Latch Inc.
03/26/2025 | Press release | Distributed by Public on 03/26/2025 15:10
Annual Report for Fiscal Year Ending December 31, 2023 (Form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes of Latch, Inc. and its subsidiaries included elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in Part I, Item 1A. "Risk Factors," actual results may differ materially from those anticipated in these forward-looking statements. Unless the context otherwise requires, references in this subsection to "we," "our," "Latch" and the "Company" refer to the business and operations of Latch Systems, Inc. (formerly known as Latch, Inc.) and its consolidated subsidiaries prior to the Business Combination and to Latch, Inc. (formerly known as TS Innovation Acquisitions Corp.) and its consolidated subsidiaries following the consummation of the Business Combination.
For a comparison of our financial condition and results of operations for the years ended December 31, 2022 and December 31, 2021, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2022 Annual Report.
Overview
Latch is a technology company primarily serving the multifamily rental home market segment of the smart building industry deploying hardware and software technology to digitize otherwise manual processes, including building and unit access and in-unit device control.
We combine hardware, software and services into a system that enables smart access for users of a multifamily building, enabling easier, more modernized experiences for residents and visitors, more efficient operations for building owners and property managers and more convenient interaction for service providers. We designed and developed the Latch Platform, a cloud-based SaaS product, to address the access requirements of modern multifamily buildings.
Key Factors Affecting Our Performance
We believe that our future success is dependent on many factors, including those further discussed below. While these areas represent opportunities for Latch, they also represent challenges and risks that we must successfully address in order to operate and grow our business.
Evolving our go-to-market strategy.Our performance is dependent on evolving our go-to-market strategy to address the needs of our customers and facilitate efficient internal motions. We must continue to develop a go-to-market strategy that scales and allows higher sales volumes at lower incremental costs. Our ability to generate operating profits and grow our business depends, in part, on the success of our go-to-market strategy.
Investing in research and development ("R&D") and enhancing our customer experience. Our performance is dependent on the investments we make in research and development, including our ability to attract and retain highly skilled research and development personnel. We believe we must continually develop and introduce innovative new hardware products, software applications and other offerings. If we fail to innovate and enhance our brand and our products, our market position and revenue will likely be adversely affected.
Category adoption, expansion of our total addressable market and market growth. Our future growth depends in part on the continued adoption of hardware and software products that improve resident experience and the growth of this market.
Key Business Metrics
We are presenting software revenue (prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP")), total revenue (GAAP), net loss (GAAP) and Adjusted EBITDA (non-GAAP) as key business metrics, as we believe each of those metrics is important in measuring our performance, identifying trends affecting our business, formulating business plans and making strategic decisions that will impact our future operational results.
Our key business metrics are as follows for the periods presented (in thousands):
| Year ended December 31, | ||||||||||||||||||||||||||
| 2023 | 2022 |
$ Change
|
% Change
|
|||||||||||||||||||||||
| GAAP Measures: | ||||||||||||||||||||||||||
| Software revenue | $ | 17,775 | $ | 13,024 | $ | 4,751 | 36.5 | % | ||||||||||||||||||
| Total revenue | $ | 44,961 | $ | 42,955 | $ | 2,006 | 4.7 | % | ||||||||||||||||||
| Net loss | $ | (107,540) | $ | (162,336) | $ | 54,796 | (33.8 | %) | ||||||||||||||||||
| Non-GAAP Measure: | ||||||||||||||||||||||||||
| Adjusted EBITDA | $ | (68,459) | $ | (118,573) | $ | 50,114 | (42.3 | %) | ||||||||||||||||||
Adjusted EBITDA
To supplement our financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we have presented in this Form 10-K Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies.
We define Adjusted EBITDA as our net loss, excluding the impact of stock-based compensation expense, depreciation and amortization expense, interest income, interest expense, provision for income taxes, restructuring, non-ordinary course legal fees and settlement reserves, loss on extinguishment of debt, gain or loss on change in fair value of derivative instruments, warrant liabilities and trading securities and transaction-related expenses. The most directly comparable GAAP measure is net loss. We believe excluding the impact of these items in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance. We monitor, and have presented in this Form 10-K, Adjusted EBITDA because it is a key measure used by our management and Board to understand and evaluate our operating performance, to establish budgets and to develop operational goals for managing our business. We believe Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we include in net loss. Accordingly, we believe Adjusted EBITDA provides useful information to investors, analysts and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance.
Adjusted EBITDA is not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than net loss, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. In addition, the expenses and other items that we exclude in our calculations of Adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA when they report their operating results.
In addition, other companies may use other measures to evaluate their performance, all of which could reduce the usefulness of Adjusted EBITDA as a tool for comparison. The following table reconciles Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP (in thousands):
| Year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net loss | $ | (107,540) | $ | (162,336) | |||||||
| Depreciation and amortization | 7,201 | 5,504 | |||||||||
|
Interest (income) expense, net(1)
|
(2,309) | 2,961 | |||||||||
| Provision for income taxes | 30 | 89 | |||||||||
| Change in fair value of warrant liability | (230) | (9,558) | |||||||||
| Change in fair value of trading securities | - | 3,460 | |||||||||
|
Restructuring costs(2)
|
5,812 | 8,573 | |||||||||
|
Transaction-related costs(3)
|
1 | 468 | |||||||||
|
Non-ordinary course legal fees and settlement reserves(4)
|
10,405 | 2,010 | |||||||||
|
Stock-based compensation(5)
|
18,171 | 30,256 | |||||||||
| Adjusted EBITDA | $ | (68,459) | $ | (118,573) | |||||||
(1)As a result of significant discounts provided to our customers on certain long-term software contracts paid in advance, the Company has determined that there is a significant financing component related to the time value of money and has therefore broken out the interest component and recorded it as a component of interest expense, net on the Consolidated Statements of Operations and Comprehensive Loss. Interest (income) expense, net includes interest expense associated with the significant financing component of $4.6 million and $5.1 million for the years ended December 31, 2023 and 2022, respectively.
(2)Reflects restructuring costs primarily associated with the July 2023 RIF for the year ended December 31, 2023 and resulting from the 2022 RIFs for the year ended December 31, 2022.
(3)Transaction costs related to the Business Combination.
(4)Non-ordinary course legal fees and settlement reserves incurred in connection with non-ordinary course litigation and disputes. For the year ended December 31, 2023, the amount includes (i) the Company's $14.875 million share of the settlement amount related to the Merger Lawsuits, as defined and described in Note 12. Commitments and Contingencies, in Part II, Item 8. "Financial Statements," offset by (ii) the $10.0 million contribution insurers provided to such settlement. While the Company is involved in various litigation and legal disputes in the ordinary course of its business, the Company believes the non-ordinary course legal fees and settlement reserves included in our calculation of Adjusted EBITDA do not represent normal and recurring operating expenses. See Note 12.Commitments and Contingencies, in Part II, Item 8. "Financial Statements." These costs are included within general and administrative within the Consolidated Statements of Operations and Comprehensive Loss.
(5)See Note 15.Stock-Based Compensation, in Part II, Item 8. "Financial Statements."
Components of Results of Operations
Revenue
Hardware Revenue. We generate hardware revenue primarily from the sale of our portfolio of devices for our smart access and smart apartment solutions. We sell hardware to customers, which include real estate developers, builders, building owners and property managers, directly or through our channel partners, who act as intermediaries, installers or wholesalers. The Company recognizes hardware revenue when there is evidence a contract exists and control has been transferred to the customer. The Company provides warranties that its hardware will be substantially free from defects in materials and workmanship, generally for a period of one or two years for electronic components depending on the hardware product, and five years for mechanical components. The Company determines in its sole discretion whether to replace, repair or refund warrantable devices.
From time-to-time, industry-wide supply chain disruptions have created shortages of certain construction materials and other products. Additionally, our customers have also experienced trade labor availability constraints and delays. These factors have caused our customers to experience construction delays, which have delayed and may continue to delay the timing of the installation of our products and our recognition of hardware and software revenue.
Software Revenue. We generate software revenue primarily through the license of our SaaS over our cloud-based platform on a subscription-based arrangement. Subscription fees vary depending on the features selected by customers. SaaS
arrangements generally have term lengths between one and ten years. The SaaS provided by the Company are considered stand-ready performance obligations where customers benefit from the services evenly throughout the service period. Revenue is generally recognized ratably over the subscription period beginning when or as control of the promised services is transferred to the customer.
Installation Services Revenue. We generate revenue by facilitating hardware installation and activation services to select customers. This revenue is recognized over time on a percentage of completion basis.
Cost of Revenue
Cost of hardware revenue consists primarily of product costs, including manufacturing costs, duties and other applicable importing costs, shipping and handling costs, packaging costs, warranty costs, assembly costs and warehousing costs, as well as other non-inventoriable costs, including personnel-related expenses associated with supply chain logistics and direct deployment and outsourced labor costs. We expect hardware cost of revenue to move in-line with our hardware revenue. Our hardware costs have been and may continue to be impacted by any supply chain constraints, shipping cost volatility and changes in import tariffs.
Cost of software revenue consists primarily of outsourced hosting costs, other outsourced cloud-based service costs and personnel-related expenses associated with monitoring and managing outsourced hosting service providers.
Cost of installation services revenue consists primarily of third-party installation labor costs, parts and materials and personnel-related expenses associated with deployment of our hardware.
Cost of revenue excludes depreciation and amortization shown in operating expenses.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, general and administrative and depreciation and amortization expenses.
R&D Expenses. R&D expenses consist primarily of personnel and related expenses for our employees working on our product, design and engineering teams, including salaries, bonuses, benefits, payroll taxes, travel and stock-based compensation. Also included are non-personnel costs such as amounts paid to our third-party contract manufacturers for tooling, engineering and prototype costs of our hardware products, fees paid to third-party consultants, R&D supplies and rent.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily of personnel and related expenses for our employees working on our sales, customer success, deployment and marketing teams, including salaries, bonuses, benefits, payroll taxes, travel, commissions and stock-based compensation. Also included are non-personnel costs such as marketing activities (trade shows and events, conferences and digital advertising), professional fees, rent and customer support.
General and Administrative Expenses. General and administrative expenses consist primarily of personnel and related expenses for our executive, legal, human resources, finance and IT functions, including salaries, bonuses, benefits, payroll taxes, travel and stock-based compensation. Additional expenses included in this category are non-personnel costs such as legal fees, rent, professional fees, audit fees, bad debt expense and insurance costs. We expect our general and administrative expenses to increase at least through 2024, due to professional services costs related to the Investigation, the SEC Investigation, the Restatement and remediation activities.
Depreciation and Amortization Expenses. Depreciation and amortization expenses consist primarily of depreciation expenses related to investments in property and equipment and internally-developed capitalized software.
Other Income (Expense), Net
Other income (expense), net consists of interest expense associated with the significant financing component of our longer-term software contracts, interest expense associated with our previous debt financing arrangements, interest income on highly liquid short-term investments, gain or loss on extinguishment of debt and gain or loss on change in fair value of derivative liabilities, warrant liabilities and trading securities.
Interest income (expense), net is summarized as follows:
| Year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
|
Interest income
|
$ | 8,099 | $ | 4,481 | |||||||
|
Interest expense
|
(5,790) | (7,442) | |||||||||
| Interest income (expense), net | $ | 2,309 | $ | (2,961) | |||||||
Income Taxes
The provision for income taxes consists primarily of income taxes related to state and foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be utilized.
Results of Operations
The tables and period-to-period comparisons of operating results below summarize our Consolidated Statements of Operations and Comprehensive Loss data and are not necessarily indicative of results for future periods.
Comparison of years ended December 31, 2023 and December 31, 2022
| Year ended December 31, | ||||||||||||||||||||||||||
| (in thousands, except share and per share data) | 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||
| Hardware | $ | 19,739 | $ | 24,532 | $ | (4,793) | (19.5) | % | ||||||||||||||||||
| Software | 17,775 | 13,024 | 4,751 | 36.5 | % | |||||||||||||||||||||
| Installation services | 7,447 | 5,399 | 2,048 | 37.9 | % | |||||||||||||||||||||
| Total revenue | 44,961 | 42,955 | 2,006 | 4.7 | % | |||||||||||||||||||||
|
Cost of revenue(1)
|
||||||||||||||||||||||||||
| Hardware | 24,074 | 39,533 | (15,459) | (39.1) | % | |||||||||||||||||||||
| Software | 2,023 | 1,561 | 462 | 29.6 | % | |||||||||||||||||||||
| Installation services | 6,539 | 5,785 | 754 | 13.0 | % | |||||||||||||||||||||
| Total cost of revenue | 32,636 | 46,879 | (14,243) | (30.4) | % | |||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Research and development | 33,787 | 54,933 | (21,146) | (38.5) | % | |||||||||||||||||||||
| Sales and marketing | 15,394 | 45,589 | (30,195) | (66.2) | % | |||||||||||||||||||||
| General and administrative | 66,211 | 55,292 | 10,919 | 19.7 | % | |||||||||||||||||||||
| Depreciation and amortization | 7,201 | 5,504 | 1,697 | 30.8 | % | |||||||||||||||||||||
| Total operating expenses | 122,593 | 161,318 | (38,725) | (24.0) | % | |||||||||||||||||||||
| Loss from operations | (110,268) | (165,242) | 54,974 | (33.3) | % | |||||||||||||||||||||
|
Other income (expense), net
|
||||||||||||||||||||||||||
| Change in fair value of warrant liability | 230 | 9,558 | (9,328) | (97.6) | % | |||||||||||||||||||||
| Change in fair value of trading securities | - | (3,460) | 3,460 | (100.0) | % | |||||||||||||||||||||
| Interest income (expense), net | 2,309 | (2,961) | 5,270 | (178.0) | % | |||||||||||||||||||||
|
Other income (expense), net
|
219 | (142) | 361 | (254.2) | % | |||||||||||||||||||||
|
Total other income (expense), net
|
2,758 | 2,995 | (237) | (7.9) | % | |||||||||||||||||||||
| Loss before income taxes | (107,510) | (162,247) | 54,737 | (33.7) | % | |||||||||||||||||||||
| Provision for income taxes | 30 | 89 | (59) | (66.3) | % | |||||||||||||||||||||
| Net loss | (107,540) | (162,336) | 54,796 | (33.8) | % | |||||||||||||||||||||
|
Other comprehensive loss
|
||||||||||||||||||||||||||
| Unrealized loss on available-for-sale securities | 1,515 | (787) | 2,302 | (292.5) | % | |||||||||||||||||||||
| Foreign currency translation adjustment | (7) | 3 | (10) | (333.3) | % | |||||||||||||||||||||
| Comprehensive loss | $ | (106,032) | $ | (163,120) | $ | 57,088 | (35.0) | % | ||||||||||||||||||
|
Net loss per common share:
|
||||||||||||||||||||||||||
|
Basic and diluted net loss per common share
|
$ | (0.68) | $ | (1.13) | $ | 0.45 | (39.8) | % | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic and diluted | 159,146,081 | 143,615,820 | ||||||||||||||||||||||||
(1)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
Revenue
Revenue increased by $2.0 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, driven by increases of $4.8 million in software revenue and $2.0 million in installation services revenue, partially offset by a $4.8 million decrease in hardware revenue. The decrease in hardware revenue was primarily driven by lower units delivered, including higher units returned, which negatively impacted net delivered units, partially offset by higher average selling prices. Increased software revenue reflects the continued growth in subscriptions as a result of the continued increases in cumulative delivered hardware units. Installation services revenue growth reflects continued expansion of the direct deployment program.
Cost of Revenue
Cost of revenue decreased by $14.2 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily a result of a $15.5 million decrease in hardware sales related costs, partially offset by a $0.8 million increase in cost of installation services revenue and a $0.5 million increase in software related expenses, which reflects the increased server costs associated with an expansion in licensed buildings. The decrease in hardware sales related costs was driven by (i) $9.5 million of fewer units delivered, net of units returned, (ii) an $8.8 million decrease in inventory purchase commitments liability, (iii) a $2.1 million decrease due to a reduction in the size of the supply-chain team and (iv) a $0.3 million smaller adjustment in the cost of inventory to net realizable value. The decrease was offset by a $5.7 million increase of expense for excess and obsolete reserves.
Research and Development Expenses
Research and development expenses decreased by $21.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily due to: (i) $18.8 million decrease in personnel-related expenses, comprised of $11.9 million of decreased compensation expense and $6.9 million of decreased stock-based compensation expense due to the impact of the 2022 RIFs and the July 2023 RIF; (ii) $0.9 million decrease in professional fees related to outsourced brand and website refresh initiatives; (iii) $0.4 million decrease in travel expenses and (iv) $1.1 million decrease in other research and development expenses. These decreases were partially offset by a $0.6 million increase in restructuring costs.
Sales and Marketing Expenses
Sales and marketing expenses decreased by $30.2 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily due to: (i) $19.3 million decrease in personnel-related expenses, comprised of $15.1 million of decreased compensation expense and $4.2 million of decreased stock-based compensation expense due to the impact of the 2022 RIFs and the July 2023 RIF; (ii) $3.6 million decrease in paid marketing expense; (iii) $3.5 million decrease in restructuring costs due to the magnitude of the 2022 RIFs as compared to the July 2023 RIF; (iv) $0.7 million decrease in professional and consulting fees; (v) $1.0 million decrease in software license expense due to decreased headcount and (vi) $1.1 million decrease in travel expenses.
General and Administrative Expenses
General and administrative expenses increased by $10.9 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to (i) a $7.3 million increase in legal fees, including a $4.9 million increase in settlement reserves; (ii) an increase of $5.8 million in professional fees related to the Investigation and Restatement; (iii) $3.8 million in higher professional fees related to outsourced management; and (iv) an increase of $2.7 million in audit fees. These increases were partially offset by a (i) $2.2 million decrease in compensation expense; (ii) $0.4 million decrease in stock-based compensation expense, comprised of a $7.2 million decrease related to the 2022 RIFs and the July 2023 RIF, mostly offset by a $6.8 million increase related to stock-based compensation expense in connection with the HDW Acquisition; (iii) $2.2 million decrease in insurance expenses; (iv) $2.1 million decrease in bad debt expense related to software; (v) $0.4 million decrease in recruiting expense as a result of certain key hires in 2022; (vi) $1.3 million decrease in IT and software licenses expenses and (vii) $0.2 million decrease in impairment of long-lived assets.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $1.7 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to the increased amortization of capitalized internally-developed software.
Total Other Income (Expense), Net
Total other income (expense), net decreased by $0.2 million for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily due to a smaller decrease in the price of our common stock during the year ended December 31, 2023 compared to the year ended December 31, 2022, which resulted in a $9.3 million unfavorable change in the fair value of the private placement warrants liability. The decrease was partially offset by (i) a $5.3 million increase in interest income related to higher interest rates; (ii) a $3.5 million favorable variance in the change in fair value of trading securities driven by the Company ceasing to own any trading securities as of December 31, 2022 and (iii) a $0.3 million favorable change in other miscellaneous income and expense.
Liquidity and Capital Resources
We have incurred losses since our inception. Prior to the Closing of the Business Combination, our operations were financed primarily through net proceeds from the issuance of our redeemable convertible preferred stock and Convertible Notes, as well as borrowings under our term loan. We received approximately $450.0 million in cash proceeds, net of fees and expenses funded in connection with the Closing, which included approximately $192.6 million from the sale of approximately 19.3 million newly-issued shares of common stock in connection with the Business Combination. See Note 1. Description of Business, in Part II, Item 8. "Financial Statements."
As of December 31, 2023 and 2024, the Company's unrestricted cash and cash equivalents and current and non-current available-for-sale securities were approximately $179.5 million and $75.5 million, respectively. The Company's available-for-sale securities investment portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. The Company's investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.
Prior to December 31, 2023, the Company (i) received $19.3 million of proceeds from the sale of a maturing available-for-sale security and (ii) reinvested the proceeds by purchasing an equal amount of new securities prior to such date. The Company uses trade-date accounting and, as such, the new securities position of $19.3 million is included in the balance of available-for-sale securities of $84.9 million on the Company's Consolidated Balance Sheets as of December 31, 2023, and a liability of $19.3 million presented as investment purchases payable is included in accrued expenses on the Company's Consolidated Balance Sheets as of December 31, 2023. The funds were deducted from the Company's account in early January 2024. Accordingly, the sum of the Company's cash and cash equivalents as of December 31, 2023 is $19.3 million higher than it would have been had the funds been deducted from the Company's account prior to year end. See Note 2. Summary of Significant Accounting Policies - Cash and Cash Equivalents, and Note 9. Accrued Expenses, in Part II, Item 8. "Financial Statements."
Historically, our short-term liquidity needs have primarily included working capital for salaries, including sales and marketing and research and development, as well as component inventory purchases from our contract manufacturers. To better align staffing and expense levels with sales volumes and the macroeconomic environment and create operating efficiencies, we incurred $8.6 million in restructuring costs during the year ended December 31, 2022 resulting from the 2022 RIFs (excluding the impact of stock-based compensation). In 2023, we conducted the July 2023 RIF in order to further streamline our business operations, reduce costs and complexities in the business and create additional operating efficiencies. In connection with the July 2023 RIF, we incurred $5.8 million in restructuring costs (excluding the impact of stock-based compensation).
Beginning in the second quarter of 2022 and continuing through 2025, we have incurred, and may continue to incur, significant professional fees, primarily consisting of legal, forensic accounting, management consulting and related advisory services as a result of the Investigation and the SEC Investigation, as well as accounting related consulting services, independent registered accounting firm fees and advisory services related to the Restatement and Financial Statement Review. Additionally, we have incurred significant costs in connection with various pending litigation. See Note 12. Commitments and Contingencies, in Part II, Item 8. "Financial Statements." Such litigation involves significant defense and other costs and, if decided adversely to us or settled, has resulted or could result in significant monetary damages or expenditures. Although we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations, our insurance coverage does not cover all claims that have been or may be brought against us.
In connection with the HDW Acquisition, in July 2023 the Company issued to HDW's stockholders as merger consideration $22.0 million aggregate principal amount of unsecured Promissory Notes. The Promissory Notes accrued paid-in-kind interest at a rate of 10% per annum and were scheduled to mature on July 3, 2025, unless earlier accelerated in connection
with an event of default (including certain events of delisting from Nasdaq) or change of control of the Company. On April 26, 2024, the Company repaid the Promissory Notes in full without penalty. The Company paid an aggregate of $23.9 million in principal and accrued interest to the holders of the Promissory Notes.
We contract with third parties to manufacture our products. During the normal course of business, we and our contract manufacturers procure components based upon a demand plan. During the year ended December 31, 2022, we materially reduced our original demand plan and started engaging in discussions with our contract manufacturers regarding our obligation to purchase the inventory based on our original demand plan. In 2022, we purchased and received excess inventory for certain products based on our original demand plan. Additionally, as a result of these discussions, we agreed to prepay certain contract manufacturers approximately $12.3 million for material and component obligations. As of December 31, 2023, we had prepaid approximately $11.7 million of such obligations, resulting in a net purchase obligation of $0.6 million. We may not be able to utilize such prepayments and inventory in the foreseeable future.
Near-Term Liquidity Position
As of the date of this Form 10-K (the "Filing Date"), the presence of the following risks and uncertainties associated with the Company's liquidity position may adversely affect its ability to sustain its operations:
•The continued incurrence of significant expenses related to legal and other professional services in connection with the SEC Investigation and the possibility that the SEC may levy civil penalties or fines against the Company;
•Potential expenditures associated with defending, negotiating or resolving the service provider demand described in Note 12. Commitments and Contingencies, in Part II, Item 8. "Financial Statements;"
•Unexpected expenditures related to the Stockholder Lawsuits in the event the agreed-to settlements are not approved by the respective courts, or otherwise;
•The incurrence of significant expenses related to other legal or regulatory proceedings, whether actual or threatened;
•The failure of the Company to achieve its revenue expectations, including as a result of:
◦Pricing compression for the Company's SaaS products;
◦Market adoption of the DOOR application;
◦The success of the HelloTech business;
◦The impact of elevated interest rates on the Company's potential customers, who may eliminate or delay expenditures for the products or services the Company offers; and
◦Market perception of the Company and its offerings;
•Costs of revenue and operating expenses exceeding the Company's expectations;
•The Company's failure to maintain the liquidity ratio required by the Loan Agreement with Customers Bank;
•The Company's inability to fully leverage its prepaid inventory; or
•The catastrophic loss of inventory due to theft, natural disaster or otherwise.
Due to the risks and uncertainties described above, the Company continues to monitor its liquidity position. The Company recognizes the challenge of maintaining sufficient liquidity to sustain its operations and remain in compliance with the liquidity ratio required by the Loan Agreement. However, notwithstanding its liquidity position as of the Filing Date, and while it is difficult to predict its future liquidity requirements with certainty, the Company currently expects it will be able to generate sufficient liquidity to fund its operations over the 12 months beyond the Filing Date.
In response to the risks and uncertainties described above, the Company may attempt to secure additional outside capital. However, the Company has not sought any commitments of additional outside capital and can provide no assurance it will be able to secure any outside capital in the future at all, or on terms that are acceptable to the Company. Additionally, the Company's securities are currently traded on the OTC Expert Market. Because of applicable restrictions, there is a minimal public market for the Company's securities, and the Company's ability to raise additional capital may be impaired because of the less liquid nature of the over-the-counter markets. The Company also plans to continue to closely monitor its cash flow forecast and, if necessary, may implement certain incremental cost savings measures to preserve its liquidity beyond the 2022 RIFs and the July 2023 RIF. See Note 20.Restructuring, in Part II, Item 8. "Financial Statements."
As of December 31, 2023 and 2024, the Company's unrestricted cash and cash equivalents and current and non-current available-for-sale securities were approximately $179.5 million and $75.5 million, respectively. Current financial information regarding the Company, including its results of operations and statement of cash flows, will not be available until we file our 2024 financial statements.
Other significant factors that affect our overall management of liquidity include certain actions controlled by management such as capital expenditures and acquisitions. See Note 10. Leases, Note 11. Debt, and Note 12. Commitments and Contingencies, in Part II, Item 8. "Financial Statements."
Indebtedness
Revolving Credit Facility
On July 1, 2021, the Company executed a new revolving credit facility replacing the matured facility described in Note 11. Debt, in Part II, Item 8. "Financial Statements." The revolving credit facility, which was subsequently amended in May 2022, had a credit limit of $6.0 million with no stated maturity date. Installment plan agreements were executed for each financing request, which included the interest rate. The revolving credit facility had no financial or other covenants. As of December 31, 2023, no amount was outstanding under the revolving credit facility, which the Company cancelled in January 2023.
Promissory Notes
As discussed above, in July 2023 in connection with the HDW Acquisition, the Company issued to HDW's stockholders as merger consideration $22.0 million aggregate principal amount of Promissory Notes. The Promissory Notes accrued paid-in-kind interest at a rate of 10% per annum and were scheduled to mature on July 3, 2025, unless earlier accelerated in connection with an event of default (including certain events of delisting from Nasdaq) or change of control of the Company. As of December 31, 2023, the Company concluded that it was virtually certain the Promissory Notes would become payable within the upcoming 12 months due to the Company's then-anticipated delisting from Nasdaq, which was an event of default with respect to the Promissory Notes. Consequently, the Company reclassified the debt obligation as current as of December 31, 2023, despite the event of default not yet occurring. On April 26, 2024, the Company repaid the Promissory Notes in full without penalty. The Company paid an aggregate of $23.9 million in principal and accrued interest to the holders of the Promissory Notes.
Term Loan with Customers Bank
Following the closing of the HelloTech Merger, on July 15, 2024, Latch Systems and HelloTech, as the Borrowers, entered into the Loan Agreement with Customers Bank.
Pursuant to the Loan Agreement, Customers Bank issued the Borrowers the New Loan, a term loan in the principal amount of $6.0 million. The Loan Agreement did not result in the Borrowers receiving any additional loan proceeds. Interest is payable on the New Loan at a rate equal to the greater of (a) the prime rate published in The Wall Street Journal or (b) 6.0%, and the Maturity Date is July 15, 2029.
The Borrowers were required to pay interest on the New Loan monthly until January 15, 2025. Thereafter, the Borrowers are required to pay equal monthly installments of principal plus accrued interest until the Maturity Date. There is no penalty for prepayment of the New Loan.
Pursuant to the Loan Agreement, the Borrowers have granted Customers Bank security interests in substantially all of the Borrowers' assets, other than intellectual property. HelloTech is required to maintain an operating account with Customers Bank with a sufficient balance to support monthly payments. Additionally, the Borrowers are collectively required to maintain a liquidity ratio of at least 4.00, tested monthly, which is calculated as the quotient of unrestricted cash and cash equivalents of the Company and its subsidiaries (subject to certain limitations with respect to cash of foreign subsidiaries), divided by all outstanding indebtedness owed to Customers Bank. As of December 31, 2024, the Company was in compliance with the liquidity ratio covenant.
The Loan Agreement contains various covenants that, among other things, limit the Borrowers' ability to:
• engage in certain asset dispositions;
• permit a change in control;
• merge or consolidate;
• incur indebtedness or grant liens on its assets;
• declare or pay dividends, distributions or redemptions;
• make loans or investments; and
• engage in certain transactions with affiliates.
If an event of default exists under the Loan Agreement, Customers Bank will be able to accelerate the maturity of the New Loan and exercise other rights and remedies. Events of default include, but are not limited to, the following events:
• failure to pay any principal or interest within three business days of the due date;
• failure to perform or otherwise comply with the covenants and obligations in the Loan Agreement, subject, in certain instances, to certain grace periods;
• bankruptcy or insolvency events involving the Borrowers; or
• the rendering of judgments against a Borrower that remain undischarged, unvacated, unbonded, unsatisfied or unstayed for a certain period.
Cash Flows
The following table sets forth a summary of our cash flows for the years ended December 31, 2023, 2022 and 2021 (in thousands):
| Year ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash used in operating activities | $ | (65,586) | $ | (135,239) | |||||||
| Net cash provided by investing activities | 50,479 | 126,356 | |||||||||
| Net cash used in financing activities | - | (6,039) | |||||||||
| Effect of exchange rates on cash | (46) | (32) | |||||||||
| Net change in cash and cash equivalents | $ | (15,153) | $ | (14,954) | |||||||
Cash flows for the year ended December 31, 2023 compared to December 31, 2022
Operating Activities. Net cash used in operating activities in 2023 decreased by $69.7 million compared to 2022. This resulted primarily from a decrease in net loss of $54.8 million, a decrease in inventories, net of $36.3 million, a net increase in accrued expenses and accounts payable of $25.4 million, a reduction in the change in the fair value of warrant liability and trading securities of $5.9 million and an increase in depreciation and amortization of $1.7 million. These sources of cash were partially offset by an increase in prepaid expense and other current assets of $19.7 million, a decrease in deferred revenue of $13.8 million, a decrease in stock-based compensation expense of $12.1 million, a decrease in non-cash interest expense of $4.8 million, and a decrease in the provision for doubtful accounts of $2.2 million.
Investing Activities. Net cash provided by investing activities in 2023 decreased by $75.9 million compared to 2022, primarily due to an increase in purchases of available-for-sale securities of $47.0 million and a decrease in the proceeds from sales and maturities of available-for-sale securities of $42.4 million. These uses of cash were partially offset by $8.1 million cash received, net of cash paid, in connection with the HDW Acquisition, $3.3 million in lower capitalization of internally developed software costs and a decrease of $1.9 million in purchases of property and equipment.
Financing Activities. The Company did not conduct any financing activities in the year ended December 31, 2023. In the year ended December 31, 2022, net cash used in financing activities primarily consisted of (i) the net repayment of $3.4 million of our revolving credit facility and (ii) payments of $3.4 million for tax withholding on net settlement of equity awards. These uses of cash were partially offset by $0.7 million in proceeds from the issuance of common stock.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2023 or 2022 that had, or were reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.
Critical Accounting Estimates
Our consolidated financial statements, which include estimates, have been prepared in accordance with GAAP. Our critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial condition or results of operations. In making these determinations, management makes subjective and complex judgments that frequently require
estimates about matters that are inherently uncertain. It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our consolidated financial statements. A summary of each of these critical accounting estimates follows.
Stock-Based Compensation
We record stock-based compensation expense related to stock options based upon the award's grant date fair value. We estimate the fair value of stock options using the Black-Scholes-Merton option-pricing model, which requires us to estimate the risk-free interest rate, expected term, expected stock price volatility and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of our stock options.
The expected term of stock options represents the period of time the stock options are expected to be outstanding based on the "simplified method." Under the "simplified method," the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term. We use the "simplified method" due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the stock options.
Since we have minimal trading history of our common stock, the expected stock price volatility was derived from the average historical stock volatility of several unrelated public companies within our industry that we consider to be comparable to our business over a period equivalent to the expected term of the awards.
The assumptions used in calculating the fair values of stock option grants represent management's best estimates, but these estimates involve inherent uncertainties and the application of judgment. If material changes in these assumptions occur, they could have a material impact on our stock-based compensation expense.
Inventory Valuation
We regularly monitor inventory quantities on hand and in transit and reserve for excess and obsolete inventories using estimates based on historical and projected sales trends, specific categories of inventory and age of inventory. If actual conditions or product demands are less favorable than our assumptions, additional inventory reserves may be required.
Net inventories not expected to be sold according to a one year forecasted sales projection are classified as other non-current assets on the Consolidated Balance Sheets. Inventory on hand that exceeds a three year forecasted sales projection is recorded as an excess and obsolete inventory reserve. This reserve is comprised of inventory greater than can be used to meet future needs (excess) or for which the product is outdated or otherwise not expected to be sold (obsolete).
Both the one year and three year sales forecasts were lower as of December 31, 2023 than at December 31, 2022. The total excess and obsolete inventory reserve increased by $9.1 million as of December 31, 2023, $6.9 million of which was due to these lower forecasts and $2.2 million of which represents inventory the Company had determined had become obsolete during the period.
We also review our inventory to ensure that its carrying value does not exceed its net realizable value ("NRV"), with NRV based on the estimated selling price of inventory in the ordinary course of business, less estimated costs of completion, disposal and transportation. Each of these estimates requires management to make subjective and complex judgments. When our expectations indicate that the carrying value of inventory exceeds its NRV, we estimate the amount by which carrying value exceeds NRV and record additional cost of revenue for the difference. Should our estimates used in these calculations, such as sales forecasts, estimated selling prices or disposal costs, change, additional write-downs may occur.
Goodwill and Intangible Asset Impairments
The HDW Acquisition resulted in our recording of intangible assets, which primarily consist of developed technologies, trade names and goodwill. Key assumptions used in the valuation of these intangible assets include revenue growth rates, expectations of profitability and discount rates. We allocated the fair value of purchase consideration to the assets acquired and liabilities assumed based on their fair values at the acquisition date. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Goodwill is generally attributable to the value of the synergies between the combined companies and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. At December 31, 2023, we recorded $25.3 million of goodwill and $4.8 million of other intangible assets on the Consolidated Balance Sheets.
We test goodwill and indefinite-lived intangible assets for impairment annually, as of December 31 of each year, or more frequently if indicators arise. The Company operates as a single reporting unit, and, therefore, goodwill is assessed for impairment at this level.
Management evaluates whether events or circumstances have occurred that may affect the estimated useful life or the recoverability of the remaining balance of goodwill and other identifiable intangible assets. If the events or circumstances indicate that the remaining balance may be impaired, the potential impairment will be measured based upon the difference between the carrying amount of the intangible asset or goodwill and the fair value of such asset.
Determining the Fair Value
Per ASC 350, Intangibles - Goodwill and Other, the fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. Quoted market prices in active markets are typically the best evidence of fair value and shall be used as the basis for the measurement, if available.
We utilize third-party valuation specialists to assist us in the determination of the most appropriate evaluation techniques and perform the calculation of fair value of the reporting unit in accordance with ASC 820, Fair Value Measurement ("ASC 820"). The valuation methodologies applied consider both entity-specific and observable market information under the fair value hierarchy in ASC 820, and changes in, or additions to, available information may affect the assumptions we use in estimating fair value. Our analysis was based upon both the income approach and the market approach, equally weighted. These approaches required significant assumptions, including: expected future revenue growth rates, profit margins, discount rate, terminal growth rate, the selection of guideline public companies and selected guideline public company revenue multiples. We performed the analysis retrospectively as of December 31, 2023, leveraging inputs that were both known and knowable as of such date.
In conducting our annual impairment test of goodwill as of December 31, 2023, we elected to perform a quantitative assessment without first considering qualitative factors. After adjusting for the Company's cash and debt on the Consolidated Balance Sheets as of December 31, 2023, the Company determined its estimated fair value to be $204.0 million, which exceeded the carrying value of $169.1 million by $34.9 million, or 20.6%. Because the estimated fair value exceeded the carrying value, no impairment was recorded as of December 31, 2023.
We performed a reconciliation of our market capitalization to our implied total equity value and determined that the Company's market capitalization as of December 31, 2023 was $118.1 million, which is approximately 73% less than the estimated fair value of $204.0 million. The company attributes this significant difference to various factors, including low trading volume, stock price volatility, net cash position as of the measurement date and the lack of information available to the public due to the Company's non-current filing status.
Sensitivity Analysis
The fair value analysis requires significant assumptions, as noted above. We believe the assumptions and estimates made are reasonable and appropriate. Different assumptions and estimates, however, could materially impact our reported financial results. For instance, different assumptions regarding the Company's anticipated performance could result in an impairment charge, which would decrease operating income and result in lower asset values on our Consolidated Balance Sheet. We performed a sensitivity analysis on the impairment test described above by applying two separate adjustments while holding all other assumptions constant. First, we reduced the selected terminal growth rate in the discounted cash flow analysis from 3% to 2%. Second, we reduced the selected guideline public company multiples from 0.40x next fiscal year ("NFY") revenue and 0.30x NFY+1 revenue to 0.30x and 0.20x, respectively. The sensitivity analysis, while not predictive in nature, indicated a fair value of $192.5 million, exceeding the carrying value by $23.4 million, or 14%, confirming no goodwill impairment as of December 31, 2023.
Potential Future Impairment Risk
Our impairment analysis was performed retrospectively as of December 31, 2023, leveraging inputs that were both known and knowable as of such date. While we did not identify any impairment of our goodwill as of December 31, 2023, we continue to monitor Company performance, along with the risks related to our business and industry, to evaluate if the carrying value of the Company exceeds its estimated fair value. We expect that some or all of the goodwill on our consolidated balance sheet could be impaired during the year ended December 31, 2024 due to various factors, including lower revenue projections based on current business performance, a reduced cash position resulting from financing our ongoing operations and a decline in the trading price of our common stock during 2024. Because we have not completed the
accounting, or finalized our financial statements, for the year ended December 31, 2024, including the quarterly periods therein, we have not yet determined the amount of any additional goodwill on our balance sheet as of December 31, 2024 related to any other business combinations, such as the HelloTech Merger, or any related impairment.
Business Combinations
We account for business combinations using the acquisition method of accounting, in which the purchase price is allocated to the assets acquired and liabilities assumed and recorded at their estimated fair values at the date of acquisition. Management is required to make significant assumptions and estimates in determining the fair value of the assets acquired, particularly the intangible assets. Purchased intangible assets are primarily comprised of acquired trade names and customer relationships that are recorded at fair value at the date of acquisition. We utilize third-party valuation specialists to assist us in the determination of the fair value of the intangibles. The fair value of acquired trade names is determined using the relief-from-royalty method, which relies on the use of estimates and assumptions about projected revenue growth rates, royalty rates and discount rates. The fair value of customer relationships is determined using the multi-period excess earnings method, which relies on the use of estimates and assumptions about projected revenue growth rates, customer attrition rates, profit margins and discount rates. Intangible assets are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight-line method. Determining the useful lives of intangible assets also requires management to make various assumptions and is inherently uncertain. There is a measurement period of up to one year in which to finalize the fair value determinations, and preliminary fair value estimates may be revised if new information is obtained during this period.
Litigation
Latch is subject to various legal proceedings, investigations and claims. Latch routinely assesses the likelihood of any adverse judgments or outcomes of these matters, as well as ranges of probable losses. A determination of the amount of the accruals required, if any, for these contingencies is made after analysis of each known issue. The analysis, which involves the advice of counsel, includes consideration of various factors such as the amount and timing of any potential exposure, interpretations of applicable laws, regulations or contractual terms, the likelihood or status of proceedings, the merits of the arguments, negotiations or discussions with the applicable counterparties and results of similar fact patterns experienced by the Company or third parties. Accruals are subject to change based upon changes in the above factors. The accrued expenses on the Consolidated Balance Sheets as of December 31, 2023 associated with the Stockholder Lawsuits are based upon settlement amounts agreed to between the applicable parties that remain subject to court approval. However, in the event court approval does not occur, the expense amounts are subject to change.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies, in Part II, Item 8. "Financial Statements" for information about recent accounting pronouncements.
Latch Inc. published this content on March 26, 2025, and is solely responsible for the information contained herein. Distributed via SEC EDGAR on March 26, 2025 at 21:10 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at support@pubt.io