10-Q: Latch Inc. Restates Prior Financials Amidst Investigation Findings, Reports Q2 2022 Results

Latch Inc. restated its financial statements for 2019-2021 and Q1 2022 due to material errors in revenue recognition and internal controls, while also reporting its Q2 2022 results.

Summary

• Latch Inc. conducted an investigation into its key performance indicators and revenue recognition practices, leading to a restatement of financial statements for 2019, 2020, 2021 and the first quarter of 2022.
• The investigation revealed errors in hardware and software revenue recognition, including failures to disclose relevant terms, consider agreement impacts, and assess collectability.
• The company also identified errors in key performance indicators, such as bookings, which are no longer presented.
• Material weaknesses in internal control over financial reporting were identified as of December 31, 2022, in addition to those that existed as of December 31, 2021.
• For the quarter ended June 30, 2022, Latch reported total revenue of $9.83 million, a net loss of $51.62 million, and an adjusted EBITDA of -$35.58 million.
• The company's hardware revenue was $4.71 million, software revenue was $3.24 million, and installation services revenue was $1.88 million for the quarter ended June 30, 2022.
• Latch's total operating expenses for the quarter were $47.26 million, with significant costs in research and development and sales and marketing.
• The company's cash and cash equivalents were $80.6 million as of June 30, 2022, down from $124.8 million at the end of 2021.

Sentiment

Score: 3

Explanation: The document reveals significant financial and operational issues, including restatements, material weaknesses, and substantial losses, indicating a negative outlook for the company.

Positives

• Software revenue increased by 99% to $3.24 million in Q2 2022 compared to Q2 2021.
• Installation services revenue increased significantly to $1.88 million in Q2 2022, reflecting the expansion of this offering.
• Total revenue increased by 46% to $9.83 million in Q2 2022 compared to Q2 2021.

Negatives

• Latch experienced a net loss of $51.62 million in Q2 2022, an increase of 24% compared to the same period in 2021.
• Adjusted EBITDA was -$35.58 million for Q2 2022, a 92% decrease compared to Q2 2021.
• Hardware revenue decreased by 4.8% to $4.71 million in Q2 2022 compared to Q2 2021.
• The company identified material weaknesses in its internal control over financial reporting.
• Cash and cash equivalents decreased from $124.8 million at the end of 2021 to $80.6 million as of June 30, 2022.

Risks

• The company faces risks related to its ability to remediate material weaknesses in internal control over financial reporting.
• Latch's stock performance is impacted by limited liquidity and depressed trading prices due to delisting from Nasdaq.
• The company is involved in pending stockholder class action and derivative complaints.
• Latch is subject to regulatory disputes and governmental inquiries, including an SEC investigation.
• The company faces risks related to supply chain disruptions, construction delays, and defects in new products.
• Latch's ability to improve operating and financial results and attain profitability is uncertain.
• The company is subject to macroeconomic conditions that could impact its business, suppliers, and customers.

Future Outlook

The company's future performance is dependent on evolving its go-to-market strategy, investing in research and development, and expanding its total addressable market. The company expects to be able to use its current cash and cash equivalents and available-for-sale securities to fund its operational cash requirements for at least one year from the date of this Form 10-Q.

Management Comments

• Management believes that the consolidated financial statements and related financial information included in this Form 10-Q fairly present in all material respects the Company's financial condition, results of operations and cash flows as of the dates presented.
• Management is committed to remediating the material weaknesses identified and fostering continuous improvement in internal controls.

Industry Context

The announcement reflects challenges in the smart building technology sector, particularly in revenue recognition and internal controls. The company's struggles highlight the importance of robust financial practices and the impact of supply chain issues and construction delays on revenue recognition.

Comparison to Industry Standards

• Latch's restatement of financials is a significant deviation from industry standards, where companies typically maintain accurate and reliable financial reporting.
• The material weaknesses in internal controls are a concern, as companies in the technology sector are expected to have strong financial governance.
• The company's adjusted EBITDA of -$35.58 million for Q2 2022 is significantly below industry benchmarks for companies of similar size and stage, indicating a need for improved operational efficiency.
• The company's cash burn rate is also a concern, as cash and cash equivalents decreased from $124.8 million at the end of 2021 to $80.6 million as of June 30, 2022, indicating a need for improved financial management.
• Compared to companies like Assa Abloy or Allegion, which are established players in the access control market, Latch's financial performance and internal control issues are a significant concern.

Management Changes

Legal Proceedings

• Latch is involved in a securities class action lawsuit in the Southern District of New York (Brennan Action), where a settlement agreement has been reached for $1.95 million, pending court approval.
• The company is also facing a securities class action lawsuit in the District of Delaware (Schwartz Action), where a settlement agreement has been reached for $1.95 million, pending court approval.
• Latch is involved in a consolidated fiduciary duty lawsuit in the Court of Chancery of the State of Delaware (Fiduciary Lawsuits), where a settlement agreement has been reached for $29.75 million, pending court approval.
• The company is also facing two derivative lawsuits in the Southern District of New York (Manley Action and Gottlieb Action), which have been consolidated.
• Latch is in discussions with a service provider regarding a demand for payment under a prior agreement, with an accrued liability of approximately $6.8 million.
• The company is subject to an SEC investigation related to the findings of the internal investigation.

Related Party Transactions

• Latch has customers who are also stockholders and directors, or affiliates thereof, in the company, with receivables of $0.2 million and $0.4 million as of June 30, 2022 and December 31, 2021, respectively.
• The company had $0.01 million and $0.01 million of hardware revenue and $0.04 million and $0.1 million of software revenue from these customers for the three and six months ended June 30, 2022, respectively.
• In January 2021, one of the company's existing equity holders acquired shares of Legacy Latch's common stock from certain employees and non-employee service providers.

Stakeholder Impact

• Shareholders are negatively impacted by the restatement of financials, material weaknesses in internal controls, and ongoing litigation.
• Employees have been affected by workforce reductions and management changes.
• Customers may experience uncertainty due to the company's financial and operational challenges.
• Suppliers may face risks due to the company's financial instability and supply chain issues.
• Creditors may be concerned about the company's ability to meet its financial obligations.

Next Steps

• The company plans to continue to remediate the identified material weaknesses in internal control over financial reporting.
• Latch will continue to monitor the effectiveness of its internal control over financial reporting and perform additional procedures to ensure future financial statements are fairly stated.
• The company will continue to communicate with the SEC Staff and voluntarily produce documents and information related to the SEC Investigation.

Key Dates

Keywords

revenue recognition, internal controls, financial restatement, material weakness, software as a service, smart building, hardware sales, adjusted EBITDA, SEC investigation, stockholder litigation