SmartRent, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statement amounts below are in millions of dollars unless otherwise stated. The filing was signed November 10, 2022.
Business context
SmartRent provides smart-building hardware, installation services and cloud software for property owners, managers and residents. The March 2022 SightPlan acquisition expanded its property-operations software offering. As of quarter-end, customers owned approximately 6.7 million units, including 1.3 million associated with SightPlan; SmartRent reported 504,409 units deployed and 811,312 committed units.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $47.5 | $35.1 | $127.3 | $76.0 |
| Gross profit (loss) | $1.2 | $(6.8) | $(2.6) | $(6.9) |
| Operating loss | $(26.7) | $(26.5) | $(82.0) | $(45.7) |
| Net loss | $(26.0) | $(26.7) | $(74.9) | $(46.0) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(82.0) | $(41.7) |
Revenue rose 35% in Q3 and 68% for the nine-month period. Hosted-services revenue grew 171% in Q3 and 180% year to date; hardware revenue increased 21% and 44%, respectively. Professional-services revenue declined 9% in Q3 but increased 53% year to date. Approximate gross margin improved to 2.5% in Q3 from negative 19.3% a year earlier, but remained negative at approximately 2.0% year to date (versus negative 9.1%).
Cash and cash equivalents were $210.1 at September 30, down from $430.8 at December 31, 2021; cash, cash equivalents and restricted cash totaled $217.4. Operating activities used $82.0 in cash, while investing activities used $129.8, primarily for SightPlan. The company reported no outstanding borrowings on its $75.0 senior secured revolving facility, which matures in December 2026. Management said available resources are expected to fund obligations for at least 12 months beyond the financial-statement issuance date, while noting additional capital may be needed before positive operating cash flow is achieved.
Material changes versus prior comparable periods
- Nine-month net loss increased to $74.9 from $46.0, and operating loss widened to $82.0 from $45.7, as operating expenses rose 105%.
- Q3 net loss improved slightly, while operating loss was broadly unchanged. Gross margin improved substantially, in part because the prior-year period included a large battery-deficiency warranty provision.
- General and administrative expense rose 94% in Q3 and 162% year to date. Drivers included acquisition-related costs and compensation, higher insurance expense, acquired-intangible amortization, and a $2.4 impairment of a prepaid license.
- The SightPlan acquisition involved approximately $131.7 of consideration transferred and added $105.2 of goodwill and $30.9 of intangible assets. Goodwill and intangibles increased materially on the balance sheet.
- Year-to-date cash declined substantially, reflecting operating cash use and the $129.0 net cash outlay for SightPlan; the prior-year period included substantial business-combination and preferred-stock proceeds.
Outlook, risks and unusual items
- Outlook: No specific revenue, earnings or deployment guidance was provided. Management expects cost of revenue and research, sales and administrative expenses to increase in absolute dollars; it expects hosted-services revenue to grow faster than its related cost of revenue.
- Supply chain and demand: Semiconductor shortages, including Z-wave chips, and delays affecting Alloy Access and specialty locks pushed installations into future periods. Management said orders had not been canceled, but did not expect marked improvement in some supply constraints for the rest of 2022. Customer projects and purchasing were also delayed.
- Acquisition and accounting items: The company recorded a $5.7 income-tax benefit for the nine months, primarily from a valuation-allowance release associated with deferred tax liabilities acquired with SightPlan. Acquisition-related compensation and earnout valuation changes also affected expenses.
- Warranty: The company continued to accrue costs for replacement of certain deficient batteries; the remaining related warranty allowance was $1.7 at September 30. Total warranty allowance was $3.1.
- Legal contingency: SmartRent is pursuing a supplier over defective products; the supplier filed a cross-complaint. The company reported no legal accrual and said it did not believe the matters would materially affect the financial statements. Discovery was ongoing.
- Controls: Management reported disclosure controls were not effective as of December 31, 2021, citing material weaknesses in journal-entry review and IT segregation controls. It said remediation work continued and it expected to remediate during 2022; full remediation had not yet been concluded.
- Other risks: The filing highlights execution, customer adoption, supplier and logistics dependence, acquisition integration, competition, privacy and regulatory compliance, and foreign-currency exposure. The company reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether deployment backlogs convert to installations and revenue despite component shortages; monitor units booked, deployed and committed.
- Whether hosted-services growth and recurring revenue translate into sustained gross-margin improvement and lower operating cash burn.
- Cash runway assumptions, acquisition-related spending, and compliance with the revolver’s minimum-cash or liquidity requirements.
- Final SightPlan purchase-price allocation, goodwill and intangible-asset assumptions, and ongoing acquisition-related compensation and earnout obligations.
- Progress toward remediating the remaining material weaknesses in financial reporting controls.
- Developments in the supplier litigation and the remaining battery-replacement obligation.