Hi there, welcome to another post by Cedar Grove Capital Management and our first post sharing our thoughts on a special situation.
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Latch has been decimated from consistently delaying filings, laying off staff, and recently removing their CEO and CFO
Nasdaq sent a delisting notice and received an extension until August 4th to get its books in order1
The company’s current price does not reflect the total value or even the liquidation value
Trading at $0.68/share, this company, even sold is worth much more even from the cash position alone
I’m not going to spend too much time on a company overview because this trade is a special situation trade and not a position of betting on the future of the company or its demise.
I’m looking at this company merely as a trade that it is indeed worth more than the current share price even if it were to be sold for parts, or liquidated.
My notes that I am sharing here strictly reflect that thought. With that, let’s give you a quick context of Latch LTCH 0.00%↑.
Latch is a smart home lock product system that offers LatchOS, an operating system that extends smart access, delivery and guest management, smart home, sensors, connectivity, and personalization and services.
Basically, it’s a company that sells those cool Bluetooth door locks and systems to building management and individual residences.
Conveniently, my apartment building (owned by BAM) uses them for every single door in here. Considering my building is 36 floors with ~13 units a floor and 33 livable floors (rest are amenities), my building alone supports ~430 door locks for apartments + another 2-3 dozen of ancillary locks.
That’s a lot of products to sell one building and then also charge them a SaaS fee to manage them all. Mind you, BAM owns 3 other buildings on my block with the same system so you can do the math on that one.
Not to be a TAM bro, but it’s not like there isn’t a market for these products. Pulling from Alarm.com (not Latch SPAC since toilet paper is worth more than those projections), the market is sizable.
I’m not saying that Latch fits perfectly into the market above (more residential than commercial) but at the end of the day, the product is a good product, and if Tishman Speyer and Brookfield are buying into it, that holds weight.
What Went Wrong?
Not to beat a dead horse but this was a SPAC so that pretty much sums it up.
All jokes aside though, when you look at the finances, while revenue growth has really been accelerating, so too have losses. A product from low-interest rates and a growth at-all-costs narrative.
Most of those costs have come directly from sales and marketing and G&A. From 2020 to 2021, they grew 167% and 212% respectively. So how has the stock panned out?
Since announcing that Tishmans SPAC was taking the company public at $1.56 billion2 (ridiculously stupid) the stock is down 93%.
Losses continued to mount and to make matters worse, the company has delayed not only its Q2’22 filing but also its Q3’22 and full-year 2022 filings.
This little conviction in the name along with all the macro noise going on has really sent this company down the shitter.
The company also had not one, but two restructuring events last year (will get into that in a bit), the recent ousting of its CEO and CFO3, and notice from NASDAQ about not being in compliance and will be delisted soon if books don't get in order.
So a lot of fun stuff happening with the company but despite a bunch of doo doo everywhere, I believe there is still value in this company above what it is currently trading at.
What I’m going to share next is actually two scenarios.
Liquidation value if the company shuts down and ceases operations.
If a strategic were to scoop them up to recognize synergies ➡️ NOT pay a premium
What I Think It’s Worth
If we’re going to analyze option #1, I will not be biased when I look at this since this is true, “we’re shutting down. Sell everything down to the nuts and bolts for what you can reasonably get for it”.
So, let’s dive into option #1.
First thing we need to do is look at the balance sheet and what I think we can get things for.
If you literally want to call it a day and make this simple, you can just look at the book value based on its last filing and come to ~$2.41/share ($342.3M in assets / 141.9M shares).
But no, it’s not that simple.
This is how I want to think about it if it’s going to liquidate.
What we need to analyze first is just how liquid the assets are and what the value of each of them is at the time of the filing period (March 31, 2022).