) $ 31,123 $ 3,590 $ - $ 3,590 Amortization expense on all intangible assets was $ 3,367 for the year ended December 31, 2022 . There was no amortization expense for the years ended December 31, 2021 or 2020, as the assets were acquired on December 31, 2021 or thereafter. Accumulated amortization on all intangible assets was $ 3,367 as of December 31, 2022 . There was no accumulated amortization as of December 31, 2021 . Total future amortization for finite-lived assets is estimated as follows. Amortization Expense 2023 $ 3,873 2024 3,873 2025 3,873 2026 3,873 2027 3,734 Thereafter 11,897 Total $ 31,123 Other long-term assets consisted of the following. As of December 31, 2022 2021 Operating lease - ROU asset, net $ 3,968 $ 2,927 Capitalized software costs 3,066 - Restricted cash, long-term portion 247 495 Other long-term assets 2,240 3,790 Total other long-term assets $ 9,521 $ 7,212 67 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Amortization expense on capitalized software costs was $ 79 for the year ended December 31, 2022 and was recorded in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss . No amortization expense was recorded related to capitalized software costs for the years ended December 31, 2021 or 2020. Additionally, the Company recorded impairment of $ 2,000 related to a note receivable within other long-term assets on the Consolidated Balance Sheets. Impairment is recorded in general and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss. Accrued expenses and other current liabilities consisted of the following. As of December 31, 2022 2021 Accrued compensation costs $ 14,157 $ 6,588 Accrued expenses 8,571 4,559 Warranty allowance 2,277 6,106 Other 9,391 4,981 Total accrued expenses and other current liabilities $ 34,396 $ 22,234 NOTE 6. DEBT Term Loan and Revolving Line of Credit Facility In December 2021, the Company entered into a $ 75,000 Senior Revolving Facility with a five-year term (the "Senior Revolving Facility"). The Senior Revolving Facility includes a letter of credit sub-facility in the aggregate availability of $ 10,000 as a sublimit of the Senior Revolving Facility, and a swingline sub-facility in the aggregate availability of $ 10,000 as a sublimit of the Senior Revolving Facility. Proceeds from the Senior Revolving Facility are to be used for general corporate purposes. Amounts borrowed under the Senior Revolving Facility may be repaid and, prior to the Senior Revolving Facility maturity date, reborrowed. The Senior Revolving Facility terminates on the Senior Revolving Facility maturity date in December 2026 , when the principal amount of all advances, the unpaid interest thereon, and all other obligations relating to the Senior Revolving Facility shall be immediately due and payable. The Company has yet to draw on the Senior Revolving Facility as of December 31, 2022. The Company accounted for the cancellation of its previous revolving facility and the issuance of the Senior Revolving Facility as an exchange with the same creditor. As a result, all costs related to entering into the Senior Revolving Facility that are allowed to be deferred are recorded as a deferred asset and included in other assets on the Consolidated Balance Sheets. These costs totaled $ 688 and will be amortized ratably over the five-year term of the Senior Revolving Facility. For the years ended December 31, 2022 and 2021, the Company recorded $ 147 and $ 11 , respectively, of amortization expense in connection with these costs, which is a component of interest expense on the Consolidated Statements of Operations and Comprehensive Loss. No such expenses were recorded during the year ended December 31, 2020. Interest rates for draws upon the Senior Revolving Facility are determined by whether the Company elects a secured overnight financing rate loan (“SOFR Loan”) or alternate base rate loan (”ABR Loan”). For SOFR Loans, the interest rate is based upon the forward-looking term rate based on SOFR as published by the CME Group Benchmark Administration Limited (CBA) plus 0.10 %, subject to a floor of 0.00 %, plus an applicable margin. For ABR Loans, the interest rate is based upon the highest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus 0.50 %, or (iii) 3.25 %, plus an applicable margin. As of December 31, 2022, the applicable margins for SOFR Loans and ABR Loans under the Senior Revolving Facility were 1.75 % and ( 0.50 %) , respectively. In addition to paying interest on the outstanding principal balance under the Senior Revolving Facility, the Company is required to pay a facility fee to the lender in respect of the unused commitments thereunder. The facility fee rate is based on the daily unused amount of the Senior Revolving Facility and is one fourth of one percent ( 0.25 %) per annum based on the unused facility amount. During the year ended December 31, 2022, the facility fee totaled $ 190 . There were no facility fees recorded during the years ended December 31, 2021 or 2020. 68 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The Senior Revolving Facility contains certain customary affirmative and negative covenants and events of default. Such covenants will, among other things, restrict, subject to certain exceptions, the Company’s ability to (i) engage in certain mergers or consolidations, (ii) sell, lease or transfer all or substantially all of the Company’s assets, (iii) engage in certain transactions with affiliates, (iv) make changes in the nature of the Company’s business and its subsidiaries, and (v) incur additional indebtedness that is secured on a pari passu basis with the Senior Revolving Facility. The Senior Revolving Facility also requires the Company, on a consolidated basis with its subsidiaries, to maintain a minimum cash balance. If the minimum cash balance is not maintained, the Company is required to maintain a minimum liquidity ratio. If an event of default occurs, the lender is entitled to take various actions, including the acceleration of amounts due under the Senior Revolving Facility and all actions permitted to be taken by a secured creditor. As of December 31, 2022, and through the date these consolidated financial statements were issued, the Company believes it was in compliance with all financial covenants. The Senior Revolving Facility is collateralized by first priority or equivalent security interests in substantially all the property, rights, and assets of the Company. As of December 31, 2022 and 2021, there was no outstanding principal amount under the Senior Revolving Facility. In August 2019, Legacy SmartRent entered into a loan and security agreement for a Credit Facility. The Credit Facility provided $ 15,000 of borrowing capacity and consisted of a $ 10,000 Revolving Facility, which originally matured in August 2021 , but was extended to December 2021 , and a $ 5,000 Term Loan Facility, with a maturity date of November 2023 . The Term Loan Facility was subject to monthly payments of interest, in arrears, accrued on the principal balance of the Term Loan Facility through November 2020 . Thereafter, and continuing through the Term Loan Facility maturity date, the Term Loan Facility was subject to equal monthly payments of principal plus accrued interest. Proceeds from the Credit Facility were used for general corporate purposes. In connection with the Credit Facility, the Company issued warrants (see Note 7) to purchase Legacy SmartRent’s common stock, which were subsequently exercised on September 7, 2021 pursuant to a cashless exercise and resulting in the issuance of 147,911 shares of Common Stock. At the time of issuance, the fair value of the warrants was recorded as additional paid-in capital with a reduction to the carrying value of the Term Loan Facility. The resulting discount from outstanding principal balance of the Term Loan Facility was amortized using the effective interest rate method over the periods to maturity. Amortization of this discount is recorded as interest expense in the accompanying Consolidated Statements of Operations and Comprehensive Loss and Comprehensive Loss. In December 2021, the Credit Facility was cancelled upon the repayment in full of the Term Loan Facility principal and accrued interest. The repayment of the Term Loan Facility was accounted for as an extinguishment of debt. NOTE 7. CONVERTIBLE PREFERRED STOCK AND EQUITY Preferred Stock The Company is authorized to issue 50,000 shares of $ 0.0001 par value preferred stock. As discussed in Note 1, the Company has retroactively adjusted the shares issued and outstanding prior to August 24, 2021 to give effect to the Exchange Ratio to determine the number of shares of Common Stock into which they were converted. Prior to the Business Combination, Legacy SmartRent had shares of $ 0.00001 par value Series Seed, Series A, Series B, Series B-1, Series C, and Series C-1 preferred stock outstanding, all of which were convertible into shares of common stock of Legacy SmartRent on a 1:1 basis , subject to certain anti-dilution protections. Upon the closing of the Business Combination, the 24,816 outstanding shares of preferred stock were converted into 121,214 shares of Common Stock of the Company based on the Exchange Ratio of approximately 4.8846 . 69 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The original issuance price per share of Legacy SmartRent’s authorized, issued and outstanding preferred stock follows as of August 24, 2021. Issue Date Series Shares Authorized Shares Issued and Outstanding Original Issue Price per Share Liquidation Preference March 2018 Seed 4,707 4,707 $ 1.0000 $ 4,707 September 2018 A 4,541 4,541 $ 1.1011 5,000 May 2019 B-1 508 508 $ 4.9767 2,527 May 2019 B 5,425 5,425 $ 6.2209 33,750 March 2020 C-1 761 761 $ 10.0223 7,624 March - May 2020; March 2021 C 8,874 8,874 $ 10.4236 92,468 24,816 24,816 $ 146,076 During the year ended December 31, 2021 , Legacy SmartRent issued an additional 3,358 shares of Series C preferred stock through two tranches that closed in February and March 2021. The Series C preferred stock was issued in exchange for $ 35,000 gross cash proceeds. Expenses in connection with the issuance of the Series C preferred stock were $ 207 , resulting in net cash proceeds of $ 34,793 . Warrants In February 2021, Legacy SmartRent issued 750 warrants to purchase Legacy SmartRent’s common stock as consideration to certain customers. As part of the Business Combination on August 24, 2021, these warrants converted to warrants to purchase 3,663 shares of Common Stock at $ 0.01 per share pursuant to the Exchange Ratio and remain outstanding. The warrants are exercisable upon issuance until their expiration in February 2031 or earlier upon redemption. The number of warrants issued to these customers is dependent on the number of installed units, as defined by the warrant agreements, purchased by the customer. The fair value of the vested portion of the warrants has been recorded as additional paid in capital and contra-revenue on the accompanying Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Loss, respectively. For the years ended December 31, 2022 and 2021 respectively, the Company recorded $ 72 and $ 121 , as contra-revenue in the Consolidated Statement of Operations and Comprehensive Loss related to these warrants. No contra-revenue was recorded in connection with these warrants during the year ended December 31, 2020. In April 2020, in connection with the closing of the second tranche of the Series C preferred stock, Legacy SmartRent issued a warrant to purchase common stock to an investor who participated in the second tranche closing. The warrant represents compensation paid for marketing services to be provided and was accounted for using stock-based compensation guidance. The warrant vests based on the number of installed units attained over a measurement period, which expires in April 2023 . The variability in the units earned was determined to be a performance condition and did not require classification of the warrant as a liability. Upon vesting, the warrant holder is entitled to purchase 384 fully paid and non-assessable shares of Legacy SmartRent’s common stock at $ 0.01 per share, subject to adjustment pursuant to the warrant. The Company measured the fair value of the warrants using the Black-Scholes-Merton model. As part of the Business Combination on August 24, 2021, these warrants converted to warrants to purchase 1,874 shares of Common Stock pursuant the Exchange Ratio. The remaining warrants fully vested during the three months ended March 31, 2022. The warrants were exercised during the three months ended June 30, 2022. The Company recorded the associated marketing expense over the service period as the units were installed with an offset to additional paid-in-capital. During the years ended December 31, 2022 and 2021 respectively, the Company recognized $ 217 and $ 810 of sales and marketing expens e related to these warrants. No expenses related to these warrants were recognized during the year ended December 31, 2020. 70 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) In August 2019, in connection with the Credit Facility (Note 6), Legacy SmartRent issued warrants to purchase common stock of Legacy SmartRent to the lender. The warrants were exercisable upon issuance until their expiration in August 2029 or earlier upon redemption. The holder of the warrants, together with any successor or permitted assignee or transferee, was entitled to purchase 33 fully paid and non-assessable shares of the Legacy SmartRent’s common stock at $ 2.30 per share, subject to adjustment pursuant to the warrant. The fair value of the warrants has been recorded as additional paid in capital and a reduction to the carrying value of the Term Loan Facility. The resulting discount from outstanding principal balance of the Term Loan Facility was being amortized using the effective interest rate method over the periods to maturity. Amortization of this discount was recorded as interest expense. The warrants were exercised during the year ended December 31, 2021 as discussed above (Note 6). In March 2019, Legacy SmartRent issued a warrant to purchase common stock to the purchaser of a $ 2,500 convertible note. The warrant represented compensation paid for marketing services to be provided and was accounted for using stock-based compensation guidance. The warrant vested based on the number of installed units attained over a measurement period, which expired in March 2021. The variability in the units earned was determined to be a performance condition and did not require classification of the warrant as a liability. Upon vesting, the warrant holder was entitled to purchase up to 503 fully paid and non-assessable shares of Legacy SmartRent’s common stock at $ 0.01 per share, subject to adjustment pursuant to the warrant. The Company measured the fair value of the warrant using the Black-Scholes-Merton model. The Company recorded the associated marketing expense over the service period as the units were installed with an offset to additional paid-in-capital. These warrants were exercised by the holder in March 2021, which resulted in 503 shares of common stock being issued by Legacy SmartRent. During the years ended December 31, 2022 and 2021 , no sales and marketing expense related t o these warrants was recorded in the accompanying Consolidated Statements of Operations and Comprehensive Loss. During the year ended December 31, 2020, the Company recognized $ 342 of sales and marketing expense related to these warrants in the accompanying Consolidated Statements of Operations and Comprehensive Loss. NOTE 8. STOCK-BASED COMPENSATION 2018 Stock Plan Legacy SmartRent’s board of directors adopted, and its stockholders approved, the SmartRent.com, Inc. 2018 Stock Plan (the “2018 Stock Plan”), effective March 2018. The purpose of the 2018 Stock Plan was to advance the interests of Legacy SmartRent and its stockholders by providing an incentive to attract, retain and reward persons performing services for Legacy SmartRent and by motivating such persons to contribute to the growth and profitability of Legacy SmartRent. The 2018 Stock Plan seeks to achieve this purpose by providing for awards in the form of options, restricted stock purchase rights or restricted stock bonuses. Awards granted under the 2018 Stock Plan generally expire ten years from the date of grant and become vested and exercisable over a four-year period. All options are subject to certain provisions that may impact these vesting schedules. As part of the Business Combination on August 24, 2021, all awards issued under the 2018 Stock Plan were assumed by the Company and converted to options to purchase Common Stock and RSUs for Common Stock using the Exchange Ratio. Summaries of the Company’s 2018 Stock Plan activity for the year ended December 31, 2022 is presented below. Options Outstanding Number of Options Weighted- Average Exercise Price ($ per share) Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value December 31, 2020 10,457 $ 0.51 8.96 $ - Granted - $ - Forfeited - $ - December 31, 2021 10,457 $ 0.51 7.96 $ 95,935 Granted 175 $ 9.58 Exercised ( 465 ) $ 0.47 Forfeited ( 496 ) $ 0.47 December 31, 2022 9,671 $ 0.67 6.99 $ 18,234 Exercisable options as of December 31, 2022 8,276 $ 0.49 6.83 $ 16,024 71 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Amendment to the 2018 Stock Plan In April 2021, the board of directors of Legacy SmartRent executed a unanimous written consent to provide an additional incentive to certain employees of Legacy SmartRent by amending the 2018 Stock Plan to allow for the issuance of RSUs and granted a total of 1,533 RSUs to certain employees which vest over four years . The estimated fair value for each RSU issued was approximately $ 21.55 per share and the total stock-based compensation expense to be amortized over the vesting period is $ 33,033 . As part of the Business Combination on August 24, 2021 these RSUs were assumed by the Company and converted to 7,489 RSUs at a per share fair value of $ 4.41 pursuant to the Exchange Ratio. The outstanding RSUs also contain a liquidity event vesting condition which was satisfied upon closing of the Business Combination. Accordingly, the Company recognized an additional one-time stock-based compensation expense of $ 2,827 in August 2021 as a retroactive catch-up of cumulative stock-based compensation expense for such awards from their original grant dates. During the years ended December 31, 2022 and 2021, stock-based compensation expense of $ 662 and $ 906 , respectively, was recognized in connection with the outstanding options. During the year ended December 31, 2020, there was no stock-based compensation expense related to the options. 2021 Equity Incentive Plan In connection with the Business Combination, the board of directors approved and implemented the SmartRent, Inc. 2021 Equity Incentive Plan. The purpose of the 2021 Plan is to enhance the Company's ability to attract, retain and motivate persons who make, or are expected to make, important contributions to the Company by providing these individuals with equity ownership opportunities and equity-linked compensation opportunities. The 2021 Plan authorizes the compensation committee to provide incentive compensation in the form of stock options, restricted stock and stock units, performance shares and units, other stock-based awards and cash-based awards. Under the 2021 Plan, the Company is authorized to issue up to 15,500 shares of common stock. As part of the Business Combination on August 24, 2021, the RSUs granted in the 2018 Stock Plan were assumed by the Company and converted to 7,489 restricted stock units pursuant to the Exchange Ratio. Non-employee board member RSUs will vest either over one year or three years . The RSUs granted to employees are generally subject to a four-year vesting schedule and all vesting shall be subject to the recipient’s continued employment with the Company or its subsidiaries through the applicable vesting dates. I n November 2021, the Company granted 72 RSUs to certain executives pursuant to the 2021 Equity Incentive Plan. These RSUs had a fair value of $ 12.10 at the time of the grant and will vest over four years . The table below summarizes the activity related to the RSUs. Restricted Stock Units Number of Restricted Stock Units Weighted Average Grant Date Fair Value (per share) December 31, 2020 - $ - Granted - pre-merger, retroactive application of exchange ratio 7,489 $ 4.41 Granted - post-merger 426 $ 12.10 Forfeited ( 244 ) $ 4.41 December 31, 2021 7,671 $ 4.98 Granted 2,047 $ 6.63 Vested or distributed ( 3,026 ) $ 4.88 Forfeited ( 1,199 ) $ 5.06 December 31, 2022 5,493 $ 5.43 No right to any Common Stock is earned or accrued until such time that vesting occurs, nor does the grant of the RSU award confer any right to continue vesting or employment. Compensation expense associated with the unvested RSUs is recognized on a straight-line basis over the vesting period. During the years ended December 31, 2022 and 2021 respectively, stock-based compensation expense of $ 11,955 and $ 6,413 wa s recognized in connection with the vesting of all RSUs. During the year ended December 31, 2020, there was no stock-based compensation expense related to the RSUs. At December 31, 2022, $ 26,373 of unrecognized compensation expense related to restricted stock units, which is expected to be recognized over a weighted-average period of 1.2 years. 72 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Employee Stock Purchase Plan The Company has the ability to initially issue up to 2,000 shares of Common Stock under the Employee Stock Purchase Plan ("ESPP"), subject to annual increases effective as of January 1, 2022 and each subsequent January 1 through and including January 1, 2030 in an amount equal to the smallest of (i) 1 % of the number of shares of the Common Stock outstanding as of the immediately preceding December 31, (ii) 2,000 shares or (iii) such amount, if any, as the Board may determine. During the year ended December 31, 2022, stock-based compensation expense of $ 288 was re cognized in connection with the ESPP. No expense related to the ESPP was recognized during the years ended December 31, 2021 or 2020. Stock-Based Compensation The fair value of stock option grants is estimated by the Company on the date of grant using the Black Scholes-Merton option pricing model with the following weighted-average assumptions for the year ended December 31, 2022 and 2020. There were no options granted during the year ended December 31, 2021. December 31, 2022 December 31, 2020 Risk free interest 1.47 % 0.99 % Dividend yield 0.00 % 0.00 % Expected volatility 58.80 % 103.59 % Expected life (years) 6.08 6.11 The Company recorded stock-based compensation expense as follows. Years Ended December 31, 2022 2021 2020 Research and development $ 3,668 $ 2,340 $ 256 Sales and marketing 1,396 1,379 86 General and administrative 8,652 4,412 1,417 Total $ 13,716 $ 8,131 $ 1,759 During the years ended December 31, 2022, 2021 and 2020, respectively, stock-based compensation expense of $ 811 , $ 812 and $ 707 was recognized for 844 shares granted in connection with the Company's February 2020 acquisition of a foreign supplier and are recorded as a component of general and administrative expense. As part of the Business Combination on August 24, 2021, these 844 shares converted into 4,123 shares pursuant to the Exchange Ratio. NOTE 9. INCOME TAXES The Company's provision for income taxes consisted of the following. Years Ended December 31, Income Tax Provision 2022 2021 2020 Federal $ - $ - $ - Foreign 99 133 128 State and local 233 - - Current provision 332 133 128 Federal ( 4,390 ) - - Foreign ( 3 ) ( 18 ) 21 State and local ( 1,327 ) - - Deferred (benefit) provision ( 5,720 ) ( 18 ) 21 Provision for income taxes $ ( 5,388 ) $ 115 $ 149 73 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The following table presents a reconciliation of the Company’s effective tax rates for the periods indicated. Years Ended December 31, Rate Reconciliation 2022 2021 2020 U.S. statutory rate 21.0 % 21.0 % 21.0 % State rate net of fed benefit 3.4 % 8.1 % 5.0 % Change in valuation allowance ( 18.2 %) ( 33.8 %) ( 25.0 %) SPAC transaction costs 0.0 % 3.7 % 0.0 % Stock compensation 2.0 % 0.0 % 0.0 % Permanent adjustments ( 0.2 %) ( 0.6 %) ( 1.0 %) Deferred Adjustments ( 2.8 %) 0.0 % 0.0 % Other 0.1 % 1.4 % 0.0 % Effective Tax Rate 5.3 % ( 0.2 %) 0.0 % Tax effects of temporary differences can give rise to significant portions of deferred tax assets and deferred tax liabilities. The components of deferred income tax assets and liabilities are as follows. Tax Effects of Temporary Differences As of December 31, 2022 2021 Attributes Deferred tax asset Federal NOLs $ 38,326 $ 27,815 State NOLs 9,782 8,206 Deferred revenue 14,021 9,408 Capitalized R&D 7,973 - Other deferred tax assets 9,187 5,669 Total deferred tax assets 79,289 51,098 Less: Valuation allowance ( 61,683 ) ( 43,175 ) Total net deferred tax asset $ 17,606 $ 7,923 IRC 481(a) Adjustment ( 324 ) ( 209 ) Deferred costs of revenue ( 8,960 ) ( 6,576 ) Intangibles ( 7,408 ) - Other deferred tax liabilities ( 1,142 ) ( 1,140 ) Total deferred tax liabilities ( 17,834 ) ( 7,925 ) Net deferred tax liability $ ( 228 ) $ ( 2 ) The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. As a result of historical cumulative losses, Management determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net federal and state deferred taxes in future periods. Therefore, a valuation allowance equal to the amount of the net federal and state deferred tax assets was provided at December 31, 2022 and 2021. The net valuation allowance increased by $ 18,508 from $ 43,175 to $ 61,683 in 2022. As of December 31, 2022, the Company has gross NOLs of $ 205.8 million and $ 188.3 million for federal and state income tax return purposes, respectively. Federal NOLs can be carried forward indefinitely, while State NOLs will expire between 2038 and 2042 . The Company also has $ 0.1 million of R&D credits available that expire in 2039 . The Tax Reform Act of 1986 (the "Act") provides for a limitation of the annual use of the net operating loss carryforwards following certain ownership changes (as defined by the Act and codified under IRC 382) that could limit the company's ability to utilize these carryforwards. Should the limitation apply, the related net operating loss and Section 163(j) deferred tax assets and the valuation allowance would be reduced by the same amount. The Company has not performed a Section 382 analysis. The Company recorded net deferred tax liabilities during the year ended December 31, 2022, due to the acquisition of SightPlan. Those net deferred tax liabilities provide a source of taxable income to offset future tax deductions from deferred tax assets, and as a result, management reduced the valuation allowance by $ 5,902 during the year ended December 31, 2022 (Note 13). 74 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The income tax benefit on the Consolidated Statement of Operations and Comprehensive Loss is primarily related to the valuation allowance release due to deferred tax liabilities from the SightPlan acquisition. We have established a full valuation allowance for net deferred U.S. federal and state tax assets, including net operating loss carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized in future periods if we report taxable income. We believe that we have established an adequate allowance for our uncertain tax positions, although we can provide no assurance that the final outcome of these matters will not be materially different. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. On August 16, 2022, the Inflation Reduction Act ("IRA") (H.R. 5376) was signed into law in the United States. The IRA implements a 15 % minimum tax on financial statement income of certain large corporations and a 1 % excise tax on stock repurchases, among other things. While the Company continues to evaluate the IRA, it does not believe it will have a material effect on its audited financial statements, including on its effective tax rate or on its liquidity. The Company files income tax returns in the U.S. federal and various state jurisdictions, as well as in Croatia and India. The Company is subject to U.S. federal and state income tax examinations by authorities for all tax years beginning in 2018, due to the accumulated net operating losses that are carried forward. Similarly, SightPlan is subject to U.S. federal and state income tax examination by authorities for all tax years beginning in 2012. The Company is subject to Croatian income tax examinations for all tax years beginning in 2017. The Company is subject to Indian income tax examinations for all tax years beginning in 2019. The Company evaluates uncertain tax positions which requires significant judgments and estimates regarding the recoverability of deferred tax assets, the likelihood of the outcome of examinations of tax positions that may or may not be currently under review and potential scenarios involving settlements of such matters. A summary of changes in the Company's gross unrecognized tax benefits for the years ended December 31, 2022 and 2021 is as follows (in thousands): As of December 31, 2022 2021 Unrecognized tax benefits - January 1 $ 8,757 $ - Gross increases - tax positions in prior period - 6,961 Gross decreases - tax positions in prior period - - Gross increases - tax positions in current period 14,495 1,796 Settlement - - Lapse of statute of limitations - - Unrecognized tax benefits - December 31 $ 23,252 $ 8,757 The total balance of unrecognized tax benefits as of December 31, 2022 would not impact the effective tax rate if recognized, as the Company is in a full valuation allowance and the unrecognized tax benefit is a deferred tax asset. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefit as a component of income tax expense. The Company has no t accrued penalties and interest as of December 31, 2022. The Company expects the unrecognized tax benefits to reverse in full within the next 12 months. NOTE 10. NET LOSS PER SHARE The following potentially dilutive shares were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because inclusion of the shares on an as-converted basis would have been anti-dilutive. Years Ended December 31, 2022 2021 2020 Convertible preferred stock - - 104,821 Common stock options and restricted stock units 15,163 18,370 11,019 Common stock warrants 3,664 4,601 161 Shares subject to repurchase 1,374 2,748 4,123 Total 20,201 25,719 120,123 75 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) NOTE 11. RELATED-PARTY TRANSACTIONS During the years ended December 31, 2022, 2021 and 2020 respectively, the Company incurred marketing expense of $ 217 , $ 810 and $ 481 in connection with the vesting of warrants held by an investor. The Company incurred consulting expense of $ 20 included in research and development expenses for the year December 31, 2022, related to services provided by companies in which one of the Company's executives have control or significant influence. During the years ended December 31, 2021 and 2020, the Company incurred consulting expenses from these companies of $ 110 and $ 39 , respectively. On March 22, 2022, the Company purchased all of the outstanding equity interests of SightPlan (see Note 13) . One of the Company's directors, through a personal investment vehicle, held an unsecured convertible promissory note in SightPlan (the “SightPlan Convertible Note”). As consideration for the conversion and cancellation of the SightPlan Convertible Note, the director received $ 458 at the closing of the SightPlan acquisition. The director did not participate in any negotiations, recused himself from all board discussions related to the SightPlan acquisition, and did not vote on the matter. Entities affiliated with RETV Management, LLC ("RET"), which currently hold more than 3 % of the outstanding shares of the Company's Common Stock, held more than 17 % of th e fully diluted shares outstanding of SightPlan (the “RET SightPlan Holdings”). As consideration for the RET SightPlan Holdings, entities affiliated with RET received $ 22,271 at the closing of the SightPlan acquisition. None of the Company's executive officers or directors hold any economic interest in RET and RET does not have a designee on the Company's board of directors. Further, RET did not assist the Company with any negotiations or participate in the Company's board discussions related to the SightPlan acquisition. NOTE 12. COMMITMENTS AND CONTINGENCIES Lease Commitments From time to time, the Company enters into lease agreements with third parties for purposes of obtaining office and warehouse space. These leases are accounted for as operating leases and have remaining lease terms of 1.25 years to 4.33 years . In addition to monthly rent payments, the Company reimburses the lessors for its share of operating expenses as defined in the leases. Such amounts are not included in the measurement of the lease liability but are recognized as a variable lease expense when incurred. One of these leases includes a single, five-year extension option . The Company does not intend to exercise this extension option. During the years ended December 31, 2022 and 2021, the Company obtained $ 2,776 and $ 3,007 of ROU assets, respectively, in exchange for lease obligations in connection with its operating leases. No new leases were entered into during the year ended December 31, 2020. ROU assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. The Company’s weighted average discount rate was 3.50 % at December 31, 2022. The weighted-average lease term was 3.1 years, 2.8 years and 2.1 years at December 31, 2022, 2021 and 2020, respectively. During the years ended, and as of December 31, 2022, 2021 and 2020 the Company had no finance leases. During the years ended December 31, 2022, 2021 and 2020 the Company incurred rent and other related occupancy expenses of $ 1,614 , $ 683 and $ 542 , respectively. Included in these amounts are $ 133 , $ 77 and $ 35 , respectively, of variable rent expense which is comprised primarily of the Company’s proportionate share of operating expenses, properly classified as lease cost due to the Company’s election to not separate lease and non-lease components. Rent costs are recorded to cost of revenue and general and administrative expenses on the Company’s Consolidated Statement of Operations. 76 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Annual base rental commitments associated with these leases, excluding operating expense reimbursements, month-to-month lease payments and other related fees and expenses during the remaining lease terms are as follows. Operating Leases 2023 $ 1,677 2024 1,531 2025 563 2026 and thereafter 664 Total lease payments 4,435 Less: imputed interest ( 47 ) Total lease liability 4,388 Less: Lease liability, current portion 1,585 Lease liability, noncurrent $ 2,803 The Company had $ 3,968 and $ 2,927 of ROU assets related to its lease liabilities at December 31, 2022 and 2021, respectively, and are included in other long-term assets on the Consolidated Balance Sheets. The noncurrent portion of the Company’s lease liability is included in other long-term liabilities on the Consolidated Balance Sheets. The current portion of the Company's lease liability is included in other current liabilities on the Consolidated Balance Sheets. Cash paid for amounts included in the measurement of operating lease liabilities was $ 1,272 , $ 603 , and $ 529 for the years ended December 31, 2022, 2021, and 2020, respectively. Sales Taxes The Company determined that it was required to pay sales and use tax in various jurisdictions. Accordingly, the Company has recorded a liability of $ 2,291 and $ 1,156 as of December 31, 2022 and 2021, respectively. These liabilities are included in accrued expenses and other current liabilities on the Consolidated Balance Sheets. There are no penalties and interest included in the balance at December 31, 2022 or 2021. Legal Matters The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Liabilities are accrued when it is believed that it is both probable that a liability has been incurred and that the Company can reasonably estimate the amount of the potential loss. The Company does not believe that the outcome of these proceedings or matters will have a material effect on the consolidated financial statements. The Company entered into an agreement with a supplier in April 2020, as further amended in March 2021, to purchase minimum volumes of certain products through August 2022. Due to significant failure rates and other defects, the Company ceased ordering product from this supplier as of December 2020. Despite the Company’s requests, the supplier indicated they are not willing to refund the Company for the malfunctioning products previously purchased, and therefore, the Company filed a complaint against the supplier on March 22, 2022 in the Superior Court for the State of California, County of Santa Clara. On July 26, 2022, the supplier filed a demurrer seeking to dismiss the complaint filed by the Company as well as a cross-complaint against the Company for breach of contract and other allegations. The Company denies the allegations in the supplier’s complaint and does not believe it has any further commitment to the supplier. On October 18, 2022, the supplier’s demurrer was overruled, in part, thus allowing the Company’s claims against the supplier to move forward. In addition, the Company filed a demurrer to supplier’s cross-complaint on October 31, 2022. The parties are now engaging in discovery. The Company regularly reviews outstanding legal claims, actions and enforcement matters, if any exist, to determine if accruals for expected negative outcomes of such matters are probable and can be reasonably estimated. The Company evaluates any such outstanding matters based on management’s best judgment after consultation with counsel. There is no assurance that the Company's accruals for loss contingencies will not need to be adjusted in the future. The amount of such adjustment could significantly exceed the accruals the Company has recorded. The Company had no such accruals as of December 31, 2022, 2021 or 2020. 77 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) NOTE 13. ACQUISITIONS SightPlan Acquisition On March 22, 2022, the Company purchased all of the outstanding equity interests of SightPlan for approximately $ 135,000 . SightPlan was founded in 2013 and is headquartered in Orlando, Florida. SightPlan is a SaaS company that provides a real estate operating platform offering automated answering, resident engagement, field service and maintenance management, inspections management, and due diligence and audit management services to real estate owners and managers. The Company accounted for the SightPlan acquisition as a business combination. The preliminary purchase price consisted of $ 131,781 of cash and restricted cash and a post-closing downward adjustment of $ 127 reflecting the difference between estimated and actual net working capital of SightPlan on the acquisition date. On the acquisition date, the Company paid cash consideration of $ 130,931 and placed $ 850 in escrow accounts legally owned by the Company. During the year ended December 31, 2022 , consideration held in escrow of $ 850 was distributed. As part of the distribution, the net working capital adjustment of $ 127 was returned to the Company. As part of the business combination, the Company agreed to pay up to approximately $ 5,760 to the former employees of SightPlan on the one-year anniversary of the acquisition date, subject to continued employment at the Company. As this payment is contingent upon the continuous service of the employees, it is accounted for as post-combination expense and will be recognized ratably over the service period of one year . During the year ended December 31, 2022, the Company recorded $ 4,495 t o general and administrative expenses on the Statements of Operations and Comprehensive Loss and to other current liabilities on the Consolidated Balance Sheets in connection with this contingent consideration. The Company deposited $ 5,760 cash in escrow on the acquisition date for this obligation. The escrow deposit is classified as restricted cash, current portion. The fair value and allocation of the business combination are preliminary, are based upon management’s best estimates and assumptions, and are subject to future revision. The Company will finalize these amounts no later than one year from the acquisition date once it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the acquisition date may result in adjustments to the preliminary amounts disclosed above which may impact the reported results in the period those adjustments are identified. The total purchase consideration and the fair values of the acquired assets and liabilities at the acquisition date were as follows. Consideration Cash paid at acquisition $ 130,931 Cash consideration held in escrow 850 Net working capital adjustment ( 127 ) Fair value of total consideration transferred 131,654 Recognized amounts of identifiable assets acquired and liabilities assumed Cash $ 1,978 Accounts receivable, net 1,255 Intangible assets 30,900 Other assets 749 Total identifiable net assets acquired 34,882 Accounts payable 6 Deferred revenue 885 Accrued expenses and other liabilities 735 Deferred tax liability ( Note 9 ) 5,947 Other long-term liabilities 256 Total liabilities assumed 7,829 Total identifiable assets 27,053 Goodwill $ 104,601 78 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Changes resulting from facts and circumstances that existed as of the acquisition date resulted in measurement period adjustments to the estimated fair values of accounts receivable, net, intangible assets, other assets, deferred tax liability, and goodwill during the year ended December 31, 2022. Specifically, the refinement of inputs used to estimate the fair value of intangible assets resulted in an increase in customer relationships of $ 4,400 , a decrease in goodwill of $ 3,839 , and an increase in the deferred tax liability of $ 557 . The increase to the deferred tax liability caused an increase to the release of the valuation allowance, generating a $ 1,227 income tax benefit on the Consolidated Statement of Operations. Changes to accounts receivable, net and other assets were immaterial. Cash paid at acquisition $ 130,931 Cash acquired ( 1,978 ) Cash consideration released from escrow 850 Net working capital adjustment ( 127 ) Payment of acquisition consideration, net of cash acquired $ 129,676 The Company recognized approximately $ 4,495 of compensation expense related to the SightPlan acquisition during the year ended December 31, 2022. The Company recognized $ 771 of other non-recurring acquisition related costs that were expensed during the year ended December 31, 2022. Compensation and other non-recurring acquisition related costs and are included in general and administrative expenses on the Consolidated Statement of Operations and Comprehensive Loss. The fair value of the assets acquired includes accounts receivable of $ 1,255 . The gross amount due under contracts for accounts receivable is $ 1,284 , substantially all of which is expected to be collected. The Company did not acquire any other class of receivable as a result of the acquisition of SightPlan. The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based on the fair market value of such assets and liabilities at the date of acquisition. Intangible assets associated with the acquisition totaled $ 30,900 and primarily related to customer relationships and developed technology. The excess purchase price over the fair value of net assets acquired was recognized as goodwill and totaled $ 104,601 . The goodwill is attributable primarily to the workforce of the acquired business and expected synergies with the Company’s existing operations and is not deductible for income tax purposes. 79 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The Company recorded intangible assets at their fair value, which consisted of the following. Estimated useful life (in years) March 31, 2022 Trade Name 5 $ 900 Customer relationships 10 19,700 Developed technology 7 10,300 Total intangible assets $ 30,900 The valuation of intangible assets was determined using an income approach methodology. The fair value of the customer relationship intangible assets was determined using the multi-period excess earnings method based on discounted projected net cash flows associated with the net earnings attributable to the acquired customer relationships. The fair value of the trade name and the acquired developed technology was determined using the relief from royalty method, which measures the value by estimating the cost savings associated with owning the asset rather than licensing it. The income approach methodology involves estimating cash flows over the remaining economic life of the intangible assets, which are considered from a market participant perspective. Key assumptions used in estimating future cash flows included projected revenue growth rates and customer attrition rates. The projected future cash flows were discounted to present value using an appropriate discount rate. As such, all aforementioned intangible assets were valued using Level 3 inputs. During the year ended December 31, 2022, the Company recorded amortization expense of $ 2,806 related to intangible assets. There was no such amortization expense recorded in the years end ed December 31, 2021 or 2020 as the acquisition occurred on March 22, 2022. These intangible assets are deductible over 15 years for income tax purposes. Pro Forma Operating Results The Company’s Consolidated Balance Sheet as of December 31, 2022, and other financial statements presented herein for the year ended December 31, 2022 include the results of operations of SightPlan since the acquisition date. The following unaudited pro forma information presents consolidated financial information as if the SightPlan acquisition had occurred on January 1, 2020. Pro forma disclosures for net loss have not been provided as the acquisition did not have, and is not expected to have, a material impact on the consolidated results through the year of acquisition. Pro forma operating results were prepared for comparative purposes only and are not indicative of what would have occurred had the acquisition been made as of January 1, 2020 or of the results that may occur in the future. For the years ended December 31, 2022 December 31, 2021 December 31, 2020 Revenues $ 170,173 $ 119,310 $ 57,574 iQuue Acquisition On December 31, 2021, the Company purchased all of the outstanding equity interests of iQuue, LLC. iQuue was founded in 2015 and is headquartered in Altamonte Springs, Florida. iQuue is a SaaS company providing a smart home and smart building technology platform for property owners, managers, and residents in the multifamily industry. Backed by Samsung SmartThings, the iQuue technology platform is capable of integrating with any smart device. iQuue offerings include access control, door code management, managed WiFi, and professional installation. 80 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The Company accounted for the iQuue acquisition as a business combination. The preliminary purchase price consisted of $ 7,213 of cash and restricted cash, estimated fair market value of $ 5,230 in contingent consideration relating to three earnout payments tied to the attainment of installed unit targets during the period of December 31, 2021 to June 30, 2025, and a Net Working Capital Adjustment of $ 508 to be paid out 91 days after the acquisition date. On the acquisition date, the Company paid cash of $ 6,192 , and placed $ 1,021 in escrow accounts. As of December 31, 2022, the current escrow deposits are classified as “Restricted cash, current portion” in the Consolidated Balance Sheets. The Company determines current or non-current classification based on the expected duration of the restriction. The maximum value of the earnout payments is $ 6,375 . To the extent these are earned, they will be payable in cash on, or promptly after, the earnout period dates of December 31, 2022, December 31, 2023, and June 30, 2025. The fair value of the earnout payments is determined using the Monte Carlo simulation model based on installed unit projections during the period of December 31, 2021 through June 30, 2025, implied revenue volatility, a risk-adjusted discount rate, and a credit spread. Each reporting period, the Company is required to remeasure the fair value of the earnout liability as assumptions change and such adjustments will be recorded as a general and administrative expense within the Consolidated Statement of Operations and Comprehensive Loss. The fair value of the earnout liability falls within Level 3 of the fair value hierarchy as a result of the unobservable inputs used for the measurement. The Company determined there was an increase of $ 310 in the fair value of the earnout during the year ended December 31, 2022 and therefore, recorded the adjustment in general and administrative expenses on the Consolidated Statement of Operations and Comprehensive Loss. The fair value of the earnout as of December 31, 2022 and 2021 was $ 5,540 and $ 5,230 , respectively. As part of the business combination, the Company agreed to pay up to approximately $ 742 to the former shareholders of iQuue over the next three years , subject to the shareholders’ continued employment at the Company. As this payment is contingent upon the continuous service of the key employees, it is accounted for as post-combination compensation expense and is being recognized ratably over the service period of three years . The Company deposited $ 742 cash in escrow on the acquisition date for this obligation. The current portion of the escrow deposit is classified as “Restricted cash, current portion” and the non-current portion is classified as a component of "Other long-term assets" on the Consolidated Balance Sheets. During the year ended December 31, 2022, the Company recognized $ 247 of compensation expense in connection with this bonus. No such compensation expense was recorded during the year ended December 31, 2021. The total purchase consideration and the fair values of the acquired assets and liabilities at the acquisition date were as follows. Consideration Cash paid at acquisition $ 6,192 Contingent consideration 5,230 Cash consideration held in escrow 1,021 Net working capital adjustment 508 Fair value of total consideration transferred 12,951 Recognized amounts of identifiable assets acquired and liabilities assumed Cash $ 290 Accounts receivable 721 Inventory 49 Intangible assets 3,590 Prepaid expenses and other assets 5 Total identifiable net assets acquired 4,655 Accounts payable 48 Deferred revenue 91 Accrued expenses and other liabilities 69 Total liabilities assumed 208 Total identifiable assets 4,447 Goodwill $ 8,504 81 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The Company recognized approximately $ 547 of compensation expense related to the iQuue acquisition during the year ended December 31, 2022 . No such compensation expense was recorded during the year ended December 31, 2021. The Company recognized $ 116 and $ 314 of other non-recurring acquisition related costs that were expensed during the years ended December 31, 2022 and 2021, respectively. Compensation and other non-recurring acquisition related costs are included in general and administrative expenses on the Consolidated Statement of Operations and Comprehensive Loss. The fair value of the assets acquired includes accounts receivable of $ 721 . The gross amount due under contracts for accounts receivable is $ 721 , all of which is expected to be collected. The Company did not acquire any other class of receivable as a result of the acquisition of iQuue. The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based on the fair market value of such assets and liabilities at the date of acquisition. Intangible assets associated with the acquisition totaled $ 3,590 and primarily related to customer relationships. The excess purchase price over the fair value of net assets acquired was recognized as goodwill and totaled $ 8,504 . The goodwill is attributable primarily to the workforce of the acquired business and expected synergies with the Company’s existing operations and is deductible over 15 years for income tax purposes. The Company recorded intangible assets at their fair value, which consisted of the following. Estimated useful life (in years) December 31, 2021 Customer relationships 13 $ 3,290 Developed technology 1 300 Total intangible assets $ 3,590 The valuation of intangible assets was determined using an income approach methodology. The fair value of the customer relationship intangible assets was determined using the multi-period excess earnings method based on discounted projected net cash flows associated with the net earnings attributable to the acquired customer relationships. The fair value of the acquired developed technology was determined using the relief from royalty method, which measures the value by estimating the cost savings associated with owning the asset rather than licensing it. The income approach methodology involves estimating cash flows over the remaining economic life of the intangible assets, which are considered from a market participant perspective. Key assumptions used in estimating future cash flows included projected revenue growth rates and customer attrition rates. The projected future cash flows were discounted to present value using an appropriate discount rate. As such, all aforementioned intangible assets were valued using Level 3 inputs. During the year ended December 31, 2022, the Company recorded amortization expense of $ 562 related to intangible assets. There was no such amortization expense recorded for the year ended December 31, 2021 as the acquisition occurred on December 31, 2021. These intangible assets are deductible over 15 years for income tax purposes. The Company’s Consolidated Balance Sheets as of December 31, 2022 and 2021, and other financial statements presented herein for the year ended December 31, 2022 include the results of operations of iQuue since the acquisition date. Pro forma disclosures have not been provided since the acquisition did not have, and is not expected to have, a material impact on the Company’s results of operations. Zenith Acquisition In February 2020, Legacy SmartRent purchased all of the outstanding equity interests of Zenith which had previously been a vendor for Legacy SmartRent. The Company accounted for the Zenith acquisition as a business combination. The purchase price consisted of $ 6,909 cash, $ 974 promissory note consideration, $ 813 common stock consideration, and $ 1,158 related to settlement of preexisting relationships for a total purchase price of $ 9,854 . The preexisting relationship related to prepaid inventory owned by the Company, with a corresponding deferred revenue balance recorded by Zenith. This preexisting relationship was settled on the acquisition date as an adjustment to the purchase price. 82 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The aggregate purchase price exceeded the fair value of the net tangible and intangible assets acquired, and accordingly the Company recorded goodwill of $ 4,162 . Additionally, Legacy SmartRent issued 844 shares of common stock that vest annually over three years and $ 3,353 of promissory notes to certain employees, contingent upon continued employment. These costs are recognized as post-combination compensation expenses as a component of general and administrative expense on the Company’s Consolidated Statement of Operations and Comprehensive Loss. In connection with the common stock issued with this transaction, the Company recorded $ 811 , $ 812 and $ 707 of stock-based compensation expense during the years ended December 31, 2022, 2021 and 2020, respectively. As part of the Business Combination of August 24, 2021 these 844 shares converted to 4,123 shares pursuant to the Exchange Ratio. The total purchase consideration and the fair values and liabilities at the acquisition date were as follows. Consideration Cash Consideration $ 6,909 Promissory Note Consideration 974 Stock Consideration 813 Settlement of Preexisting Relationships 1,158 Fair Value of Total Consideration Transferred 9,854 Recognized amounts of identifiable assets acquired and liabilities assumed Cash $ 4,527 Accounts receivable 518 Inventory 692 Prepaid expenses and other current assets 632 Property and equipment, net 61 Total identifiable assets acquired 6,430 Accounts payable 490 Accrued expenses and other current liabilities 248 Total liabilities assumed 738 Total identifiable net assets 5,692 Goodwill $ 4,162 The Company recognized approximately $ 21 of acquisition related costs that were expensed during the year ended December 31, 2020 and are included in general and administrative expenses. None of these costs were expensed during the years ended December 31, 2022 or 2021. The excess of the purchase price over the tangible and intangible assets acquired has been recorded as Goodwill. The Company determined the intangible assets held by Zenith were not material to the acquisition and did not include them in the acquisition. The goodwill is attributable primarily to the workforce of the acquired business and expected synergies with the Company’s existing operations and is not deductible for income tax purposes. The Company’s consolidated balance sheet for the year ended December 31, 2022, and other financial statements presented herein for the years ended December 31, 2022, 2021 and 2020 include the results of operations of Zenith since the acquisition date. Revenue related to Zenith and included in amounts presented on the Company’s Consolidated Statement of Operations and Comprehensive Loss are $ 2,026 , $ 2,565 and $ 2,259 for the years ended December 31, 2022, 2021 and 2020, respectively. Net income related to Zenith and included in amounts presented on the Company’s Consolidated Statement of Operations and Comprehensive Loss are $ 218 , $ 819 and $ 420 for the years ended December 31, 2022, 2021 and 2020. Pro forma disclosures have not been provided since the acquisition did not have, and is not expected to have, a material impact on the Company’s results of operations. 83 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) NOTE 14. SUBSEQUENT EVENTS In connection with the preparation of the accompanying consolidated financial statements, the Company has evaluated events and transactions occurring after December 31, 2022 and through March 8, 2023, the date these financial statements were issued, for potential recognition or disclosure and has determined that there are no additional items to disclose except as disclosed below. In January 2023, issuable shares of the Company’s Class A Common Stock under the ESPP increased by 1,985 shares. In January 2023, the Board of Directors approved 2,157 RSUs and 3,070 Option awards to certain employees under the 2021 Equity Incentive Stock Plan. In February 2023, employees enrolled in the Company’s ESPP purchased 176 shares of the Company’s Class A Common Stock. 84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.