10-Q: Latch (DOOR) Q1 2025: Revenue Up, Losses Narrow Amid Internal Control Challenges

Latch, recently rebranded as DOOR, reported a 31.1% increase in total revenue and a 17.5% reduction in net loss for Q1 2025, despite ongoing material weaknesses in internal controls and a worsening Adjusted EBITDA.

Summary

• Total revenue increased by 31.1% to $15.774 million for the three months ended March 31, 2025, compared to $12.035 million for the same period in 2024.
• Net loss decreased by 17.5% to $(11.250) million for Q1 2025, down from $(13.637) million in Q1 2024.
• Professional services revenue surged by 179.3% to $6.578 million, primarily driven by the 2024 acquisition of HelloTech.
• Hardware revenue decreased by 13.1% to $4.037 million, attributed to the impact of the Restatement which shifted revenue to prior periods.
• Software revenue saw a modest increase of 2.4% to $5.159 million.
• Adjusted EBITDA worsened by 21.5% to $(7.384) million for Q1 2025, compared to $(6.077) million in Q1 2024 (corrected from a previously reported figure).
• Cash and cash equivalents stood at $58.717 million as of March 31, 2025, a decrease from $70.203 million at December 31, 2024.
• The company continues to report material weaknesses in its internal control over financial reporting.
• New executive leadership was appointed in February 2025, with David Lillis as CEO, Jeff Mayfield as CFO, and Priyen Patel as Chief Strategy and Legal Officer.
• A settlement for the Schwartz Action (securities class action) was reached for $1.95 million, paid in November 2025.
• The company is negotiating a potential settlement for derivative litigation and has accrued $0.2 million for expenses.
• An accrual of $6.8 million has been made for a service provider demand, despite the company not believing the provider is entitled to fees.
• The SEC Investigation into key performance indicators and revenue recognition practices is ongoing.

Sentiment

Score: 4

Explanation: While the company showed revenue growth and reduced net loss, driven by acquisitions and cost-cutting in G&A, the worsening Adjusted EBITDA, continued cash burn from operations, and persistent material weaknesses in internal controls indicate ongoing operational challenges. The delisting from Nasdaq and trading on the OTC Expert Market, coupled with ongoing legal and regulatory investigations, also weigh heavily on sentiment. The new management team and strategic focus on building intelligence are positive long-term signals, but the immediate financial health and control environment remain a concern.

Positives

• Total revenue increased significantly by 31.1% year-over-year, demonstrating overall growth.
• Professional services revenue experienced substantial growth of 179.3%, largely due to the successful integration of the HelloTech acquisition.
• Net loss decreased by 17.5% year-over-year, indicating improved financial performance in terms of bottom-line loss.
• General and administrative expenses decreased by 33.1%, driven by a $1.9 million reduction in non-ordinary course legal fees and settlement fees, a $1.6 million decrease in RSU expense, and a $1.0 million decrease in professional accounting fees.
• The company expects to fund its operational cash requirements for at least 12 months using its current cash and available-for-sale securities.
• The company is in compliance with all covenants under its term loan agreement as of March 31, 2025.
• A new executive leadership team was appointed in February 2025, aiming to reinforce the control environment and integrity.

Negatives

• Hardware revenue decreased by 13.1% year-over-year, indicating a decline in a core product segment.
• Adjusted EBITDA worsened by 21.5% to $(7.384) million, suggesting a deterioration in core operating profitability.
• Cash and cash equivalents decreased by $11.486 million during the quarter, reflecting continued cash burn.
• Net cash used in operating activities was $(10.137) million, highlighting ongoing operational cash outflows.
• Research and development expenses increased by 34.1%, primarily due to $1.0 million in third-party expenses related to the transition of engineering contractors.
• Sales and marketing expenses increased by 41.5%, mainly due to an $0.8 million rise in compensation expense from team expansion.
• Interest (expense) income, net, shifted from income to expense, decreasing by $0.5 million year-over-year.
• The company continues to have material weaknesses in internal control over financial reporting, posing significant financial reporting risks.
• The company's securities are trading on the OTC Expert Market due to delisting from Nasdaq, resulting in limited liquidity and depressed trading prices.
• Significant legal and professional fees continue to be incurred due to past investigations and ongoing litigation.

Risks

• Ability to remediate identified material weaknesses in internal control over financial reporting and the timing of such remediation.
• Performance of the company's stock, particularly given the limited liquidity and depressed trading prices due to delisting from The Nasdaq Stock Market LLC.
• Uncertainty regarding whether the company's common stock and warrants will remain on OTC Markets Group Inc.'s Expert Market rather than be listed on OTCQX, OTCQB, or OTC Pink markets.
• Developments in the pending stockholder class action and derivative complaints or other legal proceedings.
• Regulatory disputes and governmental inquiries, including the SEC Investigation.
• Privacy and data protection laws, privacy or data breaches, or the loss of data.
• The impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, demographic trends and employee availability.
• Increases in component costs, long lead times, supply shortages and other disruptions to the supply chain.
• Delays in construction timelines at customer building sites.
• Any defects in new products or enhancements to existing products.
• Ability to continue to develop new products, services and innovations to meet constantly evolving customer demands.
• Ability to hire, retain, manage and motivate employees, including key personnel.
• The impact of workforce reductions on business, financial condition and results of operations.
• Ability to improve operating and financial results and attain profitability.
• Compliance with laws and regulations applicable to the business.
• The impact of macroeconomic conditions on business, suppliers and existing and potential customers.
• Ability to upgrade and maintain information technology systems.
• Ability to create, acquire and protect intellectual property.
• Ability to successfully identify, complete, integrate and realize synergies from acquisitions.
• The potential adverse impact of any future acquisitions, including the potential increase in risks already existing in operations, poor performance or decline in value of acquired businesses and unexpected costs or liabilities that may arise from any future acquisitions.

Future Outlook

The company expects to fund its operational cash requirements for at least 12 months from the filing date using current cash and available-for-sale securities. Management is focused on cost discipline, inventory management, and liquidity preservation to reduce operating cash usage. The company plans to continue designing and implementing control activities to mitigate identified risks and test their operating effectiveness. It also expects to resume granting Restricted Stock Units (RSUs) once current in SEC filings, which will increase stock-based compensation expense. The company is actively expanding the DOOR Platform and device integrations to encompass broader smart home solutions and lay the groundwork for a building intelligence platform.

Management Comments

• "Management continues to focus on cost discipline, inventory management and liquidity preservation as it seeks to reduce operating cash usage."
• "We expect to be able to use our current cash and cash equivalents and available-for-sale securities to fund our operational cash requirements for at least 12 months from the date of this Form 10-Q."
• "Management believes that these remediation actions have resulted in meaningful improvements to the Company’s control environment and strengthened the Company’s Tone at the Top."
• "Management believes the ultimate liability arising from such actions, individually and in the aggregate, which existed at March 31, 2025 (other than detailed above), will not materially affect the Company’s condensed consolidated results of operations, financial position or cash flows."

Industry Context

The company operates in the multifamily rental market, providing an integrated ecosystem of smart access, smart home solutions, and property management services. Its strategic expansion into broader smart home solutions and a building intelligence platform aligns with broader industry trends towards integrated smart building technologies and automation in real estate. The acquisition of HelloTech diversifies revenue streams by offering on-demand technical and home services, moving beyond its core smart access hardware and software offerings.

Management Changes

Corporate Governance

Legal Proceedings

• **Schwartz Action (Securities Class Action)**: An alleged stockholder filed a securities class action complaint alleging violations of Sections 11 and 15 of the Securities Act of 1933. The parties agreed to a settlement of $1.95 million, which was paid by the company in November 2025, and the settlement was approved by the court in December 2025.
• **Derivative Litigation (Manley Action & Gottlieb Action)**: Two alleged stockholders filed derivative actions consolidated under 'In re Latch Inc. Derivative Litigation,' alleging certain directors and former officers breached fiduciary duties and violated Section 14(a) of the Exchange Act. The company is negotiating a potential settlement and has accrued $0.2 million for expenses as of March 31, 2025, while intending to vigorously defend against the allegations.
• **Service Provider Demand**: The company is in discussions with a service provider regarding a demand for payment under a prior agreement. The company does not believe the service provider is entitled to fees but has accrued approximately $6.8 million as of March 31, 2025, believing a settlement is probable. No legal proceedings have been initiated.
• **SEC Investigation**: The Staff of the SEC is conducting an ongoing investigation into issues related to the company's key performance indicators and revenue recognition practices that led to the Restatement. The company is cooperating but cannot predict the duration or outcome, or whether an enforcement action will be brought.

Related Party Transactions

• The company has customers who are also stockholders and directors, or affiliates thereof, and charges market rates for products and services.
• Receivables due from these customers were $0.01 million as of March 31, 2025, down from $0.05 million at December 31, 2024.
• Hardware revenue from these customers was $0.001 million for Q1 2025, down from $0.002 million for Q1 2024.
• Software revenue from these customers was $0.05 million for Q1 2025, up from $0.04 million for Q1 2024.

Stakeholder Impact

• **Shareholders**: Face continued uncertainty due to ongoing material weaknesses, legal proceedings, and the SEC investigation. The delisting from Nasdaq and trading on the OTC Expert Market impact liquidity and stock price. Potential for further dilution exists if warrants are exercised or new capital is raised.
• **Employees**: Past workforce reductions and the company's focus on hiring and retaining key personnel suggest potential for further organizational changes. New leadership appointments aim to stabilize the company's direction.
• **Customers**: The expansion of the DOOR Platform and service offerings (HelloTech, property management) aims to enhance value. However, risks such as delays in construction timelines at customer building sites could impact service delivery.
• **Suppliers**: Risks related to supply chain constraints, increases in component costs, and long lead times could impact product availability and costs for the company, potentially affecting supplier relationships.
• **Creditors**: The company is currently in compliance with its loan covenants, but ongoing net losses and cash burn from operations could impact its future ability to meet financial obligations.

Next Steps

• Continue to evaluate the sustained operating effectiveness of controls related to 'Tone at the Top'.
• Continue to perform additional procedures, including manual mitigating control procedures and employing additional tools and resources, to ensure future consolidated financial statements are fairly stated.
• Continue to design and implement control activities to mitigate identified risks and test their operating effectiveness.
• Resume granting Restricted Stock Units (RSUs) pursuant to the S-8 Registration Statement once current in SEC filings.
• Evaluate the impact of ASU 2023-09 on consolidated financial statements for the year ended December 31, 2025.
• Evaluate the impact of ASU 2024-03 and ASU 2025-01 on consolidated financial statements and related disclosures.
• Evaluate the impact of ASU 2025-06 on consolidated financial statements.
• Negotiate a potential settlement for derivative litigation.
• Evaluate the impact of the privately held company acquisition on the fair value of the investment in future reporting periods.

Key Dates

Recommendation

The company exhibits mixed financial results with increased total revenue and reduced net loss, driven by strategic acquisitions and cost management in general and administrative expenses. However, the worsening Adjusted EBITDA, continued cash burn from operations, and persistent material weaknesses in internal controls present significant operational and financial risks. The ongoing SEC investigation and legal proceedings add further uncertainty. While the new leadership and rebrand offer potential for future improvement, the stock's limited liquidity and depressed trading prices on the OTC Expert Market, combined with the unresolved internal control issues, suggest a 'hold' position. Investors should await clear evidence of sustained profitability, full remediation of internal control weaknesses, and resolution of legal/regulatory matters before considering a more aggressive stance.

Keywords

Smart access control, SaaS platform, Property management, HelloTech, SEC filing, Financial results, Internal controls, Litigation, Hardware, Software, Professional services, DOOR rebrand, Multifamily rental market, 10-Q