10-Q: Latch Narrows Q1 Loss, Revenue Up Amid Restructuring

Latch, Inc. (DOOR) reported a significantly reduced net loss and increased total revenue in Q1 2024, driven by software and professional services growth, while continuing to address internal control weaknesses.

Summary

• Net loss significantly narrowed to $13.6 million in Q1 2024, a 58.6% improvement from $32.9 million in Q1 2023.
• Total revenue increased by 7.9% to $12.0 million in Q1 2024, up from $11.1 million in Q1 2023.
• Software revenue grew by 26.8% to $5.0 million, and professional services revenue increased by 28.5% to $2.4 million.
• Hardware revenue decreased by 13.1% to $4.6 million, despite increased shipments, attributed to restatement-related revenue shifts.
• Adjusted EBITDA improved by 69.7%, reducing the loss to $7.4 million from $24.4 million in the prior year.
• Operating expenses decreased by 33.3% to $20.4 million, primarily due to reductions in R&D, sales and marketing, and general and administrative costs.
• Cash and cash equivalents increased to $108.6 million as of March 31, 2024, from $94.7 million at December 31, 2023.
• The company repaid $23.9 million in Promissory Notes in full on April 26, 2024.
• Acquired property management division of The Broadway Company in March 2024, launching Door Property Management, LLC (DPM).
• Entered into a merger agreement with HelloTech, Inc. on June 21, 2024, which closed on July 1, 2024, assuming $6.9 million of HelloTech's term loan.

Sentiment

Score: 6

Explanation: The company shows significant financial improvement with a narrowed net loss and increased revenue, driven by software and services. However, ongoing material weaknesses in internal controls, legal proceedings, and the delisting from Nasdaq present substantial challenges and uncertainties, tempering overall positive sentiment.

Positives

• Net loss significantly narrowed by 58.6% to $13.6 million.
• Adjusted EBITDA loss improved by 69.7% to $7.4 million.
• Total revenue increased by 7.9%, driven by strong growth in software (26.8%) and professional services (28.5%).
• Operating expenses decreased substantially by 33.3%, reflecting successful cost reduction efforts across R&D, sales & marketing, and G&A.
• Cash and cash equivalents increased, indicating improved liquidity.
• Repayment of $23.9 million Promissory Notes in full without penalty post-quarter end.
• Strategic acquisition of a property management business (DPM) to enhance product refinement and service offerings.

Negatives

• Hardware revenue decreased by 13.1%, despite increased shipments, due to prior period restatement impacts.
• Net cash used in operating activities increased by $5.4 million compared to the prior year, indicating higher cash burn from operations.
• Ongoing material weaknesses in internal control over financial reporting, including "Tone at the Top," which are not yet fully remediated.
• Significant legal and regulatory costs continue to impact general and administrative expenses, including increased audit fees and litigation expenses.
• The company's common stock and warrants are trading on the OTC Expert Market due to delisting from Nasdaq, impacting liquidity and trading prices.
• The HelloTech merger involved assuming $6.9 million in debt and HelloTech stockholders received no consideration, which could indicate distress or low valuation for HelloTech.

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 limited liquidity and depressed trading prices due to delisting from Nasdaq.
• Uncertainty regarding whether common stock and warrants will remain on the OTC Expert Market or be listed on other OTC markets.
• Developments in pending stockholder class action and derivative complaints or other legal proceedings related to the Investigation and Restatement.
• Regulatory disputes and governmental inquiries, including the ongoing SEC Investigation.
• Privacy and data protection laws, privacy or data breaches, or loss of data.
• Impact of changes in consumer spending patterns, preferences, 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 developing new products, services, and innovations to meet evolving customer demands.
• Ability to hire, retain, manage, and motivate employees, including key personnel.
• 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.
• Impact of macroeconomic conditions on the business, suppliers, and existing/potential customers.
• Ability to upgrade and maintain information technology systems.
• Ability to acquire and protect intellectual property.
• Ability to successfully identify, complete, integrate, and realize synergies from acquisitions, such as the HelloTech Merger, including retaining key personnel.
• Potential adverse impact of the HelloTech Merger and any future acquisitions, including increased risks, poor performance or decline in value of acquired businesses, and unexpected costs or liabilities.
• Impact of remediating the findings of the Investigation.

Future Outlook

The company is actively expanding its DOOR Platform and device integrations to encompass broader smart home solutions, laying the groundwork for a building intelligence platform to automate and streamline building operations. Management expects to resume granting Restricted Stock Units (RSUs) once current in SEC filings, which will increase stock-based compensation expense. The company anticipates being able to fund its operational cash requirements for at least 12 months from the filing date of this 10-Q.

Management Comments

• Our core offering is built around a proprietary, cloud-based software-as-a-service (SaaS) platform (the DOOR Platform), which powers and manages our suite of smart access control devices (including locks, readers and intercoms) and smart home devices and integrates with other connected devices within a building.
• While our foundation remains smart access control, we are actively expanding the DOOR Platform and our device integrations to encompass broader smart home solutions, managing devices such as sensors, thermostats and lighting.
• This ongoing expansion leverages our established platform to create more connected and efficient buildings as we lay the groundwork for a building intelligence platform, automating and streamlining building operations, including work order management and automation, property maintenance and unit inspections and repairs.
• We are committed to remediating the Legacy Material Weaknesses, fostering continuous improvement in internal controls and enhancing its overall internal control environment.
• Management believes that these activities, when fully implemented, should remediate the Legacy Material Weaknesses and strengthen its internal control over financial reporting.

Industry Context

Latch, now rebranding as DOOR, operates in the rapidly evolving smart building and multifamily technology sector. The expansion into broader smart home solutions and property management services (DPM) aligns with a growing industry trend towards integrated building intelligence platforms that offer comprehensive operational efficiencies and enhanced resident experiences. The focus on SaaS and professional services revenue growth, while hardware revenue declines, reflects a shift towards recurring revenue models common in the tech industry. The company's challenges with internal controls and delisting from Nasdaq highlight the intense scrutiny and operational demands faced by growth-stage technology companies, particularly those that have undergone SPAC mergers and subsequent restatements.

Comparison to Industry Standards

• The company's shift towards a SaaS-centric model with growing software and professional services revenue is consistent with industry leaders in smart building technology, such as Honeywell Building Technologies or Johnson Controls, who emphasize recurring revenue streams from software and services over one-time hardware sales.
• The acquisition of a property management business (DPM) to gain hands-on experience and refine products is a strategic move to deepen market understanding, similar to how larger real estate tech firms might acquire specialized service providers to integrate vertically.
• The significant net loss and negative Adjusted EBITDA, despite improvements, indicate the company is still in a growth or turnaround phase, which is not uncommon for technology companies investing heavily in R&D and market expansion, but the magnitude of the losses and the ongoing internal control issues suggest performance below established, profitable industry benchmarks.
• The delisting from Nasdaq and trading on the OTC Expert Market places the company at a disadvantage compared to peers listed on major exchanges, affecting liquidity and investor confidence.

Management Changes

Corporate Governance

Legal Proceedings

• Brennan Action: Securities class action settled for $1.95 million, paid in March 2025, with court approval in May 2025.
• Schwartz Action: Securities class action, agreed in principle to settle for $1.95 million in December 2024, with final approval pending, expected to be paid before December 31, 2025.
• Merger Lawsuits: Consolidated class actions alleging breach of fiduciary duties related to the TSIA merger, settled for $29.75 million, with the company paying $4.875 million and insurers paying $10.0 million in January 2025.
• Derivative Litigation: Consolidated derivative actions alleging breach of fiduciary duties and Exchange Act violations, with a potential settlement being negotiated and $0.1 million accrued as of March 31, 2024.
• Service Provider Demand: Ongoing discussions with a service provider regarding a demand for payment under a prior agreement, with $6.8 million accrued as of March 31, 2024.
• SEC Investigation: Ongoing cooperation with the SEC's investigation into key performance indicators and revenue recognition practices that led to the Restatement.

Related Party Transactions

• The company has one customer who is an affiliate of a Board member.
• Receivables due from this customer were $0.07 million as of March 31, 2024, and $0.02 million as of December 31, 2023.
• Hardware revenue from this customer was $0.002 million for the three months ended March 31, 2024, and $0.1 million for the three months ended March 31, 2023.
• Software revenue from this customer was $0.04 million for both the three months ended March 31, 2024, and March 31, 2023.
• The company charges market rates for products and services offered to this customer.

Stakeholder Impact

• Shareholders: Potential for increased value from improved financial performance and strategic acquisitions, but ongoing legal proceedings, SEC investigation, and material weaknesses in internal controls create significant uncertainty and risk. Delisting from Nasdaq impacts liquidity and trading prices.
• Employees: Workforce reductions have occurred, but new leadership compensation and performance equity programs aim to motivate and retain key personnel. The acquisition of HDW and DPM integrated new team members.
• Customers: Expansion of the DOOR Platform, smart home solutions, and property management services aims to enhance offerings and experiences for multifamily building customers. Delays in construction timelines at customer sites remain a risk.
• Suppliers/Contract Manufacturers: Supply chain constraints, component costs, and long lead times continue to be factors. The company has reduced demand plans, impacting contract manufacturers.
• Creditors: Repayment of Promissory Notes demonstrates commitment to debt obligations. The new term loan with Customers Bank involves security interests in company assets and liquidity ratio covenants.

Next Steps

• Continue remediation efforts for material weaknesses in internal control over financial reporting.
• Monitor the effectiveness of the improved control environment and "Tone at the Top."
• Resume granting RSUs once current in SEC filings.
• Continue expanding the DOOR Platform and device integrations for broader smart home solutions and building intelligence.
• Further refine and optimize products and services based on hands-on experience from Door Property Management.
• Address ongoing legal proceedings and the SEC Investigation.
• File the Annual Report on Form 10-K for the year ended December 31, 2024.
• Pay the Schwartz Action settlement amount before December 31, 2025.

Key Dates

Recommendation

While Latch (DOOR) has demonstrated significant progress in narrowing its net loss and improving Adjusted EBITDA, driven by strong software and professional services revenue growth and effective cost reductions, substantial uncertainties persist. The ongoing material weaknesses in internal controls, the SEC investigation, and multiple legal proceedings create significant operational and financial risks. The delisting from Nasdaq and trading on the OTC Expert Market severely limit liquidity and investor access. Strategic acquisitions like HelloTech and DPM offer long-term potential but also introduce integration challenges and assumed liabilities. Given the mixed signals of improving financials against a backdrop of significant governance and legal challenges, a 'hold' recommendation is appropriate. Investors should monitor the remediation of internal control weaknesses, the outcome of legal and regulatory matters, and the successful integration and synergy realization from recent acquisitions before considering further investment.

Keywords

Smart Access, SaaS, Property Management, IoT, Building Technology, Multifamily Rental, Hardware, Software, SEC Filing, Financial Results, Corporate Governance, Risk Management, Restatement, HelloTech, DOOR