# SmartRent, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [SmartRent, Inc.](/companies/smrt.md) (CIK 1837014)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 12:15 ET
- Period: 2023-09-30
- Accession: 0000950170-23-059762
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1837014/000095017023059762/smrt-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1837014/000095017023059762/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $58.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $176.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $44.6m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $144.1m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $7.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $21.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$9.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$37.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$33.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | −$22.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$7.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$31.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.04 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.16 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.04 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.16 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 201,584,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 199,858,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$1.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $116.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $211.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $344.1m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $515.6m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $123.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $172.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $343.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 61,564 characters.

*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 herein and the consolidated financial statements and notes thereto for the year ended December 31, 2022 contained in our Annual Report on Form 10-K filed with the SEC on March 8, 2023, as amended.*

*This discussion may contain forward-looking statements based upon our current expectations that involve risks and uncertainties. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”*

### 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 both smart building hardware and cloud-based SaaS solutions, provides seamless visibility and control over real estate assets. Our platform lowers operating costs, increases revenues, mitigates operational friction and protects assets for owners and operators, while providing a differentiated, elevated living experience for residents.

Through a Hub Device, we integrate our proprietary enterprise software with third-party smart 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 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 that provides customers with training, installation, and support services. Our SightPlan acquisition advanced our product roadmap and augmented our cloud-based SaaS solutions for current and prospective customers.

We believe SmartRent is the category leader in the enterprise smart home solutions industry. As of September 30, 2023, we had 682,632 Units Deployed and 588 customers, including many of the top multifamily residential owners in the U.S. As of that date, our customers owned an aggregate of approximately 6.9 million units. This represents approximately 16% 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 homebuilders, single-family rental homeowners, and iBuyers in the United States.

### 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.

### 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 Alloy Access and made-to-order specialty locks.

The incremental improvements in the global supply chain are evidenced by our reduction of backlogged Units Deployed for Alloy Access and made-to-order locks. We believe that this positive trend will continue into next year.

### 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. 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.

The acquisition of SightPlan enhances 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. Both SmartRent and SightPlan 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.

### Category Adoption and Market Growth

Our future growth depends in part on the continued consumer adoption of hardware and software 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. 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 included elsewhere in this Report are prepared in accordance with GAAP.

### 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: (i) they might not accurately predict our future GAAP financial results, (ii) we might not realize all or any part of the anticipated value reflected in Units Booked, and (iii) 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.

### 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) as of a stated measurement date. We define New Units Deployed as the aggregate number of Hub Devices that were installed (including customer self-installations) during a stated measurement period. Although our revenue is primarily driven by New Units Deployed and the aggregate number of Units Deployed due to the expansion of our products and services, the correlation between New Units Deployed and revenue is not as strong as it was historically. We use these operating metrics to assess the general health and trajectory of our business and growth. As of September 30, 2023 and 2022, we had an aggregate of 682,632 and 504,409 Units Deployed, respectively.

We had 32,308, and 53,399 New Units Deployed during the three months ended September 30, 2023 and 2022, respectively. We had 135,436, and 164,924 New Units Deployed during the nine months ended September 30, 2023 and 2022, respectively.

### Units Booked

We define Units Booked as the aggregate number of Hub Device 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. We had 46,272 and 67,285 Units Booked during the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, there were 131,347 and 218,073 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 income/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, warranty provisions for battery deficiencies, asset impairment, loss on extinguishment of debt, change in fair value of derivatives, unrealized gains and losses in currency exchange rates, non-recurring expenses in connection with acquisitions, severance charges, and other expenses caused by non-recurring or unusual events that are not indicative of our ongoing business. 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 reconciliations of these measures.

### Annual Recurring Revenue

We define Annual Recurring Revenue (“ARR”) as the annualized value of our recurring SaaS 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 $43.3 million and $31.8 million as of September 30, 2023 and 2022, respectively.

### 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.

#### 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 proprietary 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 eight 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 sell certain Hub Devices, which only function with the subscription to our proprietary software applications and related hosting services. 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.

### 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 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 proprietary 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. 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 in the future.

#### 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.

#### 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. We expect cost of Hosted Services 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 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. Our research and development costs may increase in absolute dollars if 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. As we have expanded our international operations, our exposure to fluctuations in foreign currencies has increased, which we expect to continue.

### Provision for Income Taxes

The income tax benefit on the Consolidated Statement of Operations and Comprehensive Loss is primarily related to the foreign and state taxes offset by a change in the valuation allowance. We 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 the federal and state deferred tax assets will be realized in future periods if it reports taxable income. We believe we have established an adequate allowance for 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 September 30, 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.

*(dollars in thousands)*

*(dollars in thousands)*

| Revenue | Three months ended September 30, 2023 | 2022 | Change $% | Change | Nine months ended September 30, 2023 | 2022 | Change $% | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware | $35,631 | $26,683 | $8,948 | 34% | $100,744 | $69,692 | $31,052 | 45% |
| Professional services | 5,962 | 7,478 | (1,516) | (20)% | 28,781 | 23,510 | 5,271 | 22% |
| Hosted services | 16,511 | 13,341 | 3,170 | 24% | 47,060 | 34,068 | 12,992 | 38% |
| Total revenue | 58,104 | 47,502 | 10,602 | 22% | 176,585 | 127,270 | 49,315 | 39% |
| Cost of revenue |  |  |  |  |  |  |  |  |
| Hardware | 27,556 | 25,417 | 2,139 | 8% | 82,118 | 68,226 | 13,892 | 20% |
| Professional services | 11,130 | 14,386 | (3,256) | (23)% | 44,573 | 43,668 | 905 | 2% |
| Hosted services | 5,887 | 6,516 | (629) | (10)% | 17,365 | 17,949 | (584) | (3)% |
| Total cost of revenue | 44,573 | 46,319 | (1,746) | (4)% | 144,056 | 129,843 | 14,213 | 11% |
| Operating expense |  |  |  |  |  |  |  |  |
| Research and development | 7,573 | 7,610 | (37) | (0)% | 21,340 | 22,086 | (746) | (3)% |
| Sales and marketing | 4,636 | 4,901 | (265) | (5)% | 14,626 | 16,202 | (1,576) | (10)% |
| General and administrative | 11,269 | 15,337 | (4,068) | (27)% | 33,891 | 41,120 | (7,229) | (18)% |
| Total operating expenses | 23,478 | 27,848 | (4,370) | (16)% | 69,857 | 79,408 | (9,551) | (12)% |
| Loss from operations | (9,947) | (26,665) | 16,718 | (63)% | (37,328) | (81,981) | 44,653 | (54)% |
| Other income (expense) |  |  |  |  |  |  |  |  |
| Interest income, net | 2,233 | 506 | 1,727 | 341% | 6,064 | 747 | 5,317 | 712% |
| Other (expense) income, net | (42) | 290 | (332) | (114)% | (45) | 566 | (611) | (108)% |
| Loss before income taxes | (7,756) | (25,869) | 18,113 | (70)% | (31,309) | (80,668) | 49,359 | (61)% |
| Income tax benefit (expense) | 33 | (81) | 114 | (141)% | 22 | 5,735 | (5,713) | (100)% |
| Net Loss | $(7,723) | $(25,950) | $18,227 | (70)% | $(31,287) | $(74,933) | $43,646 | (58)% |

### Comparison of the Three and Nine months ended September 30, 2023 and 2022

### Revenue

*(dollars in thousands)*

*(dollars in thousands)*

| Revenue | Three months ended September 30, 2023 | 2022 | Change $% | Change | Nine months ended September 30, 2023 | 2022 | Change $% | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware | $35,631 | $26,683 | $8,948 | 34% | $100,744 | $69,692 | $31,052 | 45% |
| Professional services | 5,962 | 7,478 | (1,516) | (20)% | 28,781 | 23,510 | 5,271 | 22% |
| Hosted services | 16,511 | 13,341 | 3,170 | 24% | 47,060 | 34,068 | 12,992 | 38% |
| Total revenue | $58,104 | $47,502 | $10,602 | 22% | $176,585 | $127,270 | $49,315 | 39% |

Total revenue increased by $10.6 million, or 22%, to $58.1 million for the three months ended September 30, 2023, from $47.5 million for the three months ended September 30, 2022. The increase in revenue resulted primarily from an increase in average revenue per unit ("ARPU"), increased hardware revenue related to shipping distinct Hub Devices in the current period, and an increased number of cumulative active subscriptions for our Hosted Services during 2023 compared to 2022.

Total revenue increased by $49.3 million, or 39%, to $176.6 million for the nine months ended September 30, 2023, from $127.3 million for the nine months ended September 30, 2022. The increase in revenue resulted primarily from an increase in ARPU, increased hardware revenue related to shipping distinct Hub Devices in the current period, an increased number of cumulative active subscriptions for our Hosted Services during 2023 compared to 2022, and the realization of additional revenue from our acquisition of SightPlan in March 2022.

Hardware revenue increased by $8.9 million, or 34%, to $35.6 million for the three months ended September 30, 2023, from $26.7 million for the three months ended September 30, 2022 This increase in hardware revenue resulted from a 23% increase in units shipped and an ARPU increase of 8% to $569.32 for the 2023 period from $524.79 for the 2022 period. The increase in ARPU is primarily driven by hardware revenue recognized on the shipment of distinct Hub Devices during the three months ended September 30, 2023. During the three months ended September 30, 2022, only non-distinct Hub Devices were shipped, and thus, no hardware revenue was recognized for these devices. See Note 2 - Revenue Recognition for more information on revenue recognition related to Hub Devices. We define hardware ARPU as total hardware revenue for a given period divided by number of Hub Devices shipped in the same period.

Hardware revenue increased by $31.1 million, or 45%, to approximately $100.8 million for the nine months ended September 30, 2023, from $69.7 million for the nine months ended September 30, 2022. This increase in hardware revenue resulted from a 17% increase in units shipped and an ARPU increase of 24% to $569.95 for the 2023 period from $460.15 for the 2022 period. The increase in ARPU is primarily driven by hardware revenue recognized on the shipment of distinct Hub Devices during the nine months ended September 30, 2023. During the nine months ended September 30, 2022, only non-distinct Hub Devices were shipped, and thus, no hardware revenue was recognized for these devices. See Note 2 - Revenue Recognition for more information on revenue recognition related to Hub Devices.

Professional services revenue decreased by $1.5 million, or 20%, to $6.0 million for the three months ended September 30, 2023, from $7.5 million for the three months ended September 30, 2022. The decrease was primarily attributable to a 39% decrease in Units Deployed from the three months ended September 30, 2022, partially offset by an increase in ARPU of 32% from the three months ended September 30, 2022. The increase in ARPU was primarily driven by a favorable customer mix. We define professional services ARPU as total professional services revenue divided by Units Deployed in a period.

Professional services revenue increased by $5.3 million, or 22%, to $28.8 million for the nine months ended September 30, 2023, from $23.5 million for the nine months ended September 30, 2022. The increase was primarily attributable to an ARPU increase of 49% from the nine months ended September 30, 2022. The increase in ARPU was primarily driven by a favorable customer mix.

Hosted Services revenue increased by $3.2 million, or 24%, to $16.5 million for the three months ended September 30, 2023, from $13.3 million for the three months ended September 30, 2022. Of the $16.5 million revenue in 2023, $5.7 million is related to hub amortization and $10.8 million is related to SaaS revenue. Revenue increased from hub amortization and SaaS by $0.4 million and $2.8 million, respectively, from the three months ended September 30, 2022 to the three months ended September 30, 2023. The increase from both components of Hosted Services revenue resulted primarily from the increased aggregate number of Units Deployed from 504,409 units at September 30, 2022 to 682,632 units at September 30, 2023. We anticipate Hosted Services revenue from hub amortization will decrease in future periods as we continue to ship distinct Hub Devices. This revenue will be recognized as Hardware revenue at a point in time when the device is shipped to the customer. See Note 2 - Revenue Recognition for more information on revenue recognition related to Hub Devices.

Hosted Services revenue increased by $13.0 million, or 38%, to $47.1 million for the nine months ended September 30, 2023, from $34.1 million for the nine months ended September 30, 2022. Of the $47.1 million revenue in 2023, $17.6 million is related to hub amortization and $29.5 million is related to SaaS revenue. Revenue increased from hub amortization and SaaS by $3.2 million and $9.8 million, respectively, from the nine months ended September 30, 2022 to the nine months ended September 30, 2023. The increase from both components of Hosted Services revenue resulted primarily from the increased aggregate number of Units Deployed from 504,409 units at September 30, 2022 to 682,632 units at September 30, 2023 and an increase in SaaS ARPU of 1% to $5.33 for the nine months ended September 30, 2023 from $5.28 for the nine months ended September 30, 2022. Approximately $2.5 million of the 2023 increase in SaaS resulted from SightPlan contributions. We define SaaS ARPU as total SaaS revenue for a given period divided by the average aggregate Units Deployed in the same 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 are a subset of Committed Units. We had 46,272 and 67,285 Units Booked during the three months ended September 30, 2023 and 2022, respectively. We had 131,347 and 218,073 Units Booked during the nine months ended September 30, 2023 and 2022, respectively.

We define Committed Units as the aggregate number of Hub Device (i) units that are subject to binding orders from customers together with (ii) units that existing customers, who are parties to a SmartRent 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 measure and evaluate Committed Units to assess the general health and trajectory of our business operations and growth. As of September 30, 2023 and 2022, we had 907,860 and 811,312 Committed Units, respectively.

### Cost of Revenue

*(dollars in thousands)*

*(dollars in thousands)*

| Cost of revenue | Three months ended September 30, 2023 | 2022 | Change $% | Change | Nine months ended September 30, 2023 | 2022 | Change $% | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Hardware | $27,556 | $25,417 | $2,139 | 8% | $82,118 | $68,226 | $13,892 | 20% |
| Professional services | 11,130 | 14,386 | (3,256) | (23)% | 44,573 | 43,668 | 905 | 2% |
| Hosted services | 5,887 | 6,516 | (629) | (10)% | 17,365 | 17,949 | (584) | (3)% |
| Total cost of revenue | $44,573 | $46,319 | $(1,746) | (4)% | $144,056 | $129,843 | $14,213 | 11% |

Total cost of revenue decreased by $1.7 million, or 4%, to $44.6 million for the three months ended September 30, 2023, from $46.3 million for the three months ended September 30, 2022. The decrease in cost of revenue resulted primarily from a decrease in New Units Deployed, and related third-party direct labor costs, from the three months ended September 30, 2022. This was partially offset by the shipment of distinct hub devices during the three months ended September 30, 2023.

Total cost of revenue increased by $14.2 million, or 11%, to approximately $144.0 million for the nine months ended September 30, 2023, from $129.8 million for the nine months ended September 30, 2022. The increase in cost of revenue resulted primarily from an increase in the volume of sales and units shipped of our smart home hardware devices, the shipment of distinct Hub Devices in the current period and increased third-party direct labor costs.

Hardware cost of revenue increased by approximately $2.2 million, or 8%, to $27.6 million for the three months ended September 30, 2023, from $25.4 million for the three months ended September 30, 2022. This increase in hardware cost of revenue was primarily attributable to the shipment of distinct hubs during the three months ended September 30, 2023.

Hardware cost of revenue increased by $13.9 million, or 20%, to $82.1 million for the nine months ended September 30, 2023, from $68.2 million for the nine months ended September 30, 2022. This increase in hardware cost of revenue was primarily attributable to approximately $16.1 million of additional cost resulting from greater sales volumes and the shipment of distinct hub devices during the nine months ended September 30, 2023, partially offset by reductions to other costs of revenue attributable to improved processes and efficiencies.

Professional services cost of revenue decreased by $3.3 million, or 23%, to $11.1 million for the three months ended September 30, 2023, from $14.4 million for the three months ended September 30, 2022. The decrease in professional services cost of revenue is primarily attributable to approximately $1.8 million resulting from a decrease in personnel-related costs and a decrease of $1.2 million in third-party direct labor costs due to decreased New Units Deployed.

Professional services cost of revenue increased by $0.9 million, or 2%, to $44.6 million for the nine months ended September 30, 2023, from $43.7 million for the nine months ended September 30, 2022. The increase in professional services cost of revenue is primarily attributable to approximately $5.4 million resulting from an increase in third-party direct labor costs. This was partially offset by a decrease in personnel-related costs, and related travel, of $4.1 million. This year 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. As a result, we believe that we have transformed our professional services to a more variable cost model that will improve efficiency in future periods.

Hosted Services cost of revenue decreased by $0.6 million, or 10%, to $5.9 million for the three months ended September 30, 2023, from $6.5 million for the three months ended September 30, 2022. The decrease resulted from the decrease of approximately $0.5 million in personnel related expenses.

Hosted Services cost of revenue decreased by approximately $0.5 million to $17.4 million for the nine months ended September 30, 2023, from $17.9 million for the nine months ended September 30, 2022. The decrease resulted from the decrease in personnel related costs, partially offset by the increase in the aggregate number of Units Deployed and the resulting increase in hub amortization and the number of active subscriptions for our software service applications.

### Operating Expenses

*(dollars in thousands)*

*(dollars in thousands)*

|  | Three months ended September 30, 2023 | 2022 | Change $% | Change | Nine months ended September 30, 2023 | 2022 | Change $% | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $7,573 | $7,610 | $(37) | (0)% | $21,340 | $22,086 | $(746) | (3)% |
| Sales and marketing | 4,636 | 4,901 | (265) | (5)% | 14,626 | 16,202 | (1,576) | (10)% |
| General and administrative | 11,269 | 15,337 | (4,068) | (27)% | 33,891 | 41,120 | (7,229) | (18)% |

Research and development expenses remained flat at $7.6 million for the three months ended September 30, 2023 from the three months ended September 30, 2022.

Research and development expenses decreased by $0.7 million, or 3%, to approximately $21.4 million for the nine months ended September 30, 2023, from $22.1 million for the nine months ended September 30, 2022, resulting primarily from a decrease of approximately $1.0 million of personnel-related expenses recorded during the nine months ended September 30, 2023.

Sales and marketing expenses decreased by $0.3 million, or 5%, to $4.6 million for the three months ended September 30, 2023 from $4.9 million for the three months ended September 30, 2022, resulting primarily from approximately $0.2 million of decreased conference and trade show expenses.

Sales and marketing expenses decreased by $1.6 million, or 10%, to $14.6 million for the nine months ended September 30, 2023 from $16.2 million for the nine months ended September 30, 2022, resulting primarily from a decrease of approximately $0.7 million in stock-based compensation, and $0.7 million in conference and trade show expenses.

For the three months ended September 30, 2023, general and administrative expenses decreased by approximately $4.0 million, or 27%, to $11.3 million, from $15.3 million for the three months ended September 30, 2022, resulting primarily from a $2.4 million asset impairment related to a prepaid license agreement during the three months ended September 30, 2022. Additionally, business insurance and personnel-related expenses decreased by $0.5 million and $0.4 million, respectively.

For the nine months ended September 30, 2023, general and administrative expenses decreased by $7.2 million, or 18%, to $33.9 million, from $41.1 million for the nine months ended September 30, 2023, resulting primarily from a $2.4 million asset impairment related to a prepaid license agreement during the nine months ended September 30, 2022. Additionally, business insurance and third-party consulting expenses decreased by $2.2 million and $1.5 million, respectively.

### Other Income

*(dollars in thousands)*

*(dollars in thousands)*

|  | Three months ended September 30, 2023 | 2022 | Change $% | Change | Nine months ended September 30, 2023 | 2022 | Change $% | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income, net | $2,233 | $506 | $1,727 | 341% | $6,064 | $747 | $5,317 | 712% |
| Other (expense) income, net | (42) | 290 | (332) | (114)% | (45) | 566 | (611) | (108)% |

Interest income, net increased by approximately $1.7 million, or 341%, to $2.2 million for the three months ended September 30, 2023, from $0.5 million for the three months ended September 30, 2022. Interest income, net increased by $5.3 million to $6.1 million for the nine months ended September 30, 2023, from $0.7 million for the nine months ended September 30, 2022. The increase in net interest income for both periods is primarily attributable to interest earned on interest-bearing cash balances.

Other (expense) income, net decreased by $0.3 million, or 114%, to $(42) thousand for the three months ended September 30, 2023, from $0.3 million for the three months ended September 30, 2022. Other (expense) income, net decreased by $0.6 million, or 101%, to $(45) thousand for the nine months ended September 30, 2023, from $0.6 million for the nine months ended September 30, 2022. The decrease in both periods is primarily due to foreign currency adjustments.

### Income Taxes

*(dollars in thousands)*

*(dollars in thousands)*

|  | Three months ended September 30, 2023 | 2022 | Change $% | Change | Nine months ended September 30, 2023 | 2022 | Change $% | Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Loss before income taxes | $(7,756) | $(25,869) | $18,113 | 70% | $(31,309) | $(80,668) | $49,359 | (61)% |
| Income tax benefit (expense) | 33 | (81) | 114 | (141)% | 22 | 5,735 | (5,713) | (100)% |

We provided a full valuation allowance on our net U.S. federal and state deferred tax assets at September 30, 2023, and September 30, 2022. As of December 31, 2022, we had $205.8 million of U.S. federal and $188.3 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 2038 and 2042. The Company also has $0.1 million of R&D credits available that expire in 2039. The income tax expense is related to the foreign and state taxes offset by a change in the valuation allowance.

### 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 income/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, warranty provisions for battery deficiencies, asset impairment, loss on extinguishment of debt, change in fair value of derivatives, unrealized gains and losses in currency exchange rates, non-recurring expenses in connection with acquisitions, severance charges, 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 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.

*(dollars in thousands)*

*(dollars in thousands)*

|  | Three months ended September 30, 2023 | 2022 | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Net loss** | $(7,723) | $(25,950) | $(31,287) | $(74,933) |
| Interest income, net | (2,233) | (506) | (6,064) | (747) |
| Provision for income taxes | (33) | 81 | (22) | (5,735) |
| Depreciation and amortization | 1,395 | 1,240 | 3,991 | 2,876 |
| **EBITDA** | (8,594) | (25,135) | (33,382) | (78,539) |
| Stock-based compensation | 3,273 | 3,272 | 10,229 | 10,618 |
| Non-employee warrant expense | - | 51 | - | 289 |
| Compensation expense in connection with acquisitions | 15 | 1,341 | 2,010 | 3,450 |
| Asset impairment | - | 2,441 | - | 2,441 |
| Severance charges | 317 | - | 805 | - |
| Other non-recurring acquisition expenses | (23) | 405 | 408 | 1,144 |
| **Adjusted EBITDA** | $(5,012) | $(17,625) | $(19,930) | $(60,597) |

### Liquidity and Capital Resources

### Sources of Liquidity

As of September 30, 2023, we had cash and cash equivalents of $211.0 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.

#### ADI Global Distribution Agreement

On August 3, 2023 we entered into a Product Sales Agreement (the "Agreement") with ADI Global Distribution ("ADI"), pursuant to which, ADI will serve as our non-exclusive hardware fulfillment partner throughout the United States, Canada, and Puerto Rico. In connection with the Agreement, the Company will transfer certain of its inventory to ADI, to fulfill our future sales in exchange for cash. No revenue is recognized when inventory is transferred to ADI and no such transfers had occurred as of September 30, 2023. We believe the Agreement will result in a net positive cash flow impact in future periods.

#### 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 September 30, 2023, 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 have incurred negative cash flows from operating activities and significant losses from operations in the past as reflected in our accumulated deficit of $282.2 million as of September 30, 2023. We may require additional capital to continue our operations in future periods. We expect to incur expenses related to non-cancellable contractual obligations such as from our operating leases.

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.

### Cash Flow Summary - Nine Months Ended September 30, 2023 and 2022

The following table summarizes our cash flows for the periods presented:

*(dollars in thousands)*

| Net cash used in | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | $(1,366) | $(79,380) |
| Investing activities | (3,313) | (132,423) |
| Financing activities | (1,500) | (2,525) |

### Operating Activities

For the nine months ended September 30, 2023, our operating activities used $1.4 million in cash resulting primarily from our net loss of $31.3 million partially offset by $10.9 million provided by changes in our operating assets and liabilities and $19.0 million provided by non-cash expenses. Changes in our operating assets and liabilities primarily resulted from a $26.4 million decrease in inventory, a $9.9 million decrease in deferred cost of revenue and a $0.5 million decrease in prepaid expenses and other assets, partially offset by an $12.3 million decrease in accrued expenses and other liabilities and a $9.3 million decrease in accounts payable. Non-cash expenses consisted primarily of stock-based compensation of $10.2 million, depreciation and amortization of $4.0 million, compensation expense related to acquisitions of $1.9 million, and provision for excess and obsolete inventory of $1.8 million. Of the total cash used for our operating activities, $6.0 million was attributable to payments related to the SightPlan acquisition. While the Agreement with ADI did not have a cash flow impact during the nine months ended September 30, 2023, we believe the Agreement will have a positive impact on cash flow in future periods.

For the nine months ended September 30, 2022, our operating activities used $79.4 million in cash resulting primarily from our net loss of $74.9 million and $20.0 million used in changes in our operating assets and liabilities, partially offset by $15.5 million provided by non-cash expenses. Changes in our operating assets and liabilities primarily resulted from a $28.4 million increase in inventory, $17.6 million increase in accounts receivable and $10.4 million increase in deferred cost of revenue, partially offset by a $32.0 million increase in deferred revenue. Non-cash expenses consisted primarily of stock-based compensation of $10.6 million, compensation expense related to acquisitions of $3.5 million, depreciation and amortization of $2.9 million, and $2.4 million of asset impairment, partially offset by a deferred tax benefit of $5.9 million resulting from the SightPlan acquisition.

### Investing Activities

For the nine months ended September 30, 2023, we used $3.3 million of cash for investing activities, resulting primarily from cash paid for capitalized internal-use software development costs.

For the nine months ended September 30, 2022, we used $132.4 million of cash for investing activities, resulting primarily from $129.0 million used for the SightPlan acquisition, net of cash acquired.

### Financing Activities

For the nine months ended September 30, 2023, our financing activities used $1.5 million of cash, resulting primarily from $1.7 million used for earnout payments related to the iQuue acquisition.

For the nine months ended September 30, 2022, our financing activities used $2.5 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 September 30, 2023.

### Critical Accounting Policies and 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 credit card, 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 proprietary 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.

### 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.

### 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 last day of our first fiscal year following the fifth anniversary of our initial public offering, (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.

## Market risk

As filed, 2,236 characters.

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial condition due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates.

We do not believe that inflation has had a material effect, to date, on our business, results of operations or financial condition. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs. Our inability or failure to do so could harm our business, results of operations or financial condition.

### Interest Rate Fluctuation Risk

As of September 30, 2023, we had cash, cash equivalents, and restricted cash of approximately $211.5 million, which consisted primarily of institutional money market funds, which carries a degree of interest rate risk. A hypothetical 10% change in interest rates would increase our annual interest income by $21.2 million, or decrease our annual interest income by $6.3 million, based on our cash position as of September 30, 2023.

### Foreign Currency Exchange Rate Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. Substantially all of our revenue is generated in U.S. dollars. Our expenses are generally denominated in the currencies of the jurisdictions in which we conduct our operations, which are primarily in the United States and to a lesser extent in Croatia and other international markets. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign currency exchange rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates.

## Controls and procedures

As filed, 1,504 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at the end of the period covered by this Report and, based on such evaluation, have concluded that our disclosure controls and procedures were effective as of September 30, 2023, at the reasonable assurance level to ensure that the information required to be disclosed by us in this Report was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

In addition, our management has determined we have remediated the deficient control first disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, as amended on May 9, 2023.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three or nine months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,757 characters.

We are subject to various risks and uncertainties in the course of our business. For a discussion of risks and uncertainties relating to our business, please see the section titled "Risk Factors" in our Annual Report on 10-K filed with the SEC on March 8, 2023. Other than the risk factor below, there have been no material changes from the risk factors described in our Annual Report on 10-K filed with the SEC on March 8, 2023, as amended. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future SEC filings.

***Uncertain commercial banking conditions could materially adversely affect our results of operations and financial condition.***

Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems, which may in turn effect our financial condition. For example, we have a banking relationship with SVB and also are a party with SVB to the Senior Revolving Facility. On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. On March 12, 2023, the U.S. Treasury, Federal Reserve, and the FDIC announced that SVB depositors would have access to all of their money starting March 13, 2023. SVB’s closure did not have a material impact on our operations and we did not experience any losses.

Although we assess our banking relationships as we believe necessary or appropriate, our access to cash in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect the financial institutions with which we have banking relationships, and in turn, us. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could also include factors involving financial markets or the financial services industry generally. The results of events or concerns that involve one or more of these factors could include a variety of material and adverse impacts on our current and projected business operations and our financial condition and results of operations.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-059762. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.