LTCH - Latch: Executive Turnover Delayed Financials And Layoffs (Rating Downgrade)

Summary

• Latch went public during the SPAC boom but has performed poorly since then.
• This has come from continued negative gross margins, cash burn, and a failure to file quarterly earnings for its second and third quarters of fiscal 2022.
• It's hard to see a reason to continue to hold the commons.

Latch ( LTCH ) entered the public market just as the comedown from pandemic-induced trading highs began pulling back. The company would, like other deSPACs, quickly shoot up following the completion of its merger to peak at around $17. It has since fallen 96% to trade where it does now. The broad bullish point laid out in my first article on the company still stands as the LatchOS is genuinely a useful technology layer that's used by several multifamily real estate companies to manage access to their properties. Latch's stated goal is to make buildings better places to live, work, and visit.

The company continues to do this, recently reaching a milestone of 100 million unlocks this year and announcing an update to its LatchOS . This will see dioramic controls added, allowing residents the ability to see a 3D representation of their space and to control some of its elements. Concierge is also being added to allow residents to share access to their homes with guests and service providers. That Latch is still building on its relative success is good. But the positive news stops there. Latch is facing intense financial difficulty and has oddly not filled its second and third quarter financials. The company has received a non-compliance notification from Nasdaq due to the delay in filing its second quarter earnings.

Communication from management has been abysmal on this front. Some shareholders would be right to state it is appalling to be issuing press releases on events like the partnership with WeWork ( WE ) whilst still facing a non-compliance notice that could see its shares delisted from Nasdaq. The tie-up with WeWork will see Latch offer a monthly membership subscription to the co-working provider at no extra cost to certain residents in New York City.

Unlocking More Uncertainty

What is the cause of the delay? Latch's Form 12b-25 filed with the SEC on the 10th of August holds more information. The form allows publicly traded companies to request an extension to file specific required financial reports. Latch stated that there is an ongoing investigation by its audit committee into alleged current and prior period matters, including certain aspects of its key performance indicators, revenue recognition practices, and related accounting treatment and financial reporting. The company did not provide an estimated time for when the investigation will be completed or for when its Form 10-Q will actually be filed. The continued delay since August essentially conveys that there will likely be a need to restate its financial statements.

This is heightened by the exit of Barry Schaeffer, the company's Chief Financial Officer and Treasurer as per a Form 8-K filed with the SEC on the 2nd of December. Hence, the previous financials should be disregarded. There will likely be a material restatement of financial results ahead of Nasdaq's March deadline to regain compliance. This is 180 days from October 10th 2022, around the 8th of April 2023.

Latch Investors Should Leave And Keep The Door Shut

Latch has also moved to reduce its workforce by around 37%, around 115 people from their August employee base. This has been aggregated with job cuts made earlier this year in May which saw the company cut at least 130 people across two consecutive rounds of layoffs in the same month. The company expects the August layoffs to incur $2.5 million to $3.5 million of total cash restructuring charges. Management's view is that this is a necessary expense for reducing less profitable areas of their business.

The company expects $85 million to $95 million in total annualized operational savings from efficiencies gained under the layoffs with annualized operating expenses and capex to be between $65 million to $75 million following the implementation of the changes. Latch has not made it fully clear what it means by the cuts enabling a pivot to higher margin activities. The LatchOS is built on a combination of both hardware and software to fully manage who gains access to a building. They can't shed the hardware aspect for higher margin software revenue as it's just one part of the overall technology stack. The company has been using hardware as a loss leader for its high-margin software sales and corresponding ARR.

The job cuts likely focused on non-core roles. But it's hard to see how this will fundamentally drive a revision of what was mainly near-zero per cent negative gross profit margins from the era when it filed quarterly earnings. It's hard to see why current shareholders should maintain a position in the company's common shares. This combined with the lack of adequate communication from management is unfortunate. Investors who were attracted to the company's stated goal have now seen their position decline markedly with no financials to use as an assessment point. This is a sell.

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