SmartRent, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Amounts below are in U.S. dollars. Financial statement amounts are in millions unless noted. The August 24, 2021 business combination was accounted for as a reverse recapitalization, with Legacy SmartRent as the accounting predecessor.
Business context
SmartRent provides an integrated smart-home operating system, devices, installation and hosted services for residential property owners, operators and residents. At quarter-end, the company reported 270,772 installed SmartHubs, 704,242 committed units and customers with approximately 4.1 million rental units in aggregate.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $35.1 | $16.6 | $76.0 | $38.9 |
| Gross profit (loss) | $(6.8) | $(0.03) | $(6.9) | $(1.4) |
| Gross margin | (19.3%) | (0.2%) | (9.1%) | (3.6%) |
| Operating loss | $(26.5) | $(8.1) | $(45.7) | $(24.8) |
| Net loss | $(26.7) | $(8.7) | $(46.0) | $(26.4) |
| Adjusted EBITDA loss | $(16.1) | $(6.8) | $(33.8) | $(19.8) |
Q3 revenue grew 112% year over year; nine-month revenue grew 95%. Q3 revenue included hardware of $22.0 million, professional services of $8.2 million and hosted services of $4.9 million. Hosted-services annual recurring revenue was approximately $8.7 million, versus $3.4 million in Q3 2020. The company reported 49,706 units booked in Q3, versus 21,272 a year earlier.
Cost of revenue exceeded revenue in both 2021 reporting periods. Q3 cost of revenue was $41.9 million, up 152%; nine-month cost was $82.9 million, up 106%. Operating expenses were $19.7 million in Q3 and $38.8 million for the nine months. Stock-based compensation was $4.3 million in Q3 and $5.2 million for the nine months.
Cash, liquidity and debt
- Cash and cash equivalents were $472.5 million at September 30, 2021, compared with $38.6 million at December 31, 2020. Current assets were $557.4 million and current liabilities $61.6 million.
- For the nine months, operating cash use was $41.7 million, investing cash use was $2.9 million and financing cash provided was $478.5 million. Financing included approximately $445.0 million net proceeds from the business combination and $34.8 million net preferred-stock proceeds.
- Term-loan principal was $3.6 million; the revolving facility had no outstanding balance. The company said available resources were expected to fund obligations for at least 12 months, while noting it may need additional capital if it does not generate positive operating cash flow.
- Deferred revenue was $84.7 million at quarter-end. Management expected to recognize 45% within 12 months, 31% in 13–36 months and 23% in 37–60 months.
Changes, outlook and risks
- Business combination: The August transaction brought approximately $445.0 million of net cash proceeds and converted legacy preferred stock into common stock. Class A shares outstanding were 193,864,107 as of November 8, 2021.
- Warranty item: The company recorded a $5.7 million Q3 provision to replace batteries from one supplier because of a battery deficiency; the affected batteries were less than 1% of those deployed. The total warranty allowance was $5.9 million at quarter-end.
- Operating outlook: No specific revenue, earnings or cash-flow guidance was provided. Management expected COVID-19 disruptions to continue through 2021 and said semiconductor and other supply-chain constraints, including Z-wave chip shortages, could continue to affect production and installations through year-end. It also expected cost of revenue and research, sales and administrative expenses to rise in absolute dollars as the business grows.
- Other risks: The filing highlights customer purchase delays, supplier availability, competition, privacy and cybersecurity obligations, and execution of growth and product-development plans. A supplier purchase commitment was $22.9 million at September 30, 2021. Ordinary-course legal matters were not considered likely to have a material financial effect; no material change to previously disclosed risk factors was reported.
- Controls: Management reported unremediated material weaknesses relating to non-routine transaction accounting, journal-entry review and formal IT segregation controls. Remediation efforts were ongoing.
Key facts for investors to verify
- Whether unit deployment growth converts into recurring hosted-services revenue and improved gross margins.
- Progress on battery replacements, warranty costs and product quality.
- Effects of chip shortages, supply-chain delays and customer project timing on bookings and installations.
- Cash burn relative to the stated liquidity runway, and the status of the revolving facility, whose maturity was extended to December 2021 after quarter-end.
- Remediation of the disclosed internal-control material weaknesses and the impact of public-company costs and stock compensation.