SMARTRENT, INC. 
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our Current Report on Form 8-K filed onAugust 30, 2021 , as amended onAugust 31, 2021 , including the audited consolidated financial statements of the Company as ofJune 30, 2021 and 2020 filed as Exhibit 99.1 thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included therein, as well as the accompanying unaudited condensed consolidated financial statements and notes thereto included in this Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those discussed in sections titled "Forward Looking Statements" and "Risk Factors" of this Form 10-Q, that could cause actual results to differ materially from historical results or anticipated results. Unless the context otherwise requires, references in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" to "we," "our," "us," "the Company" and "SmartRent" generally refer toSmartRent Technologies, Inc. (formerly known asSmartRent.com, Inc. ) and its consolidated subsidiaries prior to the business combination pursuant to the Merger Agreement datedApril 21, 2021 (as amended by Amendment No. 1 to Merger Agreement, datedJuly 23, 2021 ), among FWAA,Einstein Merger Corp. I, a wholly owned subsidiary of FWAA ("Merger Sub"), andSmartRent.com, Inc. (the "Merger Agreement") and toSmartRent, Inc. and its consolidated subsidiaries after giving effect to the transactions contemplated by the Merger Agreement (the "Business Combination").
Overview
SmartRent is an enterprise software company that provides a fully integrated, brand-agnostic smart home operating system to residential property owners and operators, as well as homebuilders, iBuyers, developers, and residents. We startedSmartRent with the vision of transforming residential real estate into the next generation of connected communities. Our smart home operating system is designed to enable owners and operators to streamline property management and operations, lower operating costs, increase revenues, and protect their assets through improved visibility and control, while providing a differentiated, elevated living experience for residents. Through our central connected device, called SmartHub, we integrate our proprietary enterprise software with third-party smart devices and other technology interfaces through an open-architecture, brand-agnostic approach, which allows owners, operators, and residents to manage their smart home systems through a single connected interface. Our products and solutions include smart apartments and homes, access control for buildings, common areas, and rental units, asset protection and monitoring, parking management, self-guided tours, and community and resident Wi-Fi. We also have a professional services team of approximately 200 employees acrossthe United States through which we provide customers with training, installation, and support services. We believeSmartRent is the category leader in the enterprise smart home solutions industry. As ofSeptember 30, 2021 , our customers owned an aggregate of approximately 4.1 million rental units, representing approximately 10% of the U.S. market for institutionally owned multifamily rental units and single-family rental homes, and included 15 of the top 20 multifamily residential owners inthe United States . In addition to multifamily residential owners, our customers include some of the leading homebuilders, single-family rental homeowners, and iBuyers inthe United States . Since beginning operations in 2017, we have installed more than 1,100,000 SmartHubs and other smart home devices in approximately 3,800 communities with more than 450,000 users located in 45 states acrossthe United States . We estimate that the U.S. market for residential real estate has approximately 43 million institutionally owned multifamily rental units and single-family rental homes as ofSeptember 30, 2021 . While several of the top multifamily residential owners are currentSmartRent customers, we believe that we have only begun to take advantage of the full market opportunity in residential and commercial real estate sectors and in domestic and international markets. For example, we recently adapted our software and applications to target new opportunities in other residential real estate sectors, including single-family rental homes, student housing, senior housing, and new construction homes. In addition, we believe there is significant potential for growth beyond residential real estate to other commercial real estate asset classes, including, among others, office, hotels, retail, industrial, and self-storage. Furthermore, we believe there is an attractive opportunity to expand our smart home solutions into other markets globally and have started pilot programs and/or developed partner relationships in theUnited Kingdom ,Canada ,the Netherlands , andIreland . We have designed our open-architecture, brand-agnostic smart home operating system to help the residential real estate industry become more efficient and effective. Importantly, our enterprise software integrates into most existing property management systems used by residential property owners and operators. With features speci?cally designed to increase productivity, while decreasing operating costs, we estimate that owners and operators can realize a 50% return on investment after installation of our smart home operating system. 28 --------------------------------------------------------------------------------
The Business Combination
OnAugust 24, 2021 , we consummated the Business Combination contemplated by the Merger Agreement. Upon the closing of the Business Combination, Merger Sub merged with and intoSmartRent.com, Inc. , withSmartRent.com, Inc. continuing as the surviving company and changing its name to "SmartRent Technologies, Inc. " In connection with the consummation of the Business Combination, we changed our name from "Fifth Wall Acquisition Corp. I" to "SmartRent, Inc. " and changed our trading symbol and listing on a securities exchange from "FWAA" on Nasdaq to "SMRT" on theNew York Stock Exchange ("NYSE")" Immediately prior to the effective time of the Business Combination, each share ofSmartrent.com, Inc.'s preferred stock converted into one share of common stock. As a result of and upon the Closing, (i) each share of common stock ofSmartRent.com, Inc. ("Legacy SmartRent common stock") was canceled and converted into the right to receive the applicable portion of the merger consideration comprised of shares of FWAA's Class A Common Stock, par value$0.0001 ("Class A Common Stock") as determined pursuant to the Exchange Ratio (as defined in the Merger Agreement), (ii) each share of FWAA's Class B common stock, was canceled and converted into Class A Common Stock, and (iii) each restricted stock unit and outstanding option and warrant to purchaseSmartRent.com, Inc.'s common stock (whether vested or unvested) was assumed by FWAA and converted into comparable restricted stock units and options or warrants that are exercisable for shares of Class A Common Stock, with a value determined in accordance with the Exchange Ratio. The Business Combination is accounted for as a reverse capitalization in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Under the guidance in FASB ASC 805, "Business Combinations," FWAA is treated as the "acquired" company for financial reporting purposes. We are deemed the accounting predecessor of the combined business and the successorSEC registrant, meaning that our financial statements for previous periods will be disclosed in the registrant's future periodic reports filed with theSEC . The Business Combination will have a significant impact on our future reported financial condition and results of operations as a consequence of the reverse capitalization. The most significant change inSmartRent's future reported financial condition and results of operations is a net increase in cash (as compared to our Consolidated Balance Sheet atJune 30, 2021 ) of approximately$445.0 million , which includes approximately$155.0 million in proceeds from thePipe Investment (described below), offset by additional transaction costs for the Business Combination. The transaction costs for the Business Combination are approximately$55.9 million , of which$12.1 million represents deferred underwriter fees from the FWAA IPO.
In connection with the consummation of the Business Combination, holders of 246 shares of FWAA Class A Common Stock elected to have their shares redeemed.
OnApril 21, 2021 , concurrently with the execution of the Merger Agreement, FWAA entered into subscription agreements with certain investors (the "PIPE Investors ") to which such investors collectively subscribed for an aggregate of 15,500,000 shares of Class A common stock at$10.00 per share for aggregate gross proceeds of$155,000,000 (the "PIPE Investment "). The PIPE Investments were consummated substantially concurrently with the closing of the Business Combination. Our Model Our smart home products and solutions provide an enterprise-grade holistic approach to what it means to be a connected community. ASmartRent connected community is a "curb to couch" concept where an entire property utilizes a variety of third-party smart devices from various manufacturers and features that can be remotely managed to provide efficiency, automation and ancillary revenue opportunities. OurSmartRent connected communities combine in-unit smart home technology with our Alloy Access control system and our Alloy Parking system, which are connected by our Community WiFi solution and can be managed remotely using our core smart home operating system, Community Manager.
Impact of the COVID-19 Pandemic
The extensive impact of the COVID-19 pandemic has resulted and will likely
continue to result in significant disruptions to the global economy, as well as
businesses and capital markets around the world. In an effort to halt the spread
of COVID-19, a number of countries, states, counties and other jurisdictions
have imposed, and may impose in the future, various measures, including, but not
limited to, voluntary and mandatory quarantines, stay-at-home orders, travel
restrictions, limitations on gatherings of people, reduced operations and
extended closures of businesses.
The timing of customer orders and our ability to fulfill orders were impacted by
various COVID-19-related government mandates, resulting in a reduction in units
sold. We have also witnessed certain current and prospective customers delaying
purchases based on budget constraints or project delays related to the COVID-19
pandemic. While the broader and long-term implications of the COVID-19 pandemic
on our workforce, operations and supply chain, customer demand, results of
operations and overall financial performance remain uncertain, we believe that
we will continue to experience disruptions to our business due to the COVID-19
pandemic through 2021.
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The impact of the COVID-19 pandemic and measures to prevent its spread have affected and continue to affect our business in several ways.
• Our workforce. Employee health and safety is our priority. In response to
the COVID-19 pandemic, we established new protocols to protect the health
and safety of our workforce, including restricting employee travel,
recommending that all non-essential personnel work from home and cancelled
or reduced physical participation in sales activities, meetings, events and
conferences and implemented additional safety protocols for essential
workers.
• Operations and supply chain. We have experienced some production delays as a
result of the effects of the COVID-19 pandemic on our sourcing,
manufacturing, and logistics channels. For example, as described below, we
have experienced SmartHub production delays as a result of a global shortage
of Z-wave chips, which facilitate the communication protocol used for
communication between our SmartHub and all other smart devices.
• Demand for our products. During the year ended
our products was less than we had anticipated based on our growth
projections made during 2019. We believe that this decrease in customer
demand was, in part, the result of the COVID-19 pandemic and customers'
delayed purchasing decisions. While we continue to engage with existing and
potential customers, we believe some customers may continue to delay
purchases from us because their development programs may also be delayed as
a result of the COVID-19 pandemic. We believe that demand for our products
remains strong, but due to the COVID-19 pandemic, a portion of the
transactions expected to be completed in 2020 were delayed until early 2021
and, similarly, that transactions expected to be completed in early 2021 may
be delayed until later in the year and into 2022.
See "Risk Factors" for further discussion of the possible impact of the COVID-19 pandemic on our business.
Comparability of Financial Information
Our future results of operations and financial position may not be comparable to historical results as a result of the Business Combination.
Factors Affecting Our Performance
We believe that our future success will be dependent on many factors, including those further discussed below. Our future 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), 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.
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, integrate with third-party products and services, mobile applications and other new offerings. If we fail to innovate and enhance our brand and our products, our market position and revenue will likely be adversely affected.
Active
We are focused on successfully navigating global supply chain disruptions. Specifically, increased demand for electronics as a result of the COVID-19 pandemic, theU.S. trade relations withChina and certain other factors have led to a global shortage of semiconductors, including Zwave chips, which are a central component of our SmartHubs. Due to this shortage, we have experienced SmartHub production delays, which have occasionally affected our ability to meet scheduled installations and facilitate customer upgrades to our higher-margin Alloy Fusion SmartHub. We believe these supply chain disruptions may continue, with varying degrees of operational impact, through the end of the 2021 fiscal year.
New Products, Features and Functionality
We will need to expend additional resources to continue introducing new products, features and functionality to enhance the value of our smart home operating system. We have recently introduced a number of product enhancements and features, including theBuilding Access Control , Video Intercom, WiFi and Parking Management solutions. 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. 30 --------------------------------------------------------------------------------
Category Adoption and Market Growth
Our future growth depends in part on the continued consumer adoption of hardware and software products which improve 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. In addition, our long-term growth depends in part on our ability to expand into international markets in the future.
Basis of Presentation
The consolidated financial statements and accompanying notes of
Key Operating Metrics
We regularly monitor a number of operating and financial metrics, which include
certain non-GAAP financial measures in order to evaluate our operating
performance, identify trends affecting our business, formulate business plans,
measure our progress and make strategic decisions. Non-GAAP financial measures
may not provide accurate predictions of future GAAP financial results.
The limitations our Key Operating Metrics have as an analytical tool are: (1)
they might not accurately predict our future GAAP financial results, (2) we
might not realize all or any part of the anticipated value reflected in Units
Booked and (3) other companies, including companies in our industry, may
calculate our Key Operating Metrics or similarly titled measures differently,
which reduces its usefulness as a comparative measure.
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--------------------------------------------------------------------------------Units Deployed and New Units Deployed
We define Units Deployed as the aggregate number of our SmartHubs that have been installed (including customer self-installations) as of a stated measurement date. We define New Units Deployed as the aggregate number of our SmartHubs that were installed (including customer self-installations) during a stated measurement period. We use these operating metrics to assess the general health and trajectory of our business and growth. We had 83,293, and 60,935 New Units Deployed during the years endedDecember 31, 2020 and 2019, respectively, and 59,347 and 28,190 New Units Deployed during the three months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 and 2020, there were 115,667 and 53,073 New Units Deployed, respectively. As ofSeptember 30, 2021 andDecember 31, 2020 , we had an aggregate of 270,772 and 155,105 Units Deployed, respectively.
Committed Units
We define Committed Units as the aggregate number of SmartHub (i) units that are subject to binding orders from customers together with (ii) units that existing customers who are parties to aSmartRent master services agreement have informed us (on a non-binding basis) that they intend to order in the future for deployment within two years of the measurement date. We track the number of Committed Units to assess the general health and trajectory of our business and to assist in our longer-term resource analysis. As ofSeptember 30, 2021 , we had 704,242 Committed Units. Units Booked We define Units Booked as the aggregate number of SmartHub units associated with binding orders executed during a stated measurement period. 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 and accordingly are a subset of Committed Units. We had 49,706 and 21,272 Units Booked during the three months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 and 2020, there were 134,054 and 53,488 Units Booked, respectively. EBITDA and Adjusted EBITDA We define EBITDA as net income or loss computed in accordance with GAAP before the following items: interest expense, income tax expense and depreciation and amortization. We define Adjusted EBITDA as EBITDA before the following items: stock-based compensation expense, non-employee warrant expense, loss on extinguishment of debt, change in fair value of derivatives, unrealized gains and losses in currency exchange rates, warranty provisions for battery deficiencies and other income and expenses. Management uses EBITDA and Adjusted EBITDA to identify controllable expenses and make decisions designed to help us meet our current financial goals and optimize our financial performance, while neutralizing the impact of expenses included in our operating results which could otherwise mask underlying trends in our business. See "Non-GAAP Financial Measures" for additional information and reconciliation of these measures.
Annual Recurring Revenue
We define Annual Recurring Revenue ("ARR") as the annualized value of our
recurring SaaS services revenue earned in the current quarter. We monitor our
ARR to assess the general health and trajectory of our hosted services business.
Our ARR was approximately $3.4 million and $1.2 million during the years ended
December 31, 2020 and 2019, respectively, and approximately $8.7 million based
upon the annualized run rate for the quarter ended September 30, 2021 , compared
to $3.4 million for the quarter ended September 30, 2020 .
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 to assist
property owners and property managers 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 are transferred to
the customer in an amount that reflects the consideration we expect to collect
for those products and services.
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--------------------------------------------------------------------------------Hardware Revenue
We generate revenue from the direct sale to our customers of hardware smart home devices, which devices currently consist of door-locks, thermostats, sensors, and light switches. These smart home devices connect to the SmartHub, which is discussed in "Hosted Services Revenue" below. The performance obligation for hardware revenue is considered satisfied, and revenue is recognized, when the hardware device is shipped to the customer, except for the SmartHub, which is discussed in "Hosted Services Revenue" below. We generally provide a one-year warranty period on hardware devices that we deliver and install. We record the cost of the warranty as a component of cost of revenue.
Professional Services Revenue
We generate professional services revenue from the installation of smart home hardware devices, which do not result in significant customization of the installed products and is generally performed over a period of 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 with our employees managing the engagement. Professional services contracts are generally performed on a fixed-price basis and revenue is recognized over time as installations are completed.
Hosted Services Revenue
Hosted services include recurring 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 typically ranging from one month to seven years and include recurring fixed plan subscription fees. 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. Variable consideration is immaterial. We also sell the hardware SmartHub device, which only functions with the subscription to our proprietary software applications and related hosting services. We consider the SmartHub device and hosting services subscription as a single performance obligation, and therefore we defer the recognition of revenue for the SmartHub devices that are sold with application subscriptions. The estimated average in-service life of the SmartHub devices is four years. When a SmartHub 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.
Cost of Revenue
Cost of revenue consists primarily of direct costs of products and services together with the indirect cost of customer care and support over the life of the service arrangement. We expect cost of revenue to increase in absolute dollars in future periods. We record any change to cost of job performance, job conditions and the resulting estimated profitability in the period during which the revision is identified. Hardware Cost of hardware revenue consists primarily of direct costs of proprietary products, 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 warranty expenses together with the indirect cost of customer care and support. We expect cost of revenue to increase in absolute dollars in future periods. In 2019, theU.S. administration imposed significant changes toU.S. trade policy with respect toChina . Tariffs have subjected certainSmartRent products manufactured overseas to additional import duties. The amount of the import tariff has changed numerous times based on action by theU.S. administration. We continue to monitor the change in tariffs. If tariffs are increased, such actions may increase our cost of hardware revenue and reduce our hardware revenue margins further in the future. 33 --------------------------------------------------------------------------------
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. We expect cost of revenue to increase in absolute dollars in future periods. Hosted Services Cost of hosted services revenue consists primarily of the amortization of the direct costs of our SmartHub device 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. We expect cost of revenue to increase in absolute dollars in future periods 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. Our research and development efforts are focused on enhancing and developing additional functionality for our existing products and on new product development. We expense research and development costs as incurred. We expect our research and development expense to 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. We expect that our sales and marketing expenses will increase over time as we hire additional sales and marketing personnel, increase our marketing activities, grow our domestic and international 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 and information technology costs. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and stock exchange listing requirements, additional insurance expense, investor relations activities and other administrative and professional services. We also expect to increase the size of our general and administrative staff in order to support the growth of our business.
Other Expenses
Other expenses consist primarily of interest expense, foreign currency transaction gains and losses, and other income related to the operations ofZipato , a wholly owned subsidiary ofZenith Highpoint, Inc. , which entities we acquired in a business combination inFebruary 2020 . The interest expense is recorded in connection with balances outstanding on our Revolving Facility (as defined below) and Term Loan Facility (as defined below). The foreign currency transaction gains and losses relate to the impact of transactions denominated in a foreign currency other than theU.S. dollar. As we have expanded our international operations, our exposure to fluctuations in foreign currencies has increased, which we expect to continue. 34 --------------------------------------------------------------------------------
Provision for Income Taxes
We had no provision forU.S. federal and state income taxes for the reported periods. The provision for income taxes on the Consolidated Statement of Operations is related to foreign subsidiaries. We have established a full valuation allowance for net deferredU.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.
Results of Operations for the Three and Nine Months Ended
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.
Nine months ended September
Three months ended September 30, Change Change 30, Change Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands) (dollars in thousands)
Revenue
Hardware $ 22,025 $ 9,782 $ 12,243 125 % $ 48,452 $ 23,956 $ 24,496 102 %
Professional
services 8,180 4,717 3,463 73 % 15,345 9,558 5,787 61 %
Hosted services 4,927 2,089 2,838 136 % 12,172 5,419 6,753 125 %
Total revenue 35,132 16,588 18,544 112 % 75,969 38,933 37,036 95 %
Cost of revenue
Hardware 24,565 10,428 14,137 136 % 49,222 24,991 24,231 97 %
Professional
services 14,115 4,842 9,273 192 % 25,849 11,591 14,258 123 %
Hosted services 3,240 1,351 1,889 140 % 7,817 3,735 4,082 109 %
Total cost of
revenue 41,920 16,621 25,299 152 % 82,888 40,317 42,571 106 %
Operating expense
Research and
development 6,881 2,637 4,244 161 % 14,057 6,641 7,416 112 %
Sales and
marketing 4,948 1,328 3,620 273 % 9,094 4,048 5,046 125 %
General and
administrative 7,910 4,104 3,806 93 % 15,673 12,759 2,914 23 %
Total operating
expenses 19,739 8,069 11,670 145 % 38,824 23,448 15,376 66 %
Loss from
operations (26,527 ) (8,102 ) (18,425 ) 227 % (45,743 ) (24,832 ) (20,911 ) 84 %
Other Expense
Interest expense (57 ) (130 ) 73 (56 )% (199 ) (510 ) 311 (61 )%
Other expense,
net (58 ) (417 ) 359 (86 )% 69 (909 ) 978 (108 )%
Loss before
income taxes (26,642 ) (8,649 ) (17,993 ) 208 % (45,873 ) (26,251 ) (19,622 ) 75 %
Provision for
income taxes 43 48 (5 ) (10 )% 130 170 (40 ) (24 )%
Net Loss $ (26,685 ) $ (8,697 ) $ (17,988 ) 207 % $ (46,003 ) $ (26,421 ) $ (19,582 ) 74 %
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Comparison of the three and nine months ended
Revenue
Three months ended September Nine months ended
30, Change Change September 30, Change Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands) (dollars in thousands)Revenue Hardware$ 22,025 $ 9,782$ 12,243 125 %$ 48,452 $ 23,956 $ 24,496 102 % Professional services 8,180 4,717 3,463 73 % 15,345 9,558 5,787 61 % Hosted services 4,927 2,089 2,838 136 % 12,172 5,419 6,753 125 % Total revenue$ 35,132 $ 16,588 $ 18,544 112 %$ 75,969 $ 38,933 $ 37,036 95 % Total revenue increased by$18.5 million , or 112%, to$35.1 million for the three months endedSeptember 30, 2021 , from$16.6 million for the three months endedSeptember 30, 2020 . Total revenue increased by$37.0 million , or 95%, to$76.0 million for the nine months endedSeptember 30, 2021 , from$38.9 million for the nine months endedSeptember 30, 2020 . The increase in revenue for both periods resulted primarily from an increase in New Units Deployed during 2021 compared to 2020 and from the increased number of cumulative active subscriptions for our hosted services during 2021 compared to 2020. We had 59,347 New Units Deployed during the three months endedSeptember 30, 2021 compared to 28,190 New Units Deployed during the same period in 2020, an increase of 31,157 New Units Deployed, or 111%, in the volume of our installation activity. During the nine months endedSeptember 30, 2021 , we had 115,667 New Units Deployed compared to 53,073 New Units Deployed during the same period in 2020, an increase of 62,594 New Units Deployed, or 118%, in the volume of our deployments. The aggregate number of Units Deployed was 270,772 atSeptember 30, 2021 compared to 124,885 atSeptember 30, 2020 . Hardware revenue increased by$12.2 million , or 125%, to$22.0 million for the three months endedSeptember 30, 2021 , from$9.8 million for the three months endedSeptember 30, 2020 . The increase in hardware revenue for the three months endedSeptember 30, 2021 was primarily attributable to an increase in hardware sales volumes of$12.5 million resulting from the increase in units shipped, which was partially offset by a decrease of approximately$0.3 million related to third-party sales by our subsidiaryZipato . Average revenue per unit ("ARPU") increased 25% to$340.56 for the 2021 period from$272.18 for the 2020 period. Hardware revenue increased by$24.5 million , or 102%, to$48.5 million for the nine months endedSeptember 30, 2021 , from$24.0 million for the nine months endedSeptember 30, 2020 . This increase in hardware revenue was primarily attributable to an increase in hardware sales volume of$24.0 million resulting from the increase in units shipped and an increase of approximately$0.4 million related to third- party sales by our subsidiaryZipato . ARPU decreased 3% to$352.34 for the 2021 period from$363.89 for the 2020 period. Professional services revenue increased by$3.5 million , or 73%, to$8.2 million for the three months endedSeptember 30, 2021 , from$4.7 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , professional services revenue increased by$5.8 million , or 61%, to$15.3 million from$9.6 million for the nine months endedSeptember 30, 2020 . For both periods, the increases were primarily attributable to an increase in New Units Deployed, partially offset by decreased ARPU. Hosted services revenue increased by$2.8 million , or 136%, to$4.9 million for the three months endedSeptember 30, 2021 , from$2.1 million for the three months endedSeptember 30, 2020 , resulting from the increased aggregate number of Units Deployed from 124,885 units atSeptember 30, 2020 to 270,772 units atSeptember 30, 2021 . Our ARR was approximately$8.7 million for the three months endedSeptember 30, 2021 , compared to$3.4 million for the three months endedSeptember 30, 2020 . Hosted services revenue increased by$6.8 million , or 125%, to$12.2 million for the nine months endedSeptember 30, 2021 , from$5.4 million for the nine months endedSeptember 30, 2020 , resulting from the increased aggregate number of Units Deployed from 124,885 units atSeptember 30, 2020 to 270,772 units atSeptember 30, 2021 . We measure and evaluate Committed Units to assess the general health and trajectory of our business operations and growth. As ofSeptember 30, 2021 ,SmartRent had 704,242 Committed Units. We began tracking Committed Units in the latter part of 2020 and do not have the comparative metric as ofSeptember 30, 2020 . 36
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Cost of Revenue
Three months ended September Nine months ended
30, Change Change September 30, Change Change
2021 2020 $ % 2021 2020 $ %
(dollars in thousands) (dollars in thousands)Cost of revenue Hardware$ 24,565 $ 10,428 $ 14,137 136 %$ 49,222 $ 24,991 $ 24,231 97 % Professional services 14,115 4,842 9,273 192 % 25,849 11,591 14,258 123 % Hosted services 3,240 1,351 1,889 140 % 7,817 3,735 4,082 109 % Total cost of revenue$ 41,920 $ 16,621 $ 25,299 152 %$ 82,888 $ 40,317 $ 42,571 106 % Total cost of revenue increased by$25.3 million , or 152%, to$41.9 million for the three months endedSeptember 30, 2021 , from$16.6 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , total cost of revenue increased by$42.6 million , or 106%, to$82.9 million , from$40.3 million for the nine months endedSeptember 30, 2020 . For both the three months and nine months endedSeptember 30, 2021 , the increase in cost of revenue resulted primarily from an increase in the volume of sales and installations of our smart home hardware devices and the increased number of active subscriptions for our software service applications. In addition, the 2021 periods include an increase to the warranty provision of$5.7 million . Hardware cost of revenue increased by$14.1 million , or 136%, to$24.6 million for the three months endedSeptember 30, 2021 , from$10.4 million for the three months endedSeptember 30, 2020 . This increase in hardware cost of revenue was primarily attributable to approximately$6.2 million resulting from greater sales volumes, an increase of approximately$5.7 million for a warranty provision for battery deficiencies, and an increase of approximately$0.9 million for personnel-related costs for the three months endedSeptember 30, 2021 . Hardware cost of revenue increased by$24.2 million , or 97%, to$49.2 million for the nine months endedSeptember 30, 2021 , from$25.0 million for the nine months endedSeptember 30, 2020 . This increase in hardware cost of revenue was primarily attributable to approximately$15.3 million resulting from greater sales volumes, an increase of approximately$5.7 million for a warranty provision for battery deficiencies, and an increase of approximately$1.8 million for personnel-related costs for the nine months endedSeptember 30, 2021 . Professional services cost of revenue increased by$9.3 million , or 192%, to$14.1 million for the three months endedSeptember 30, 2021 , from$4.8 million for the three months endedSeptember 30, 2020 . This increase in professional services cost of revenue was primarily attributable to approximately$7.2 million resulting from increased sales volumes of our smart home devices leading to an increase in installation services provided, and$1.9 million of personnel-related costs as we increased our professional services staff to increase our capacity to deploy units in anticipation of increased sales volumes. Professional services cost of revenue increased by$14.3 million , or 123%, to$25.8 million for the nine months endedSeptember 30, 2021 , from$11.6 million for the nine months endedSeptember 30, 2020 . This increase in professional services cost of revenue was primarily attributable to approximately$11.2 million resulting from increased sales volumes of our smart home devices leading to an increase in installation services provided, and$2.9 million of personnel-related costs as we increased our professional services staff to increase our capacity to deploy units in anticipation of increased sales volumes. Hosted services cost of revenue increased by$1.9 million , or 140%, to$3.2 million for the three months endedSeptember 30, 2021 , from$1.4 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , hosted services cost of revenue increased by$4.1 million , or 109%, to$7.8 million from$3.7 million for the nine months endedSeptember 30, 2020 . For both periods, the increases are a result of the increase in Units Deployed and the resulting increase in the number of active subscriptions for our software service applications. 37
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Operating Expenses
Three months ended September Nine months ended
30, Change Change September 30, Change Change
2021 2020 $ % 2021 2020 $ %
Research and
development $ 6,881 $ 2,637 $ 4,244 161 % $ 14,057 $ 6,641 $ 7,416 112 %
Sales and
marketing 4,948 1,328 3,620 273 % 9,094 4,048 5,046 125 %
General and
administrative 7,910 4,104 3,806 93 % 15,673 12,759 2,914 23 %
Research and development expenses increased by $4.2 million , or 161%, to $6.9
million for the three months ended September 30, 2021 , from $2.6 million for the
three months ended September 30, 2020 , resulting primarily from approximately
$2.1 million of research and development personnel-related costs as we increased
our research and development staff, $1.4 million of stock-based compensation, a
$0.3 million increase in expenses related to business applications and software,
and a $0.2 million increase in recruiting expenses.
Research and development expenses increased by $7.4 million , or 112%, to $14.1
million for the nine months ended September 30, 2021 , from $6.6 million for the
nine months ended September 30, 2020 , resulting primarily from approximately
$4.6 million of research and development personnel-related costs, as we
increased our research and development staff, $1.3 million of stock-based
compensation, a $0.5 million increase in expenses related to business
applications and software, a $0.3 million increase in recruiting expenses, and
$0.3 million in consulting expenses. We expect that our personnel-related costs
will continue to increase in future periods as we continue to develop new
applications and enhance existing products and solutions.
Sales and marketing expenses increased by $3.6 million , or 273%, to $4.9 million
for the three months ended September 30, 2021 , from $1.3 million for the three
months ended September 30, 2020 , resulting primarily from approximately $1.3
million of increased personnel-related costs, as we increased our sales and
marketing staff, a $1.0 million increase in stock-based compensation, a $0.5M
increase in conferences and trade shows expense, $0.3 million increase in travel
related expenses, and a $0.3 million increase in expenses related to business
applications and software.
Sales and marketing expenses increased by $5.0 million , or 125%, to $9.1 million
for the nine months ended September 30, 2021 , from $4.0 million for the nine
months ended September 30, 2020 , resulting primarily from approximately $2.3
million of increased personnel-related costs as we increased our sales and
marketing staff, an increase in stock-based compensation of $1.0 million , an
increase in business applications and software of $0.6 million , an increase in
warrant related marketing expense of $0.5 million , and an increase in travel
related expenses of $0.4 million . We expect that our personnel-related costs
will continue to increase in future periods as we continue to expand our sales
and marketing efforts to increase sales with existing customers and initiate
business with new customers, and we expect that our conference and tradeshow
costs and other sales and marketing expense will increase in future periods.
General and administrative expenses increased by $3.8 million , or 93%, to $7.9
million for the three months ended September 30, 2021 , from $4.1 million for the
three months ended September 30, 2020 , resulting primarily from an increase in
stock-based compensation of $1.6 million , an increase in business insurance of
$0.6 million primarily related to directors and officers insurance initiated in
connection with the Business Combination, an increase in legal and consulting
expenses of $0.7 million , and an increase in travel related expense of $0.3
million .
For the nine months ended September 30, 2021 , general and administrative
expenses increased by $2.9 million , or 23%, to $15.7 million from $12.8 million
for the nine months ended September 30, 2020 , resulting primarily from increases
in stock-based compensation of $1.5 million , $1.8 million in legal and
consulting fees, $0.7 million in business insurance, $0.6 million in other
miscellaneous general and administrative expenses. These increases were
partially offset by a decrease in personnel-related costs of $3.2 million , which
is primarily attributable to Zipato acquisition-related compensation costs
recorded during the nine months ended September 30, 2020 that did not reoccur
during 2021. We expect our general and administrative costs to increase in
future periods as we incur expenses to support the anticipated growth of our
business, and the significant accounting, legal, and compliance infrastructure
required to operate as a public company.
38
--------------------------------------------------------------------------------Other Expenses
Three months ended September 30 , Change
Change Nine months ended
2021 2020 $ % 2021 2020 $ %
Interest expense $ (57 ) $ (130 ) $ 73 (56 )% $ (199 ) $ (510 ) $ 311 (61 )%
Other expense, net (58 ) (417 ) 359 (86 )% 69 (909 ) 978 (108 )%
Net interest expense decreased by $0.1 million , or 56%, to $0.1 million for the
three months ended September 30, 2021 , from $0.1 million for the three months
ended September 30, 2020 . Net interest expense decreased by $0.3 million , or
61%, to $0.2 million for the nine months ended September 30, 2021 , from $0.5
million for the nine months ended September 30, 2020 . The decrease in net
interest expense for both comparison periods is due to convertible notes being
outstanding during the three and nine months ended September 30, 2020 . There
were no convertible notes outstanding in the corresponding periods during 2021.
Other expense, net decreased by $0.4 million , or 86%, to $0.1 million of other
income, net for the three months ended September 30, 2021 , from $0.4 million of
other expense, net, primarily due to gains in foreign currency balances. Other
expense, net decreased by $1.0 million , or 108%, to $0.1 million of other
income, net for the nine months ended September 30, 2021 , from $0.9 million of
other expense, net for the nine months ended September 30, 2020 . This change is
driven by gains in foreign currency balances as well as the $0.2 million loss on
the extinguishment of debt due to the conversion of convertible notes during the
nine months ended September 30, 2020 , which did not occur during the nine months
ended September 30, 2021 .
Income Taxes
Nine months ended September
Three months ended September 30, Change Change 30, Change Change
2021 2020 $ % 2021 2020 $ %
Loss before
income taxes $ (26,642 ) $ (8,649 ) $ (17,993 ) 208 %$ (45,873 ) $ (26,251 ) $ (19,622 ) 75 % Provision for income taxes 43 48 (5 ) (10 )% 130 170 (40 ) (24 )% We provided a full valuation allowance on our netU.S federal and state deferred tax assets atSeptember 30, 2021 andDecember 31, 2020 . As ofSeptember 30, 2021 , we had$18.7 million ofU.S. federal and$3.3 million of state tax effected net operating loss carryforwards available to reduce future taxable income, which will be carried forward indefinitely forU.S. federal tax purposes and will expire on varying dates for state tax purposes. The provision for income taxes in each of the periods reported is related foreign subsidiaries. 39 --------------------------------------------------------------------------------
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 it also 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 or loss computed in accordance with GAAP before interest expense, income tax expense and depreciation and amortization.
We define Adjusted EBITDA as EBITDA before stock-based compensation expense, non-employee warrant expense, loss on extinguishment of debt, change in fair value of derivatives, unrealized gains and losses in currency exchange rates, warranty provisions for battery deficiencies and other income and expenses. Our management uses EBITDA and Adjusted EBITDA in a number of ways 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 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 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 or loss. EBITDA and Adjusted EBITDA are not used as measures of our liquidity and should not be considered alternatives to net income or 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.
Three months ended September
Nine months ended
30,
(amounts in thousands) 2021 2020 2021 2020
Net loss $ (26,685 ) $ (8,697 ) $ (46,003 ) $ (26,421 )
Interest expense, net 57 130 199 510
Provision for income taxes 43 48 130 170
Depreciation and amortization 130 96 303 217
EBITDA (26,455 ) (8,423 ) (45,371 ) (25,524 )
Stock-based compensation 4,307 440 5,162 1,342
Non-cash warrant expense 248 160 647 342
Loss on extinguishment of debt - - - 164
Loss on change in exchange rates - 311 - 476
Compensation expense in connection - 760 - 3,353
with Zipato acquisition
Loss on warranty accrual 5,700 - 5,700 -
Other non-operating expense, net 60 (4 ) 64 10
Adjusted EBITDA $ (16,140 ) $ (6,756 ) $ (33,798 ) $ (19,837 )
40
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Liquidity and Capital Resources
Sources of Liquidity
Debt Issuances
As ofSeptember 30, 2021 , we had cash and cash equivalents of$472.5 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 we received through the private issuance of our convertibleSmartRent preferred stock, the net proceeds received as a result of the Business Combination, payments collected from sales to our customers, and proceeds from a Revolving Facility, convertible notes and Term Loan Facility. The term of our Revolving Facility matured inAugust 2021 , and we have extended the maturity of the Revolving Facility throughDecember 2021 as we revise the Revolving Facility to support operations as a public company. InAugust 2019 , we entered into a loan and security agreement for a credit facility (the "Credit Facility"). The Credit Facility provides$15.0 million of borrowing capacity and consists of a$10.0 million revolving line of credit (the "Revolving Facility"), which will mature inNovember 2021 and a$5.0 million term loan (the "Term Loan Facility"), which will mature inNovember 2023 . The Term Loan Facility is subject to monthly payments of interest, in arrears, accrued on the principal balance of the Term Loan Facility throughNovember 2020 . Thereafter, and continuing through the Term Loan Facility maturity date, the Term Loan Facility is subject to equal monthly payments of principal plus accrued interest. As ofSeptember 30, 2021 , the Term Loan Facility had a balance of$3.6 million . The Revolving Facility had no balance as ofSeptember 30, 2021 . InFebruary 2020 , we issued a subordinated convertible note in the principal amount of$0.1 million , bearing interest at 5% per annum, pursuant to a note purchase agreement (the "February 2020 Convertible Note"). Interest on theFebruary 2020 Convertible Note accrued at the coupon rate, compounded annually. TheFebruary 2020 Convertible Note was converted inMarch 2020 into shares of SmartRent Series C-1 Preferred Stock, which automatically converted into a number of shares of Common Stock upon consummation of the Business Combination.
Legacy SmartRent Preferred Stock Issuances
During the year endedDecember 31, 2020 , Legacy SmartRent issued a total of approximately 5.5 million shares of Series C Preferred Stock in three tranches that closed in March, April, andMay 2020 . The Series C Preferred Stock was issued in exchange for$57.5 million gross cash proceeds. Expenses in connection with the issuance of the Series C Preferred Stock were$0.1 million , resulting in net cash proceeds of$57.4 million . During the year endedDecember 31, 2020 , Legacy SmartRent also issued 761 shares of Series C-1 Preferred Stock (which automatically converted into a number of shares of Common Stock upon consummation of the Business Combination) in connection with the redemption of certain convertible notes. In February andMarch 2021 , Legacy SmartRent issued approximately 3.4 million additional shares of Series C Preferred Stock (which automatically converted into a number of shares of Common Stock upon consummation of the Business Combination) in exchange for$35.0 million gross cash proceeds. Expenses in connection with the issuance of the Series C Preferred Stock were$0.2 million , resulting in net cash proceeds of$34.8 million . We have incurred negative cash flows from operating activities and significant losses from operations in the past as reflected in our accumulated deficit of$128.6 million as ofSeptember 30, 2021 . We may require additional capital resources to continue our operations in future periods. We expect to incur expenses related to non-cancellable contractual obligations from our operating leases and the Term Loan Facility. We believe that our current cash, cash equivalents, available borrowing capacity under the Revolving Facility, and cash raised in the Business Combination will be sufficient to fund our operations for at least the next 12 months. We intend to use a portion of the net cash proceeds from the Business Combination for payment of certain transaction expenses. 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. 41 --------------------------------------------------------------------------------
Cash Flow Summary - Nine Months Ended
The following table summarizes our cash flows for the periods presented:
Nine months ended September 30,
2021 2020
(dollars in thousands)
Net cash provided by (used in)
Operating activities $ (41,745 ) $ (42,311 )
Investing activities (2,851 ) (2,656 )
Financing activities 478,531 48,360
Operating Activities
For the nine months ended September 30, 2021 , our operating activities used
$41.7 million in cash resulting primarily from our net loss of $46.0 million ,
which was partially offset by $12.6 million of non-cash expenses consisting
primarily of $5.9 million for the provision of warranty expense, $5.2 million
for stock-based compensation, $0.6 million for non-employee warrant expense, and
$0.3 million for depreciation and amortization. For the nine months ended
September 30, 2021 , we used $8.3 million net cash from changes in our operating
assets and liabilities resulting primarily from an increase of $18.0 million in
prepaid expenses and other assets, an increase of $12.3 million in accounts
receivable, an increase of $6.0 million in deferred cost of revenue, an increase
of $5.0 million in inventory, and a decrease of $1.9 million in accrued expenses
and other liabilities. These uses were partially offset by an increase of $30.2
million in deferred revenue and an increase of $5.1 million in accounts payable.
For the nine months ended September 30, 2020 , our operating activities used
$42.3 million in cash resulting primarily from our net loss of $26.4 million ,
which was partially offset by $6.0 million non-cash expenses consisting
primarily of $3.4 million non-cash compensation expense related to the Zipato
acquisition, stock-based compensation of $1.3 million , and non-employee warrant
expense of $0.3 million . For the nine months ended September 30, 2020 , we used
net cash of $21.9 million from changes in our operating assets and liabilities
resulting primarily from an increase of $26.8 million in accounts receivable, an
$7.4 million increase in inventory, a $6.7 million increase in deferred cost of
revenue, and $5.2 million increase in prepaid expenses and other assets. This
was partially offset by an $21.8 million increase in deferred revenue.
Investing Activities
For the nine months ended
For the nine months endedSeptember 30, 2020 , we used$2.7 million of cash for investing activities, primarily related to theZipato acquisition, net of cash acquired. Financing Activities For the nine months endedSeptember 30, 2021 , our financing activities provided$478.5 million of cash consisting primarily of net proceeds from the consummation of the Business Combination in the amount of$445.0 million and convertible preferred stock issued of$34.8 million , net of expenses. The proceeds were partially offset by payments on the Term Loan Facility of$1.3 million . For the nine months endedSeptember 30, 2020 , our financing activities provided$48.4 million of cash consisting primarily of net proceeds from the issuance of Legacy SmartRent Series C Preferred Stock in the amount of$57.4 million which were partially offset by net payments on the Revolving Facility of$4.8 million and payments on a note payable related to theZipato acquisition of$4.3 million .
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