LATCH, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related notes ofLatch, Inc. and its subsidiaries included elsewhere in this Report. 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 the section captioned "Risk Factors" in our Registration Statement on Form S-1 filed with theSEC onJune 25, 2021 and elsewhere in this Report, 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 ofLatch Services, Inc. (formerly known asLatch, Inc. ) and its consolidated subsidiaries prior to the Merger and toLatch, Inc. (formerly known asTS Innovation Acquisitions Corp. ) and its consolidated subsidiaries following the consummation of the Merger. Overview Latch is an enterprise technology company focused on revolutionizing how people experience spaces by making spaces better places to live, work and visit. Latch has created a full-building operating system, LatchOS, which addresses the essential requirements of modern buildings. Our LatchOS system streamlines building operations, enhances the resident experience and enables efficient interactions with service providers. Our product offerings, designed to optimize the resident experience, include smart access, delivery and guest management, smart home and sensors, connectivity and resident experience. We combine hardware, software and services into a holistic system that makes spaces more enjoyable for residents, more efficient and profitable for building operators and more convenient for service providers. LatchOS enables spaces acrossNorth America . Throughout 2020, approximately one in ten newly constructed multi-family apartment home units inthe United States were equipped with Latch products including 35 states andCanada , from affordable housing inBaltimore , to historic buildings inManhattan , to luxury towers in the Midwest. Latch works with real estate developers, large and small, ranging from the largest real estate companies in the world to passionate local owners. We engage with customers early in their new construction or renovation process, helping establish Latch as the technology consultant for the building. LatchOS is made up of modules, enabling essential capabilities for modern buildings. Building owners have the flexibility to select LatchOS modules to match their specific building or portfolio's needs. LatchOS software starting pricing ranges from$7-12 per apartment per month, depending on which capabilities the building owner selects, for the LatchOS modules Smart Access, Smart Home and Guest Management. Customers also purchase our hardware devices upfront to go along with the LatchOS modules they choose. The LatchOS ecosystem has been created to serve all the stakeholders at a building, and today LatchOS modules consist of the following: •Smart Access. Latch's smart access software capabilities include complete resident, building staff, guest, service provider and construction access management powered by the Latch R, M and C devices. These devices serve every door in a building, from apartment doors to elevators, from parking garages to gyms. •Delivery & Guest Management. Going beyond smart access, Latch Intercom solves the access problem for unexpected guests and deliveries enabling visitors to quickly connect with residents or building operators with just a few clicks. The Latch Delivery Assistant takes this further to the package room with a remote, virtual doorman facilitating secure package management. •Smart Home & Sensors. Latch's enterprise device management enables smart home capabilities for thermostat, lighting, leak detection and other sensor integration, monitoring and centralized device management for building owner and private resident control right in the Latch App. The integration of the LatchOS platform with smart home device manufacturers likeNest , ecobee, Honeywell, Jasco, Leviton and more provide our customers with a wide choice in smart home devices that can be controlled through LatchOS. •Connectivity. Connecting devices, operations and residents reliably to the network across buildings can be complex. Latch Intercom and Latch Hub's cellular connectivity bring internet access to new and existing building infrastructure from new construction to retrofits. •Resident Experience. Residents can control all of the Latch-enabled devices in their spaces through the Latch App right from the moment they arrive. Latch's mobile applications also enable resident onboarding, streamlining the 24 -------------------------------------------------------------------------------- move-in experience. The average Latch App user already interacts with the Latch App multiple times per day, giving us a foundation from which to engage and transact further with residents over time as we introduce new functionalities and services to the Latch mobile applications. After Latch has been installed and set up at a building, the building managers add all their residents as users to the Latch system. Our mobile applications then enable the residents to unlock all connected spaces in Latch buildings from the front door, package rooms, common spaces, elevators and garages to their unit entrance, control their thermostat and smart home devices from the app, see who rang the bell at the front door through the intercom and let guests in through the app. In the near future, we believe interacting with service providers, buying renters insurance or choosing their internet package will all be possible from the Latch App. Residents become highly engaged users across all the capabilities that Latch provides them in their spaces. Beyond enabling a new set of experiences at buildings for residents and building operators, Latch turns the purchase experience of smart building technology for building owners from a complex sale with multiple vendors into a simple process with Latch as a single vendor with one single contract and straightforward billing. LatchOS enables a unified management experience for building operators with a single interface to manage all Latch experiences instead of having a separate interface for each vendor and solution. Latch also enables a unified resident experience with a single interface through the Latch App for all resident-facing interactions and Latch experiences in our customers' buildings. Devices that are part of the Latch ecosystem work better together since our curated set of partner devices and our smart building operating system, LatchOS, seamlessly integrate instead of a patchwork of devices from different vendors with different standards and interfaces that create technology silos and limited experiences. Our sales strategy is simple, repeatable, scalable and unique. We engage directly with our customers to ensure they have the best possible experience with Latch and our partners from sale to installation to lease-up. Latch engages with customers early in their construction or renovation process, establishing Latch as a technology advisor to the building. This engagement enables us to provide more technology advice early in the development process and creates high revenue visibility. Our customers sign letters of intent, or LOIs, specifying which software and devices they want to receive and on which dates. This approach leads to multi-year software contracts, direct feedback loops with our customers and their residents, local and regional market insights and a complete picture of the ever-changing demands of building operators. The installation timeline can range from six to 18 months after signing the LOI, depending on the construction schedule. We continuously evolve our products and add new features between signing the LOI and the time of installation. Currently, we primarily serve the rental home markets inNorth America . Based on internal research and external reporting, we estimate there are approximately 32 million multi-family apartment home units inNorth America . Today we primarily serve new construction and retrofit buildings. Since our launch in 2017, we have seen the share of our business coming from retrofit opportunities increase significantly: a trend we expect to continue over the medium term. We also serve the single-family rental market through our existing relationships with large real estate developers and owners. Based on internal research and external reporting, we estimate there are 15 million single-family rental home units inNorth America . Developments in 2021 First Quarter 2021 InFebruary 2021 , we launched the C2 series door-mounted access control product to make retrofits and ongoing operations easier for every project. ThroughMarch 31, 2021 , we booked over 20,000 units and delivered over 1,000 units to customers across the country. The C2 includes: a patent-pending turn mechanism ensuring smooth locking and unlocking; a three-piece modular design simplifying and reducing installation costs; 24 months of battery life, decreasing building staff time and operational costs; and improved functionality and quality at a lower price to both customers and Latch. InMarch 2021 , we launched NFC unlock on Android through an over-the-air update, delivering a much desired feature for the industry and deepening our integrations with theMay 2021 , we announced the expansion of LatchOS into commercial offices, bringing Latch's expertise in multifamily building management technology to the commercial office space for the first time. With the availability of LatchOS for offices, we are extending our smart access, visitor and delivery management, smart device and sensor control, connectivity and identity and personalization solutions to meet the needs of modern office spaces. The first solution in our new ecosystem 25 -------------------------------------------------------------------------------- for commercial offices is Latch Visitor Express, a new contactless visitor entry system designed to streamline visitor entry within office buildings, reduce lobby lines and wait times and greatly increase operational efficiencies for building staff. Latch Visitor Express pilots are set to launch at Rockefeller Center, theEmpire State Building andBrookfield Place later this year. This innovative solution is powered by LatchID, our proprietary identification system that creates a trusted network of users across spaces and devices. LatchID provides users with digital credentials that can be accepted at Latch-enabled buildings, streamlining access across both residential, short term rental locations and office spaces. Once users are credentialed, they receive a personalized and unified "identity" that works across every Latch-enabled space and device, allowing them to move seamlessly across Latch-enabled buildings. COVID-19 Update InMarch 2020 , the outbreak of COVID-19 was declared a pandemic. Measures taken by various governments to contain the virus have affected economic activity. We have taken a number of measures to monitor and mitigate the effects of COVID-19, such as safety and health measures for our people (such as social distancing and working from home) and securing the supply of materials that are essential to our production process. The COVID-19 pandemic disrupted and may continue to disrupt our hardware deliveries due to delays in construction timelines at our customers' building sites. In addition, the COVID-19 pandemic resulted in a global slowdown of economic activity and a recession inthe United States , and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle. While the nature of the situation is dynamic, the Company has considered the impact when developing its estimates and assumptions. Actual results and outcomes may differ from management's estimates and assumptions. In the first quarter of 2020, we initiated a restructuring plan as part of our efforts to reduce operating expenses and preserve liquidity due to the uncertainty and challenges stemming from the COVID-19 pandemic. We incurred costs in connection with involuntary termination benefits associated with our corporate-related initiatives and cost-saving opportunities. The RIF involved an approximate 25% reduction in headcount, including severance and benefits costs for affected employees and other miscellaneous direct costs. These amounts were recorded principally in research and development, sales and marketing, and general and administrative within the Consolidated Statements of Operations and Comprehensive Loss based on the department to which the expense relates. As a result of our strong performance in 2020 and 2021, we have rehired some of the staff that was terminated at the outset of the pandemic. OnMarch 27, 2020 , the CARES Act was enacted to provide certain relief in response to the COVID-19 pandemic. The CARES Act includes numerous tax provisions and other stimulus measures. Among the various provisions in the CARES Act, the Company is utilizing the payroll tax deferrals. In the second quarter of 2020, the Company received and repaid$3.4 million in loans under the CARES Act. The Business Combination OnJune 4, 2021 , we consummated the previously announced Merger, pursuant to which Merger Sub merged with and into Legacy Latch, with Legacy Latch becoming our wholly owned subsidiary. On the Closing Date, and in connection with the closing of the Transactions, we changed our name toLatch, Inc. OnJune 7, 2021 , Latch's common stock and warrants began trading on theNasdaq Stock Market LLC under the ticker symbols "LTCH" and "LTCHW," respectively. The Business Combination is accounted for as a reverse capitalization in accordance with GAAP. Under the guidance in ASC 805, Business Combinations, TSIA is treated as the "acquired" company for financial reporting purposes. We are deemed the accounting predecessor of the combined business and the successorSEC registrant, meaning that our financial statements for previous periods will be disclosed in future periodic reports filed with theSEC . See Note 1, Description of Business, in Part I, Item 1. "Financial Statements" for additional detail about the Business Combination. Products and Platform Our platform, LatchOS, is a full building operating system that brings together all the elements that make up the modern building experience for building managers, vendors and residents. The LatchOS ecosystem consists of two general elements: software and devices. Our software, hardware and services in turn enable the essential features for every stakeholder in the Latch ecosystem. Latch has three software products in the market today: the Latch Resident Mobile Applications, Latch Manager Web and the Latch Manager Mobile Application. These three products encompass the software that powers the LatchOS platform and allows for devices and services to operate in harmony. We also have a collection of first-party devices and third-party partner 26 -------------------------------------------------------------------------------- devices and services that can integrate into the LatchOS system to be managed, controlled and/or operated through our software products. Software Products Latch Mobile Applications The Latch mobile applications are the primary tools for residents to unlock doors, give access to guests or service providers, control and manage smart devices, interact and communicate with the building or consumer services and transact with Latch. Latch offers a subset of these experiences through the Apple Watch as well. Latch Manager Web and Manager Mobile Applications Latch Manager Web is LatchOS's central orchestration application for building operators. Our fully integrated system lets property managers support the resident experience from a single source. From the Latch Manager Web, property managers can control access sharing, resolve issues remotely, save time and money on rental unit turnover and ensure their residents are secure. First Party Hardware Devices M, C, R Series The M, C and R series are door-mounted access control products that interface with industry-standard lock hardware. They are designed to meet and exceed every project requirement. They are built to industry standards, compliant with code requirements and suited for interior or exterior use. Other Devices Latch Intercom integrates seamlessly into the Latch core access systems and allows audio and video calls for remote unlocking. Latch Camera is a dome camera that integrates seamlessly into Latch Intercom and core access systems to allow for video calls for remote unlocking. Latch Hub is an all-in-one connectivity solution that enables smart access, smart home and sensor devices to do more at every building. The Latch Leak Detectors offer a simple and scalable solution to enable leak prevention, detection and quick resolution for building owners and residents. Works with Latch: Third Party Devices, Software and Partnerships The LatchOS platform is compatible with a collection of industry-leading smart home devices, allowing these devices to be managed, controlled and viewed from the LatchOS platform. Latch has selected several initial smart home devices with which to integrate (currently or in the near term), including smart home devices manufactured by GoogleNest , Honeywell, ecobee, Jasco, Leviton and Sonos, based on Latch's assessment that these devices are aligned with Latch's vision around enterprise device management privacy and security, design and brand when it comes to building operators and residents. Latch has entered into agreements with GoogleNest , Honeywell and ecobee and plans to enter into an agreement with Sonos. Such agreements include application programming interface (API) licensing terms that allow partner devices to be managed, controlled and viewed from the LatchOS platform as appropriate for desired functionality. Such agreements include other terms that are customary in API license agreements, including intellectual property ownership and licensing provisions, joint marketing and advertising arrangements, indemnification obligations, confidentiality restrictions and data protection requirements. Jasco and Leviton smart lighting products can be controlled by the LatchOS platform through the Zigbee protocol; therefore, no separate API license agreement is necessary between Latch and Jasco and Leviton in order to integrate the LatchOS platform with their smart lighting products. We understand at Latch that operating a building can be complex, and it can take many different processes, systems and tools to manage a great building. A majority of buildings we work with use property management software to manage their back-office operations. In order to accommodate those complex use-cases, we have forged partnerships with the top property management software companies, such as Yardi and RealPage, and enabled integrations between such software and our software and devices so the building can operate seamlessly between the two systems at the building. Latch leverages its cutting-edge smart access platform to unlock new use-cases in adjacent real estate verticals and with partners that serve buildings. Our smart access platform integrates with partners such as Tour24, Pinwheel andUPS to enable unattended showings and secure package delivery, and it has also allowed us to build a robust business to business to consumer ("B2B2C") distribution channel for us to transact with residents through the Latch App and offer future consumer and on-demand services. 27 -------------------------------------------------------------------------------- Key Factors Affecting Our Performance We believe that our future success will be 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. Investing in Research and Development ("R&D") and enhancing our customer experience. Our performance is significantly dependent on the investments we make in research and development, including our ability to attract and retain highly skilled research and development personnel. We must continually develop and introduce innovative new hardware products, mobile applications and other new offerings. If we fail to innovate and enhance our brand and our products, our market position and revenue will likely be adversely affected. Product introductions and expansion of our platform. We will need to expend additional resources to continue introducing new products, features and functionality to enhance the value of our platform. To date, product introductions have often had a positive impact on our operating results due primarily to increases in revenue associated with sales of new products in the quarters following their introduction. For example, we have recently introduced a number of product enhancements and features, including Latch Intercom and our Smart Home integration software. In the future, we intend to continue to release new products and enhance our existing products, and we expect that our operating results will be impacted by these releases. Category adoption, expansion of our total addressable market and market growth. Our future growth depends in part on the continued consumer adoption of hardware and software products that improve resident experience, and the growth of this market. In addition, our long-term growth depends in part on our ability to expand into adjacent markets and international territories in the future. Key Business Metrics We review the following key business metrics to measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions that will impact our future operational results. Increases or decreases in our key business metrics may not correspond with increases or decreases in our revenue. The limitations our key business metrics have as an analytical tool are: (1) they might not accurately predict our future GAAP financial results; (2) we might not realize all or any part of the anticipated value reflected in our Total Bookings; and (3) other companies, including companies in our industry, may calculate our key business metrics or similarly titled measures differently, which reduces their usefulness as comparative measures. Three months ended June 30, 2021 2020 $ Change % Change (In thousands, except home units) GAAP Measures: Total Revenue$ 9,012 $ 2,752 $ 6,260 227 % Net Loss$ (40,071) $ (14,986) $ (25,085) (167 %) Key Performance Indicators: Hardware Bookings$ 34,889 $ 20,373 $ 14,516 71 % Software Bookings$ 60,889 $ 27,131 $ 33,758 124 % Total Bookings$ 95,778 $ 47,504 $ 48,274 102 % Booked ARR$ 48,800 $ 21,968 $ 26,832 122 % Booked Home Units-Cumulative 451,333 217,424 233,909 108 % Adjusted EBITDA$ (17,400) $ (13,444) $ (3,956) (29 %) 28
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Six months ended June 30,
2021 2020 $ Change % Change
(In thousands, except home units)
GAAP Measures:
Total Revenue $ 15,641 $ 5,478 $ 10,163 186 %
Net Loss $ (78,172) $ (30,927) $ (47,245) (153 %)
Key Performance Indicators:
Hardware Bookings $ 63,106 $ 34,798 $ 28,308 81 %
Software Bookings $ 104,368 $ 50,703 $ 53,665 106 %
Total Bookings $ 167,474 $ 85,501 $ 81,973 96 %
Booked ARR $ 48,800 $ 21,968 $ 26,832 122 %
Booked Home Units-Cumulative 451,333 217,424 233,909 108 %
Adjusted EBITDA $ (31,293) $ (27,351) $ (3,942) (14 %)
Bookings
We use Bookings to measure sales volume and velocity of our hardware and
software products. Bookings represent written but non-binding LOIs from our
customers to purchase Latch hardware products and software services, not
reflecting discounts. We sell software services with all our access hardware
products. Based on historical experience, we believe there is sufficient or
reasonable certainty about the customers' ability and intent to fulfill these
commitments with a target delivery date no longer than 24 months following LOI
signature.
Hardware Bookings
Hardware Bookings represent the total revenue commitment to be recognized at
time of shipment of the product. We calculate Hardware Bookings by multiplying
the total booked units by the sales price (excluding discounts) for each
respective unit. There is typically a lag between Hardware Bookings and
recognition of GAAP revenue due to installation timelines with a target delivery
date no longer than 24 months following LOI signature.
Software Bookings
Software Bookings represent the total revenue commitment over the life of the
software agreement. We calculate Software Bookings by multiplying the total
booked units by the subscription price (excluding discounts) and the contract
term as outlined in the LOI. There is typically a lag between Software Bookings
and recognition of GAAP revenue due to installation timelines and the
recognition of Software Revenue over the course of the contract with a target
delivery date no longer than 24 months following LOI signature. Our long-term
software contracts typically average more than six years in length.
Booked ARR
We use Booked Annual Recurring Revenue ("ARR") to assess the general health and
trajectory of our recurring software. Booked ARR is defined as the cumulative
value of annual recurring revenue from Latch software subscriptions that are
under a signed LOI. We calculate Booked ARR by multiplying the total number of
units that have been booked by the annual listed subscription pricing (excluding
discounts) at the time of booking. LOIs typically deliver within six to 18
months of signing, depending on construction timelines. Booked ARR is adjusted
for bookings that do not ship within a normal construction timeframe. It should
be viewed differently from Software Bookings as it represents only the average
annual software revenue, not the lifetime contract value.
Booked Home Units-Cumulative
We use Booked Home Units-Cumulative to measure the number of homes signed to
operate on our platform, market penetration in the rental homes market and the
size of the opportunity to grow revenue by increasing sales of additional
hardware, software and service revenue into already-signed homes. Booked Home
Units represent the total number of apartment units or similar dwellings
installed cumulatively, as well as committed to be installed, with Latch
products. Booked Home Units are adjusted for bookings that do not ship within a
normal construction timeframe. LOIs typically deliver within six to 18 months of
signing, depending on construction timelines.
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Adjusted EBITDA
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, one-time litigation
expenses, loss on extinguishment of debt, change in fair value of derivative
instruments and warrant liabilities, and transaction related expenses. 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 Report, Adjusted EBITDA
because it is a key measure used by our management and board of directors to
understand and evaluate our operating performance, to establish budgets, and to
develop operational goals for managing our business. See "Non-GAAP financial
measures" for additional information and a reconciliation of this measure to net
loss, the most directly comparable financial measure calculated and presented in
accordance with GAAP.
Components of Results of Operations
Revenue
We currently generate revenue from two sources: (1) hardware devices that are
both Latch built ("first-party") and partner built ("third-party") and
(2) software products used by property managers via Web or mobile and by
residents via mobile.
Hardware and Other Related Revenue
We generate hardware revenue primarily from the sale of our portfolio of both
first-party and third-party devices for our smart access and smart building
solutions. We sell hardware to building developers through our channel partners
who act as the intermediary and installer. We recognize hardware revenue when
the hardware is shipped to our channel partners, which is when control is
transferred to the building developer. We provide warranties related to the
intended functionality of the products, and those warranties typically allow for
the return of defective hardware up to one year for electrical components and
five years for mechanical components past the date of sale. We also generate
revenues related to hardware, which includes professional services related to
installation and activation of hardware devices sold to building developers.
These services are recognized over time on a percentage of completion basis. We
again began to see some of the impact of labor and building material shortages
towards the end of the second quarter of 2021.
Software Revenue
We generate software revenue primarily through the sale of our
software-as-a-service, or SaaS, over our cloud-based platform on a
subscription-based arrangement. Subscription fees vary depending on the optional
features selected by customers as well as the term length. SaaS arrangements
generally have term lengths of month-to-month, two-year, five-year and ten-year
and include a fixed fee paid upfront except for the month-to-month arrangements.
As a result of significant discounts provided on the longer-term software
contracts paid up front, we have determined that there is a significant
financing component and have therefore broken out the interest component.
Revenue is primarily recognized on a ratable basis over the subscription period
of the contractual arrangement beginning when or as control of the promised
services is available or transferred to the customer. We expect software revenue
to increase as a percentage of total revenue over time.
Cost of Revenue
Cost of hardware and other related revenue consists primarily of product costs,
including manufacturing costs, duties and other applicable importing costs,
shipping and handling costs, packaging, warranty costs, assembly costs and
warehousing costs, as well as other non-inventoriable costs including
personnel-related expenses associated with supply chain logistics and channel
partner fees. Cost of software revenue consists primarily of outsourced hosting
costs and personnel-related expenses associated with monitoring and managing the
outsourced hosting service provider. Our cost of revenue excludes depreciation
and amortization shown in operating expenses.
We expect some volatility in cost of hardware and other related revenue
primarily due to: (i) a new generation of hardware products being released with
lower production costs; (ii) recent widespread challenges within the global
electronics supply chain leading to a much more tactical sourcing environment
and higher production costs; and (iii) changes to import tariff amounts as a
result of changes to U.S. trade policy with China .
Operating Expenses
Operating expenses consist of research and development, sales and marketing,
general and administrative and depreciation and amortization expenses.
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Research and Development Expenses
Research and development 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. We expect our research and development expenses to increase in absolute
dollars as we continue to make significant investments in developing new
products and enhancing existing products.
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. We expect our sales
and marketing expense to increase in absolute dollars as the restrictions
related to COVID-19 begin to be lifted and as we continue to invest in our sales
force to drive increased market share through new customer acquisition and
provide best in class support to our existing customer base.
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. During the first quarter of 2021, we incurred stock-based
compensation expense from a non-recurring secondary purchase as described in
Note 13, Stock-Based Compensation, in Part I, Item 1. "Financial Statements."
Excluding this impact, we expect our general and administrative expenses to
increase in absolute dollars primarily due to: (i) our plans to remediate our
material weaknesses that were identified in the years ended December 31, 2020
and 2019; (ii) the continued growth of our business and related infrastructure;
and (iii) legal, accounting, director and officer insurance, investor relations
and other costs associated with operating as a public company.
Depreciation and Amortization Expenses
Depreciation and amortization expenses consist primarily of depreciation expense
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 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 derivatives and warrant liabilities.
Income Taxes
The provision for income taxes consists primarily of income taxes related to
state 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.
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Results of Operations for the three and six months ended June 30, 2021 and 2020
The following tables sets forth our historical operating results for the periods
indicated. The period-to-period comparison of operating results is not
necessarily indicative of results for future periods.
Three Months Ended
2021 2020 $ Change % Change
(In thousands, except share and per share
data)
Revenue:
Hardware and other related revenue $ 7,202 $ 1,925 $ 5,277 274
Software revenue 1,810 827 983 119
Total revenue 9,012 2,752 6,260 227
Cost of revenue(1)
Cost of hardware and other related revenue 8,069 3,179 4,890 154
Cost of software revenue 173 60 113 188
Total cost of revenue 8,242 3,239 5,003 154
Operating expenses:
Research and development 6,989 6,930 59 1
Sales and marketing 5,055 2,863 2,192 77
General and administrative 9,993 3,976 6,017 151
Depreciation and amortization 689 313 376 120
Total operating expenses 22,726 14,082 8,644 61
Loss from operations (21,956) (14,569) (7,387) (51)
Other income (expense)
Change in fair value of derivative
liabilities (8,991) - (8,991) N.M.
Change in fair value of warrant liability (4,795) - (4,795) N.M.
Loss on extinguishment of debt (1,469) - (1,469) N.M.
Interest expense, net (2,873) (291) (2,582) (887)
Other expense 23 (126) 149 118
Total other income (expense) (18,105) (417) (17,688) N.M.
Loss before income taxes (40,061) (14,986) (25,075) (167)
Income taxes 10 - 10 N.M.
Net loss $ (40,071) $ (14,986) $ (25,085) (167)
Other comprehensive income (loss)
Foreign currency translation adjustment 2 - 2 N.M.
Comprehensive income (loss) $ (40,069) $ (14,986) $ (25,083) (167)
Earnings (loss) per common share:
Basic and diluted net loss per share $ (0.78) $ (2.11)
Weighted average shares outstanding: Basic and diluted 51,256,111 7,106,954
(1)Exclusive of depreciation and amortization shown in operating expenses below. N.M. - Not meaningful
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Six Months Ended
2021 2020 $ Change % Change
(In thousands, except share and per share
data)
Revenue:
Hardware and other related revenue $ 12,216 $ 3,957 $ 8,259 209
Software revenue 3,425 1,521 1,904 125
Total revenue 15,641 5,478 10,163 186
Cost of revenue(1)
Cost of hardware and other related revenue 14,097 6,382 7,715 121
Cost of software revenue 307 119 188 158
Total cost of revenue 14,404 6,501 7,903 122
Operating expenses:
Research and development 16,604 12,534 4,070 32
Sales and marketing 8,805 7,255 1,550 21
General and administrative 27,689 9,052 18,637 206
Depreciation and amortization 1,342 586 756 129
Total operating expenses 54,440 29,427 25,013 85
Loss from operations (53,203) (30,450) (22,753) (75)
Other income (expense)
Change in fair value of derivative
liabilities (12,588) - (12,588) N.M.
Change in fair value of warrant liability (4,795) - (4,795) N.M.
Loss on extinguishment of debt (1,469) - (1,469) N.M.
Interest expense, net (6,191) (351) (5,840) N.M.
Other expense 84 (126) 210 167
Total other income (expense) (24,959) (477) (24,482) N.M.
Loss before income taxes (78,162) (30,927) (47,235) (153)
Income taxes 10 - 10 N.M.
Net loss $ (78,172) $ (30,927) $ (47,245) (153)
Other comprehensive income (loss)
Foreign currency translation adjustment (5) - (5) N.M.
Comprehensive income (loss) $ (78,177) $ (30,927) $ (47,250) (153)
Earnings (loss) per common share:
Basic and diluted net loss per share $ (2.52) $ (4.36)
Weighted average shares outstanding: Basic and diluted 30,960,173 7,089,239
(1)Exclusive of depreciation and amortization shown in operating expenses below. N.M. - Not meaningful
Comparison of three and six months endedJune 30, 2021 andJune 30, 2020 Revenue Revenue increased$6.3 million and$10.2 million when comparing the three and six months endedJune 30, 2021 with the three and six months endedJune 30, 2020 , respectively. The increases were driven by a$5.3 million and$8.3 million increase in hardware and other related revenue and a$1.0 million and$1.9 million increase in software revenue. We experienced delays in unit deliveries in the first half of 2020 as a result of the impact of COVID-19 on the residential multi-family construction market, but as the construction market and economy began to improve, hardware unit deliveries started increasing during the third quarter of 2020. The 274% and 209% hardware and other related revenue growth is also attributable to accelerated demand, including for new 2021 product releases such as C2, Latch Intercom and third-party smart home devices. High software revenue growth of 119% and 125% reflects the continued growth in the home units install base as a result of the delivered hardware units in 2020 and 2021. 33 -------------------------------------------------------------------------------- Cost of Revenue Cost of revenue increased$5.0 million and$7.9 million when comparing the three and six months endedJune 30, 2021 with the three and six months endedJune 30, 2020 , respectively. The increases were primarily as a result of the increase in cost of hardware and other related revenue of$4.9 million and$7.7 million , which was mainly driven by the costs associated with the increased hardware unit deliveries. Research and Development Expenses Research and development expenses were relatively flat for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , primarily due to: (i)$1.0 million of higher personnel-related expenses due to increased headcount to invest in new hardware devices as well as our expanded functionality of our LatchOS platform, offset by (ii)$1.0 million of lower contract manufacturer costs for the development of C2 and the Latch Intercom, which costs were higher prior to the subsequent product release. Research and development expenses increased$4.1 million when comparing the six months endedJune 30, 2021 with the six months endedJune 30, 2020 , primarily due to a$3.8 million stock-based compensation charge incurred in the first quarter of 2021 in connection with the sale of shares to investors by certain Company employees and non-employee service providers. Sales and Marketing Expenses Sales and marketing expenses increased$2.2 million and$1.6 million when comparing the three and six months endedJune 30, 2021 with the three and six months endedJune 30, 2020 , respectively. The increases were primarily due to: (i)$1.3 million and$1.0 million in higher personnel-related expenses due to increased headcount as we invest in our salesforce; and (ii)$0.3 million and$0.5 million in transaction costs related to the Business Combination. Additionally, for the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 , there was$0.2 million in higher advertising costs. General and Administrative Expenses General and administrative expenses increased by$6.0 million and$18.6 million when comparing the three and six months endedJune 30, 2021 with the three and six months endedJune 30, 2020 , respectively. The increases were primarily due to: (i)$3.0 million and$4.9 million in transaction costs and professional advisory fees in connection with the Business Combination; (ii)$1.5 million and$1.9 million in higher personnel-related expenses and recruiting fees due to increased headcount as a result of building out our corporate infrastructure to operate as a public company; (iii)$0.5 million and$0.9 million in higher software license costs due to new systems implemented to scale our IT infrastructure; and (iv)$0.3 million and$0.3 million in public company insurance expense. Additionally, for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 , there was$0.2 million in higher travel and entertainment expenses. For the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 , additional increases were due to: a$10.1 million stock-based compensation charge incurred in connection with the sale of shares to investors by certain Company employees and non-employee service providers, and$0.6 million in higher audit fees as no audit fees were incurred during the six months endedJune 30, 2020 . Depreciation and Amortization Expenses Depreciation and amortization expenses increased by$0.4 million and$0.8 million when comparing the three and six months endedJune 30, 2021 with the three and six months endedJune 30, 2020 , respectively. The increases were primarily due to the increase in amortization of internally developed software released in 2020 and 2021. Total Other Income (Expense), Net Other expenses increased by$17.7 million and$24.5 million when comparing the three and six months endedJune 30, 2021 with the three and six months endedJune 30, 2020 , respectively. The increases were primarily due to: (i)$9.0 million and$12.6 million unfavorable change in the fair value of the derivative liabilities related to our Convertible Notes and warrants related to our term loan; (ii)$4.8 million and$4.8 million unfavorable change in the fair value of the private placement warrants; (iii)$1.5 million and$1.5 million loss on extinguishment of debt related to the Convertible Notes; and (iv)$2.6 million and$5.8 million higher interest expense primarily related to our Convertible Notes. 34 -------------------------------------------------------------------------------- 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 theJune 4, 2021 Closing of the Business Combination, which included approximately$192.6 million from thePIPE Investment . At Closing, we also repaid the$5.0 million term loan and cancelled the associated$5.0 million revolving line of credit. Also in connection with the Closing of the Business Combination,$50.0 million outstanding principal amount of Convertible Notes and unpaid accrued interest converted into 6.9 million shares of our common stock. As ofJune 30, 2021 , we had an accumulated deficit of$240.4 million , working capital of$475.9 million ,$0.8 million outstanding under our$6.0 million revolving facility with a freight forwarding and customs brokerage company and$472.0 million in cash and cash equivalents. We subcontract with other companies to manufacture our products. During the normal course of business, we and our manufacturers procure components based upon a forecasted production plan. If we cancel all or part of the orders, we may be liable to our suppliers and manufacturers for the cost of the unutilized component orders or components purchased by our manufacturers. Historically, we do not believe there have been any material liabilities that have resulted from cancellation of purchase orders. Our short-term liquidity needs primarily include working capital for sales and marketing, research and development and continued innovation. Our future capital requirements will depend on many factors, including our levels of revenue, the expansion of sales and marketing activities, market acceptance of our products, the results of business initiatives, the timing of new product introductions and overall economic conditions. We believe our existing cash and cash equivalent balances and revolving facility will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Indebtedness 2020 Convertible Notes BetweenAugust 11, 2020 andOctober 23, 2020 , Legacy Latch issued a series of Convertible Notes with a maturity date ofApril 23, 2022 (subject to the holder's option to extend the maturity date for a period of one year), for an aggregate principal amount of$50 million . The notes accrued interest at a rate of 5% per annum for the first six months, 7% per annum for the following six months and 9% per annum from month 13 until maturity, that was due and payable upon the earlier to occur of the maturity date or an event of default, unless otherwise converted prior to maturity or an event of default. The terms of the Convertible Notes provided for the principal and accrued interest to automatically convert into the type of preferred stock issued in a sale of preferred stock at a specified conversion price. Upon certain corporate transactions or liquidity events, outstanding principal at 1.25 times par value and interest on each note would, at the holder's option, be due and payable in full or be converted into common stock of Legacy Latch at a specified conversion price. As noted above, in connection with the Closing of the Business Combination,$50.0 million outstanding principal amount of Convertible Notes and unpaid accrued interest converted into 6.9 million shares of our common stock. Revolving Line of Credit and Term Loan InSeptember 2020 , Legacy Latch obtained a revolving line of credit and a term loan, both of which were secured by a first-perfected security interest in substantially all of the assets of Legacy Latch. The revolving line of credit provided a credit extension of up to$5 million and bore interest at the greater of the prime rate plus 2% or 5.25% per annum, as long as Legacy Latch maintained an Adjusted Quick Ratio of 1.25. If the Adjusted Quick Ratio fell below 1.25, then the revolving line of credit would bear interest at the greater of the prime rate plus 3% or 6.25% per annum. Legacy Latch could only borrow up to 80% of eligible accounts receivable. Legacy Latch did not draw any amounts on the line of credit, which was cancelled upon the repayment in full of the term loan in connection with the Closing. The available amount under the term loan was an initial$5 million , with two additional tranches of$2.5 million each, which Legacy Latch could draw down on in annual increments from closing. The term loan bore interest at the greater of the prime 35 -------------------------------------------------------------------------------- rate plus 3% or 6.25% per annum. The term loan was set to mature onDecember 1, 2024 . OnJune 4, 2021 , the Company paid in full the outstanding principal and accrued interest on the term loan. Revolving Credit Facility OnJuly 1, 2021 , the Company executed a new revolving credit facility replacing the matured facility described in Note 8, Debt, in Part I, Item 1. "Financial Statements." The revolving facility has a credit limit of$6.0 million with no stated maturity date. An installment plan agreement will be executed for each financing request, which will include the interest rate. The revolving facility has no financial or other covenants. Cash Flows The following table sets forth a summary of our cash flows for the six months endedJune 30, 2021 and 2020: Six Months Ended June
30,
(In thousands) 2021
2020
Net cash used in operating activities$ (32,835) $
(30,091)
Net cash used in investing activities (4,311)
(3,300)
Net cash provided by financing activities 448,621
10,344
Effect of exchange rates on cash (5)
3
Net change in cash and cash equivalents$ 411,470 $
(23,044)
Operating Activities The increase of$2.7 million in net cash used in operating revenues reflects the$9.6 million increase in the net loss, after adjusting for non-cash items, partially offset by: •a$4.8 million decrease in inventory purchases primarily due to the delayed unit deliveries experienced in 2020 as a result of the impact of COVID-19; and •a$2.4 million increase in accounts payable and accrued expenses reflecting the accrual of expenditures incurred related to the Business Combination and to support general business growth, and the related timing of payments. Investing Activities Net cash used in investing activities increased by$1.0 million to$4.3 million for the six months endedJune 30, 2021 from$3.3 million for the six months endedJune 30, 2020 , primarily due to higher capitalization of internally developed software costs of$0.8 million reflecting increased headcount as well as incremental new functionality being added to our LatchOS platform for future product releases. Financing Activities In the six months endedJune 30, 2021 , net cash provided by financing activities consisted of: (i)$450.0 million of net proceeds from the Business Combination; (ii)$2.8 million from the issuance of common stock in connection with exercises of stock options; and (iii)$0.8 million of borrowings under our revolving facility, partially offset by the$5.0 million repayment of the term loan. In the six months endedJune 30, 2020 , net cash provided by financing activities consisted principally of the net proceeds from the issuance of Series B-1 preferred stock. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as ofJune 30, 2021 andDecember 31, 2020 . Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates as disclosed in our Registration Statement on Form S-1 filed with theSEC onJune 25, 2021 . 36 -------------------------------------------------------------------------------- Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies, in Part I, Item 1. "Financial Statements" for information about recent accounting pronouncements. Non-GAAP Financial Measures 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 Report 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, one-time litigation expenses, loss on extinguishment of debt, gain or loss on change in fair value of derivative instruments and warrant liabilities, 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 Report, Adjusted EBITDA because it is a key measure used by our management and board of directors 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. Reconciliation of Adjusted EBITDA to Net loss: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2021 2020 2021 2020 Net loss$ (40,071) $
(14,986)
689 313 1,342 586
Interest (income)/expense, net 2,873 291 6,191 351
Income taxes 10 - 10 -
Loss on extinguishment of debt 1,469 - 1,469 -
Change in fair value of derivative
liabilities 8,991 - 12,588 -
Change in fair value of warrant liability 4,795 - 4,795 -
Restructuring costs(1) - 576 - 886
Transaction-related costs(2) 3,420 - 5,568 -
Litigation costs(3) - 11 - 1,046
Stock-based compensation and warrant
expense(4) 424 351 14,916 707
Adjusted EBITDA $ (17,400) $ (13,444) $ (31,293) $ (27,351)
(1)The Company initiated a restructuring plan in the first quarter of 2020 as
part of its efforts to reduce operating expenses and preserve liquidity due to
the uncertainty and challenges stemming from the COVID-19 pandemic. The
37
--------------------------------------------------------------------------------
restructuring included a reduction in force involving an approximate 25%
reduction in headcount, which resulted in severance and benefit costs for
affected employees and other miscellaneous direct costs. These costs are
included principally within research and development, sales and marketing, and
general and administrative within the Condensed Consolidated Statements of
Operations and Comprehensive Loss, based on the department to which the expense
relates.
(2)Transaction costs related to the Business Combination. These costs are
included within sales and marketing and general and administrative within the
Condensed Consolidated Statements of Operations and Comprehensive Loss.
(3)Legal and settlement fees incurred in connection with non-ordinary course
litigation and other disputes. These costs are included within general and
administrative within the Condensed Consolidated Statements of Operations and
Comprehensive Loss.
(4)Stock-based compensation and warrant expense associated with equity
compensation plans including $13.8 million related to the secondary purchase
transaction during the six months ended June 30, 2021 . See Note 13, Stock-Based
Compensation included in Part I, Item 1. "Financial Statements."
Emerging Growth Company Status
Following the consummation of the Business Combination, the Post Combination
Company is an emerging growth company (EGC), as defined in the Jumpstart Our
Business Startups Act of 2012 ("JOBS Act"). The JOBS Act permits companies with
EGC status to take advantage of an extended transition period to comply with new
or revised accounting standards, delaying the adoption of these accounting
standards until they would apply to private companies. We have elected to use
this extended transition period to enable us to comply with new or revised
accounting standards that have different effective dates for public and private
companies until the earlier of the date we (i) are no longer an emerging growth
company or (ii) affirmatively and irrevocably opt out of the extended transition
period provided in the JOBS Act. As a result, our financial statements may not
be comparable to companies that comply with the new or revised accounting
standards as of public company effective dates.
In addition, we intend to rely on the other exemptions and reduced reporting
requirements provided by the JOBS Act. Subject to certain conditions set forth
in the JOBS Act, if, as an EGC, we intend to rely on such exemptions, we are not
required to, among other things: (i) provide an auditor's attestation report on
our system of internal controls over financial reporting pursuant to
Section 404(b) of the Sarbanes-Oxley Act of 2002; (ii) provide all of the
compensation disclosure that may be required of non-emerging growth public
companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act;
(iii) comply with any requirement that may be adopted by the Public Company
Accounting Oversight Board regarding mandatory audit firm rotation or a
supplement to the auditor's report providing additional information about the
audit and the financial statements (auditor discussion and analysis); and
(iv) disclose certain executive compensation-related items such as the
correlation between executive compensation and performance and comparisons of
the Chief Executive Officer's compensation to median employee compensation.
We will remain an EGC under the JOBS Act until the earliest of (i) the last day
of our first fiscal year following the fifth anniversary of the TSIA IPO,
(ii) the last date of our fiscal year in which we have total annual gross
revenue of at least $1.07 billion , (iii) the date on we are deemed to be a
"large accelerated filer" under the rules of the SEC with at least
$700.0 million of outstanding securities held by non-affiliates or (iv) the date
on which we have issued more than $1.0 billion in non-convertible debt
securities during the previous three years.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this Item.
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