LATCH(LTCH) - 2022 Q2 - Quarterly Report

Explanatory Note Introduction Latch, Inc. is restating its financial statements for the years ended December 31, 2019, 2020, and 2021, and the quarter ended March 31, 2022, due to material errors and possible irregularities in revenue recognition and internal controls, reflecting a significant delay in periodic reporting - The Audit Committee determined that consolidated financial statements for 2019, 2020, 2021, and Q1 2022 should no longer be relied upon due to material errors and possible irregularities in revenue recognition, primarily related to hardware sales through third-party channel partners[6][12] - The Company is restating financial statements for periods ended December 31, 2021, and December 31, 2020, as presented in the 2022 Annual Report. This Form 10-Q includes restated financial data for Q2 2021 and Q1 2022[8][9][13] - The delay in periodic reporting was partly due to a comprehensive Financial Statement Review and turnover in accounting and finance departments, leading to a lack of institutional knowledge[10][11] Findings of Investigation The investigation revealed errors in revenue recognition, primarily from sales personnel failing to disclose relevant terms, inadequate consideration of sales agreement terms, and insufficient assessment of collectability, leading to the cessation of 'bookings' reporting - The investigation involved an extensive review of documents and interviews with current/former officers, employees, and third-party channel partners, expanding its scope to include additional partners and direct customer sales[14] - Key errors in revenue recognition stemmed from: (1) sales personnel failing to disclose relevant terms, (2) inadequate consideration of sales agreement terms, and (3) failure to assess collectability[15] - Errors were also identified in 'bookings' and related metrics; the Company ceased presenting these metrics in its 2021 Annual Report and advises against relying on them[15] Internal Control Considerations Management concluded that the Company's internal control over financial reporting and disclosure controls were ineffective as of December 31, 2022, due to material weaknesses identified during the investigation and financial statement review, with remedial steps underway - Based on the investigation, financial statement review, and existing deficiencies, material weaknesses in internal control over financial reporting were identified as of December 31, 2022[16] - The Interim CEO and Interim CFO concluded that internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2022[16] - Management has initiated steps to remediate the identified material weaknesses[16] Cautionary Note Regarding Forward-Looking Statements This Form 10-Q contains forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially, including those related to material weakness remediation, stock performance post-delisting, legal proceedings, SEC investigation, supply chain disruptions, and macroeconomic conditions - Forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially[18][20] - Key risks include: remediation of material weaknesses, stock performance and trading on OTC Expert Market post-Nasdaq delisting, pending stockholder class action and derivative complaints, regulatory disputes (including an SEC investigation), supply chain disruptions, and the impact of macroeconomic conditions[19] - The Company does not plan to publicly update or revise any forward-looking statements unless required by applicable law[20] Part I - Financial Information Item 1. Financial Statements This section presents the condensed consolidated financial statements for Latch, Inc. and its subsidiaries, including balance sheets, statements of operations and comprehensive loss, statements of redeemable convertible preferred stock and stockholders' equity (deficit), and statements of cash flows, which are unaudited for interim periods and include restated prior period amounts due to identified errors in revenue recognition and internal controls Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets show a decrease in total assets from $449.6 million as of December 31, 2021 (restated) to $372.6 million as of June 30, 2022, with total liabilities increasing slightly and total stockholders' equity decreasing significantly due to accumulated deficit Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 (unaudited) | December 31, 2021 (audited, restated) | | :-------------------------------- | :-------------------------- | :------------------------------------ | | Total current assets | $311,471 | $331,423 | | Total assets | $372,555 | $449,601 | | Total current liabilities | $48,761 | $42,613 | | Total liabilities | $80,526 | $75,609 | | Total stockholders' equity | $292,029 | $373,992 | | Accumulated deficit | $(429,698) | $(331,212) | Condensed Consolidated Statements of Operations and Comprehensive Loss The Company reported increased net losses for both the three and six months ended June 30, 2022, compared to the restated prior year periods, with Total revenue growing significantly, driven by software and installation services, but outpaced by a substantial increase in cost of revenue and operating expenses, particularly R&D and Sales & Marketing Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric (in thousands) | Three months ended June 30, 2022 | Three months ended June 30, 2021 (restated) | Six months ended June 30, 2022 | Six months ended June 30, 2021 (restated) | | :-------------------- | :------------------------------- | :------------------------------------------ | :----------------------------- | :---------------------------------------- | | Total revenue | $9,830 | $6,745 | $23,386 | $11,719 | | Total cost of revenue | $13,080 | $6,677 | $27,024 | $11,635 | | Total operating expenses | $47,256 | $23,423 | $100,111 | $55,222 |\ | Loss from operations | $(50,506) | $(23,355) | $(103,749) | $(55,138) | | Net loss | $(51,616) | $(41,485) | $(98,448) | $(80,041) | | Basic and diluted net loss per common share | $(0.36) | $(0.81) | $(0.69) | $(2.59) | - Hardware revenue decreased by 4.8% for the three months ended June 30, 2022, but increased by 65.8% for the six months ended June 30, 2022, compared to the restated prior year periods[28] - Software revenue increased significantly by 99.1% and 91.6% for the three and six months ended June 30, 2022, respectively, compared to the restated prior year periods[28] - Installation services revenue saw substantial growth, increasing by 1006.5% and 1924.7% for the three and six months ended June 30, 2022, respectively, compared to the restated prior year periods[28] Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) The statements detail changes in stockholders' equity, reflecting the impact of the Business Combination in 2021, stock-based compensation, and net losses, with total stockholders' equity decreasing from $373.99 million to $292.03 million for the six months ended June 30, 2022, primarily due to the accumulated deficit Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) (in thousands) | Metric (in thousands) | January 1, 2022 (restated) | June 30, 2022 | | :-------------------- | :------------------------- | :------------ | | Common Stock Amount | $15 | $16 | | Additional Paid-In Capital | $705,865 | $724,285 | | Accumulated Other Comprehensive Loss | $(676) | $(2,574) | | Accumulated Deficit | $(331,212) | $(429,698) | | Total Stockholders' Equity | $373,992 | $292,029 | - The Business Combination in June 2021 resulted in a reverse recapitalization, converting preferred stock and convertible notes into common stock and significantly increasing additional paid-in capital[31] - Stock-based compensation contributed $13.08 million and $7.84 million to additional paid-in capital for the periods ended March 31, 2022, and June 30, 2022, respectively[32] Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2022, the Company experienced a significant increase in cash used in operating activities, a shift to cash provided by investing activities, and a substantial decrease in cash provided by financing activities compared to the prior year, leading to a net decrease in cash and cash equivalents Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Six months ended June 30, 2022 | Six months ended June 30, 2021 (restated) | | :-------------------- | :----------------------------- | :---------------------------------------- | | Net cash used in operating activities | $(83,464) | $(33,187) | | Net cash provided by (used in) investing activities | $44,883 | $(4,040) | | Net cash (used in) provided by financing activities | $(5,596) | $448,702 | | Net change in cash and cash equivalents | $(44,184) | $411,470 | | Cash and cash equivalents, end of period | $80,598 | $471,999 | - The increase in cash used in operating activities was primarily due to a higher net loss and increased inventories[35] - Investing activities shifted from cash used to cash provided, driven by proceeds from maturities and call redemptions of available-for-sale securities[35] - Financing activities significantly decreased due to the one-time proceeds from the Business Combination and private offering in the prior year[35] Notes to Condensed Consolidated Financial Statements The notes provide detailed information on the Company's business, the restatement of prior period financial statements, significant accounting policies, investments, fair value measurements, inventories, internally-developed software, accrued expenses, commitments and contingencies, equity, earnings per share, income taxes, stock-based compensation, related-party transactions, and subsequent events Note 1. Description of Business Latch, Inc. is a technology company focused on the multifamily rental home market, providing smart building hardware and software for access and in-unit device control, which completed a Business Combination in June 2021 and now trades on OTC Markets Group Inc.'s Expert Market post-Nasdaq delisting - Latch is a technology company serving the multifamily rental home market with smart building hardware and software for digitizing processes like access and in-unit device control[36] - The Company consummated a Business Combination on June 4, 2021, which was accounted for as a reverse recapitalization, with Legacy Latch stockholders owning approximately 60.0% of the Post-Combination Company[37][47][50] - Following the suspension of trading and delisting from Nasdaq on August 10, 2023, the Company's securities have been traded on OTC Markets Group Inc.'s Expert Market[52] Note 2. Restatement of Prior Period Financial Statements and Information The Company restated financial statements for 2019, 2020, 2021, and Q1 2022 due to material errors identified in an Audit Committee investigation and subsequent Financial Statement Review, primarily relating to hardware and software revenue recognition, internally-developed software amortization, stock-based compensation, and other corrections, impacting various financial statement line items - The Audit Committee initiated an investigation into key performance indicators and revenue recognition practices, leading to the determination that financial statements for 2019, 2020, 2021, and Q1 2022 could not be relied upon[53] - Identified errors include: (1) Hardware revenue recognition issues (failure to disclose terms, inadequate consideration of sales agreements, collectability assessment), (2) Software revenue recognition issues (timing of access transfer, collectability criteria, lump-sum vs. ratable recognition), (3) Internally-developed software (amortization timing, expensing discontinued features), (4) Stock-based compensation (ratable recognition of RSUs), and (5) Other corrections[54][57][60][61][65] Impact of Restatement on Q1 2022 Condensed Consolidated Statements of Operations (in thousands) | Metric | Previously Reported | Adjustments | Restated | | :-------------------------- | :------------------ | :---------- | :------- | | Hardware Revenue | $9,055 | $233 | $9,288 | | Software Revenue | $3,039 | $(332) | $2,707 | | Total Revenue | $13,655 | $(99) | $13,556 | | Cost of Hardware Revenue | $10,992 | $857 | $11,849 | | Net Loss | $(44,231) | $(2,601) | $(46,832) | Impact of Restatement on Q2 2021 Condensed Consolidated Statements of Operations (in thousands) | Metric | Previously Reported | Adjustments | Restated | | :-------------------------- | :------------------ | :---------- | :------- | | Hardware Revenue | $7,032 | $(2,084) | $4,948 | | Software Revenue | $1,810 | $(183) | $1,627 | | Total Revenue | $9,012 | $(2,267) | $6,745 | | Cost of Hardware Revenue | $7,567 | $(1,566) | $6,001 | | Net Loss | $(40,071) | $(1,414) | $(41,485) | Impact of Restatement on December 31, 2021 Consolidated Balance Sheet (in thousands) | Metric | Previously Reported | Adjustments | Restated | | :-------------------------- | :------------------ | :---------- | :------- | | Accounts receivable, net | $25,642 | $(13,754) | $11,888 | | Inventories, net | $11,615 | $11,460 | $23,075 | | Internally-developed software, net | $12,475 | $(1,470) | $11,005 | | Deferred revenue, current | $6,016 | $1,243 | $7,259 | | Accumulated deficit | $(328,506) | $(2,706) | $(331,212) | Note 3. Summary of Significant Accounting Policies This section outlines the Company's significant accounting policies, including the basis of presentation, principles of consolidation, use of estimates, and specific policies for cash and cash equivalents, marketable securities, accounts receivable, inventories, property and equipment, software development costs, intangible assets, leases, equity issuance costs, and revenue recognition, also detailing recent accounting pronouncements adopted by the Company - The condensed consolidated financial statements are prepared in accordance with GAAP for interim reporting and Article 10 of Regulation S-X, with certain information condensed or omitted[81] - Revenue is recognized from hardware sales (when control transfers), software licenses (ratably over subscription period), and installation services (over time on a percentage of completion basis)[113][116][119][120] - The Company adopted ASU 2016-02 (Leases) and ASU 2016-13 (Credit Losses) effective January 1, 2022, with the latter resulting in a cumulative-effect adjustment to accumulated deficit[102][151][152] Deferred Contract Costs Roll-Forward (in thousands) | Metric | Amount | | :-------------------------- | :----- | | Balance as of January 1, 2022 (restated) | $1,237 | | Additions to deferred contract costs | $711 | | Amortization of deferred contract costs | $(111) | | Balance as of June 30, 2022 | $1,837 | Contract Assets and Liabilities (in thousands) | Metric | June 30, 2022 | December 31, 2021 (restated) | | :-------------------------- | :------------ | :--------------------------- | | Contract assets (unbilled receivables) | $1,182 | $713 | | Contract liabilities (deferred revenue) | $40,722 | $30,468 | Note 4. Investments The Company's investments primarily consist of available-for-sale securities and trading securities (convertible promissory notes); as of June 30, 2022, available-for-sale securities had gross unrealized losses of $2.58 million, primarily from corporate bonds, while trading securities incurred a loss of $2.5 million for the three months ended June 30, 2022 Available-for-Sale Securities (in thousands) | Security Type | Amortized Cost (June 30, 2022) | Gross Unrealized Loss (June 30, 2022) | Estimated Fair Value (June 30, 2022) | | :-------------------------- | :----------------------------- | :------------------------------------ | :----------------------------------- | | Asset backed securities | $8,034 | $(210) | $7,824 | | Commercial paper and corporate bonds | $178,285 | $(1,904) | $176,381 | | U.S. government agency debt securities | $23,632 | $(461) | $23,171 | | Total | $209,951 | $(2,575) | $207,376 | - The Company recorded $2.6 million in gross unrealized losses on available-for-sale securities as of June 30, 2022, primarily due to decreased fair value of corporate bonds[155] - Trading securities (convertible promissory notes) incurred a loss of $2.5 million and $1.5 million for the three and six months ended June 30, 2022, respectively, with a fair value of $3.1 million as of June 30, 2022[161] Note 5. Fair Value Measurements The Company categorizes its financial assets and liabilities measured at fair value into a three-level hierarchy, with cash and money market funds primarily Level 1, available-for-sale securities Level 2, and trading securities (convertible promissory notes) Level 3 due to significant unobservable inputs, while the warrant liability is classified as Level 2 Fair Value Measurements as of June 30, 2022 (in thousands) | Asset/Liability | Level 1 | Level 2 | Level 3 | Total | | :-------------------------- | :------ | :------ | :------ | :---- | | Cash and cash equivalents | $74,100 | $6,498 | $— | $80,598 | | Available-for-sale securities | $— | $207,376 | $— | $207,376 | | Trading securities | $— | $— | $3,050 | $3,050 | | Warrant liability | $— | $821 | $— | $821 | - Trading securities (convertible promissory notes) are classified as Level 3, valued using a Monte Carlo model with significant unobservable inputs like timing/amount of equity financing and counterparty equity value[164] - The warrant liability, including Private Placement Warrants, is classified as Level 2, with fair value determined by the closing price of the Company's public warrants[166] Note 6. Inventories, Net Net inventories increased from $23.08 million as of December 31, 2021, to $37.12 million as of June 30, 2022, primarily driven by increases in Raw materials and Finished goods, with Channel inventory decreasing and a reserve for Excess and obsolete inventory reserve maintained Inventories, Net (in thousands) | Category | June 30, 2022 | December 31, 2021 (restated) | | :-------------------------- | :------------ | :--------------------------- | | Raw materials | $3,851 | $2,513 | | Finished goods | $17,897 | $9,843 | | Channel inventory | $7,284 | $11,109 | | Excess and obsolete inventory reserve | $(340) | $(390) | | Total current inventories, net | $28,692 | $23,075 | | Finished goods - non-current | $8,425 | $— | | Total inventories, net | $37,117 | $23,075 | - Hardware shipped to channel partners is considered channel inventory until a contract exists and control passes to the customer[170] - Net inventories in excess of one year of historical sales are classified as other non-current assets[170] Note 7. Internally-Developed Software, Net Internally-developed software, net, increased from $11.01 million as of December 31, 2021, to $14.35 million as of June 30, 2022, with the Company capitalizing $5.1 million in internally-developed software and recognizing $1.7 million in amortization expense and $0.4 million in impairment expense for the six months ended June 30, 2022 Internally-Developed Software, Net (in thousands) | Category | June 30, 2022 | December 31, 2021 (restated) | | :-------------------------- | :------------ | :--------------------------- | | Internally-developed software | $13,321 | $9,667 | | Software-in-development | $6,233 | $4,853 | | Less: Accumulated amortization | $(5,206) | $(3,515) | | Total internally-developed software, net | $14,348 | $11,005 | - Capitalized internally-developed software amounted to $5.1 million for the six months ended June 30, 2022, compared to $3.5 million in the prior year[171] - Amortization expense for internally-developed software was $1.7 million for the six months ended June 30, 2022, and impairment expense was $0.4 million, included in general and administrative expenses[172][173] Note 8. Accrued Expenses Accrued expenses increased from $24.31 million as of December 31, 2021, to $29.37 million as of June 30, 2022, with notable increases in accrued purchases, accrued non-cancellable purchase commitments, and accrued restructuring costs, partially offset by a decrease in accrued compensation Accrued Expenses (in thousands) | Category | June 30, 2022 | December 31, 2021 (restated) | | :-------------------------- | :------------ | :--------------------------- | | Accrued compensation | $4,580 | $5,985 | | Accrued purchases | $4,050 | $1,701 | | Accrued non-cancellable purchase commitments | $3,981 | $549 | | Accrued operating expense | $6,560 | $8,214 | | Accrued litigation costs | $6,750 | $6,750 | | Accrued restructuring costs | $2,426 | $— | | Total accrued expenses | $29,373 | $24,309 | - Accrued non-cancellable purchase commitments significantly increased from $0.55 million to $3.98 million, reflecting reduced demand plans[174][177] - Accrued restructuring costs of $2.43 million were recorded as of June 30, 2022[174] Note 9. Commitments and Contingencies The Company has significant unfunded non-cancellable purchase commitments of $26.3 million as of June 30, 2022, is involved in several legal proceedings with proposed settlements totaling $33.65 million for certain class actions, expects insurers to cover $10.0 million of its $14.875 million share in one case, faces an ongoing SEC investigation, and is discussing a $6.8 million service provider demand - As of June 30, 2022, the Company had unfunded non-cancellable purchase commitments of approximately $26.3 million due to reduced demand plans[176] - Two securities class action complaints (Brennan Action and Schwartz Action) have proposed settlements of $1.95 million each, subject to court approval[179][180] - Three Fiduciary Lawsuits were consolidated, with a proposed settlement of $29.75 million. Latch and TS Innovation Acquisitions Sponsor, LLC agreed to share costs equally, and Latch expects insurers to pay $10.0 million of its $14.875 million share[181] - An SEC investigation commenced in March 2023 regarding the findings of the internal investigation and related matters, with the Company cooperating fully[184][185] - The Company has accrued approximately $6.8 million for a probable settlement with a service provider related to a payment demand under a prior agreement[183] Note 10. Equity The Company's authorized capital includes 1.0 billion shares of common stock and 100.0 million shares of preferred stock, with approximately 58.17 million shares reserved for future issuance as of June 30, 2022, including stock options, restricted stock units, and warrants, where Public warrants are classified as equity and Private Placement Warrants as warrant liabilities Common Stock Reserved for Future Issuance | Category | June 30, 2022 | December 31, 2021 (restated) | | :-------------------------- | :------------ | :--------------------------- | | Stock options issued and outstanding | 13,365,270 | 15,009,656 | | Restricted stock units issued and outstanding | 12,380,472 | 6,498,869 | | Public warrants outstanding | 9,999,967 | 9,999,967 | | Private placement warrants outstanding | 5,333,334 | 5,333,334 | | 2021 Incentive Award Plan available shares | 17,093,100 | 16,731,819 | | Total | 58,172,143 | 53,573,645 | - Public warrants are classified as equity, while Private Placement Warrants are recorded as warrant liabilities and re-measured at fair value each balance sheet date[189][190] Note 11. Earnings per Share Basic and diluted net loss per common share for the three and six months ended June 30, 2022, were $(0.36) and $(0.69), respectively, with potentially dilutive securities (stock options, RSUs, and warrants) excluded from diluted EPS calculations due to net losses making their inclusion anti-dilutive Net Loss Per Common Share | Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 (restated) | Six months ended June 30, 2022 | Six months ended June 30, 2021 (restated) | | :-------------------------- | :------------------------------- | :------------------------------------------ | :----------------------------- | :---------------------------------------- | | Net loss | $(51,616) | $(41,485) | $(98,448) | $(80,041) | | Basic and diluted net loss per common share | $(0.36) | $(0.81) | $(0.69) | $(2.59) | Potential Common Shares Excluded from Diluted EPS | Category | June 30, 2022 | December 31, 2021 (restated) | | :-------------------------- | :------------ | :--------------------------- | | Stock options | 13,365,270 | 15,009,656 | | Restricted stock units | 12,397,845 | 6,498,869 | | Warrants | 15,333,301 | 15,333,301 | | Total | 41,096,416 | 36,841,826 | Note 12. Income Taxes The Company recorded minimal income tax provisions for the three and six months ended June 30, 2022 and 2021, maintaining a full valuation allowance against deferred tax assets due to cumulative net losses, indicating that realization of these assets is not more likely than not - The income tax provision was $0.02 million and $0.03 million for the three and six months ended June 30, 2022, respectively[192] - A full valuation allowance is maintained against deferred tax assets because the Company has incurred cumulative net losses, making it unlikely that these assets will be fully realized[194] Note 13. Stock-Based Compensation Total stock-based compensation expense for the six months ended June 30, 2022, was $19.28 million, significantly higher than the prior year, including expenses for stock options and restricted stock units (RSUs), with a May 2022 reduction in force leading to a net reversal of $3.3 million in share-based compensation expense, and unrecognized compensation expense for unvested RSUs at $66.8 million Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 (restated) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 (restated) | | :-------------------------- | :------------------------------- | :------------------------------------------ | :----------------------------- | :---------------------------------------- | | Stock options | $340 | $552 | $1,825 | $15,003 | | Restricted stock units | $7,500 | $— | $19,090 | $— | | Capitalized costs | $(682) | $16 | $(1,639) | $(51) | | Total stock-based compensation expense | $7,158 | $568 | $19,276 | $14,952 | - Unrecognized stock-based compensation expense related to unvested stock options was $1.0 million, expected to be recognized over 1.5 years[202] - Unrecognized stock-based compensation expense related to unvested equity-based RSUs was $66.8 million, expected to be expensed over 2.2 years[206] - A May 2022 reduction in force led to a modification of option and RSU awards, resulting in a net reversal of $3.3 million in share-based compensation expense[209] Note 14. Related-Party Transactions The Company engages in transactions with strategic partners who are also stockholders and directors, or their affiliates, charging market rates for products and services, with receivables from these customers at $0.2 million as of June 30, 2022, and minimal related hardware and software revenues for the three and six months ended June 30, 2022 - The Company transacts with customers who are also stockholders and directors, or their affiliates, charging market rates[214] Related-Party Receivables and Revenue (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------- | :------------ | :---------------- | | Receivables due from customers | $0.2 | $0.4 | | Hardware revenue (3 months) | $0.01 | $0.2 | | Software revenue (3 months) | $0.04 | $0.1 | | Hardware revenue (6 months) | $0.01 | $0.3 | | Software revenue (6 months) | $0.1 | $0.3 | Note 15. Subsequent Events Significant subsequent events include the HDW Acquisition in July 2023, involving $22.0 million in promissory notes (repaid April 2024) and 29.0 million shares of common stock, July 2023 RIFs, Nasdaq delisting in April 2024, headquarters relocation, the HelloTech Merger in July 2024 assuming a $6.0 million term loan, and November 2024 executive transitions with new compensation and equity programs approved - The Company completed the HDW Acquisition on July 3, 2023, issuing $22.0 million in Promissory Notes (repaid April 26, 2024) and approximately 29.0 million Consideration Shares to HDW's stockholders[216][217][220] - A July 2023 Reduction in Force (RIF) impacted approximately 95 employees (70% of full-time staff) to streamline operations and reduce costs[223][224] - The Company's securities were delisted from Nasdaq on April 1, 2024, and its headquarters relocated to Olivette, Missouri, effective November 1, 2023[227][228] - The HelloTech Merger was completed on July 1, 2024, with the Company assuming HelloTech's $6.9 million term loan, which was subsequently amended and restated as a new $6.0 million term loan with Customers Bank[229][230][232] - Executive transitions in November 2024 include Mr. Siminoff stepping down as Chief Strategy Officer and Mr. Mitura as Chief Product Officer, with new advisory roles and amended stock restriction agreements[245][253] - The Board approved an extended cash-based leadership compensation program and a performance-based equity incentive program (Performance Equity Program) with stock price hurdles for vesting[236][237][239][240] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, emphasizing the impact of the restatement, detailing key factors affecting performance, business metrics, components of revenue and expenses, and a comparison of financial results for the three and six months ended June 30, 2022, versus 2021, also covering liquidity, capital resources, indebtedness, and cash flows Restatement of Prior Financial Information The Company has restated certain historical financial statements and information, as detailed in the Explanatory Note and Note 2, to correct material errors identified during an internal investigation and comprehensive review - The Company has restated certain historical financial statements and financial information due to material errors identified in an internal investigation and comprehensive review[256] Overview Latch is a technology company providing smart access and in-unit device control solutions for the multifamily rental home market, integrating hardware, cloud-based SaaS, and services to enhance experiences for residents, building owners, and service providers - Latch is a technology company primarily serving the multifamily rental home market, deploying hardware and software to digitize manual processes like building access and in-unit device control[257] - The Company's system combines hardware, cloud-based SaaS (Latch Platform), and services to provide smart access and efficient operations for multifamily buildings[257] Key Factors Affecting Our Performance Future performance hinges on evolving the go-to-market strategy for scalability and efficiency, continuous investment in R&D to innovate products and enhance customer experience, and the broader market adoption and growth of smart building hardware and software - Future success depends on evolving the go-to-market strategy to achieve higher sales volumes at lower incremental costs[259] - Continuous investment in R&D and enhancing customer experience through innovative hardware and software products is crucial[260] - Growth is also tied to the continued consumer adoption of smart building products and the expansion of the total addressable market[261] Key Business Metrics The Company no longer presents 'Annual Recurring Revenue' (ARR) or 'Spaces' as key business metrics due to significant organizational and management changes, including the HDW Acquisition and HelloTech Merger, instead focusing on GAAP measures like software revenue, total revenue, net loss, and the non-GAAP measure Adjusted EBITDA - The Company ceased presenting 'Annual Recurring Revenue' (ARR) and 'Spaces' as key business metrics due to significant organizational and management changes, including recent acquisitions[262][263] - Key business metrics now include GAAP measures (software revenue, total revenue, net loss) and non-GAAP Adjusted EBITDA[263] Key Business Metrics (in thousands) | Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 (restated) | $ Change | % Change | | :-------------------------- | :------------------------------- | :------------------------------------------ | :------- | :------- | | Software revenue | $3,239 | $1,627 | $1,612 | 99% | | Total revenue | $9,830 | $6,745 | $3,085 | 46% | | Net loss | $(51,616) | $(41,485) | $(10,131) | 24% | | Adjusted EBITDA | $(35,584) | $(18,543) | $(17,041) | (92%) | | Metric | Six months ended June 30, 2022 | Six months ended June 30, 2021 (restated) | $ Change | % Change | | :-------------------------- | :----------------------------- | :---------------------------------------- | :------- | :------- | | Software revenue | $5,946 | $3,104 | $2,842 | 92% | | Total revenue | $23,386 | $11,719 | $11,667 | 100% | | Net loss | $(98,448) | $(80,041) | $(18,407) | 23% | | Adjusted EBITDA | $(75,214) | $(33,116) | $(42,098) | (127%) | Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure used by management to evaluate core operating performance, excluding stock-based compensation, depreciation, interest, taxes, restructuring, non-ordinary course legal fees, and changes in fair value of derivatives, warrants, and trading securities, with a significant increase in loss to $(75.21) million for the six months ended June 30, 2022, compared to $(33.12) million in the prior year - Adjusted EBITDA is a non-GAAP measure defined as net loss, excluding stock-based compensation, depreciation and amortization, interest, taxes, restructuring, non-ordinary course legal fees, and changes in fair value of derivative instruments, warrant liabilities, and trading securities[266] - This metric is used by management and the Board to understand operating performance, establish budgets, and develop operational goals[266] Adjusted EBITDA Reconciliation to Net Loss (in thousands) | Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 (restated) | Six months ended June 30, 2022 | Six months ended June 30, 2021 (restated) | | :-------------------------- | :------------------------------- | :------------------------------------------ | :----------------------------- | :---------------------------------------- | | Net loss | $(51,616) | $(41,485) | $(98,448) | $(80,041) | | Depreciation and amortization | $1,381 | $678 | $2,511 | $1,345 | | Interest expense, net | $1,263 | $2,864 | $2,100 | $6,177 | | Provision for income taxes | $17 | $34 | $34 | $34 | | Loss on extinguishment of debt | $— | $1,469 | $— | $1,469 | | Change in fair value of derivative liabilities | $— | $8,991 | $— | $12,512 | | Change in fair value of warrant liability | $(2,699) | $4,795 | $(8,966) | $4,795 | | Change in fair value of trading securities | $2,500 | $— | $1,500 | $— | | Restructuring costs | $6,226 | $— | $6,226 | $— | | Transaction-related costs | $156 | $3,543 | $510 | $5,641 | | Non-ordinary course legal fees and settlement reserves | $30 | $— | $43 | $— | | Stock-based compensation expense | $7,158 | $568 | $19,276 | $14,952 | | Adjusted EBITDA | $(35,584) | $(18,543) | $(75,214) | $(33,116) | Components of Results of Operations This section details the components of revenue (hardware, software, installation services) and cost of revenue, as well as operating expenses (R&D, sales and marketing, general and administrative, depreciation and amortization) and other income/expense, highlighting factors influencing each component, such as supply chain disruptions, headcount changes, and public company operational requirements - Hardware revenue is generated from device sales, recognized when control transfers to the customer, and can be impacted by supply chain disruptions and construction delays[270][273][274] - Software revenue comes from SaaS licenses, recognized ratably over the subscription period, typically one to ten years[275] - Installation services revenue is recognized over time on a percentage of completion basis[276] - R&D and Sales & Marketing expenses are expected to decrease in 2023 due to restructuring initiatives (2022 RIFs and July 2023 RIF)[280][281] - General and administrative expenses are expected to increase through 2024 due to professional services costs related to the Investigation, SEC Investigation, Restatement, and remediation activities[283] Results of Operations The Company's results show significant revenue growth for both the three and six months ended June 30, 2022, driven by software and installation services, but this growth was overshadowed by even larger increases in cost of revenue and operating expenses, particularly R&D and sales and marketing, leading to increased net losses, while other income (expense), net, saw a favorable change due to prior year derivative extinguishments and warrant liability fair value adjustments Comparison of Three Months Ended June 30, 2022 and 2021 (in thousands) | Metric | 2022 | 2021 (restated) | $ Change | % Change | | :-------------------------- | :----- | :-------------- | :------- | :------- | | Total revenue | $9,830 | $6,745 | $3,085 | 45.7% | | Total cost of revenue | $13,080 | $6,677 | $6,403 | 95.9% | | Research and development | $16,710 | $7,063 | $9,647 | 136.6% | | Sales and marketing | $16,824 | $5,097 | $11,727 | 230.1% | | General and administrative | $12,341 | $10,585 | $1,756 | 16.6% | | Loss from operations | $(50,506) | $(23,355) | $(27,151) | 116.3% | | Net loss | $(51,616) | $(41,485) | $(10,131) | 24.4% | Comparison of Six Months Ended June 30, 2022 and 2021 (in thousands) | Metric | 2022 | 2021 (restated) | $ Change | % Change | | :-------------------------- | :----- | :-------------- | :------- | :------- | | Total revenue | $23,386 | $11,719 | $11,667 | 99.6% | | Total cost of revenue | $27,024 | $11,635 | $15,389 | 132.3% | | Research and development | $35,532 | $16,905 | $18,627 | 110.2% | | Sales and marketing | $34,247 | $8,872 | $25,375 | 286.0% | | General and administrative | $27,821 | $28,100 | $(279) | (1.0)% | | Loss from operations | $(103,749) | $(55,138) | $(48,611) | 88.2% | | Net loss | $(98,448) | $(80,041) | $(18,407) | 23.0% | - Hardware revenue decreased by $0.2 million (4.8%) for the three months ended June 30, 2022, but increased by $5.6 million (65.8%) for the six months ended June 30, 2022, due to increased hardware deliveries[292][303] - Total other income (expense), net, saw a favorable change of $17.0 million for the three months and $30.2 million for the six months ended June 30, 2022, primarily due to the extinguishment of derivatives and a decrease in warrant liability fair value in the prior year[298][309] Liquidity and Capital Resources As of June 30, 2022, the Company had $288.0 million in unrestricted cash, cash equivalents, and available-for-sale securities, expected to fund operations for at least one year, with significant cash outflows including $6.2 million in restructuring costs in H1 2022, substantial professional fees for investigations and restatement, the repayment of $23.9 million in Promissory Notes in April 2024, and $26.3 million in unfunded non-cancellable purchase commitments - As of June 30, 2022, unrestricted cash, cash equivalents, and current/non-current available-for-sale securities totaled approximately $288.0 million, expected to fund operations for at least one year[310][317] - The Company incurred $6.2 million in restructuring costs in H1 2022 related to the May RIF and significant professional fees for the Investigation, SEC Investigation, Restatement, and related litigation[312][313] - The Company repaid $23.9 million in principal and accrued interest for Promissory Notes related to the HDW Acquisition on April 26, 2024[314] - Unfunded non-cancellable purchase commitments amounted to approximately $26.3 million as of June 30, 2022[315] Indebtedness The Company cancelled its $6.0 million revolving credit facility in January 2023, fully repaid $22.0 million in Promissory Notes (plus interest) from the HDW Acquisition in April 2024, and following the HelloTech Merger, secured a new $6.0 million term loan with Customers Bank, maturing in July 2029, subject to various covenants and events of default - The Company cancelled its $6.0 million revolving credit facility in January 2023, with $0.2 million outstanding as of June 30, 2022[318] - Promissory Notes of $22.0 million (plus 10% PIK interest) from the HDW Acquisition were fully repaid on April 26, 2024, totaling $23.9 million[319] - A new $6.0 million term loan with Customers Bank was entered into on July 15, 2024, following the HelloTech Merger, maturing on July 15, 2029[320][321][322] - The new term loan requires monthly interest payments until January 15, 2025, followed by equal monthly installments of principal plus accrued interest, and is secured by substantially all Borrower assets (excluding IP)[323] - The Loan Agreement includes covenants limiting asset dispositions, changes in control, mergers, indebtedness, dividends, and certain affiliate transactions, with events of default including payment failures and covenant non-compliance[324][325] Cash Flows For the six months ended June 30, 2022, net cash used in operating activities increased by $50.3 million to $(83.46) million, primarily due to higher net loss and increased inventories; investing activities provided $44.88 million in cash, a $48.9 million increase, driven by proceeds from available-for-sale securities; and financing activities shifted to a net use of $(5.60) million, a $454.3 million decrease, mainly due to the absence of Business Combination proceeds Summary of Cash Flows (in thousands) | Category | Six months ended June 30, 2022 | Six months ended June 30, 2021 (restated) | | :-------------------------- | :----------------------------- | :---------------------------------------- | | Net cash used in operating activities | $(83,464) | $(33,187) | | Net cash provided by (used in) investing activities | $44,883 | $(4,040) | | Net cash (used in) provided by financing activities | $(5,596) | $448,702 | | Net change in cash and cash equivalents | $(44,184) | $411,470 | - Operating cash outflow increased by $50.3 million, driven by increased net loss and higher inventories[325] - Investing activities provided cash due to $95.4 million from sales/maturities of available-for-sale securities, offsetting increased purchases and capitalized software costs[326] - Financing cash flow decreased by $454.3 million, primarily due to the $450.0 million net proceeds from the Business Combination in the prior year not recurring[327] Off-Balance Sheet Arrangements As of June 30, 2022, and December 31, 2021, the Company had no material off-balance sheet arrangements that were material or reasonably likely to have a material effect on its financial condition or results of operations - The Company had no material off-balance sheet arrangements as of June 30, 2022, and December 31, 2021[328] Critical Accounting Policies and Estimates There have been no material changes to the Company's critical accounting policies and estimates since those disclosed in its 2022 Annual Report - No material changes to critical accounting policies and estimates have occurred since the 2022 Annual Report[329] Recent Accounting Pronouncements Information regarding recent accounting pronouncements is provided in Note 3, 'Summary of Significant Accounting Policies,' within the financial statements section - Details on recent accounting pronouncements are available in Note 3. Summary of Significant Accounting Policies[331] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Latch, Inc. is not required to provide quantitative and qualitative disclosures about market risk in this Form 10-Q - As a smaller reporting company, Latch, Inc. is exempt from providing quantitative and qualitative disclosures about market risk[332] Item 4. Controls and Procedures The Company's interim CEO and CFO concluded that disclosure controls and procedures were ineffective as of June 30, 2022, due to material weaknesses in internal control over financial reporting, stemming from an ineffective control environment, risk assessment, control activities, information and communication, and monitoring activities, which led to the restatement of prior financial statements, and the Company is actively implementing a remediation plan Background An Audit Committee investigation into key performance indicators and revenue recognition practices revealed accounting, financial reporting, and internal control deficiencies, necessitating the restatement of financial statements for 2019, 2020, 2021, and Q1 2022 - An Audit Committee investigation identified accounting, financial reporting, and internal control deficiencies, leading to the restatement of financial statements for 2019, 2020, 2021, and Q1 2022[333][334] - Errors included issues with hardware and software revenue recognition, expense recognition, internally developed software, stock-based compensation, and key performance indicators[334] Evaluation of Disclosure Controls and Procedures The interim CEO and CFO concluded that the Company's disclosure controls and procedures were not effective as of June 30, 2022, due to material weaknesses in internal control over financial reporting, though management believes the financial statements fairly present the Company's financial condition - The interim CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2022, due to material weaknesses in internal control over financial reporting[335] - Management believes the consolidated financial statements and related financial information in this Form 10-Q fairly present the Company's financial condition, results of operations, and cash flows[336] Previously Disclosed Material Weakness A material weakness related to control activities over information technology was identified in the 2021 Annual Report, with personnel changes, including the May 2022 RIF and CFO transition, hindering remediation efforts and contributing to additional material weaknesses - A material weakness related to the selection and development of control activities, including IT, was identified in the 2021 Annual Report[337] - Personnel changes, including the May 2022 RIF (impacting ~26% of employees) and CFO transition, hindered remediation and contributed to new material weaknesses[338] Material Weaknesses Identified New material weaknesses were identified across all five COSO Framework components: control environment, risk assessment, control activities, information and communication, and monitoring activities, which contributed to material accounting errors - The Company did not maintain controls to execute the criteria established in the COSO Framework for control environment, risk assessment, control activities, information and communication, and monitoring activities[341] - Specific material weaknesses include: (i) ineffective control environment (insufficient tone, lack of policies/resources), (ii) ineffective risk assessment (failure to identify/assess objectives and changes), (iii) ineffective control activities (failure to identify/communicate sales terms, consider agreement impact, account for extended payment terms, and issues due to personnel changes), (iv) ineffective information and communication (inadequate processes between accounting, finance, and sales), and (v) ineffective monitoring activities (failure to monitor compliance and evaluate controls)[342][343][344][345][347] - These material weaknesses contributed to the material accounting errors corrected in the financial statements[346] Remediation Plan and Status The Company is committed to remediating identified material weaknesses through various initiatives, including appointing interim executive leadership, establishing a new leadership team with co-located sales and accounting departments, hiring qualified finance professionals, providing employee training, reinforcing communication protocols, updating sales contracts, developing an intranet for policies, reevaluating its Sarbanes-Oxley compliance program, implementing internal control compliance software, and revising revenue recognition policies and procedures - Remediation activities include: appointing interim CEO/CFO, voluntary/involuntary terminations in sales/finance, establishing a new leadership team, co-locating sales and accounting departments in St Louis[352] - Further steps involve hiring qualified finance/accounting professionals, providing internal control training, reinforcing communication between sales/accounting/finance, updating sales contracts to clarify terms, and developing an intranet for company policies[352] - The Company is reevaluating and improving its Sarbanes-Oxley compliance program, implementing internal control compliance software, and revising revenue recognition policies and procedures[352] - Material weaknesses cannot be considered fully remediated until controls have operated effectively for a sufficient period and are tested[349] [Changes in Internal Control Over Financial Reporting](index=85&type=section&id=Changes%20in%20Internal%20Contro