SmartRent, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Report. This discussion contains forward-looking statements that involve risks and uncertainties. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Risk Factors” and other parts of this Report. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview We are an enterprise real estate technology company that provides a comprehensive management platform designed for property owners, managers and residents. Our suite of products and services, which includes cloud-based SaaS solutions many of which are enabled by smart building hardware, provide seamless visibility and control over real estate assets. Our platform can lower operating costs, increase revenues, mitigate operational friction and protect assets for owners and operators, while providing a differentiated, elevated living experience for residents. Through a Hub Device, we enable the integration of our platform with third-party smart devices, our own hardware devices and other technology interfaces. We use an open-architecture, brand-agnostic approach that allows owners, operators, and residents to manage their smart home systems through a single connected interface. Our Smart Community solutions include software and devices that power (i) smart apartments and homes, (ii) access control for buildings, common areas, and rental units, (iii) community and resident WiFi, and other solutions such as asset protection and monitoring, parking management and self-guided tours. Our Smart Operations solutions include work order management, the automation of leasing and resident call handling, audit management, and the automation of the inspection process. We also have a professional services team that provides customers with training, installation, and support services. SmartRent is a category leader in the enterprise smart home solutions industry. As of December 31, 2024, we had 809,497 Units Deployed (as defined below) and over 650 customers, including many of the largest multifamily residential owners in the United States. As of that date, we believe our customers owned an aggregate of approximately 7.4 million rental units. This represents approximately 15% of the United States market for institutionally owned multifamily rental units and single-family rental homes. In addition to multifamily residential owners, our customers include some of the leading single-family rental homeowners, homebuilders, and iBuyers in the United States. Our Business Model We generate revenue primarily from sales of smart home systems that enable property owners and property managers to have visibility and control over assets, while providing all-in-one home control offerings for residents. Our revenue is generated from: (1) the direct sale to our customers of hosted services from monthly subscription fees collected from customers to provide access Hosted Services including access controls, asset monitoring, WiFi, and related services; (2) the sale and delivery of smart home devices, which generally consist of a Hub Device, door-locks, thermostats, sensors, and light switches ; and (3) installation and implementation of smart home devices that enable our Hosted Services. Subscription arrangements have contractual terms ranging from one month to ten years and the weighted average length of our recurring revenue contracts is 4.4 years. Key Factors Affecting Our Performance We believe that our success is dependent on many factors, including those further discussed below. Our operating results and cash flows are dependent upon a number of opportunities, challenges and other factors, including our ability to grow our customer base in a cost-effective manner, expand our hardware and hosted service offerings to generate increased revenue per Unit Deployed (as defined below), and provide high quality hardware products and hosted service applications to maximize revenue and improve the leverage of our business model. While these areas represent opportunities for us, they also represent challenges and risks that we must successfully address in order to operate our business. 40 Active Supply Chain Management We continue to experience improvements in the challenges related to the global supply chain. In prior periods, the increased demand for electronics as a result of the COVID-19 pandemic, U.S. trade relations with China and certain other factors in recent periods led to a global shortage of semiconductors, including Z‑wave chips, which are a central component of our Hub Devices. Due to this shortage in prior periods, we experienced Hub Device production delays, which affected our ability to meet scheduled installations and facilitate customer upgrades to our higher-margin Hub Devices. We also experienced shortages and shipment delays related to components for Access Control and made-to-order specialty locks. The incremental improvements in the global supply chain are evidenced by our reduction of backlogged Units Deployed for Access Control and made-to-order locks. Investing in Research and Development Our performance is significantly dependent on the investments we make in research and development, including our ability to attract and retain highly skilled research and development personnel. We must continually develop and introduce innovative new software services and hardware products, and integrate with third-party products and services, mobile applications and other new offerings. New Products, Features and Functionality We are evolving our business into a more diverse platform with new products, features and functionality that enhance the value of our smart home operating system. We have introduced a number of SaaS product enhancements and features, including Answer Automation and Work Management solutions, that streamline property management operations. We have also introduced Community WiFi, which provides communities with a private, device-dedicated WiFi network to power Hub Devices and other in-home smart devices, and Smart Package Room, which is a smart package management solution that transforms package visibility, reduces labor demands, optimizes storage space and enhances resident satisfaction. Our Smart Operations Solutions enhance our overall platform offering and customer value proposition by providing a comprehensive one-stop platform that broadens our support of property operations, enhancing the experience for residents, property owners and managers. We offer an open-API architecture that enables a myriad of third-party partner integrations, resulting in a multi-functional platform that enhances property management workflow efficiencies, empowers teams to get more done, elevates resident interactions, and improves resident living experiences. In the future, we intend to continue to release new products and solutions and enhance our existing products and solutions, and we expect that our operating results will be impacted by these releases. Category Adoption and Market Growth Our future growth depends in part on the continued consumer adoption of software and hardware products which improve the resident experience and the growth of this market. We need to deliver solutions that enhance the resident experience and deliver value to our customers, rental property owners and operators, as well as homebuilders and developers, by providing products and solutions designed to enhance visibility and control over assets while providing additional revenue opportunities. During the year ended December 31, 2024, we experienced headwinds to adoption as certain customers deferred capital expenditures, driven by broader macroeconomic conditions, which resulted in a decrease in Units Shipped and New Units Deployed. In addition, changes in our executive leadership and the structure of our sales organization have impacted sales and overall volumes. Recent Developments On July 30, 2024, we announced the departure of Lucas Haldeman, the Company’s Chief Executive Officer and Chairman of the Board, effective July 29, 2024. As part of the transition, Mr. Haldeman resigned as a member of the Board, effective July 29, 2024. We appointed Daryl Stemm, the Company’s Chief Financial Officer, as the Interim Principal Executive Officer, effective as of July 29, 2024. John Dorman, the Board’s lead independent director, was appointed Chairman of the Board, and the Board formed an Operating Committee of independent directors and a Management Committee of current executives to guide us through the transition period. On January 27, 2025, we announced the appointment of Michael Shane Paladin as President and Chief Executive Officer and member of the Board. Mr. Paladin’s employment commenced on February 24, 2025 (the "Start Date"). Mr. Paladin replaces Daryl Stemm who had been serving as Interim Principal Executive Officer since July 29, 2024. Mr. Stemm will continue to serve as our Chief Financial Officer. The Management Committee of SmartRent and the Operating Committee of the Board dissolved effective as of the Start Date. 41 Basis of Presentation The consolidated financial statements and accompanying notes included elsewhere in this Report are prepared in accordance with GAAP. Key Metrics We regularly monitor a number of operating metrics in order to evaluate our operating performance, identify trends affecting our business, formulate business plans, measure our progress and make strategic decisions. Our key metrics are not based on any standardized industry methodology and are not necessarily calculated in the same manner or comparable to similarly titled measures presented by other companies. Similarly, our key metrics may differ from estimates published by third parties or from similarly titled metrics of our competitors due to differences in methodology. The numbers that we use to calculate our key metrics are based on internal data. While these numbers are based on what we believe to be reasonable judgments and estimates for the applicable period of measurement, there are inherent challenges in measuring such information. We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. Units Deployed and New Units Deployed We define Units Deployed as the aggregate number of Hub Devices that have been installed (including customer self-installations) and have an active subscription as of a stated measurement date. We utilize the Units Deployed metric to assess the health of our business and measure the trajectory of our growth. We define New Units Deployed as the aggregate number of Hub Devices that were installed (including customer self-installations) and resulted in a new active subscription during a stated measurement period. Although our revenue is primarily driven by New Units Deployed and the number of Units Deployed, due to the expansion of our products and services that don't require a Hub Device, and Hub Device upgrades that do not result in net new active subscriptions, the correlation between New Units Deployed and revenue is not as strong as it was historically. Although the correlation has decreased, New Units Deployed is still an indicator of our ability to acquire new customers and expand our relationships with our current customers. As of December 31, 2024, 2023 and 2022, we had an aggregate of 809,497, 719,691 and 547,196 Units Deployed, respectively. For the years ended December 31, 2024, 2023 and 2022, we had 89,806, 172,495 and 207,711 New Units Deployed, respectively. Units Shipped We define Units Shipped as the aggregate number of Hub Devices that have been shipped to customers during a stated measurement period. Units Shipped is used to assess the trajectory of our growth and is an indicator of our ability to acquire new customers and expand our relationships with our current customers. However, we caution that Units Shipped also includes Hub Devices for upgrades and out of warranty replacements and may not be an indicator of New Units Deployed in future periods. For the years ended December 31, 2024, 2023 and 2022, we had 169,476, 226,722 and 200,169 Units Shipped, respectively. Units Booked We define Units Booked as the aggregate number of Hub Device units subject to binding orders executed during a stated measurement period that will result in a New Unit Deployed. We utilize the concept of Units Booked to measure estimated near-term resource demand and the resulting approximate range of post-delivery revenue that we will earn and record. Units Booked represent binding orders only. For the years ended December 31, 2024, 2023 and 2022 there were 121,670, 173,195 and 282,512 Units Booked, respectively. For the year ended December 31, 2024, ARR (as defined below) related to Units Booked was $8,410. Bookings We define Bookings as the contract value of hardware, professional services, and the first year of ARR for binding orders executed during a stated measurement period, including renewals and upgrades. We utilize Bookings to measure revenue expected to be earned in future periods from orders contracted during the current period. For the years ended December 31, 2024, 2023 and 2022, Bookings were $133,836, $158,453 and $242,957, respectively. 42 SaaS Revenue We define SaaS Revenue as monthly subscription revenue from fees paid by customers for access to one or more of SmartRent's software applications, including access controls, asset monitoring and related services, and our Community WiFi solution. We believe that SaaS Revenue growth demonstrates our ability to acquire new customers and to maintain and expand our relationships with existing customers. More specifically, we monitor our SaaS Revenue to assess the general health and trajectory of our Hosted Services business. Arrangements with customers do not provide the customer with the right to take possession of SmartRent's software at any time. Customers are granted continuous access to the services over the contractual period. As of December 31, 2024, approximately 35% of our ARR had prepaid payment terms. We believe that our customer base is inherently sticky given the barriers to entry associated with rolling out an integrated enterprise solution across a portfolio of rental units. For the years ended December 31, 2024, 2023 and 2022, we generated SaaS Revenue of $51.6 million, $41.1 million and $27.8 million, respectively. Annual Recurring Revenue We define ARR as the annualized value of our SaaS Revenue earned in the current quarter, which we calculate by taking the total amount of SaaS Revenue in the current quarter and multiplying that amount by four. We believe that ARR growth demonstrates our ability to acquire new customers and to maintain and expand our relationships with existing customers. More specifically, we monitor our ARR to assess the general health and trajectory of our Hosted Services business. As of December 31, 2024, 2023 and 2022, ARR was approximately $54.4 million, $46.2 million and $32.3 million, respectively. Hardware Average Revenue per Unit ("ARPU"), Professional Services ARPU, SaaS ARPU, and Units Booked SaaS ARPU We define Hardware ARPU as total hardware revenue during a given period divided by the total Units Shipped during the same period. Hardware ARPU is used to evaluate the effectiveness of our hardware pricing and assess our ability to market and sell our hardware offerings. For the years ended December 31, 2024, 2023 and 2022, Hardware ARPU was $489, $605 and $436 , respectively. We define Professional Services ARPU as total professional services revenue during a given period divided by the total New Units Deployed, excluding customer self-installations, during the same period. Professional Services ARPU is used to assess our ability to effectively price our installation services. During the year ended December 31, 2024, we updated the denominator of the calculation to exclude self-installations as self-installations don't materially contribute to professional services revenue. For the years ended December 31, 2024, 2023 and 2022, Professional Services ARPU was $344, $255 and $182, respectively, per the new definition of Professional Services ARPU. Under the previous definition, Professional Services ARPU was $209, $206 and $156 for the years ended December 31, 2024, 2023 and 2022, respectively. We define SaaS ARPU as total SaaS Revenue during a given period divided by the average aggregate Units Deployed in the same period divided by the number of months in the period. Average aggregate Units Deployed is calculated as the Units Deployed as of the current period plus the Units Deployed as of the previous period divided by two. SaaS ARPU is used to evaluate the effectiveness of our SaaS pricing and assess our ability to market and sell our various software solutions. For the years ended December 31, 2024, 2023 and 2022, SaaS ARPU was $5.63, $5.40 and $5.32 , respectively. We define Units Booked SaaS ARPU as the first year ARR for binding orders with Units Booked executed during the stated measurement period divided by the total Units Booked in the same period divided by the number of months in the period. Units Booked SaaS ARPU is used to evaluate the effectiveness of our SaaS pricing and assess our ability to market and sell our various software solutions for orders executed during the period. For the years ended December 31, 2024, 2023 and 2022, Units Booked SaaS ARPU wa s $6.44, $8.32 and $4.60 , respectively. Customer Churn We define Customer Churn as cancelled deployed units during the measurement period divided by Units Deployed as of the beginning of the measurement period. Cancelled deployed units are the previously deployed units that have been cancelled during the same measurement period in which a customer cancels all product subscriptions. Our Hosted Services growth is driven by our ability to retain our customers and minimize Customer Churn. Our Customer Churn for our Smart Communities Solutions is 0.07% for the year ended December 31, 2024 compared to 0.02% and 0.01% for the years ended December 31, 2023 and 2022, respectively. 43 Property Net Revenue Retention We define Property Net Revenue Retention as SaaS Revenue at the end of the current period related to properties which had SaaS Revenue at the end of the same period in the prior year, divided by SaaS Revenue at the end of the same period in the prior year for those same properties. Property Net Revenue Retention includes additions to revenue from price increases on existing products, additions of new products at existing properties and transfers of ownership, offset by any reductions in revenue caused by cancellations or downgrades. Property Net Revenue Retention was 101% as of December 31, 2024 compared to 105% as of December 31, 2023. Customer Net Revenue Retention We define Customer Net Revenue Retention as SaaS Revenue at the end of the current period related to customers which had SaaS Revenue at the end of the same period in the prior year, divided by SaaS Revenue at the end of the same period in the prior year for those same customers. A customer with SaaS Revenue is defined as an entity that has an active subscription during the stated period. Customer Net Revenue Retention includes additions to revenue from transfers of ownership, price increases on existing products and additions of new products at existing properties, offset by any reductions in revenue caused by cancellations or downgrades. Customer Net Revenue Retention was 111% as of December 31, 2024. 44 Components of Results of Operations Revenue We generate revenue primarily from sales of systems that consist of hardware devices, professional installation services and Hosted Services enabling property owners and property managers to have visibility and control over assets, while providing all-in-one home control offerings for residents. We record revenue as earned when control of these products and services is transferred to the customer in an amount that reflects the consideration we expect to collect for those products and services. The table below summarizes our revenue by solution. For the years ended December 31, 2024 2023 2022 (dollars in thousands) SmartRent Solutions Hardware Professional Services Hosted Services (1) Total 2024 Hardware Professional Services Hosted Services (1) Total 2023 Hardware Professional Services Hosted Services (1) Total 2022 Smart Communities Solutions Smart Apartments $ 74,754 $ 13,095 $ 57,335 $ 145,184 $ 130,894 $ 30,546 $ 49,696 $ 211,135 $ 82,799 $ 30,419 $ 37,605 $ 150,823 Access Control 3,791 2,378 1,722 7,891 3,607 3,527 912 8,047 3,440 1,799 316 5,555 Community WiFi 287 1,041 701 2,029 395 996 688 2,078 179 44 257 480 Other 4,012 2,289 2,100 8,401 2,305 404 1,534 4,243 954 39 1,537 2,529 Smart Operations Solutions - - 11,380 11,380 - - 11,334 11,334 - - 8,433 8,433 Total Revenue $ 82,844 $ 18,803 $ 73,238 $ 174,885 $ 137,201 $ 35,473 $ 64,164 $ 236,838 $ 87,372 $ 32,301 $ 48,148 $ 167,821 (1) For the years ended December 31, 2024, 2023, and 2022, Hosted services revenue for our Smart Apartments solution included hub amortization revenue of $21,600, $23,097, and $20,360, respectively. 45 Hardware Revenue We generate revenue from the direct sale to our customers of hardware smart home devices, which devices generally consist of a Hub Device, door-locks, thermostats, sensors, and light switches. These hardware devices provide features that function independently without subscription to our 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. Certain Hub Devices do not function independently without the subscription, and therefore, the revenue is recognized in Hosted Services revenue. We generally provide a one-year warranty period on hardware devices that are delivered and installed. We record the cost of the warranty as a component of cost of hardware revenue. Professional Services Revenue We generate professional services revenue from installing smart home hardware devices, which does not result in significant customization of the installed products and is generally performed over a period ranging from two to four weeks. Installations can be performed by our employees, can be contracted out to a third party with our employees managing the engagement, or can be performed by the customer. Professional services contracts are generally performed on a fixed-price basis and revenue is recognized over the period in which installations are completed. Hosted Services Revenue Hosted Services primarily consist of monthly subscription revenue earned from the fees collected from customers to provide access to one or more of our software applications including access controls, asset monitoring and related services. These subscription arrangements have contractual terms ranging from one month to ten years and include recurring fixed plan subscription fees. The weighted average length of our recurring revenue contracts is 4.4 years. Our arrangements do not provide the customer with the right to take possession of our 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. We sold certain Hub Devices, which only function with the subscription to our software applications and related hosting services ("non-distinct Hub Devices"). We consider those devices and hosting services subscription as a single performance obligation, and therefore we defer the recognition of revenue for those devices that are sold with application subscriptions. The estimated average in-service life of those devices is four years. When a Hub Device without independent functionality 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. We do not expect to deploy any more non-distinct Hub Devices. 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. We expect the cost of revenue to increase in absolute dollars in future periods. We record any change to cost of job performance and job conditions in the period during which the revision is identified. Hardware Cost of hardware revenue consists primarily of direct costs of products, Hub Devices, hardware devices and supplies purchased from third-party providers, shipping costs, warehouse facility (including depreciation and amortization of capitalized assets and right-of-use assets) and infrastructure costs, personnel-related costs associated with the procurement and distribution of our products and estimated warranty expenses together with the indirect cost of customer care and support. We expect an increase in cost of hardware revenue in absolute dollars in future periods. In 2019, the U.S. administration imposed significant changes to U.S. trade policy with respect to China. Tariffs have subjected certain SmartRent products manufactured overseas to additional import duties. The amount of the import tariff has changed numerous times based on action by the U.S. administration and new presidential administration recently announced additional tariffs on imports from Canada, Mexico and China. Such actions may increase our cost of hardware revenue and reduce our hardware revenue margins in the future. We continue to monitor the change in tariffs. 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 installation of our products, and indirect costs that are also primarily personnel-related expenses in connection with training of and ongoing support for customers and residents. 46 Hosted Services Cost of Hosted Services revenue consists primarily of the amortization of the direct costs of certain Hub Devices consistent with the revenue recognition period noted above in “Hosted Services Revenue” and infrastructure costs associated with providing our software applications together with the indirect cost of customer care and support over the life of the service arrangement. In future periods, we expect the cost of Hosted Services revenue to increase in absolute dollars at a rate that is lower than the corresponding increase in Hosted Services revenue. Operating Expenses Research and Development Research and development expenses consist primarily of personnel-related costs directly associated with our research and development activities. Our research and development efforts are focused on enhancing and developing additional functionality for our existing products and on new product development. We account 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, which generally ranges from three to five years depending on the type of application. Costs incurred and capitalized during the product development stage generally include the costs of software configuration, coding, and testing. Such costs primarily include payroll and payroll-related expenses for employees directly involved in the product development. We expense preliminary evaluation costs as they are incurred before technological feasibility is achieved, as well as post development implementation and operation costs, such as training, maintenance and minor upgrades. We begin amortizing capitalized costs when a project is ready for its intended use, and we periodically reassess the estimated useful life of a project considering the effects of obsolescence, technology, competition and other economic factors which may result in a shorter remaining life. We believe our research and development costs will increase in absolute dollars as we increase our investment in product development to broaden the capabilities of our solutions and introduce new products and features. Sales and Marketing Expenses Our sales and marketing expenses consist of costs directly associated with our sales and marketing activities, which primarily include personnel-related costs, sales commissions, marketing programs, trade shows, and promotional materials. Our sales and marketing expenses may increase over time as we hire additional sales and marketing personnel, increase our marketing activities, grow our operations, and continue to build brand awareness. General and Administrative Expenses General and administrative expenses consist primarily of personnel-related costs associated with our general and administrative organization, professional fees for legal, accounting and other consulting services, office facility, insurance, information technology costs, and expenses incurred as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and stock exchange listing requirements, additional insurance expense, investor relations activities and other administrative and professional services. We may also increase the size of our general and administrative staff in order to support the growth of our business but at a rate that is lower than the corresponding increase in total revenue. Other Income/Expenses Other income/expenses consist primarily of interest income, net of interest expense, foreign currency transaction gains and losses, and other income related to the operations of foreign subsidiaries. Interest expense is recorded in connection with our various debt facilities. Foreign currency transaction gains and losses relate to the impact of transactions denominated in a foreign currency other than the U.S. dollar. If we continue to expand our international operations, our exposure to fluctuations in foreign currencies has increased, which we expect to continue. Provision for Income Taxes The income tax expense on the Consolidated Statement of Operations and Comprehensive Loss is primarily related to state minimum and franchise taxes. 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. 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. 47 Results of Operations for the Years Ended December 31, 2024, 2023 and 2022 The results of operations presented below should be reviewed together with the consolidated financial statements and notes included elsewhere in this Report. The following table summarizes our historical consolidated results of operations data for the periods presented. The period-to-period comparison of operating results is not necessarily indicative of results for future periods. All dollars are in thousands unless otherwise stated. For comparison of the fiscal years ended December 31, 2023 and 2022, refer to Part II, Item 7 "Management's discussion and analysis of financial condition and results of operations" on Form 10-K for our fiscal year ended December 31, 2023 filed with the SEC on March 5, 2024, under the subheading "Comparison of the years ended December 31, 2023 and 2022". Years ended December 31, 2024 vs 2023 Change 2023 vs 2022 Change 2024 2023 2022 $ % $ % (dollars in thousands) Revenue Hardware $ 82,844 $ 137,201 $ 87,372 $ (54,357 ) (40 )% $ 49,829 57 % Professional services 18,803 35,473 32,301 (16,670 ) (47 )% 3,172 10 % Hosted services 73,238 64,164 48,148 9,074 14 % 16,016 33 % Total revenue 174,885 236,838 167,821 (61,953 ) (26 )% 69,017 41 % Cost of revenue Hardware 58,833 108,780 83,289 (49,947 ) (46 )% 25,491 31 % Professional services 31,160 55,495 59,547 (24,335 ) (44 )% (4,052 ) (7 )% Hosted services 24,554 23,034 23,637 1,520 7 % (603 ) (3 )% Total cost of revenue 114,547 187,309 166,473 (72,762 ) (39 )% 20,836 13 % Operating expense Research and development 29,369 28,805 29,422 564 2 % (617 ) (2 )% Sales and marketing 18,446 19,209 20,872 (763 ) (4 )% (1,663 ) (8 )% General and administrative 54,295 44,674 55,305 9,621 22 % (10,631 ) (19 )% Total operating expenses 102,110 92,688 105,599 9,422 10 % (12,911 ) (12 )% Loss from operations (41,772 ) (43,159 ) (104,251 ) 1,387 3 % 61,092 (59 )% Other income (expense) Interest income, net 8,242 8,580 1,946 (338 ) (4 )% 6,634 (341 )% Other income (expense), net 154 (116 ) 595 270 233 % (711 ) (119 )% Loss before income taxes (33,376 ) (34,695 ) (101,710 ) 1,319 4 % 67,015 66 % Income tax expense (benefit) 267 (108 ) (5,388 ) 375 (347 )% 5,280 (98 )% Net Loss $ (33,643 ) $ (34,587 ) $ (96,322 ) $ 944 3 % $ 61,735 64 % 48 Comparison of the years ended December 31, 2024 and 2023 Revenue Years ended December 31, Change Change 2024 2023 $ % (dollars in thousands) Revenue Hardware $ 82,844 $ 137,201 $ (54,357 ) (40 )% Professional services 18,803 35,473 (16,670 ) (47 )% Hosted services 73,238 64,164 9,074 14 % Total revenue $ 174,885 $ 236,838 $ (61,953 ) (26 )% Total revenue decreased by approximately $61.9 million, or 26%, to $174.9 million for the year ended December 31, 2024, from $236.8 million for the year ended December 31, 2023. The decrease was primarily driven by a $66.0 million decrease in revenue related to our Smart Apartments solution and resulted primarily from a decrease in New Units Deployed to 89,806 units for the year ended December 31, 2024 from 172,495 units for the year ended December 31, 2023 and a 25% decrease in Units Shipped to 169,476 for the year ended December 31, 2024 from 226,722 for the year ended December 31, 2023, partially offset by a 12% increase in the number of cumulative active subscriptions for our Hosted Services during the year ended December 31, 2024 compared to the year ended December 31, 2023. Overall decreases in New Units Deployed and Units Shipped are primarily attributable to our customers' decisions to defer capital expenditures, driven by broader macroeconomic conditions. In addition, changes in leadership and the structure of our sales organization have impacted sales and overall volumes. Years ended December 31, 2024 2023 Change % Hardware Hardware Units Shipped 169,476 226,722 (25 )% Hardware ARPU $ 489 $ 605 (19 )% Professional Services New Units Deployed 89,806 172,495 (48 )% Professional services ARPU $ 344 $ 255 35 % Hosted Services Units Deployed 809,497 719,691 12 % Average aggregate units deployed 764,594 633,444 21 % SaaS ARPU $ 5.63 $ 5.40 4 % Bookings Units Booked 121,670 173,195 (30 )% Bookings (in thousands) $ 133,836 $ 158,453 (16 )% Units Booked SaaS ARPU $ 6.44 $ 8.32 (23 )% Hardware revenue decreased by $54.4 million, or 40%, to $82.8 million for the year ended December 31, 2024, from $137.2 million for the year ended December 31, 2023. This decrease in hardware revenue was driven by a decrease in revenue related to our Smart Apartments Solutions and resulted from a 25% decrease in Units Shipped to 169,476 for the year ended December 31, 2024 from 226,722 for the year ended December 31, 2023, and a Hardware ARPU decrease of 19% to $489 for the 2024 period from $605 for the 2023 period. The Hardware ARPU decrease was primarily attributable to a change in product mix which was more heavily weighted to our Alloy SmartHome hardware. The impact of the decrease in hardware revenue was mitigated by an increase in hardware gross margin, primarily driven by the product mix change in the current period. Professional services revenue decreased by $16.7 million, or 47%, to $18.8 million for year ended December 31, 2024, from $35.5 million for the year ended December 31, 2023. The decrease in professional services revenue was driven by a $17.5 million decrease in revenue related to our Smart Apartments solution. New Units Deployed decreased by 48% to 89,806 units for the year ended December 31, 2024 from 172,495 units for the year ended December 31, 2023. This was partially offset by an increase in Professional services ARPU of 35% to $344 for the year ended December 31, 2024 from $255 for the year ended December 31, 2023. 49 Hosted Services revenue increased by $9.0 million, or 14%, to $73.2 million for the year ended December 31, 2024, from $64.2 million for the year ended December 31, 2023. Of the $73.2 million revenue in 2024, $51.6 million is related to SaaS Revenue and $21.6 million is related to hub amortization. Revenue from SaaS increased by $10.5 million and revenue from hub amortization decreased by $1.5 million from the year ended December 31, 2023 to the year ended December 31, 2024. The increase of Hosted Services revenue resulted primarily from a 12% increase in the aggregate number of Units Deployed, primarily of our Smart Apartment solution, from 719,691 units at December 31, 2023 to 809,497 units at December 31, 2024 and an increase in SaaS ARPU of 4% to $5.63 for the year ended December 31, 2024 from $5.40 for the year ended December 31, 2023. We don’t expect to deploy any more non-distinct Hub Devices, thus, the revenue contribution from hub amortization should continue to decrease in future periods until the non-distinct Hub Devices are fully amortized. The table below shows the expected revenue contribution from hub amortization. 2025 2026 2027 (dollars in thousands) Revenue contribution from hub amortization Q1 $ 4,559 $ 2,110 $ 153 Q2 4,391 1,456 51 Q3 3,429 886 18 Q4 2,711 407 7 Total $ 15,090 $ 4,859 $ 229 Cost of Revenue Years ended December 31, Change Change 2024 2023 $ % (dollars in thousands) Cost of revenue Hardware $ 58,833 $ 108,780 $ (49,947 ) (46 )% Professional services 31,160 55,495 (24,335 ) (44 )% Hosted services 24,554 23,034 1,520 7 % Total cost of revenue $ 114,547 $ 187,309 $ (72,762 ) (39 )% Total cost of revenue decreased by $72.8 million, or 39%, to $114.5 million for the year ended December 31, 2024, from $187.3 million for the year ended December 31, 2023. The decrease in cost of revenue resulted primarily from a 48% decrease in New Units Deployed, a favorable product mix of our hardware devices (more heavily weighted to Alloy SmartHome hardware), and a 25% decrease in Units Shipped of our Smart Apartment solution hardware devices. Hardware cost of revenue decreased by $50.0 million, or 46%, to $58.8 million for the year ended December 31, 2024, from $108.8 million for the year ended December 31, 2023. This decrease in hardware cost of revenue was primarily attributable to a favorable product mix (more heavily weighted to Alloy SmartHome hardware), resulting in improved hardware gross margin compared to the prior period, and a 25% decrease in Units Shipped. Professional services cost of revenue decreased by $24.3 million, or 44%, to $31.2 million for the year ended December 31, 2024, from $55.5 million for the year ended December 31, 2023. The decrease in professional services cost of revenue is primarily attributable to a decrease of approximately $18.6 million in third-party direct labor costs due to a 48% decrease in New Units Deployed, and a decrease of $4.4 million in personnel-related costs including travel. Additionally, we have invested in technology initiatives to allow our teams to be more efficient and furthered our collaboration with third-party partners to augment our professional services, resulting in improved professional services gross margin compared to the previous period. We believe we will continue to improve efficiency in future periods. Hosted Services cost of revenue increased by approximately $1.6 million, or 7%, to $24.6 million for the year ended December 31, 2024, from $23.0 million for the year ended December 31, 2023. The increase resulted from a 12% increase in the aggregate number of Units Deployed and the resulting increase in the number of active subscriptions for our software service applications and an increase in personnel-related costs of $0.8 million, partially offset by a $1.4 million decrease in hub amortization. Our Hosted Services gross margin improved when compared to the same period in the prior year primarily driven by economies of scale related to our SaaS products. Additionally, Hosted Services attributable to hub amortization, which has a lower margin than our SaaS products, continues to represent a smaller portion of our Hosted Services cost of revenue. 50 Operating Expenses Years ended December 31, Change Change 2024 2023 $ % (dollars in thousands) Research and development $ 29,369 $ 28,805 $ 564 2 % Sales and marketing 18,446 19,209 (763 ) (4 )% General and administrative 54,295 44,674 9,621 22 % Research and development expenses increased by $0.6 million, or 2%, to $29.4 million for the year ended December 31, 2024, from $28.8 million for the year ended December 31, 2023, primarily related to an increase of $0.3 million in business applications and software and $0.2 million in personnel-related expenses. We believe our research and development costs will increase in absolute dollars as we increase our investment in product development to enhance the capabilities of our solutions and introduce new products and features. Sales and marketing expenses decreased by $0.8 million, or 4%, to $18.4 million for the year ended December 31, 2024 from $19.2 million for the year ended December 31, 2023, resulting primarily from a decrease of approximately $1.2 million in personnel-related expenses, partially offset by an increase of $0.3 million in business applications and software. We believe our sales and marketing expenses will increase in future periods as we continue to invest in building a scalable sales team, which began with hiring our new Chief Revenue Officer in September 2024. For the year ended December 31, 2024, general and administrative expenses increased by $9.6 million, or 22%, to $54.3 million, from $44.7 million for the year ended December 31, 2023, resulting primarily from $11.3 million in legal fees and settlements during the year ended December 31, 2024, including $5.0 million from the settlement of a dispute with a supplier which resulted in returning $5.0 million of inventory to the supplier. See Note 12. "Commitments and Contingencies" - Legal Matters for a discussion of legal proceedings in which we are involved. Additionally, severance expense increased by $2.5 million. These increases were partially offset by a decrease of $4.5 million in personnel-related expenses. Other Income Years ended December 31, Change Change 2024 2023 $ % (dollars in thousands) Interest income, net $ 8,242 $ 8,580 $ (338 ) (4 )% Other income (expense), net 154 (116 ) 270 233 % Interest income, net decreased by approximately $0.4 million to $8.2 million for the year ended December 31, 2024, from $8.6 million for the year ended December 31, 2023. The decrease in net interest income is primarily attributable to a lower cash balance on which we’re earning interest, and a decrease in interest rates throughout the year. Income Taxes Years ended December 31, Change Change 2024 2023 $ % (dollars in thousands) Loss before income taxes $ (33,376 ) $ (34,695 ) $ 1,319 4 % Income tax expense (benefit) 267 (108 ) 375 347 % We provided a full valuation allowance on our net U.S. federal and state deferred tax assets as of December 31, 2024, and December 31, 2023. As of December 31, 2024, we had $222.9 million of U.S. federal and $215.4 million of state gross net operating loss carryforwards available to reduce future taxable income, which will be carried forward indefinitely for U.S. federal tax purposes and will expire between 2032 and 2044 for state tax purposes. The income tax expense is related to the federal, state, and international taxes payable offset by a change in the valuation allowance. We do not currently expect the Inflation Reduction Act to have a material impact on our financial results, including on our annual estimated effective tax rate. 51 Non-GAAP Financial Measures To supplement the consolidated financial statements, which are prepared and presented in accordance with GAAP, we present EBITDA and Adjusted EBITDA, described below, as non-GAAP measures. We believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors’ understanding of our underlying operating performance and their ability to analyze our ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures - these non-GAAP financial measures are not intended to supersede or replace our GAAP results. We define EBITDA as net income (loss) computed in accordance with GAAP before interest income, net, income tax expense (benefit) and depreciation and amortization. We define Adjusted EBITDA as EBITDA before expenses related to non-recurring legal matters, stock-based compensation, impairment of investment in a non-affiliate, non-employee warrant expense, non-recurring warranty provisions, asset impairment, compensation expense in connection with acquisitions, other acquisition expenses, and other expenses caused by non-recurring, or unusual, events that are not indicative of our ongoing business. Our management uses EBITDA and Adjusted EBITDA to assess our financial and operating performance, and we believe these measures are helpful to management and external users in understanding our performance. EBITDA and Adjusted EBITDA help management identify controllable cash expenses and make decisions designed to help us meet our identified financial and operational goals and to optimize our financial performance, while neutralizing the impact of some expenses included in our operating results caused by external influences over which management has little or no control and by non-recurring, or unusual, events that might otherwise mask trends in our performance. Accordingly, we believe these metrics measure our financial performance based on operational factors that management can impact in the short-term, namely our cost structure and expenses. We believe that the presentation of EBITDA and Adjusted EBITDA provides information useful to investors in assessing our results of operations. The GAAP measure most directly comparable to EBITDA and Adjusted EBITDA is net income (loss). EBITDA and Adjusted EBITDA are not used as measures of our liquidity and should not be considered alternatives to net income (loss) or any other measure of financial performance presented in accordance with GAAP. Our EBITDA and Adjusted EBITDA may not be comparable to the EBITDA and Adjusted EBITDA of other companies due to the fact that not all companies use the same definitions of EBITDA and Adjusted EBITDA. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other companies. The following table presents a reconciliation of net loss (as determined in accordance with GAAP) to EBITDA and Adjusted EBITDA for each of the periods indicated. For the years ended December 31, 2024 2023 2022 (dollars in thousands) Net loss $ (33,643 ) $ (34,587 ) $ (96,322 ) Interest income, net (8,242 ) (8,580 ) (1,946 ) Income tax expense (benefit) 267 (108 ) (5,388 ) Depreciation and amortization 6,495 5,533 4,262 EBITDA (35,123 ) (37,742 ) (99,394 ) Legal matter (1) 8,325 - Stock-based compensation 10,766 13,271 13,716 Impairment of investment in non-affiliate 2,250 - - Non-employee warrant expense - (193 ) 289 Non-recurring warranty provision 291 1,746 - Asset impairment - - 4,441 Compensation expense in connection with acquisitions - 2,010 5,042 Other acquisition expenses (725 ) 651 1,197 Other non-operating expenses (2) 4,334 1,070 - Adjusted EBITDA $ (9,882 ) $ (19,187 ) $ (74,709 ) (1) Refer to Note 12 "Commitments and Contingencies". (2) During the year ended December 31, 2024, other non-operating expenses includes $3,183 of severance expense and $1,065 of CEO transition expenses. During the year ended December 31, 2023, other non-operating expenses includes $1,070 of severance expense. There were no such expenses during the year ended December 31, 2022. 52 Liquidity and Capital Resources Sources of Liquidity As of December 31, 2024, we had cash and cash equivalents of $142.5 million, which were held for working capital and general corporate purposes. Our cash equivalents are comprised primarily of money market funds. To date, our principal sources of liquidity have been the net proceeds received as a result of the Business Combination, and payments collected from sales to our customers. Debt Issuances Following the maturity of our Revolving Facility (as defined below) in December 2021, we entered into a $75.0 million senior secured revolving credit facility with a five-year term (the "Senior Revolving Facility" ) . 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, 2024, the applicable margins for SOFR Loans and ABR Loans under the Senior Revolving Facility were 1.75% and (0.50%), respectively. The Senior Revolving Facility is secured by substantially all of the Company’s assets and guaranteed by each of the Company’s material domestic subsidiaries. We believe that our current cash, cash equivalents, available borrowing capacity under the Senior Revolving Facility, and cash raised in the Business Combination will be sufficient to fund our operations for at least the next 12 months beyond the issuance date of this Report. Our future capital requirements, however, will depend on many factors, including our sales volume, the expansion of sales and marketing activities, and market adoption of our new and enhanced products and features. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. From time to time, we may seek to raise additional funds through equity and debt. If we are unable to raise additional capital when desired and on reasonable terms, our business, results of operations, and financial condition may be adversely affected. Stock Repurchase Program In March 2024, the Board authorized a stock repurchase program pursuant to which we may repurchase up to $50 million of our Class A common stock. Repurchases under the program 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 us to acquire any particular amount of our Class A common stock and may be suspended at any time at our 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. During the year ended December 31, 2024, we repurchased 15.2 million shares of our Class A common stock under the stock repurchase program at an average price of approximately $1.89 per share for a total of $28.6 million, including $0.2 million of broker fees. As of December 31, 2024, approximately $21.6 million remained available for stock repurchases pursuant to our stock repurchase program. Cash Flow Summary - Years Ended December 31, 2024, 2023 and 2022 The following table summarizes our cash flows for the periods presented. Years ended December 31, 2024 2023 2022 (dollars in thousands) Net cash (used in) provided by Operating activities $ (32,913 ) $ 5,981 $ (77,833 ) Investing activities (7,599 ) (6,023 ) (133,993 ) Financing activities (32,962 ) (1,905 ) (2,801 ) 53 Operating Activities For the year ended December 31, 2024, our operating activities used $32.9 million in cash resulting primarily from our net loss of $33.6 million and $28.4 million used in changes in our operating assets and liabilities, partially offset by approximately $29.1 million provided by non-cash expenses. Changes in our operating assets and liabilities primarily resulted from a $35.5 million decrease in deferred revenue, an $6.4 million decrease in accounts payable, and a $0.7 million decrease in accrued expenses and other liabilities, partially offset by an $11.2 million decrease in deferred cost of revenue and a $4.5 million decrease in prepaid expenses and other assets. Non-cash expenses consisted primarily of stock-based compensation of $12.1 million, non-cash legal expenses of $5.0 million, in which the Company agreed to settle a legal dispute with a supplier by returning $5.0 million of inventory, depreciation and amortization of $6.5 million, provision for excess and obsolete inventory of $2.6 million and impairment of investment in non-affiliate of $2.3 million. For the year ended December 31, 2023, our operating activities resulted in net proceeds of $6.0 million in cash resulting primarily from $27.8 million provided by non-cash expenses and $12.8 million provided by changes in our operating assets and liabilities, partially offset by our net loss of $34.6 million. Non-cash expenses consisted primarily of stock-based compensation of $13.3 million, depreciation and amortization of $5.5 million, compensation expense related to acquisitions of $2.1 million, and provision for excess and obsolete inventory of $2.5 million. Changes in our operating assets and liabilities primarily resulted from a $31.7 million decrease in inventory and a $13.0 million decrease in deferred cost of revenue, partially offset by a $16.8 million decrease in deferred revenue and an $11.0 million decrease in accrued expenses and other liabilities. For the year ended December 31, 2022, our operating activities used $77.8 million in cash resulting primarily from our net loss of $96.3 million and $4.9 million used in changes in our operating assets and liabilities, partially offset by $23.4 million provided by non-cash expenses. Changes in our operating assets and liabilities primarily resulted from a $42.8 million increase in inventory, $15.9 million increase in accounts receivable, and $9.9 million increase in deferred cost of revenue, partially offset by a $43.7 million increase in deferred revenue, a $12.4 million increase in accounts payable, and a $3.2 million increase in accrued expenses and other liabilities. Non-cash expenses consisted primarily of stock-based compensation of $13.7 million, compensation expense related to acquisitions of $5.0 million, $4.4 million of asset impairment, and depreciation and amortization of $4.3 million, partially offset by a deferred tax benefit of $5.7 million resulting from the SightPlan acquisition. Investing Activities For the year ended December 31, 2024, we used $7.6 million of cash for investing activities, resulting primarily from cash paid of $5.8 million for capitalized internal-use software development costs and $1.8 million for the purchase of property and equipment. For the year ended December 31, 2023, we used $6.0 million of cash for investing activities, resulting primarily from cash paid of $3.6 million for capitalized internal-use software development costs and $2.3 million cash paid for investment in non-affiliate. For the year ended December 31, 2022, we used $134.0 million of cash for investing activities, resulting primarily from $129.7 million used for the SightPlan acquisition, net of cash acquired. Financing Activities For the year ended December 31, 2024, our financing activities used $33.0 million of cash, resulting primarily from $28.6 million used for repurchases of Class A common stock, $2.0 million used for taxes paid related to net share settlements of stock-based compensation awards and $1.5 million used for earnout payments related to the iQuue LLC acquisition (the "iQuue acquisition"). For the year ended December 31, 2023, our financing activities used $1.9 million of cash, resulting primarily from $1.7 million used for earnout payments related to the iQuue acquisition. For the year ended December 31, 2022, our financing activities used $2.8 million of cash primarily for taxes paid related to net share settlements of stock-based compensation awards. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of December 31, 2024. 54 Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that can significantly impact the amounts we report as assets, liabilities, revenue, costs and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from these estimates under different assumptions and conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance as these policies involve a greater degree of judgment and complexity. Revenue Recognition We derive revenue primarily from sales of systems that consist of hardware devices, professional installation 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 recognized when control of these products and services are transferred to the customer in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products and services. Payments we receive by check or automated clearing house payments, and payment terms are determined by individual contracts and 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. We apply the practical expedient that allows for inclusion of the future auto-renewals in the initial measurement of the transaction price. We only apply these steps when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services it transfers to a customer. Accounting for contracts recognized over time involves the use of various estimates of total contract revenue and costs. Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation may be revised in the future as we observe the economic performance of our contracts. Changes in job performance, job conditions and estimated profitability may result in revision to our estimates of revenue and costs and are recognized in the period in which the revision is identified. We may enter into contracts that contain multiple distinct performance obligations including hardware and Hosted Services. The hardware performance obligation includes the delivery of hardware, and the Hosted Services performance obligation allows the customer use of our software during the contracted-use term. The subscription for the software and certain Hub Devices combine as one performance obligation, and there is no support or ongoing subscription for other device hardware. We partner with several manufacturers to offer a range of compatible hardware options for its customers. We maintain control of the hardware purchased from manufacturers prior to it being transferred to the customer, and accordingly, SmartRent is considered the principal in these arrangements. For each performance obligation identified, we estimate the standalone selling price, which represents the price at which we would sell the good or service separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price, considering available information such as market conditions, historical pricing data, and internal pricing guidelines related to the performance obligations. We then allocate the transaction price among those obligations based on the estimation of the standalone selling price. Inventory Valuation Inventories are stated at the lower of cost or estimated net realizable value. Cost is computed under the first-in, first-out method. We adjust the inventory balance based on anticipated obsolescence, usage, and historical write-offs. Significant judgment is used in establishing our forecasts of future demand and obsolete material exposures. We consider marketability and product life cycle stage, product development plans, demand forecasts, historical revenue, and assumptions about future demand and market conditions in establishing our estimates. If the actual product demand is significantly lower than forecast, which may be caused by factors within and outside of our control, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and our customer requirements, we may be required to increase our inventory adjustment. A change in our estimates could have a significant impact on the value of our inventory and our results of operations. 55 Stock-Based Compensation Our stock-based compensation relates to stock options and restricted stock units ("RSUs") granted to our employees and directors. Stock-based awards are measured based on the grant date fair value. We estimate the fair value of stock option awards on the grant date using the Black-Scholes option-pricing model. The fair value of RSUs is based on the grant date fair value of the stock price. The fair value of these awards is recognized as compensation expense on a straight-line basis over the requisite service period in which the awards are expected to vest. Forfeitures are recognized as they occur by reversing previously recognized compensation expense. The Black-Scholes model considers several variables and assumptions in estimating the fair value of stock-based awards. These variables include the per share fair value of the underlying common stock, exercise price, expected term, risk-free interest rate, expected annual dividend yield, the expected stock price volatility over the expected term and forfeitures, which are recognized as they occur. For all stock options granted, we calculated the expected term using the simplified method for “plain vanilla” stock option awards. The grant date fair value is also utilized with respect to RSUs with performance and service conditions to vest. For RSUs with a performance condition, based on a liquidity event, as well as a service condition to vest, no compensation expense is recognized until the performance condition has been satisfied. Subsequent to the liquidity event, compensation expense is recognized to the extent the requisite service period has been completed and compensation expense thereafter is recognized on an accelerated attribution method. Under the accelerated attribution method, compensation expense is recognized over the remaining requisite service period for each service condition tranche as though each tranche is, in substance, a separate award. In August 2021, the Company completed the merger with FWAA, which met the liquidity event vesting condition and triggered the recognition of compensation expense for awards of RSUs, or applicable portions of such awards, for which the time-based vesting condition had been satisfied. Emerging Growth Company Status Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") exempts “emerging growth companies” as defined in Section 2(A) of the Securities Act of 1933, as amended, from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. We are an “emerging growth company” and have elected to take advantage of the benefits of this extended transition period. We will use this extended transition period for complying with new or revised accounting standards that have different effective dates for public business entities and non-public business entities until the earlier of the date we (a) are no longer an emerging growth company or (b) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. The extended transition period exemptions afforded by our emerging growth company status may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of this exemption because of the potential differences in accounting standards used. We will remain an “emerging growth company” under the JOBS Act until the earliest of (a) the first fiscal year following the fifth anniversary of the initial public offering by FWAA, which closed on February 9, 2021, (b) the last date of our fiscal year in which we have total annual gross revenue of at least $1.235 billion, (c) the last date of our fiscal year in which we are deemed to be a “large accelerated filer” under the rules of the SEC with at least $700.0 million of outstanding securities held by non-affiliates or (d) the date on which we have issued more than $1.0 billion in non- convertible debt securities during the previous three years. Recent Accounting Pronouncements See Note 2, “Significant Accounting Policies” - Recent Accounting Guidance for more information.