Item 7. 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.
Restatement of Prior Financial Information
The Company has restated certain of its financial statements and financial information. The effects of the accounting adjustments made as part of the Restatement are more fully discussed in the “Explanatory Note” above and in Note 2. Restatement of Prior Period Financial Statements and Information and Note 20. Quarterly Financial Information (Unaudited) in Part II, Item 8. “Financial Statements.”
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 consumer adoption of hardware and software products that improve resident experience and the growth of this market.
Key Business Metrics
In the first quarter of 2022, to align our key business metrics with our internal priorities and business plans at the time, we reported two key business metrics: Annual Recurring Revenue (“ARR”) and “Spaces.” Since that time, the Company has undergone significant changes, including fundamental organizational and management changes and the consummation of the HDW Acquisition and HelloTech Merger. In light of these significant organizational and management changes, we do not believe ARR or Spaces, as defined and presented in the first quarter of 2022, represent key business metrics for the Company at the time of this Form 10-K. Accordingly, we are not presenting those metrics in this Form 10-K. We are continuing to present software revenue (prepared in accordance with generally accepted accounting principles in the United States of
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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,
(restated) (restated) (restated)
GAAP Measures:
Non-GAAP Measure:
Three months ended
(restated) (restated) (restated) (restated) (restated)
GAAP Measures:
Non-GAAP Measure:
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.
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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,
(restated) (restated) (restated)
Provision for income taxes 89 53 8 50
Change in fair value of derivative liabilities — 12,512 939 —
Change in fair value of warrant liability (9,558) (4,085) — —
Change in fair value of trading securities 3,460 (50) — —
Non-ordinary course legal fees and settlement reserves(d) 2,010 6,927 1,035 478
Three months ended
(restated) (restated) (restated) (restated) (restated)
Loss on extinguishment of debt — — — — — — 1,469 —
Change in fair value of derivative liabilities — — — — — — 8,991 3,521
Change in fair value of trading securities — 1,960 2,500 (1,000) (50) — — —
(a)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.
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Interest income (expense), net includes interest expense associated with the significant financing component of $5.1 million, $3.1 million, $1.5 million and $0.4 million for the years ended December 31, 2022, 2021, 2020 and 2019, respectively. For the three months ended December 31, 2022, September 30, 2022, June 30, 2022, and March 31, 2022, interest expense, net includes interest expense associated with the significant financing component of $1.3 million, $1.3 million, $1.4 million and $1.1 million, respectively. For the three months ended December 31, 2021, September 30, 2021, June 30, 2021, and March 31, 2021, interest expense, net includes interest expense associated with the significant financing component of $0.9 million, $0.8 million, $0.7 million and $0.7 million, respectively.
(b)Restructuring costs resulting from the 2022 RIFs.
(c)Transaction costs related to the Business Combination. These costs are included in research and development, sales and marketing and general and administrative on the Consolidated Statements of Operations and Comprehensive Loss.
(d)Non-ordinary course legal fees and settlement reserves incurred in connection with non-ordinary course litigation and disputes, including $6.8 million related to an estimated liability recorded in connection with a dispute with a service provider during the year ended December 31, 2021. 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.
(e)See Note 15. Stock-Based Compensation,in Part II, Item 8. “Financial Statements.” for details. Warrant expense was recognized only during the year ended December 31, 2020.
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 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 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.
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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. We expect our R&D expenses to decrease for 2023 as a result of restructuring initiatives, including the 2022 RIFs and the July 2023 RIF.
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 expenses to decrease for 2023 as a result of restructuring initiatives, including the 2022 RIFs and the July 2023 RIF.
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,
(restated) (restated) (restated)
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.
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Restated Annual Financial Information (unaudited)
During the quarter ended June 30, 2022, the Audit Committee commenced the Investigation of certain key performance indicators and revenue recognition practices, including the accounting treatment, financial reporting and internal controls related thereto. The Audit Committee determined that our consolidated financial statements for the years ended December 31, 2021, 2020 and 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as the consolidated financial statements for the first quarter of 2022 included in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022, should no longer be relied upon as a result of material errors and possible irregularities relating to, among other things, the manner in which we recognized revenue associated with the sale of hardware devices, primarily through third-party channel partners.
Following the Investigation, we completed the Financial Statement Review. As a result, we are hereby restating certain financial data herein, as described in the Explanatory Note.
Errors Identified
Through the Investigation and the Financial Statement Review, we identified errors in various categories, including:
1.Revenue recognition - Hardware
In connection with the Investigation and the Financial Statement Review, we determined that our historical revenue was misstated, primarily as a result of the following: (a) a failure of certain sales personnel in certain cases to disclose relevant terms they had negotiated and a failure to identify, consider or properly account for such terms; (b) a failure to consider fully the impact of certain terms of sales agreements in determining the revenue to be recognized and (c) a failure to adequately assess collectability. As a result of the foregoing, in certain circumstances, we originally had recognized revenues before there was evidence that a contract existed and control had passed to the customer. Additionally, we determined that there was not sufficient evidence to recognize amounts of gross revenue that were subject to certain discounts provided to channel partners. Accordingly, certain previously reported revenue related to such channel partner discounts and an offsetting and equal cost of revenue needed to be reversed. In transactions in which discounts originally had been allocated between hardware and software revenues, deferred software was also adjusted. In addition, there were adjustments related to the returns reserve. Restated hardware revenues are recorded in the amount of consideration we received or expect to receive when we had evidence that a contract existed and control had passed to the customer. The impact of the foregoing on hardware revenue and cost of hardware revenue on the previously reported Consolidated Statements of Operations and Comprehensive Loss is as follows (in thousands):
Year ended December 31,
(unaudited)
Adjustments to hardware revenue:
Adjustments to cost of hardware revenue:
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Three months ended (unaudited)
Adjustments to hardware revenue:
Adjustments to cost of hardware revenue:
In addition to the impact of these adjustments on hardware revenue and cost of hardware revenue on the previously reported Consolidated Statements of Operations and Comprehensive Loss, additional accounts impacted by the Financial Statement Review include:
•General and administrative;
•Accounts receivable, net;
•Inventories, net;
•Accounts payable;
•Accrued expenses;
•Deferred revenue, current;
•Deferred revenue, non-current;
•Other current liabilities;
•Prepaid expenses and other current assets; and
•Retained earnings.
2.Revenue recognition - Software
As discussed above, software revenue is generally recognized ratably over the subscription period beginning when or as control of the promised services is transferred to the customer. In connection with the Financial Statement Review, we determined:
•In certain cases, access to software was not transferred to the customers upon execution of the software contract, which is when the revenue had been recognized. For such contracts, software revenue has been restated to reflect the date on which Latch provided access to the customer. In the tables below, the related adjustments are described as “access related.”
•Certain software licensing contracts did not meet revenue recognition criteria primarily due to collectability not being reasonably assured. As a result, certain balance sheet accounts, including accounts receivable and deferred revenue, have been restated to correct the amounts associated with such transactions. For certain software license renewals, revenue was recorded in a lump sum instead of over the subscription period. Revenues were restated to record the revenue over the subscription period. The impacts of these adjustments on software revenue are reflected in the tables below as “other.”
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The adjustments associated with these corrections primarily impact software revenue on the previously reported Consolidated Statements of Operations and Comprehensive Loss as follows (in thousands):
Year ended December 31,
(unaudited)
Three months ended (unaudited)
In addition to the impact of these adjustments on software revenue on the previously reported Consolidated Statements of Operations and Comprehensive Loss, additional accounts impacted by the Financial Statement Review include:
•Hardware revenue;
•General and administrative;
•Other income / expense;
•Accounts receivable, net;
•Prepaid expenses and other current assets;
•Deferred revenue, current;
•Deferred revenue, non-current; and
•Retained earnings.
3.Internally-developed software
The Company capitalizes certain development costs incurred in connection with its internally-developed software (including specific software upgrades and enhancements when it is probable the expenditures will result in additional features and functionality). These capitalized costs are primarily related to software that is hosted by the Company and the firmware in the Company’s devices. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization of costs ceases upon completion of all substantial testing, at which time amortization of the capitalized software begins.
In connection with the Financial Statement Review, we determined that, due to flawed operating procedures, the Company did not (i) begin to amortize certain amounts that had been recorded as software-in-development during 2019, 2020, 2021 and 2022 when the asset was ready for its intended use or (ii) expense certain amounts when the Company determined that the planned feature was discontinued. The adjustments associated with this correction had a net impact that increased the loss before income taxes by $0.7 million, $0.5 million, and $0.3 million for the period ended December 31, 2021, 2020, and 2019, respectively.
The restated amounts presented in the tables below reflect corrections of internally-developed software, amortization expense and accumulated amortization.
The adjustments associated with these corrections impact the following accounts on the previously reported Consolidated Financial Statements:
•Research and development;
•Depreciation and amortization; and
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•Internally-developed software, net.
4.Stock-based compensation
The Company accounts for stock-based compensation expense ratably over the service period. Historically, the Company accelerated a portion of the RSU fair value at grant date instead of recognizing that amount ratably over the award’s requisite service period. The adjustments associated with this correction, along with other stock-based compensation corrections had a net impact that decreased the loss before income taxes by $1.1 million for the period ended December 31, 2021 and had a net impact that increased the loss before income taxes by $0.2 million, and $0.1 million for the period ended December 31, 2020 and 2019, respectively. The restated amounts presented in the tables below reflect stock-based compensation expense recognized ratably over the service period beginning at the grant date.
5.Other corrections
In connection with the Financial Statement Review, we determined that certain historical amounts did not meet the recognition criteria due to errors in amounts and/or the timing of recognition on the financial statements. The adjustments associated with these corrections had a net impact that increased the loss before income taxes by $0.3 million, $0.04 million, and $0.01 million for the period ended December 31, 2021, 2020, and 2019, respectively. The restated amounts presented in the tables below reflect amounts in the periods they were incurred. Other adjustments that were not materially significant have also been corrected in the Restated Financial Statement Periods and 2019.
The tables below present the impact of the Restatement adjustments on previously reported financial statements and information not included in Note 2. Restatement of Prior Period Financial Statements and Information or Note 20. Quarterly Financial Information (Unaudited), in Part II, Item 8. “Financial Statements.” Certain amounts reported previously have been reclassified. Restatement adjustments are labeled as follows:
•Related to hardware revenue recognition are labeled “HW”
•Related to software revenue recognition are labeled “SW”
•Related to internally-developed software and software-in-development are labeled “IDS”
•Related to stock-based compensation are labeled “SBC”
•Related to other corrections are labeled “OC”
In those cases where an account has been adjusted due to more than one category, a footnote reference detailing the components has been added. Certain amounts reported previously have been reclassified and are labeled “RC”.
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Latch, Inc. and Subsidiaries
Comparison of previously reported and restated Consolidated Balance Sheet Data
(in thousands, except share and per share amounts)
(unaudited)
Previously Reported Adjustments Category Reference(a) Restated
Assets
Current assets
Prepaid expenses and other current assets 3,309 125 SW 3,434
Property and equipment, net 753 — 753
Internally-developed software, net 7,416 (778) IDS 6,638
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit
Current liabilities
Commitments and contingencies
Stockholders’ Deficit
Accumulated other comprehensive income 9 — 9
(a)Category references are described above under “—Errors Identified.” Where adjustments relate to multiple categories, the adjustment amounts of each category are noted below and sum to the total adjustment reflected in the table above:
•HW1 $(4,773); SW1 $(1,953); OC1 $114
•HW2 $4,240; OC2 $62;
•HW3 $22; OC3 $135; RC3 $(27)
•HW4 $(128); SW4 $254
•OC5 $2; SBC5 $224
(b)Shares outstanding reflect the adjustment for the Exchange Ratio as a result of the Business Combination. See Note 1. Description of Business, in Part II, Item 8. “Financial Statements.”
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Latch, Inc. and Subsidiaries
Comparison of previously reported and restated Consolidated Balance Sheet Data
(in thousands, except share and per share amounts)
(unaudited)
Previously Reported Adjustments Category Reference(a) Restated
Assets
Current assets
Prepaid expenses and other current assets 1,556 110 SW3, OC3 1,666
Property and equipment, net 1,064 — 1,064
Internally-developed software, net 3,175 (284) IDS 2,891
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit
Current liabilities
Commitments and contingencies
Stockholders’ Deficit
(a)Category references are described above under “—Errors Identified.” Where adjustments relate to multiple categories, the adjustment amounts of each category are noted below and sum to the total adjustment reflected in the table above:
•HW1 $(3,889); SW1 $(1,811);
•HW2 $3,707; OC2 $101;
•SW3 $134; OC3 $(23);
•HW4 $18; OC4 $25;
•HW5 $22; SW5 $19
(b)Shares authorized and outstanding for all periods reflect the adjustment for the Exchange Ratio as a result of the Business Combination. See Part II Item 8 “Financial Statements” Note 1. Description of Business.
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Latch, Inc. and Subsidiaries
(in thousands, except share and per share amounts)
(unaudited)
Previously Reported Adjustments Category Reference(a) Restated
Revenue
Cost of revenue(b)
Operating expenses
Depreciation and amortization 723 — 723
Other expense, net
Loss on extinguishment of debt (916) — (916)
Total other expense, net (473) — (473)
Provision for income taxes 50 — 50
Net loss per common share:
Basic and diluted net loss per common share $ (7.65) $ (0.07) $ (7.72)
Weighted average shares outstanding:
(a)Category references are described above under “—Errors Identified.” Where adjustments relate to multiple categories, the adjustment amounts of each category are noted below and sum to the total adjustment reflected in the table above:
•HW1 $(7,356); OC1 $(95); SBC1 $1;
•OC2 $14; IDS2 $285; SBC2 $10;
•OC3 $(2); SBC3 $2;
•HW4$(165); SW4$(79), OC4 $93; SBC4 $42
(b)Exclusive of depreciation and amortization shown in operating expenses below.
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Latch, Inc. and Subsidiaries
(in thousands, except share and per share amounts)
(unaudited)
Shares Amount Shares Amount
(restated) (restated) (restated)
Exercises of common stock options — — 2,117 — 304 — 304
Common stock warrants issued — — — — 38 — 38
Stock-based compensation — — — — 3,722 — 3,722
(a)The restated net loss reflects the impact of the adjustments described above.
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Latch, Inc. and Subsidiaries
(in thousands)
(unaudited)
Previously Reported Adjustments Restated
Operating activities
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization 723 — 723
Non-cash interest expense 157 — 157
Loss on extinguishment of debt 916 — 916
Warrant expense 38 — 38
Provision for excess and obsolete inventory 150 126 276
Provision for doubtful accounts 266 (249) 17
Changes in assets and liabilities
Prepaid expenses and other current assets (733) (110) (843)
Investing activities
Purchase of property and equipment (908) — (908)
Capitalized internally-developed software (2,854) 384 (2,470)
Purchase of intangible assets (4) — (4)
Net cash (used in) investing activities (3,766) 384 (3,382)
Financing activities
Proceeds from issuance of common stock 304 — 304
Net cash provided by financing activities 66,087 — 66,087
Net change in cash and cash equivalents 14,696 — 14,696
Cash and cash equivalents
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ 58 $ (8) $ 50
Supplemental disclosure of non-cash investing and financing activities
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Results of Operations
The results of operations below compare 2022 versus 2021 and 2021 versus 2020 and provide quarterly and year-to-date information for the eight quarters during the two-year period ended December 31, 2022. Macroeconomic factors, including COVID-19 and related supply chain disruption, impacted the construction industry, including multi-family residential real estate, during this period. For instance, in 2020 and 2021, many of our customers experienced delays in construction timelines due to stay-at-home orders, while others experienced delays in construction material availability due to the broader supply chain disruption. These construction-related delays resulted in delays in delivery of our hardware to our customers, which are typically installed as projects near completion. During 2021, we also experienced component shortages that resulted in higher component costs, particularly where we paid spot market prices for such components, and we experienced shipping and logistical challenges, delays and elevated shipping costs.
In addition, the key events detailed below impacted the Company:
•Quarter ended March 31, 2021: Announcement of the Business Combination
•Quarter ended June 30, 2021: Consummation of the Business Combination
•Quarter ended June 30, 2022: May RIF
•Quarter ended September 30, 2022: August RIF; Announcement of the Investigation; Announcement of the Restatement
Certain of our expenses, including personnel-related expenses (compensation and stock-based compensation expenses), restructuring and software license expenses, are impacted by the number of employees, which grew throughout 2021 following the Business Combination, peaking in the quarter ended March 31, 2022 before declining throughout the remainder of 2022, largely as a result of the 2022 RIFs, as reflected in the table below.
Number of employees and non-employee full-time equivalents as of
We believe the 2022 RIFs, announcement of the Investigation and announcement of the Restatement adversely impacted our position in the marketplace, revenues and results of operations in 2022.
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.
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Comparison of years ended December 31, 2022 and December 31, 2021
Year ended December 31,
(in thousands, except share and per share data) 2022 2021 $ Change % Change
(restated)
Revenue
Cost of revenue(a)
Operating expenses
Other income (expense), net
Change in fair value of derivative liabilities — (12,512) 12,512 (100.0) %
Change in fair value of trading securities (3,460) 50 (3,510) N.M.
Other income (expense), net (142) 1 (143) N.M.
Other comprehensive loss
Unrealized loss on available-for-sale securities (787) (677) (110) 16.2 %
Foreign currency translation adjustment 3 (8) 11 (137.5) %
Net loss per common share:
Basic and diluted net loss per common share $ (1.13) $ (1.93) $ 0.80 41.5 %
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
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Revenue
Revenue increased by $15.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, driven by increases of $6.3 million in hardware revenue, $5.6 million in software revenue and $3.5 million in installation services revenue. The increase in hardware revenue resulted from increased hardware deliveries that met revenue recognition criteria. Software revenue increased due to an increase in building software access provided to customers. Installation services revenue growth reflects a full year of the direct deployment program compared to a partial year in 2021.
Cost of Revenue
Cost of revenue increased by $14.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. Cost of hardware revenue increased by $11.3 million, primarily driven by (i) a $6.1 million increase in the reserve for non-cancellable purchase commitments and (ii) a $3.4 million increase in the reserve for excess and obsolete inventory. The cost of hardware revenue in 2022 also reflects fewer spot buy purchases resulting from the relief of global supply chain challenges that occurred in 2021, as described above. The $2.1 million increase in cost of installation services revenue reflects a full year of the direct deployment program compared to a partial year in 2021. The $0.8 million increase in cost of software revenue reflects the increased server costs associated with an increase in licensed buildings.
Research and Development Expenses
Research and development expenses increased by $8.7 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to: (i) $6.5 million increase in personnel-related expenses comprised of (a) $4.0 million of increased compensation expense due to increased headcount during the first half of 2022 to invest in new hardware devices as well as the expanded functionality of the Latch Platform, and (b) $2.5 million of increased stock-based compensation due to new RSUs granted; (ii) restructuring costs of $2.3 million related to the 2022 RIFs and (iii) $1.7 million increase in software license expense. These increases were partially offset by (i) $1.1 million decrease in product development costs resulting from the 2022 RIFs and (ii) $0.9 million decrease in outsourced engineering fees.
Sales and Marketing Expenses
Sales and marketing expenses increased by $11.2 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to: (i) restructuring costs of $5.2 million in 2022 resulting from the 2022 RIFs; (ii) $3.8 million increase in personnel-related expenses comprised of (a) $1.3 million increase in compensation expense due to expansion of our sales force and demand generation team, and (b) $2.5 million of increased stock-based compensation due to new RSUs granted; (iii) $1.6 million increase in software license expense; (iv) $0.5 million increase in professional fees related to outsourced brand and website refresh initiatives; (v) $0.3 million increase in marketing expense and (vi) $0.2 million increase in travel expenses. These increases were partially offset by a $0.4 million decrease in customer support expenses resulting from the 2022 RIFs.
General and Administrative Expenses
General and administrative expenses decreased by $5.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to: (i) $4.9 million net decrease in professional fees, which in 2021 reflected the occurrence of the Business Combination and in 2022 reflected professional fees associated with the Investigation and Restatement; (ii) $3.8 million decrease in personnel-related expenses comprised of $4.4 million decrease in stock-based compensation, partially offset by an increase of $0.6 million in compensation expenses driven by increased headcount related to public company operational requirements and (iii) $1.2 million decrease in recruiting expense as a result of certain key hires in 2021. These decreases were partially offset by: (i) $1.7 million increase in public company insurance costs; (ii) restructuring costs of $1.0 million in 2022 resulting from the 2022 RIFs; (iii) $0.2 million increase in bad debt expense and (iv) $0.2 million increase in taxes and license fees.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $2.4 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to the increased amortization of capitalized internally-developed software.
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Total Other Income (Expense), Net
Total other income (expense), net increased by $20.6 million to income of $3.0 million for the year ended December 31, 2022 compared to expense of $17.6 million for the year ended December 31, 2021, primarily due to: (i) $12.5 million favorable change in the fair value of the derivative liability related to convertible notes issued by Legacy Latch between August 11, 2020 and October 23, 2020 with a maturity date of April 23, 2022 for an aggregate principal amount of $50.0 million (the “Convertible Notes”), which were converted to equity as part of the Business Combination; (ii) $5.5 million favorable change in the fair value of the Private Placement Warrants resulting from the decline in the price of our common stock; (iii) $4.8 million decrease in interest expense driven by the conversion of the Convertible Notes to common stock, partially offset by an increase in interest expense associated with software sales with upfront payments and (iv) $1.5 million favorable change in loss on extinguishment of debt. These increases were partially offset by a $3.5 million unfavorable change in the fair value of trading securities driven by increasing interest rates.
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Comparison of years ended December 31, 2021 and December 31, 2020
Year ended December 31,
(in thousands, except share and per share data) 2021 2020 $ Change % Change
(restated) (restated)
Revenue
Cost of revenue(a)
Operating expenses
Other expense, net
Change in fair value of derivative liabilities (12,512) (939) (11,573) N.M.
Change in fair value of warrant liability 4,085 — 4,085 N.M.
Change in fair value of trading securities 50 — 50 N.M.
Loss on extinguishment of debt (1,469) (199) (1,270) N.M.
Provision for income taxes 53 8 45 N.M.
Other comprehensive loss
Unrealized loss on available-for-sale securities (677) — (677) N.M.
Foreign currency translation adjustment (8) 9 (17) (188.9 %)
Net Loss per common share:
Basic and diluted net loss per common share $ (1.93) $ (9.31) $ 7.38 (79.3) %
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
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Revenue
Revenue increased by $14.6 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, driven by a $8.7 million increase in hardware deliveries that met revenue recognition criteria, $4.0 million increase in software revenue and $1.9 million increase in installation services 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 multifamily construction market, however as the construction market and economy began to improve, unit deliveries started increasing during the third quarter of 2020. The hardware revenue growth was also driven by 2021 product releases such as C2, Latch Intercom and third-party smart home devices. The software revenue growth reflects an increase in building software access provided to customers as a result of hardware units deployed in 2020 and 2021. Growth in installation services revenue reflects the launch of those offerings in the quarter ended June 30, 2021.
Cost of Revenue
Cost of revenue increased by $17.0 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, driven by an increase in cost of hardware revenue of $12.9 million, which was mainly driven by the costs associated with the higher revenue and increased hardware inventory costs due to the global supply chain challenges described above. Cost of installation service revenue increased $3.7 million due to the launch of those offerings in the quarter ended June 30, 2021.
Research and Development Expenses
Research and development expenses increased by $20.4 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to: (i) $9.5 million increase in compensation expenses due to increased headcount to expand functionality of the Latch Platform; (ii) $10.0 million increase in stock-based compensation due to (a) RSUs granted in 2021 and (b) a 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 and (iii) $0.9 million increase in capitalized professional fees.
Sales and Marketing Expenses
Sales and marketing expenses increased by $21.0 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to: (i) $12.2 million increase in compensation expenses due to increased headcount as we expanded our sales force and demand generation team; (ii) $3.0 million increase in stock-based compensation due to RSUs granted in 2021; (iii) $2.1 million increase in marketing expense; (iv) $1.4 million increase in software license expense; (v) $1.3 million increase in professional fees related to outsourced marketing initiatives and (vi) $1.2 million increase in travel expenses.
General and Administrative Expenses
General and administrative expenses increased by $40.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to: (i) $20.1 million increase in personnel-related expenses, which included (a) $13.9 million of higher stock-based compensation due to RSUs granted in 2021, including a 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, and (b) $6.3 million increase in compensation expenses due to increased headcount to build out corporate infrastructure to operate as a public company; (ii) $5.9 million increase in litigation costs as a result of an estimated liability recorded in connection with a dispute with a service provider; (iii) $5.7 million increase in professional fees, including audit fees, as a result of building out corporate infrastructure to operate as a public company; (iv) $4.5 million increase in transaction costs and professional advisory fees in connection with the Business Combination; (v) $2.4 million in public company insurance expense; (vi) $1.2 million increase in IT and software license expenses driven by a $1.8 million increase in software license expense partially offset by a $0.4 million decrease in computer and internet expense and a $0.2 million decrease in software expense: communication and (vii) $1.0 million increase in bad debt expense.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $1.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to the increase in amortization of internally-developed software.
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Total Other Income (Expense), Net
Total other income (expense), net increased by $13.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to: (i) an $11.6 million unfavorable change in the fair value of the derivative liability related to the Convertible Notes and warrants related to our term loan; (ii) $1.3 million favorable change in loss on extinguishment of debt related to the Convertible Notes; and (iii) $4.6 million increase in interest expense primarily related to the Convertible Notes. This was partially offset by a $4.1 million favorable change in the fair value of the Private Placement Warrants.
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Quarterly Financial Information
Below are unaudited (and, where noted below, restated) Consolidated Statements of Operations and Comprehensive Loss for the eight quarterly periods ended December 31, 2022 (in thousands, except share and per share data).
Three months ended
Revenue (restated) (restated) (restated) (restated) (restated)
Cost of revenue(a)
Operating expenses
Other income (expense), net
Change in fair value of derivative liabilities — — — — — — (8,991) (3,521)
Change in fair value of trading securities — (1,960) (2,500) 1,000 50 — — —
Loss on extinguishment of debt — — — — — — (1,469) —
Other comprehensive loss
Foreign currency translation adjustment (10) 12 (1) 2 (2) (1) 2 (7)
Net loss per common share:
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
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Comparison of three months ended December 31, 2022 and December 31, 2021
Three months ended December 31,
(in thousands, except share and per share data) 2022 2021 $ Change % Change
(restated)
Revenue
Cost of revenue(a)
Operating expenses
Other income (expense), net
Change in fair value of trading securities — 50 (50) (100.0) %
Other income (expense), net (33) 6 (39) N.M.
Provision for income taxes 45 6 39 N.M.
Other comprehensive loss
Unrealized loss on available-for-sale securities 855 (617) 1,472 N.M.
Foreign currency translation adjustment (10) (2) (8) N.M.
Net Loss per common share:
Basic and diluted net loss per common share $ (0.20) $ (0.38) $ 0.18 (47.4) %
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
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Revenue
Revenue increased by $1.7 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The increase was driven by $1.3 million increase in software revenue and $1.0 million increase in hardware revenue, partially offset by a $0.7 million decrease in installation services revenue. Increased software revenue reflects an increase in building software access provided to customers. The decrease in installation services revenue results from a strategic shift to only providing installation services for our largest customers in the fourth quarter of 2022.
Cost of Revenue
Cost of revenue decreased by $0.5 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. Cost of hardware revenue increased by $0.9 million, driven by (i) a $1.6 million reserve for non-cancellable purchase commitments and (ii) a $3.3 million reserve for excess and obsolete inventory. The cost of hardware revenue also reflects fewer spot buy purchases resulting from the relief of global supply chain challenges that occurred in 2021, as described above. The decrease of $1.7 million in cost of installation services revenue reflects decreased facilitation of installation services as a result of our strategic shift to only provide installation services for our largest customers.
Research and Development Expenses
Research and development expenses decreased by $9.2 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The decrease was primarily related to the 2022 RIFs which resulted in (i) a $7.3 million decrease in personnel-related expenses, comprised of $6.5 million decrease in compensation expenses and $0.8 million decrease in stock-based compensation; (ii) a $1.0 million decrease in product development costs; and (iii) a $0.6 million decrease in outsourced engineering fees.
Sales and Marketing Expenses
Sales and marketing expenses decreased by $12.1 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The decrease was primarily due to: (i) $8.2 million decrease in personnel-related expenses, comprised of $7.1 million decrease in compensation expenses and $1.1 million decrease in stock-based compensation expenses resulting from the 2022 RIFs; (ii) $2.1 million decrease in marketing expense; (iii) $0.6 million decrease in travel expenses; (iv) $0.5 million decrease in professional fees related to digital marketing placement initiatives implemented in the three months ended December 31, 2021 and (v) $0.3 million decrease in software license expense.
General and Administrative Expenses
General and administrative expenses decreased by $8.8 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. The decrease was primarily due to: (i) $5.5 million net decrease in professional and consulting fees, which in 2021 reflected the occurrence of the Business Combination and in 2022 reflected professional fees associated with the Investigation and Restatement; (ii) $2.5 million decrease in personnel-related expenses, comprised of $2.2 million decrease in compensation expenses and $0.3 million decrease in stock-based compensation expenses resulting from the RIFs and (iii) $0.4 million decrease in recruiting fees. These decreases were partially offset by $0.1 million increase in bad debt expense.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $0.6 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021. 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 $7.0 million for the three months ended December 31, 2022 compared to the three months ended December 31, 2021, primarily due to a smaller decrease in the price of our common stock during the three months ended June 30, 2022 than during the three months ended June 30, 2021, which resulted in a $7.6 million increase in the fair value of the Private Placement Warrants liability during these periods. This was partially offset by a $0.7 million increase in interest income related to higher interest rates.
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Comparison of three months ended September 30, 2022 and September 30, 2021
Three months ended September 30,
(in thousands, except share and per share data) 2022 2021 $ Change % Change
(restated)
Revenue
Cost of revenue(a)
Operating expenses
Other income (expense), net
Change in fair value of warrant liability 389 1,067 (678) (63.5) %
Change in fair value of trading securities (1,960) — (1,960) N.M.
Total other income (expense), net (2,351) 209 (2,560) N.M.
Provision for income taxes 10 13 (3) (23.1) %
Other comprehensive loss
Unrealized loss on available-for-sale securities 257 (60) 317 N.M.
Foreign currency translation adjustment 12 (1) 13 N.M.
Net loss per common share:
Basic and diluted net loss per common share $ (0.24) $ (0.24) $ — — %
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
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Revenue
Revenue increased by $2.0 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was driven by $1.4 million increase in software revenue and $0.8 million increase in installation services revenue, partially offset by $0.3 million decrease in hardware revenue. Increased software revenue reflects an increase in building software access provided to customers. Installation services revenue growth reflects expansion of the direct deployment program. The decrease in hardware revenue is primarily attributable to decreased hardware deliveries recognized.
Cost of Revenue
Cost of revenue decreased by $0.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Cost of hardware revenue decreased by $1.6 million, driven by (i) $0.6 million reserve for non-cancellable purchase commitments; (ii) $0.1 million reserve for excess and obsolete inventory and (iii) increased hardware deliveries recognized, partially offset by $0.8 million decrease in hardware inventory costs due to the improvement of global supply chain challenges that had occurred in 2021, as described above. This was partially offset by $0.7 million increase in installation services revenue and $0.3 million increase in cost of software revenue. The increases in cost of software and installation services revenue are attributable to the increased growth of those offerings.
Research and Development Expenses
Research and development expenses decreased by $0.7 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The decrease was primarily due to: (i) $1.2 million decrease in personnel-related expenses, comprised of $0.7 million decrease in compensation expenses and $0.5 million decrease in stock-based compensation resulting from the 2022 RIFs, and (ii) $0.9 million decrease in product development costs resulting from the 2022 RIFs. These decreases were partially offset by: (i) restructuring costs of $1.1 million in 2022 related to the August RIF and (ii) $0.4 million increase in software license expense.
Sales and Marketing Expenses
Sales and marketing expenses decreased by $2.1 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The decrease was primarily due to: (i) $3.7 million decrease in personnel-related expenses, comprised of $3.5 million decrease in compensation expenses and $0.2 million decrease in stock-based compensation resulting from the 2022 RIFs, and (ii) $0.3 million decrease in travel expenses. These decreases were partially offset by: (i) restructuring costs of $0.9 million in 2022 related to the August RIF; (ii) $0.5 million increase in software license expense; (iii) $0.5 million increase in professional fees related to outsourced brand and website refresh initiatives and (iv) $0.2 million increase in marketing expense.
General and Administrative Expenses
General and administrative expenses increased by $3.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily due to: (i) $4.5 million increase in professional fees primarily related to the Investigation and litigation reserves, partially offset by a reduction in fees incurred related to the Business Combination in 2021; (ii) restructuring costs of $0.6 million related to the August RIF and (iii) $0.1 million increase in taxes and license fees. These increases were partially offset by (i) $1.6 million decrease in personnel-related expenses, comprised of (a) $1.3 million decrease in compensation expense and (b) $0.3 million decrease in stock-based compensation resulting from the 2022 RIFs; (ii) $0.1 million decrease in bad debt expense and (iii) $0.3 million decrease in recruiting expense.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $0.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. 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 $2.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The decrease was primarily due to: (i) $2.0 million unfavorable change in fair value
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of the trading securities and (ii) a smaller decrease in the price of our common stock during the three months ended June 30, 2022 than during the three months ended September 30, 2021, which resulted in a $0.7 million increase in the fair value of the Private Placement Warrants liability during these periods.
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Comparison of nine months ended September 30, 2022 and September 30, 2021
Nine months ended September 30,
(in thousands, except share and per share data) 2022 2021 $ Change % Change
(restated)
Revenue
Cost of revenue(a)
Operating expenses
Other income (expense), net
Change in fair value of derivative liabilities — (12,512) 12,512 (100.0) %
Change in fair value of warrant liability 9,355 (3,728) 13,083 N.M.
Change in fair value of trading securities (3,460) — (3,460) N.M.
Other expense, net (109) (5) (104) N.M.
Provision for income taxes 44 47 (3) (6.4) %
Other comprehensive income (loss)
Unrealized loss on available-for-sale securities (1,642) (60) (1,582) N.M.
Foreign currency translation adjustment 13 (6) 19 N.M.
Net loss per common share:
Basic and diluted net loss per common share $ (0.93) $ (1.67) $ 0.74 (44.3) %
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
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Revenue
Revenue increased by $13.7 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was driven by increases of $5.3 million in hardware revenue, $4.3 million in software revenue and $4.1 million in installation services revenue. The increase in hardware revenue was primarily driven by increased hardware deliveries recognized. Increased software revenue reflects an increase in building software access provided to customers. Installation services revenue growth reflects expansion of the direct deployment program.
Cost of Revenue
Cost of revenue increased by $14.8 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Cost of hardware revenue increased by $10.4 million, driven by (i) a $4.6 million reserve for non-cancellable purchase commitments and (ii) a $4.2 million increase in cost of hardware revenue driven by increased hardware sales. The increase was also a result of a $3.8 million increase in cost of installation services revenue, which reflects increased facilitation of installations.
Research and Development Expenses
Research and development expenses increased by $17.9 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to: (i) $13.8 million increase in personnel-related expenses, comprised of $10.6 million of increased compensation expenses and $3.3 million of increased stock-based compensation due to increased headcount to invest in expanding the functionality of the Latch Platform, partially offset by the impact of the 2022 RIFs; (ii) restructuring costs of $2.4 million in 2022 resulting from the 2022 RIFs and (iii) $1.5 million increase in software license expense.
Sales and Marketing Expenses
Sales and marketing expenses increased by $23.3 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to: (i) $11.9 million increase in personnel-related expenses, comprised of $8.4 million of increased compensation expense and $3.6 million of increased stock-based compensation related to expansion of our sales force and demand generation team, partially offset by the 2022 RIFs; (ii) restructuring costs of $5.3 million in 2022 resulting from the 2022 RIFs; (iii) $2.4 million increase in marketing expense; (iv) $1.9 million increase in software license expense; (v) $1.3 million increase in professional fees related to outsourced brand and website refresh initiatives and (vi) $0.8 million increase in travel expenses.
General and Administrative Expenses
General and administrative expenses increased by $3.3 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to: (i) $1.8 million increase in public company insurance expense; (ii) restructuring costs of $1.1 million in 2022 resulting from the 2022 RIFs; (iii) $0.7 million net increase in professional fees; (iv) $0.3 million increase in bad debt; (v) $0.2 million increase in travel expenses and (iv) $0.2 million increase in taxes and license fees. These increases were partially offset by $0.8 million decrease in recruiting fees.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $1.8 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to the increased amortization of capitalized internally-developed software.
Total Other Income (Expense), Net
Total other income (expense), net increased by $27.6 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to: (i) a greater decrease in the price of our common stock during the nine months ended September 30, 2022 than during the nine months ended September 30, 2021; decreases in the price of our common stock resulted in a $13.1 million period-over-period decrease in the fair value of the Private Placement Warrants liability; (ii) $12.5 million favorable change related to the extinguishment of derivatives in June 2021 as part of the Business Combination; (iii) $1.5 million favorable change of extinguishment of debt due to the extinguishment of debt in June 2021 as part of the Business Combination and (iv) $4.1 million decrease in interest expense driven by the conversion of the Convertible Notes to common stock, partially offset by an increase in interest expense associated with
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software sales with upfront payments. These increases were partially offset by a $3.5 million unfavorable change in the fair value of trading securities driven by increasing interest rates.
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Comparison of three months ended June 30, 2022 and June 30, 2021
Three months ended June 30,
(in thousands, except share and per share data) 2022 2021 $ Change % Change
(restated)
Revenue
Cost of revenue(a)
Operating expenses
Other expense, net
Change in fair value of derivative liabilities — (8,991) 8,991 (100.0) %
Change in fair value of trading securities (2,500) — (2,500) N.M.
Other income (expense), net (29) 23 (52) N.M.
Provision for income taxes 17 34 (17) (50.0) %
Other comprehensive loss
Unrealized loss on available-for-sale securities (281) — (281) N.M.
Foreign currency translation adjustment (1) 2 (3) (150.0) %
Net loss per common share:
Basic and diluted net loss per common share $ (0.36) $ (0.81) $ 0.45 (55.6) %
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
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Revenue
Revenue increased by $3.1 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase was driven by increases of $1.6 million in software revenue and $1.7 million in installation services revenue partially offset by a $0.2 million decrease in hardware revenue. Increased software revenue reflects an increase in building software access provided to customers. The increase in installation services revenue is due to it being a new offering released in the second quarter of 2021 and the expansion of the offering. The decrease in hardware revenue is primarily attributable to decreased hardware deliveries recognized.
Cost of Revenue
Cost of revenue increased by $6.4 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase was primarily a result of an increase in cost of hardware revenue of $5.0 million, driven by a $2.9 million reserve for non-cancellable purchase commitments. The increase in cost of installation services revenue of $1.2 million reflects increased facilitation of installations.
Research and Development Expenses
Research and development expenses increased by $9.6 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase was primarily due to: (i) $7.3 million increase in personnel-related expenses, comprised of $4.2 million of increased compensation expenses and $3.2 million of increased stock-based compensation due to increased headcount to invest in expanding the functionality of our Latch Platform, net of a reduction in connection with the May RIF; (ii) restructuring costs of $1.3 million related to the May RIF; (iii) $0.5 million increase in software license expense and (iv) $0.4 million increase in development costs related to new product development.
Sales and Marketing Expenses
Sales and marketing expenses increased by $11.7 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase was primarily due to: (i) $5.1 million increase in personnel-related expenses comprised of $3.7 million in increased compensation expenses due to expansion of our sales force and demand generation team, partially offset by the May RIF, and a $1.4 million increase in stock-based compensation; (ii) restructuring costs of $4.4 million related to the May RIF; (iii) $0.9 million increase in marketing expense; (iv) $0.7 million increase in software license expense; (v) $0.4 million increase in travel expenses and (vi) $0.1 million increase in professional fees related to outsourced brand and website refresh initiatives.
General and Administrative Expenses
General and administrative expenses increased by $1.8 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase was primarily due to: (i) $3.3 million increase in personnel-related expenses, comprised of $1.5 million in increased stock-based compensation and $1.7 million in increased compensation expenses driven by increased headcount related to public company operational requirements; (ii) $0.7 million increase in public company insurance expense and (iii) restructuring costs of $0.6 million related to the May RIF. These increases were partially offset by a $2.8 million decrease in professional and consulting fees related to the occurrence of the Business Combination in 2021.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $0.7 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase was primarily due to the increased amortization of capitalized internally-developed software.
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Total Other Expense, net
Total other expense, net increased by $17.0 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The increase was primarily due to: (i) a $9.0 million favorable change in other income related to the extinguishment of derivatives in June 2021 as part of the Business Combination; (ii) a greater decrease in the price of our common stock during the three months ended June 30, 2022 than during the three months ended June 30, 2021; decreases in the price of our common stock resulted in a $7.5 million decrease in the fair value of the Private Placement Warrants liability during these periods; (iii) a $1.5 million favorable change on the extinguishment of debt due to the extinguishment of debt in June 2021 as part of the Business Combination and (iv) a $1.6 million decrease in interest expense primarily related to the conversion of the Convertible Notes and the repayment of the term loan in June 2021 as part of the Business Combination. These increases were partially offset by a $2.5 million unfavorable change in fair value of trading securities driven by increasing interest rates.
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Comparison of six months ended June 30, 2022 and June 30, 2021
Six months ended June 30,
(in thousands, except share and per share data) 2022 2021 $ Change % Change
(restated)
Revenue
Cost of revenue(a)
Operating expenses
Other income (expense), net
Change in fair value of derivative liabilities — (12,512) 12,512 (100.0) %
Change in fair value of warrant liability 8,966 (4,795) 13,761 N.M.
Change in fair value of trading securities (1,500) — (1,500) N.M.
Provision for income taxes 34 34 — — %
Other comprehensive loss
Unrealized loss on available-for-sale securities (1,899) — (1,899) N.M.
Foreign currency translation adjustment 1 (5) 6 120.0 %
Net loss per common share:
Basic and diluted net loss per common share $ (0.69) $ (2.59) $ 1.90 (73.4) %
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
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Revenue
Revenue increased by $11.7 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was driven by a $5.6 million increase in hardware revenue, $3.3 million increase in installation services revenue and $2.8 million increase in software revenue. Increased hardware revenue was primarily driven by increased hardware deliveries recognized. Increased software revenue reflects an increase in building software access provided to customers. The increase in installation services revenue is due to it being a new offering released in the second quarter of 2021 and the expansion of the offering.
Cost of Revenue
Cost of revenue increased by $15.4 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was driven by a $12.0 million increase in cost of hardware revenue and $3.0 million increase in cost of installation services revenue. The increase in cost of hardware revenue was driven by (i) a $3.6 million reserve for non-cancellable purchase commitments and (ii) an increase in cost of hardware revenue driven by increased hardware installation. The increase in cost of installation services revenue reflects increased facilitation of installations.
Research and Development Expenses
Research and development expenses increased by $18.6 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was primarily due to: (i) $15.1 million increase in personnel-related expenses, comprised of $11.2 million of increased compensation expenses and $3.8 million of increased stock-based compensation due to increased headcount to invest in expanding the functionality of the Latch Platform, net of a reduction in connection with the May RIF; (ii) restructuring costs of $1.3 million related to the May RIF; (iii) $1.1 million increase in software license expense and (iv) $0.9 million increase in development costs related to new product development.
Sales and Marketing Expenses
Sales and marketing expenses increased by $25.4 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was primarily due to: (i) $15.7 million increase in personnel-related expenses, comprised of $11.9 million of increased compensation expenses and $3.8 million of increased stock-based compensation due to expansion of our sales force and demand generation team, partially offset by the May RIF; (ii) restructuring costs of $4.4 million in 2022 related to the May RIF; (iii) $2.2 million increase in marketing expense; (iv) $1.4 million increase in software license expense; (v) $1.1 million increase in travel expenses and (vi) $0.5 million increase in professional fees related to outsourced brand and website refresh initiatives.
General and Administrative Expenses
General and administrative expenses decreased by $0.3 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The decrease was primarily due to a $3.8 million decrease in professional and consulting fees related to the occurrence of the Business Combination in 2021. This decrease was partially offset by (i) $0.3 million increase in personnel-related expenses, comprised of $4.1 million in increased compensation expenses driven by increased headcount related to public company operational requirements partially offset by a $3.8 million decrease in stock-based compensation as a result of a non-recurring 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; (ii) $1.8 million increase in public company insurance expense; (iii) restructuring costs of $0.6 million related to the May RIF and (iv) $0.1 million increase in taxes and license fees.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $1.2 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was primarily due to the increased amortization of capitalized internally-developed software.
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Total Other Income (Expense), Net
Total other income (expense), net increased by $30.2 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was primarily due to: (i) a greater decrease in the price of our common stock during the six months ended June 30, 2022 than during the six months ended June 30, 2021; decreases in the price of our common stock resulted in a $13.8 million decrease in the fair value of the Private Placement Warrants liability during these periods; (ii) a $12.5 million favorable change in other income related to the extinguishment of derivatives in June 2021 as part of the Business Combination; (iii) a $4.1 million decrease in interest expense primarily related to the conversion of the Convertible Notes and the repayment of the term loan in June 2021 as part of the Business Combination and (iv) a $1.5 million favorable change on the extinguishment of debt due to the extinguishment of debt in June 2021 as part of the Business Combination. These increases were partially offset by a $1.5 million unfavorable change in fair value of trading securities driven by increasing interest rates.
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Comparison of three months ended March 31, 2022 and March 31, 2021
Three months ended March 31,
(in thousands, except share and per share data) 2022 2021 $ Change % Change
(restated) (restated)
Revenue
Cost of revenue(a)
Operating expenses
Other income (expense), net
Change in fair value of derivative liabilities — (3,521) 3,521 (100.0) %
Change in fair value of warrant liability 6,267 — 6,267 N.M.
Change in fair value of trading securities 1,000 — 1,000 N.M.
Other income (expense), net (2) 61 (63) (103.3) %
Provision for income taxes 17 — 17 N.M.
Other comprehensive loss
Unrealized loss on available-for-sale securities (1,618) — (1,618) N.M.
Foreign currency translation adjustment 2 (7) 9 128.6 %
Net loss per common share:
Basic and diluted net loss per common share $ (0.33) $ (3.69) $ 3.36 (91.1) %
Weighted average shares outstanding:
(a)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
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Revenue
Revenue increased by $8.6 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was driven by a $5.8 million increase in hardware revenue, $1.6 million increase in installation services revenue and $1.2 million increase in software revenue. Increased hardware revenue was primarily driven by increased hardware deliveries recognized. Increased software revenue reflects an increase in building software access provided to customers. The growth in installation services revenues reflects a new offering released in the quarter ended June 30, 2021.
Cost of Revenue
Cost of revenue increased by $9.0 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was primarily a result of the increases in cost of hardware revenue of $7.0 million and cost of installation services revenue of $1.8 million. The increase in cost of hardware revenue was driven by an increase in cost of hardware revenue driven by increased hardware installation. The increase in cost of installation services revenue reflects increased facilitation of installations.
Research and Development Expenses
Research and development expenses increased by $9.0 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was primarily due to: (i) $7.7 million increase in personnel-related expenses comprised of $7.1 million of increased compensation expenses and $0.7 million of increased stock-based compensation; (ii) $0.5 million increase in development costs related to new product development and (iii) $0.5 million increase in software license expense.
Sales and Marketing Expenses