LTCH - Latch's Fight For Survival

2023-04-05 05:05:12 ET

Summary

• The stock of Latch, Inc. has plummeted more than 80% since our call to avoid the shares last April.
• On paper, the stock is selling for far less than net cash on the balance sheet. However, the company is awash in ongoing concerns.
• Are the shares worthy of a small wager? An investment analysis follows in the paragraphs below.

Sometimes even to live is an act of courage ."? Lucius Annaeus Seneca

It has been nearly a year since we first looked in an intriguing 'Busted IPO' called Latch, Inc. ( LTCH ) . We concluded that initial article around this small cap name with the following:

LTCH is definitely in 'show me' territory. I plan to avoid the shares despite what I find an interesting business model. We may revisit this name after it does an anticipated capital raise if it can show considerable progress lowering its cash burn rate in the quarters ahead.

That was the right call in retrospect as the shares have dropped more than 80% since our initial piece on the company. Is there any hope left for this company or are the shares destined to eventually circle the drain? An updated analysis follows below.

Company Overview:

This Gotham headquartered small cap concern provides offering based on its LatchOS platform. This is a full-building operating system of software, products, and services. These include building access, connectivity, sensors, guest and delivery management as well as personalization. LTCH stock has fallen to below a buck a share since our first analysis on this name and the equity sports an approximate market capitalization of $100 million.

Latch's products/services are geared to make building better places to live, work, and visit. The company works with multifamily real estate owners, operators, and developers to provide its technology and services. Latch traditionally loses money on the actual hardware that is installed in new facilities. Its model is to make money from software service fees within the contract which typically runs six years. Latch has been impacted by the slowdown in construction at its large real estate partners thanks to the big rise in interest rates since the beginning of 2022. Construction delays and supply chain problems have also negatively impacted their real estate partners.

Into The Unknown:

However, the company's woes go much deeper than that and the company seems to have completely gone off the rails since we initially peaked on it. This SPAC birthed concern has seen a litany of woes since our April piece on it. Soon thereafter the company consolidated is product and engineering organizations and reduced sales compensation in May to reduce operating expenses.

Unfortunately, those changes did not right the ship and in August the company laid off more than 35% of its staff. These two restructurings were projected to result in approximately $85 million to $95 million in total annualized operating savings combined.

In mid-August, the NASDAQ officially notified the company it had failed to comply with the requirement to file its second quarter 10-Q. Five days earlier the company had notified NASDAQ it would not be able to file the documentation in the prescribed timeframe and was granted until October 10th to file the updated report.

Then on February 13th of this year, Latch received a Staff Delisting Determination from the Listing Qualifications Department of Nasdaq for the failure to file its second quarter as well as third quarter 10-Qs. This has no immediate effect on the stock listing on the exchange. However, the exchange has initiated a process that could result in the eventual delisting of the Latch's securities from Nasdaq. The company is appealing the Staff Determination before a Nasdaq Hearings Panel and is seeking a further stay of any suspension or delisting action.

Just to complicate matters further, Latch made a huge management change on January 11th of this year. The company brought in both an interim CEO as well as interim CFO to try to save this ship from sinking. The company's CFO unexpectedly left the company early in December of last year. This follows a previous major change of the management team in March of last year.

According to a previous article on Seeking Alpha in late December, the reasons for the delays in the 10-Q filings came down to:

There is an ongoing investigation by Latch's 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

No timeframe has been given on when this investigation will be concluded and the correct data will be available to file the 10-Qs. The last time Latch posted quarterly numbers was on May 5th, when it posted first quarter results . The company had a GAAP net loss of 31 cents a share even as revenues rose more than 105% on a year-over-year basis to $13.66 million. The company had a net loss of $44.2 million for the first quarter.

Analyst Commentary & Balance Sheet:

The analyst firm community seems to have abandon this stock for the moment. The last firm to chime in around the shares was Collier Securities who maintained a Buy rating and $5 price target on the shares on August 10th. It has been ' All Quiet on the Western Front ' since then.

This is a thinly traded stock with less than 30,000 shares trading on average daily. Latch ended the first quarter of 2021 (the last time it posted quarterly results) with approximately $335 million in cash and marketable securities on its balance sheet and no long term debt.

Verdict:

Only one analyst firm has projected estimates around Latch. They see the company losing $1.10 a share in FY2023 even as sales grow nearly 90% to just over $77 million. They see the company achieving break even status in FY2024 as sales soar to $248 million. I put little to no faith in these estimates.

On paper, Latch should be selling at a huge discount to asset value at current trading levels. Based on operational savings from layoffs, the net cash on hand should be at least $250 million currently against a $100 million market cap. Add in whatever value on the company's assets you want, but the shares should be far below liquidation value. A Seeking Alpha article in October put Latch's liquidation value between $1.17 to $1.38 a share.

However, given the company has not posted quarterly results since May, substantial management turnover, a potential delisting and an ongoing investigation into the validity of previous results; an investor can have little faith in any of the company's numbers until it files its overdue 10-Qs. Therefore, the recommendation is to continue to avoid this much troubled company.

The enemy is anybody who's going to get you killed, no matter which side he is on ."? Joseph Heller, Catch-22

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