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 ) 55 Consolidated Balance Sheets 56 Consolidated Statements of Operations and Comprehensive Loss 57 Consolidated Statements of Stockholders' Equity 58 Consolidated Statements of Cash Flows 59 Notes to Consolidated Financial Statements 61 54 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, 2023 and 2022, 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, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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 5, 2024 We have served as the Company's auditor since 2020. 55 Item 1 - Financial Statements SMARTRENT, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) As of December 31, 2023 2022 ASSETS Current assets Cash and cash equivalents $ 215,214 $ 210,409 Restricted cash, current portion 495 7,057 Accounts receivable, net 61,903 62,442 Inventory 41,575 75,725 Deferred cost of revenue, current portion 11,794 13,541 Prepaid expenses and other current assets 9,359 9,182 Total current assets 340,340 378,356 Property and equipment, net 1,400 2,069 Deferred cost of revenue 11,251 22,508 Goodwill 117,268 117,268 Intangible assets, net 27,249 31,123 Other long-term assets 12,248 9,521 Total assets $ 509,756 $ 560,845 LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 15,076 $ 18,360 Accrued expenses and other current liabilities 24,976 34,396 Deferred revenue, current portion 77,257 80,020 Total current liabilities 117,309 132,776 Deferred revenue 45,903 59,928 Other long-term liabilities 4,096 3,941 Total liabilities 167,308 196,645 Commitments and contingencies (Note 12) Convertible preferred stock, $ 0.0001 par value; 50,000 shares authorized as of December 31, 2023 and December 31, 2022; no shares of preferred stock issued and outstanding as of December 31, 2023 and December 31, 2022 - - Stockholders' equity Common stock, $ 0.0001 par value; 500,000 shares authorized as of December 31, 2023 and December 31, 2022, respectively; 203,327 and 198,525 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively 20 20 Additional paid-in capital 628,156 615,281 Accumulated deficit ( 285,512 ) ( 250,925 ) Accumulated other comprehensive loss ( 216 ) ( 176 ) Total stockholders' equity 342,448 364,200 Total liabilities, convertible preferred stock and stockholders' equity $ 509,756 $ 560,845 See accompanying Notes to Consolidated Financial Statements. 56 SMARTRENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share amounts) For the years ended December 31, 2023 2022 2021 Revenue Hardware $ 137,201 $ 87,372 $ 69,629 Professional services 35,473 32,301 22,732 Hosted services 64,164 48,148 18,276 Total revenue 236,838 167,821 110,637 Cost of revenue Hardware 108,780 83,289 70,448 Professional services 55,495 59,547 38,189 Hosted services 23,034 23,637 12,073 Total cost of revenue 187,309 166,473 120,710 Operating expense Research and development 28,805 29,422 21,572 Sales and marketing 19,209 20,872 14,017 General and administrative 44,674 55,305 25,990 Total operating expense 92,688 105,599 61,579 Loss from operations ( 43,159 ) ( 104,251 ) ( 71,652 ) Interest income (expense), net 8,580 1,946 ( 249 ) Other (expense) income, net ( 116 ) 595 55 Loss before income taxes ( 34,695 ) ( 101,710 ) ( 71,846 ) Income tax (benefit) expense ( 108 ) ( 5,388 ) 115 Net loss $ ( 34,587 ) $ ( 96,322 ) $ ( 71,961 ) Other comprehensive loss Foreign currency translation adjustment ( 40 ) ( 185 ) ( 226 ) Comprehensive loss $ ( 34,627 ) $ ( 96,507 ) $ ( 72,187 ) Net loss per common share Basic and diluted $ ( 0.17 ) $ ( 0.49 ) $ ( 0.96 ) Weighted-average number of shares used in computing net loss per share Basic and diluted 200,700 195,575 74,721 See accompanying Notes to Consolidated Financial Statements. 57 SMARTRENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) 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, 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 - - 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 - - 198,525 20 615,281 ( 250,925 ) ( 176 ) 364,200 Stock-based compensation - - - - 13,271 - - 13,271 Issuance of common stock upon vesting of equity awards - - 2,259 - - - - - Tax withholdings related to net share settlement of equity awards - - ( 658 ) - ( 1,925 ) - - ( 1,925 ) Exercise of options - - 3,035 - 913 - - 913 Net settlement related to exercise of options - - ( 148 ) - - - - - ESPP purchases - - 314 - 809 - - 809 Common stock warrants issued to customers as consideration - - ( 193 ) - - ( 193 ) Net Loss - - - - - ( 34,587 ) - ( 34,587 ) Other comprehensive loss - - - - - - ( 40 ) ( 40 ) Balance, December 31, 2023 - $ - 203,327 $ 20 $ 628,156 $ ( 285,512 ) $ ( 216 ) $ 342,448 See accompanying Notes to Consolidated Financial Statements. 58 SMARTRENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the years ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ ( 34,587 ) $ ( 96,322 ) $ ( 71,961 ) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 5,533 4,262 463 Amortization of debt discount - - 14 Asset Impairment - 4,441 - Non-employee warrant expense ( 193 ) 289 931 Provision for warranty expense 2,135 ( 784 ) 7,634 Loss on extinguishment of debt - - 27 Non-cash lease expense 1,104 1,405 621 Stock-based compensation related to acquisition 109 811 812 Stock-based compensation 13,162 12,905 7,319 Compensation expense related to acquisition 2,057 5,042 - Change in fair value of earnout related to acquisition 412 310 - Deferred tax benefit - ( 5,720 ) - Non-cash interest expense 139 107 11 Provision for excess and obsolete inventory 2,494 117 ( 39 ) Provision for doubtful accounts 819 242 226 Change in operating assets and liabilities Accounts receivable ( 177 ) ( 15,943 ) ( 23,969 ) Inventory 31,689 ( 42,811 ) ( 15,778 ) Deferred cost of revenue 13,003 ( 9,880 ) ( 9,315 ) Prepaid expenses and other assets 838 5,570 ( 11,284 ) Accounts payable ( 3,484 ) 12,446 3,811 Accrued expenses and other liabilities ( 11,046 ) 3,243 1,605 Deferred revenue ( 16,800 ) 43,691 38,945 Lease liabilities ( 1,226 ) ( 1,254 ) ( 449 ) Net cash provided by (used in) operating activities 5,981 ( 77,833 ) ( 70,376 ) CASH FLOWS FROM INVESTING ACTIVITIES Payments for SightPlan acquisition, net of cash acquired - ( 129,676 ) - Payments for iQuue acquisition, net of cash acquired - - ( 5,902 ) Payments for investment in non-affiliate ( 2,250 ) - - Purchase of property and equipment ( 147 ) ( 1,113 ) ( 1,471 ) Payment for loan receivable - - ( 2,000 ) Capitalized software costs ( 3,626 ) ( 3,204 ) - Net cash used in investing activities ( 6,023 ) ( 133,993 ) ( 9,373 ) CASH FLOWS FROM FINANCING ACTIVITIES Payment on term loan - - ( 4,861 ) Payments of senior revolving facility transaction costs - - ( 658 ) Proceeds from warrant exercise - 3 5 Proceeds from options exercise 913 186 - Proceeds from ESPP purchases 809 1,125 - Taxes paid related to net share settlements of stock-based compensation awards ( 1,925 ) ( 4,045 ) - Convertible preferred stock issued - - 35,000 Payments of convertible stock transaction costs - - ( 207 ) Proceeds from business combination and private offering - - 500,628 Payments for business combination and private offering transaction costs - ( 70 ) ( 55,981 ) Payment of earnout related to acquisition ( 1,702 ) - - Net cash (used in) provided by financing activities ( 1,905 ) ( 2,801 ) 473,926 Effect of exchange rate changes on cash and cash equivalents ( 57 ) ( 264 ) ( 191 ) Net decrease (increase) in cash, cash equivalents, and restricted cash ( 2,004 ) ( 214,891 ) 393,986 Cash, cash equivalents, and restricted cash - beginning of period 217,713 432,604 38,618 Cash, cash equivalents, and restricted cash - end of period $ 215,709 $ 217,713 $ 432,604 Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets Cash and cash equivalents $ 215,214 $ 210,409 $ 430,841 Restricted cash, current portion 495 7,057 1,268 Restricted cash, included in other long-term assets - 247 495 Total cash, cash equivalents, and restricted cash $ 215,709 $ 217,713 $ 432,604 See accompanying Notes to Consolidated Financial Statements. 59 SMARTRENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (in thousands) For the years ended December 31, 2023 2022 2021 Supplemental disclosure of cash flow information Interest paid $ 97 $ 146 $ 254 Cash paid for income taxes 78 197 14 Schedule of non-cash investing and financing activities Accrued property and equipment at period end 9 110 25 Contingent consideration - - 5,230 Acquisition consideration held in escrow - - 1,021 Conversion of convertible preferred stock to common stock - - 146,225 See accompanying Notes to Consolidated Financial Statements. 60 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 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, 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, following which its shares began trading on the Nasdaq National Market. 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. 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 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 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 61 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 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 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, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021 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. Immaterial Restatement of Prior Period Financial Statements Subsequent to the issuance of the Company’s financial statements for the year ended December 31, 2022, the Company’s management identified an error in the classification of cash paid for capitalized software costs that had previously been included in operating activities but should have been included in investing activities within the statement of cash flows. As a result, the accompanying consolidated statement of cash flows for the year ended December 31, 2022 has been restated from amounts previously reported. For the year ended December 31, 2021, no such costs were paid, thus, no restatement was required. Management determined that the error was not material to previously issued financial statements. The following table presents the effects of the restatement to the Company’s consolidated statement of cash flows for the year ended December 31, 2022. As Previously Reported Adjustment As Restated Cash Flows from Operating Activities: Change in Prepaid expenses and other Assets $ 2,366 $ 3,204 $ 5,570 Net cash used in operating activities ( 81,037 ) 3,204 ( 77,833 ) Cash Flows from Investing Activities: Capitalized software costs - ( 3,204 ) ( 3,204 ) Net cash used in investing activities $ ( 130,789 ) $ ( 3,204 ) $ ( 133,993 ) 62 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Foreign Currency SmartRent, Inc.'s functional and reporting currency is United States Dollars (“USD”) and its foreign subsidiaries have a functional currency other than USD. Financial position and results of operations of the Company's international subsidiaries 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. Use of Estimates The preparation of financial statements in conformity with 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, stand-alone selling price of items sold, and certain assumptions used in the valuation of equity awards, including the estimated fair value of common stock warrants, and assumptions used to estimate the fair value of stock-based compensation expense. Actual results could differ materially from those estimates. Acquisitions In March 2022, the Company purchased all of the outstanding equity interests of 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. 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 in an acquisition that meets the definition of a business combination, for which the acquisition method of accounting was used. 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. The acquisition-related costs, such as professional fees, were excluded from the consideration transferred and 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. 63 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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 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 unvested common shares subject to repurchase do not have a contractual obligation to share in losses. 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. 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 $ 1,361 and $ 606 as of December 31, 2023, and December 31, 2022, 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 $ 819 , $ 242 , and $ 226 for the years ended December 31, 2023, 2022, and 2021, respectively. There were no material write-offs of accounts receivable for the years ended December 31, 2023, 2022, and 2021. 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 the relationship and the prior collection 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. 64 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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. 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 For the years ended December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 December 31, 2021 Customer A * 30 % 12 % 15 % 12 % Customer B * * * 12 % 12 % Customer C 18 % * 12 % * * Customer D 13 % * * * * * 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. In August 2023 the Company entered into the Agreement with ADI, pursuant to which, ADI will serve as the Company's non-exclusive hardware fulfillment partner throughout the United States, Canada, and Puerto Rico. In connection with the Agreement, the Company has agreed to transfer certain of its inventory to ADI, which ADI will use to fulfill the Company's sales in exchange for cash. The Company is subject to certain buy back provisions relating to the transferred inventory. As of December 31, 2023, the Company recorded $ 851 in connection with the buy back provision, which is recorded in other current liabilities on the balance sheet. The Company retains control of the inventory transferred to ADI and continues to recognize the inventory on the balance sheet. Revenue is recognized at a point in time when the inventory is shipped to the customer. No revenue is recognized when inventory is transferred to ADI. 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 as of September 30 to determine if the carrying value is less than the fair value. The Company will conduct additional tests between annual tests if there are indications of potential g oodwill impairment. No goodwill impairment has been recorded as of December 31, 2023 and December 31, 2022. Intangible Assets The Company recorded intangible assets with finite lives, including customer relationships and developed technology, as a result of acquisitions made in prior years. 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 follows. Estimated useful life (in years) Trade name 5 Customer relationships 10 - 13 Developed technology 1 - 7 Property and Equipment, net 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, 2023, 2022 and 2021 was $ 26 , $ 50 and $ 15 , respectively, and is included in general and administrative expense in the accompanying Consolidated Statements of Operations and Comprehensive Loss. 65 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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. 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 i s 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, 2023, 2022 and 2021, warranty expense included in cost of hardware revenue was $ 2,142 , $ 852 and $ 8,305 , respectively. As of December 31, 2023, and December 31, 2022, the Company’s warranty allowance was $ 2,215 and $ 2,277 , 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, 2023, and December 31, 2022, $ 864 and $ 1,687 , respectively, is included in the Company’s warranty allowance related to the remaining cost of replacement for this identified battery deficiency. 66 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) During the year ended December 31, 2023, the Company identified a deficiency with the firmware and sensor accuracy of certain hardware sold and has included an estimate of the expected cost to update the related firmware and hardware. As of December 31, 2023, $ 410 is included in the Company’s warranty allowance related to the remaining cost to perform the firmware and hardware updates. As of December 31, 2023 December 31, 2022 Warranty reserve beginning balance $ 2,277 $ 6,106 Non-recurring warranty items incurred 1,746 - Warranty accrual (reversal) for completed projects 327 ( 784 ) Warranty settlements ( 2,135 ) ( 3,045 ) Warranty reserve ending balance $ 2,215 $ 2,277 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, 2023 or 2022. 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. 67 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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 software (“Hosted Services”). Included in these contracts are centrally connected devices ("Hub Devices"), which integrate the Company’s enterprise software with third party smart devices. Historically, the Company only sold non-distinct Hub Devices which only functioned with a subscription to its software. During the year ended December 31, 2022, the Company began shipping distinct Hub Devices. Non-distinct Hub Devices are recognized as a single performance obligation with the Company’s 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 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 software. Payments are received by the Company by credit card, check or automated clearing house 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. • 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. 68 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) • 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 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 software applications including access controls, asset monitoring and related services. These subscription arrangements have contractual terms ranging from one-month to eight -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 . 69 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 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, 2023, the Company had capitalized $ 7,064 of research and development costs in other long-term assets on the Consolidated Balance Sheets, of which $ 6,163 remained to be amortized. As of December 31, 2022, the Company had capitalized $ 3,145 of research and development costs in other long-term assets on the Consolidated Balance Sheets, of which $ 3,066 remains to be amortized. During the years ended December 31, 2023 and 2022, $ 822 and $ 79 of amortization expense related to capitalized research and development was recorded in research and development expenses on the Consolidated Statements of Operations and Comprehensive Loss, respectively. There was no such amortization expense recorded during the year ended December 31, 2021. Advertising Advertising costs are expensed as incurred and recorded as a component of sales and marketing expense. The Company incurred $ 432 , $ 292 and $ 801 of advertising expenses for the years ended December 31, 2023, 2022 and 2021, 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 $ 8,280 and $ 8,096 of assets outside the United States at December 31, 2023 , and December 31, 2022, respectively. 70 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Recent Accounting Guidance Recent Accounting Guidance Not Yet Adopted In November 2023, the Financial Standards Accounting Board (FASB) issued Accounting Standards Update (ASU) No. 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU updates the annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and for interim periods beginning after December 15, 2024. Early adoption is also permitted. The Company is currently evaluating the potential effect that the updated standard will have on the consolidated financial statement disclosures. In December 2023, the FASB issued ASU No. 2023-09 - Income Taxes (Topics 740): Improvements to Income Tax Disclosures. This ASU requires the expansion of disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the potential effect that the updated standard will have on the consolidated financial statement disclosures. Recently Adopted Accounting Guidance In June 2016, the FASB issued 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 requirement to disclose credit quality indicators by year or origination is not applicable to trade receivables due in one year or less that result from revenue transactions within the scope of ASC 606. The Company adopted ASU 2016-13 effective January 1, 2023 using the modified-retrospective approach. The adoption of this guidance did no t have a material impact on the Company's consolidated financial statements. 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, 2023 As of December 31, 2022 Assets on the Consolidated Balance Sheets Carrying Value Unrealized Losses Fair Value Carrying Value Unrealized Losses Fair Value Cash and cash equivalents Level 1 $ 215,214 $ - $ 215,214 $ 210,409 $ - $ 210,409 Restricted cash Level 1 495 - 495 7,304 - $ 7,304 Total $ 215,709 $ - $ 215,709 $ 217,713 $ - $ 217,713 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, 2023 As of December 31, 2022 Liabilities on the Consolidated Balance Sheets Carrying Value Fair Value Carrying Value Fair Value Acquisition earnout payment Level 3 $ 4,250 $ 4,250 $ 5,540 $ 5,540 Total liabilities $ 4,250 $ 4,250 $ 5,540 $ 5,540 71 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 year ended December 31, 2023 and the year ended December 31, 2022 are as follows. As of December 31, 2023 December 31, 2022 Balance at beginning of period $ 5,540 $ 5,230 Payment of earnout in connection with the iQuue acquisition ( 1,702 ) - Change in fair value of earnout 412 310 Balance at end of period $ 4,250 $ 5,540 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, 2023 and December 31, 2022. During the year ended December 31, 2023 the Company determined there was a $ 412 increase in the fair value of the earnout, primarily due to a decreased payment term as the Company is one year closer to the payout date. During the year ended December 31, 2022, there was a $ 310 increase in the fair value of the earnout, primarily due to a decreased payment term as the Company gets closer to the payout date. The Company recorded these adjustments in general and administrative expense on the Consolidated Statement of Operations and Comprehensive Loss. See Note 13 for more information regarding the earnout payment. The following table sets forth the weighted-average assumptions used to estimate the fair value of the earnout payment as of December 31, 2023 and December 31, 2022. As of December 31, 2023 December 31, 2022 Discount Rate 10.50 % 9.80 % Volatility 42.00 % 42.00 % NOTE 4. REVENUE AND DEFERRED REVENUE Disaggregation of Revenue In the following tables, revenue is disaggregated by primary geographical market, type of revenue, and SmartRent Solution. For the years ended December 31, 2023 2022 2021 Revenue by geography United States $ 235,553 $ 165,795 $ 108,072 International 1,285 2,026 2,565 Total revenue $ 236,838 $ 167,821 $ 110,637 For the years ended December 31, 2023 2022 2021 Revenue by type Hardware $ 137,201 $ 87,372 $ 69,629 Professional services 35,473 32,301 22,732 Hosted services 64,164 48,148 18,276 Total revenue $ 236,838 $ 167,821 $ 110,637 72 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) For the years ended December 31, 2023 2022 2021 (dollars in thousands) SmartRent Solutions Hardware Professional Services Hosted Services Total 2023 Hardware Professional Services Hosted Services Total 2022 Hardware Professional Services Hosted Services Total 2021 Smart Communities Solutions Smart Apartments $ 130,894 $ 30,546 $ 49,696 $ 211,135 $ 82,799 $ 30,419 $ 37,605 $ 150,823 $ 64,393 $ 22,082 $ 17,458 $ 103,933 Access Control 3,607 3,527 912 8,047 3,440 1,799 316 5,555 1,967 342 30 2,339 Community WiFi 395 996 688 2,078 179 44 257 480 657 273 13 943 Other 2,305 404 1,534 4,243 954 39 1,537 2,529 2,612 35 775 3,422 Smart Operations Solutions - - 11,334 11,334 - - 8,433 8,433 - - - - Total Revenue $ 137,201 $ 35,473 $ 64,164 $ 236,838 $ 87,372 $ 32,301 $ 48,148 $ 167,821 $ 69,629 $ 22,732 $ 18,276 $ 110,637 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 were recorded as deferred revenue and recognized over their 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. For the years ended December 31, 2023 2022 Deferred revenue balance as of January 1 $ 139,948 $ 95,597 Revenue recognized from balance of deferred revenue at the beginning of the period ( 47,919 ) ( 25,934 ) Revenue deferred during the period 71,243 111,861 Revenue recognized from revenue originated and deferred during the period ( 40,112 ) ( 41,576 ) Deferred revenue balance as of December 31 $ 123,160 $ 139,948 As of December 31, 2023, the Company expects to recognize 56 % of its total deferred revenue within the next 12 months , 21 % of its total deferred revenue between 13 and 36 months , 20 % between 37 and 60 months , and the remainder is expected to be recognized beyond five years . Contra cts 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, 2023 and 2022 are $ 39,195 and $ 39,932 , respectively, 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. 73 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) NOTE 5. OTHER BALANCE SHEET INFORMATION Inventory consisted of the following. As of December 31, 2023 December 31, 2022 Finished Goods $ 41,206 $ 74,276 Raw Materials 369 1,449 Total inventory $ 41,575 $ 75,725 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, 2023 and 2022, the Company recorded write-downs of $ 2,837 and $ 117 , respectively. Prepaid expenses and other current assets consisted of the following. As of December 31, 2023 December 31, 2022 Prepaid expenses $ 7,144 $ 5,042 Other current assets 2,215 4,140 Total prepaid expenses and other current assets $ 9,359 $ 9,182 Property and equipment, net consisted of the following. As of December 31, 2023 December 31, 2022 Computer hardware $ 2,242 $ 2,192 Leasehold improvements 717 698 Warehouse and other equipment 748 632 Furniture and fixtures 146 163 Property and equipment 3,853 3,685 Less: Accumulated depreciation ( 2,453 ) ( 1,616 ) Total property and equipment, net $ 1,400 $ 2,069 Depreciation and amortization expense on all property, plant and equipment was $ 837 , $ 816 and $ 463 during the years ended December 31, 2023, 2022 and 2021, respectively. Intangible assets, net consisted of the following. As of December 31, 2023 December 31, 2022 Gross Accumulated Amortization Net Gross Accumulated Amortization Net Customer relationships $ 22,990 $ ( 4,001 ) $ 18,989 $ 22,990 $ ( 1,778 ) $ 21,212 Developed technology 10,600 ( 2,911 ) 7,689 10,600 ( 1,440 ) 9,160 Trade name 900 ( 329 ) 571 900 ( 149 ) 751 Total intangible assets, net $ 34,490 $ ( 7,241 ) $ 27,249 $ 34,490 $ ( 3,367 ) $ 31,123 74 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Amortization expense on all intangible assets was $ 3,874 and $ 3,367 for the years ended December 31, 2023 and 2022, respectively. There was no amortization expense for the year ended December 31, 2021 as the assets were acquired on December 31, 2021 or thereafter. Total future amortization for finite-lived intangible assets is estimated as follows. Amortization Expense 2024 $ 3,873 2025 3,873 2026 3,873 2027 3,734 2028 3,693 Thereafter 8,203 Total $ 27,249 Other long-term assets consisted of the following. As of December 31, 2023 December 31, 2022 Capitalized software costs, net $ 5,632 $ 3,066 Operating lease - ROU asset, net 2,550 3,968 Investment in non-affiliate 2,250 - Restricted cash, long-term portion - 247 Other long-term assets 1,816 2,240 Total other long-term assets $ 12,248 $ 9,521 Amortization expense on capitalized research and development costs was $ 822 and $ 79 for the years ended December 31, 2023 and 2022, respectively, which is primarily related to capitalized software costs and was recorded in research and development expenses on the Consolidated Statements of Operations and Comprehensive Loss. There was no such amortization expense recorded during the year ended December 31, 2021. In December 2023, the Company invested $ 2,250 in a non-affiliated, privately held entity, under a Simple Agreement for Future Equity ("SAFE") agreement. The non-affiliated entity provides support and consultation for consumers looking to manage and upgrade the technology within their home. The Company’s investment in the SAFE is recorded using the cost method of accounting and included under other long-term assets on the Consolidated Balance Sheets, as it is not readily convertible into cash. If the Company identifies factors that may be indicative of impairment the Company will review the investment for impairment. For the year ended December 31, 2023, the Company did not identify any factors indicative of impairment. Accrued expenses and other current liabilities consisted of the following. As of December 31, 2023 December 31, 2022 Accrued compensation costs $ 10,272 $ 14,157 Accrued expenses 6,674 8,571 Warranty allowance 2,215 2,277 Other 5,815 9,391 Total accrued expenses and other current liabilities $ 24,976 $ 34,396 75 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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, 2023. 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, 2023, 2022 and 2021, the Company recorded $ 136 , $ 147 and $ 11 , respectively, of amortization expense in connection with these costs, as a component of interest expense on the Consolidated Statements of Operations and Comprehensive Loss. 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, 2023, 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 years ended December 31, 2023 and 2022, the facility fee totaled $ 188 and $ 190 , respectively. There were no facility fees recorded during the year ended December 31, 2021. 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, 2023, 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, 2023 and December 31, 2022, there was no outstanding principal amount under the Senior Revolving Facility. 76 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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 148 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 of December 31, 2023, there are no preferred stock issued or outstanding. 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 . Warrants As of December 31, 2023, warrants issued as consideration to certain customers to purchase 3,663 shares of Common Stock at $ 0.01 per share remain outstanding. The warrants vest dependent on the number of installed units, as defined by the warrant agreements, purchased by the customer with certain measurement periods which expire in February 2024 . The fair value of the vested 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. During the years ended December 31, 2022 and 2021, the Company recorded $ 72 and $ 121 , respectively, as contra-revenue in the Consolidated Statement of Operations and Comprehensive Loss related to these warrants. As of December 31, 202 3, the Company determined, based on the count of installed units, the number of warrants to vest would be zero and removed $ 193 from additional paid-in-capital and contra-revenue on the accompanying Consolidated Balance Sheets and Consolidated Statements of Operations and Comprehensive Loss. As of December 31, 2023 , warrants issued to a former investor to purchase 1,874 shares of Common Stock were fully vested and exercised. The warrants represented compensation paid for marketing services provided by the investor and was accounted for using stock-based compensation guidance. The warrants vested based on the number of installed units attained over a measurement period. The warrants fully vested during the three months ended March 31, 2022 and 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, the Company recognized $ 217 and $ 810 of sales and marketing expens e related to these warrants. No such marketing expense was recorded during the year ended December 31, 2023. 77 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 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, 2023, 2022 and 2021, no sales and marketing expense related to these warrants was recorded 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 awards in the form of stock options and restricted stock purchase rights. Awards granted as stock options under the 2018 Stock Plan generally expire no later than 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. 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 issue d was approximately $ 21.55 per share and the total stock-based compensation expense to be amortized over the vesting period is $ 33,033 . Effective upon the Business Combination in August 2021, the 2018 Stock Plan was replaced by the 2021 Plan. The 2018 Stock Plan continues to govern the terms and conditions of the outstanding awards previously granted thereunder. No new awards will be granted out of the 2018 Stock Plan. 2021 Equity Incentive Plan In connection with the Business Combination, the Board approved and implemented the SmartRent, Inc. 2021 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. 78 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The 2021 Plan authorizes the administrator of the 2021 Plan (generally, the Board or its 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. Non-employee board member RSUs generally will vest either over one year or three years . The RSUs and options granted to employees are generally subject to a four-year vesting schedule and all vesting generally shall be subject to the recipient’s continued employment with the Company or its subsidiaries through the applicable vesting dates. The table below summarizes the activity pursuant to the 2021 Plan, for the years ended December 31, 2023, 2022, and the shares available for future issuances as of December 31, 2023, 2022 and 2021. Shares Available for Future Issuance Shares available as of December 31, 2021 15,074 Stock options issued, net ( 175 ) RSUs issued, net ( 2,045 ) Shares available as of December 31, 2022 12,854 Stock options issued, net ( 2,704 ) RSUs issued, net ( 1,840 ) Shares available as of December 31, 2023 8,310 The table below summarizes the activity related to stock options, pursuant to the 2018 Plan and 2021 Plan, for the years ended December 31, 2023 and 2022. Options Outstanding Number of Options Weighted- Average Exercise Price ($ per share) Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value 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 Granted 3,299 $ 2.84 Exercised ( 3,035 ) $ 0.47 Forfeited ( 777 ) $ 4.31 December 31, 2023 9,158 $ 1.21 6.81 $ 18,112 Exercisable options as of December 31, 2023 5,940 $ 0.52 6.03 $ 15,866 79 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) During the years ended December 31, 2023, 2022 and 2021, stock-based compensation expense of $ 1,654 , $ 662 and $ 906 , respectively, was recognized in connection with the outstanding options. As of December 31, 2023, there is $ 4,457 of unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 3.0 years. The table below summarizes the activity related to RSUs, pursuant to the 2018 Plan and 2021 Plan, for the years ended December 31, 2023 and 2022. Restricted Stock Units Number of Restricted Stock Units Weighted Average Grant Date Fair Value (per share) 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 Granted 2,718 $ 2.94 Vested or distributed ( 2,260 ) $ 5.55 Forfeited ( 1,490 ) $ 4.27 December 31, 2023 4,461 $ 4.24 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, 2023, 2022 and 2021 respectively, stock-based compensation expense of $ 11,273 , $ 11,955 and $ 6,413 was recognized in connection with the vesting of all RSUs. As of December 31, 2023, there is $ 16,623 of unrecognized compensation expense related to restricted stock units, which is expected to be recognized over a weighted-average period of 1.1 years. Employee Stock Purchase Plan The Company has the ability to initially issue up to 2,000 shares of Common Stock under the 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. The table below summarizes the activity related to the ESPP for the years ended December 31, 2023 and 2022. Shares Available December 31, 2021 2,000 Annual additions to the plan 1,939 Shares purchased ( 208 ) December 31, 2022 3,731 Annual additions to the plan 1,985 Shares purchased ( 314 ) December 31, 2023 5,402 80 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) The ESPP allows employees to purchase shares of the Company's Class A Common Stock at 85 percent of its quoted market price. During the years ended December 31, 2023 and 2022, stock-based compensation expense of $ 235 and $ 288 , respectively, was recognized in connection with the ESPP. No expense related to the ESPP was recognized during the year ended December 31, 2021. 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 years ended December 31, 2023 and 2022. During the years ended December 31, 2023 and 2022, there were options granted covering 3,299 and 175 shares, respectively. There were no options granted during the year ended December 31, 2021. For the years ended December 31, 2023 2022 Risk free interest 3.55 % - 4.32 % 1.47 % Dividend yield 0.00 % 0.00 % Expected volatility 75.00 % 58.80 % Expected life (years) 6.08 - 6.25 6.08 The Company recorded stock-based compensation expense as follows. For the years ended December 31, 2023 2022 2021 Cost of revenue $ 1,026 $ - $ - Research and development 3,664 3,668 2,340 Sales and marketing 635 1,396 1,379 General and administrative 7,946 8,652 4,412 Total $ 13,271 $ 13,716 $ 8,131 During the years ended December 31, 2023, 2022 and 2021, stock-based compensation expense of $ 109 , $ 811 and $ 812 , respectively, 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. NOTE 9. INCOME TAXES The Company's components of income tax (benefit) expense consisted of the following. Years Ended December 31, Income Tax Provision 2023 2022 2021 Federal $ ( 80 ) $ - $ - Foreign 28 99 133 State and local 117 233 - Current provision 65 332 133 Federal ( 173 ) ( 4,390 ) - Foreign - ( 3 ) ( 18 ) State and local - ( 1,327 ) - Deferred (benefit) provision ( 173 ) ( 5,720 ) ( 18 ) Income tax (benefit) expense $ ( 108 ) $ ( 5,388 ) $ 115 81 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 2023 2022 2021 U.S. statutory rate 21.0 % 21.0 % 21.0 % State rate net of fed benefit 2.7 % 3.4 % 8.1 % Change in valuation allowance ( 28.3 %) ( 18.2 %) ( 33.8 %) SPAC transaction costs 0.0 % 0.0 % 3.7 % Stock compensation 0.0 % 2.0 % 0.0 % Permanent adjustments ( 1.3 %) ( 0.2 %) ( 0.6 %) Deferred Adjustments 4.4 % ( 2.8 %) 0.0 % Other 1.7 % 0.1 % 1.4 % Effective Tax Rate 0.2 % 5.3 % ( 0.2 %) 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, 2023 2022 Attributes Deferred tax asset Federal NOLs $ 42,166 $ 38,326 State NOLs 10,518 9,782 Deferred revenue 14,551 14,021 Capitalized R&D 9,857 7,973 Other deferred tax assets 7,968 9,187 Total deferred tax assets 85,060 79,289 Less: Valuation allowance ( 71,490 ) ( 61,683 ) Total net deferred tax asset $ 13,570 $ 17,606 IRC 481(a) Adjustment ( 714 ) ( 324 ) Deferred costs of revenue ( 5,733 ) ( 8,960 ) Intangibles ( 6,208 ) ( 7,408 ) Other deferred tax liabilities ( 971 ) ( 1,142 ) Total deferred tax liabilities ( 13,626 ) ( 17,834 ) Net deferred tax liability $ ( 56 ) $ ( 228 ) 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, 2023 and 2022. The net valuation allowance increased by $ 9,807 from $ 61,683 to $ 71,490 in 2023. As of December 31, 2023, the Company had U.S. federal net operating losses of $ 3.7 million that begin to expire in 2032 and $ 200.9 million which will be carried forward indefinitely. As of December 31, 2023, the Company had $ 193.4 million of state net operating loss carryforwards that expire on varying dates. 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. 82 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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 provided 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). The income tax benefit on the Consolidated Statement of Operations and Comprehensive Loss is primarily related to the federal, state, and international taxes offset by a change in the valuation allowance. 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 2018. The Company is subject to Indian income tax examinations for all tax years beginning in 2021. 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, 2023 and 2022 is as follows (in thousands): As of December 31, 2023 2022 Unrecognized tax benefits - January 1 $ 23,252 $ 8,757 Gross increases - tax positions in prior period - - Gross decreases - tax positions in prior period ( 21,650 ) - Gross increases - tax positions in current period 2,215 14,495 Settlement - - Lapse of statute of limitations - - Unrecognized tax benefits - December 31 $ 3,817 $ 23,252 Unrecognized tax benefits - December 31 (tax-effected) $ 1,172 $ 6,658 The total balance of unrecognized tax benefits as of December 31, 2023 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, 2023. The Company expects the unrecognized tax benefits to reverse in full within the next 12 months. 83 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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. For the years ended December 31, 2023 2022 2021 Common stock options and restricted stock units 13,618 15,163 18,370 Common stock warrants 3,664 3,664 4,601 Shares subject to repurchase - 1,374 2,748 Total 17,282 20,201 25,719 NOTE 11. RELATED-PARTY TRANSACTIONS A member of the Board serves on the board of directors of a SmartRent customer. For the years ended December 31, 2023, 2022, and 2021, the Company earned revenue from this customer of $ 3,738 , $ 3,598 , and $ 3,831 , respectively. As of December 31, 2023, and 2022, the Company had receivables due from this customer of $ 1,352 and $ 287 , respectively. All business dealings with the customer were entered into in the ordinary course of business and the arrangements are on terms no more favorable than terms that would be available to unaffiliated third parties under the same or similar circumstances. During the years ended December 31, 2022 and 2021, respectively, the Company incurred marketing expenses of $ 217 and $ 810 in connection with the vesting of warrants held by a former investor (see Note 7). During the years ended December 31, 2022 and 2021, the Company incurred consulting expense of $ 20 and $ 110 related to services provided by companies in which one of the Company's former executives had control or significant influence. In March 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 at the time of the SightPlan acquisition held more than 5 % 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 Board. Further, RET did not assist the Company with any negotiations or participate in the Board discussions related to the SightPlan acquisition. As of December 31, 2023 , RET does no t hold any outstanding shares of the Company's Common Stock. NOTE 12. COMMITMENTS AND CONTINGE NCIES 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 5 months to 3.33 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 has chosen not 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, 2023. 84 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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 3.35 % at December 31, 2023. The weighted-average lease term was 2.4 years, 3.1 years and 2.8 years at December 31, 2023, 2022 and 2021, respectively. During the years ended, and as of December 31, 2023, 2022 and 2021 the Company had no finance leases. During the years ended December 31, 2023, 2022 and 2021 the Company incurred rent and other related occupancy expenses of $ 1,374 , $ 1,614 and $ 683 , respectively. Included in these amounts are $ 147 , $ 133 and $ 77 , 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. 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 2024 $ 1,572 2025 649 2026 496 2027 and thereafter 168 Total lease payments 2,885 Imputed interest ( 38 ) Total lease liability 2,847 Less: Lease liability, current portion 1,535 Lease liability, noncurrent $ 1,312 The Company had $ 2,550 and $ 3,968 of ROU assets, net of related amortization, related to its lease liabilities at December 31, 2023 and 2022, 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 $ 1,674 , $ 1,272 , and $ 603 for the years ended December 31, 2023, 2022, and 2021, respectively. 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 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. The parties are now engaging in discovery, and trial has been set for November 2024. 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 reco rded. The Company had no such accruals as of December 31, 2023 or December 31, 2022 . 85 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) NOTE 13. BUSINESS ACQUISITIONS SightPlan Acquisition In March 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 was contingent upon the continuous service of the employees, it was accounted for as post-combination expense and was recognized ratably over the service period of one year . During the year ended December 31, 2023, the Company distributed $ 5,976 in connection with this contingent consideration, including $ 216 for payroll taxes and retirement benefits. 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 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. 86 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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 $ 1,480 and $ 4,495 of compensation expense related to contingent consideration in connection with the SightPlan acquisition during the years ended December 31, 2023 and 2022, respectively. The Company recognized $ 196 and $ 771 of other non-recurring acquisition related costs that were expensed during the years ended December 31, 2023 and 2022, 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 $ 1,255 . The gross amount due under contracts for accounts receivable was $ 1,284 as of March 22, 2022. 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 were 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. 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 years ended December 31, 2023 and 2022, the Company recorded amortization expense of $ 3,622 and $ 2,806 , respectively, related to intangible assets. There was no such amortization expense recorded in the year ended December 31, 2021 as the acquisition occurred on March 22, 2022. These intangible assets are deductible over 15 years for income tax purposes. 87 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) Pro Forma Operating Results The Company’s Consolidated Balance Sheet as of December 31, 2023 and December 2022, and other financial statements presented herein for the three and years ended December 31, 2023 and 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, 2022. 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, 2022 or of the results that may occur in the future. For the years ended December 31, 2023 2022 2021 Revenues $ 236,838 $ 170,173 $ 119,310 iQuue Acquisition In December 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. 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, 2023, 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. During the years ended December 31, 2023 and 2022, the Company determined there was an increase of $ 412 and $ 310 , respectively, in the fair value of the earnout 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, 2023 and 2022 was $ 4,250 and $ 5,540 , 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, 2023 and 2022, the Company recognized $ 247 and $ 247 , respectively, of compensation expense in connection with this bonus. No such compensation expense was recorded during the year ended December 31, 2021. 88 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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 The Company recognized approximately $ 576 and $ 547 of compensation expense related to the iQuue acquisition during the years ended December 31, 2023 and 2022, respectively. No such compensation expense was recorded during the year ended December 31, 2021. The Company recognized $ 43 and $ 116 of other non-recurring acquisition related costs that were expensed during the years ended December 31, 2023 and 2022, respectively. No such non-recurring cost was recorded during the year ended December 31, 2021. 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 89 SMARTRENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 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 years ended December 31, 2023 and 2022, the Company recorded amortization expense of $ 253 and $ 562 , respectively, 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, 2023 and 2022, and other financial statements presented herein for the year ended December 31, 2023 and 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. 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, 2023 and through March 5, 2024, 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 2024, issuable shares of the Company’s Class A Common Stock under the ESPP increased by 2,000 shares. In January 2024, the Board of Directors approved 1,653 RSUs and 2,527 Option awards to certain employees under the 2021 Incentive Stock Plan. In January 2024, the Company made an earnout payment of $ 1,530 in connection with the iQuue acquisition. In January and February 2024, 542 shares of the Company's Class A Common Stock were issued to certain employees related to vested RSUs, exercised options, and ESPP purchases. In March 2024, the board of directors of the Company authorized the repurchase of up to $ 50,000 of the Company’s Class A common stock. Repurchases may be made from time to time through open market purchases or through privately negotiated transactions subject to market conditions, applicable legal requirements and other relevant factors. The repurchase program does not obligate the Company to acquire any particular amount of its Class A common stock and may be suspended at any time at the Company’s discretion. The timing and number of shares repurchased will depend on a variety of factors, including the stock price, business and market conditions, corporate and regulatory requirements, alternative investment opportunities, acquisition opportunities, and other factors. 90 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.