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,” “DOOR” and the “Company” refer to the business and operations of Latch, Inc. and its consolidated subsidiaries.
For a comparison of our financial condition and results of operations for the years ended December 31, 2024 and December 31, 2023, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2024.
45
Table of Contents
Overview
Latch is a technology company delivering an integrated ecosystem of hardware, software and services designed to enhance operations and experiences within buildings, primarily serving the multifamily rental market. In August 2025, we rebranded as DOOR, although our legal name remains Latch, Inc.
Our core offering is built around the DOOR Platform, which powers and manages our suite of smart access control devices (including locks, readers and intercoms) and smart home devices and integrates with other connected devices within a building.
We provide solutions that streamline building management for property owners and operators, offer modern convenience and security for residents and simplify interactions for visitors and service providers. While our foundation remains smart access control, we are actively expanding the DOOR Platform and our device integrations to encompass broader smart home solutions, managing devices such as sensors, thermostats and lighting. This ongoing expansion leverages our established platform to create more connected and efficient buildings as we lay the groundwork for a building intelligence platform, automating and streamlining building operations, including work order management and automation, property maintenance and unit inspections and repairs.
Our customers, which include real estate developers, builders, owners and property managers in the United States and Canada, typically purchase our hardware devices (directly or indirectly through our channel partner network) and directly license our SaaS platform. Residents interact with the DOOR Platform through the DOOR App. Through the DOOR App, residents access common areas and unlock residential doors, provide guest access, manage smart home devices and book services.
Our professional services offerings are integral to ensuring successful deployment of the DOOR Platform and ongoing support for our customers and their residents. This includes connecting our multifamily property customers with our partners for installation of Latch and third-party smart access and smart home hardware, ensuring that solutions are implemented efficiently and correctly.
Complementing our multifamily installation capabilities, our HelloTech business provides a scalable, nationwide network of skilled independent technicians. HelloTech connects these service providers with residents and property managers seeking a wide range of on-demand technical services, such as TV mounting and smart home device installation and set-up, as well as broader home services, such as furniture assembly and handyman services.
Additionally, we offer a comprehensive property management service in and around Boston, Massachusetts.
We operate in one operating and reporting segment.
Key Business Metrics
We are presenting software revenue (prepared in accordance with generally accepted accounting principles in the United States of 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,
GAAP Measures:
Non-GAAP Measure:
(1) The previously reported Adjusted EBITDA of $(40.7) million for the year ended December 31, 2024 has been corrected to $(36.0) millionherein to exclude an additional $4.8 million in non-ordinary course legal fees and settlement reserves.
46
Table of Contents
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 the following items, if applicable: (i) depreciation and amortization expense, (ii) net interest income or expense, (iii) provision for income taxes, (iv) change in fair value of warrant liability, trading securities, or derivative instruments, (v) restructuring costs, (vi) transaction-related costs, (vii) impairment of assets (viii) non-ordinary course legal fees and settlement reserves, (ix) stock-based compensation expense and (x) gain or loss on extinguishment of debt. 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.
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,
Depreciation and amortization 5,277 7,202
Interest expense (income), net(1) 1,113 (1,416)
Provision for income taxes — 2
Change in fair value of warrant liability (18) (159)
Impairment of goodwill(3) 16,600 —
Impairment of intangible assets, net(3) — 2,849
Non-ordinary course legal fees and settlement reserves(4) 3,228 12,151
Stock-based compensation(5) 551 (580)
(1)As a result of significant discounts provided to our customers on certain long-term software contracts paid in advance, we determined that there is a significant financing component related to the time value of money and have therefore broken out the interest component and recorded it as a component of interest income, net on the accompanying Consolidated Statements of Operations and Comprehensive Loss. Interest income, net includes interest expense associated with the significant financing component of $2.5 million and $3.5 million for the years ended December 31, 2025 and 2024, respectively.
(2)See Note 24. Restructuring,in Part II, Item 8. “Financial Statements.”
(3)See Note 13. Goodwill and Intangible Assets, Net, in Part II, Item 8. “Financial Statements.” Prior to 2024, we have not recorded an impairment of goodwill or intangible assets.
(4)The amounts primarily represent legal fees related to stockholder lawsuits and the SEC Investigation. The previously reported amount of $7.4 million for the year ended December 31, 2024 has been corrected to $12.2 million herein to include an additional $4.8 million in non-ordinary course legal fees and settlement reserves, consistent with the current-period presentation. While we are involved in
47
Table of Contents
various litigation and legal disputes in the ordinary course of our business, we believe the non-ordinary course legal fees and settlement reserves included in our calculation of Adjusted EBITDA do not represent normal operating expenses. See Note 17. Commitments and Contingencies,in Part II, Item 8. “Financial Statements.” These costs are included within general and administrative on the accompanying Consolidated Statements of Operations and Comprehensive Loss.
(5)See Note 20. Stock-Based Compensation,in Part II, Item 8. “Financial Statements.”
(6)The previously reported Adjusted EBITDA of $(40.7) million for the year ended December 31, 2024 has been corrected to $(36.0) millionherein to exclude an additional $4.8 million in non-ordinary course legal fees and settlement reserves.
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 home 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. We recognize hardware revenue when there is evidence a contract exists and control of the hardware has been transferred to the customer. We provide warranties that our hardware will be substantially free from defects in materials and workmanship, generally for a period of one or two years for electronic components depending on the hardware product, and five years for mechanical components. We determine in our sole discretion whether to replace or refund warrantable devices. We record a reserve as a component of cost of hardware revenue based on historical costs of replacement units for returns of defective products.
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. When significant discounts are provided to customers on the longer-term software contracts paid in advance, we determined that there is a significant financing component related to the time value of money and therefore have recorded the interest expense in interest expense, net on the accompanying Consolidated Statements of Operations and Comprehensive Loss. Our SaaS is considered a stand-ready performance obligation where customers benefit from the service evenly throughout the service period. Revenue is recognized ratably over the subscription period beginning when or as control of the promised services is transferred to the customer.
Professional Services Revenue. We generate professional services revenue in three primary ways: (i) by facilitating project-based hardware installation and activation services for enterprise customers, (ii) through fees generated by technology and home services performed for residents and consumers, and (iii) through property management services performed by DPM for our multifamily building customers.
We facilitate hardware installation and activation services to select customers. The revenues associated with these services are recognized over time based on a percentage of installation performed and completed and represent a transfer of services to a customer under contract.
Through our HelloTech platform, a network of independent contractors provides in-home technology services such as installation, repair, troubleshooting and technical support. Orders placed through the HelloTech platform are recognized as revenue as services are completed over time. We also offer a subscription service through the HelloTech platform that includes discounted home services and other technical support such as 24/7 online support, home technology checkups, and antivirus and password manager software support. Subscription revenues are recognized ratably over the subscription period.
DPM’s property management activities include operating DPM customers’ buildings, which involves maintenance and repair, construction management, leasing and administrative services. Property management service revenues are recognized ratably over the service period.
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.
48
Table of Contents
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.
Cost of professional services revenue consists primarily of (i) third-party installation labor costs and parts and materials associated with deployment of our hardware, (ii) labor costs associated with HelloTech independent technicians and credit card fees, and (iii) costs related to third-party property service providers.
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. We have not granted any RSUs since the suspension of the S-8 Registration Statement on August 10, 2022. However, we expect to resume granting RSUs pursuant to the S-8 Registration Statement after the filing of this Form 10-K. Any such grants will increase stock-based compensation expense.
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, research and development supplies and rent.
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.
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.
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 (Expense) Income, Net
Other (expense) income, 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 derivative liabilities, warrant liabilities and trading securities.
Interest income, net is summarized as follows:
Year ended December 31,
Interest (expense) income, net $ (1,113) $ 1,416
Income Taxes
The provision for income taxes consists primarily of income taxes related to 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.
49
Table of Contents
Results of Operations
The following table and period-to-period comparisons of operating results summarize our Consolidated Statements of Operations and Comprehensive Loss data and are not necessarily indicative of results for future periods.
Comparison of years ended December 31, 2025 and December 31, 2024
Year ended December 31,
(in thousands, except share and per share data) 2025 2024 $ Change % Change
Revenue
Cost of revenue(1)
Operating expenses
Impairment of intangible assets, net — 2,849 (2,849) N.M.
Other (expense) income, net
Change in fair value of warrant liability 18 159 (141) (88.7) %
Provision for income taxes — 2 (2) N.M.
Other comprehensive income (loss)
Unrealized loss on available-for-sale securities (12) (35) 23 (65.7) %
Foreign currency translation adjustment 30 8 22 N.M.
Net loss per common share:
Basic and diluted net loss per common share $ (0.34) $ (0.37) $ 0.03 (8.1) %
Weighted average shares outstanding:
(1)Exclusive of depreciation and amortization shown in operating expenses below.
N.M.: Not meaningful
50
Table of Contents
Revenue
Revenue increased by $13.5 million for the for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase was primarily due to (i) a $10.1 million increase in professional services revenue, driven by (a) a $6.6 million increase attributable to a full year of revenue in 2025 following the 2024 HelloTech Merger, (b) a $2.1 million increase in installation revenue, and (c) a $1.4 million increase in property management revenue, (ii) a $1.5 million increase in hardware revenue resulting from an increase of hardware shipments in 2025 compared to 2024, and (iii) a $1.9 million increase in software revenue due to the continued growth in subscriptions and from the resale of third-party software in connection with HelloTech services.
Cost of Revenue
Cost of revenue increased by $11.6 million for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase was primarily due to (i) a $7.6 million increase in professional services costs, driven by (a) a full year of costs in 2025 following the 2024 HelloTech Merger, which contributed $5.2 million in costs, (b) $1.6 million increase in installation services cost and (c) $0.8 million increase in property management cost, and (ii) a $4.9 million write-off of prepaid inventory deposits for components associated with non-cancellable purchase commitments to a contract manufacturer. The increases were partially offset by a $0.9 million decrease in hardware costs primarily due to efficiencies in supply chain management and lower unit costs related to prior-year inventory impairments.
Research and Development Expenses
Research and development expenses increased by $1.0 million for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase was primarily due to (i) a $3.6 million increase in compensation expense resulting from lower capitalization of internally-developed software costs, (ii) a $0.3 million increase in software license cost and (iii) a $0.2 million increase in compensation expense. The increases were partially offset by (i) a $0.9 million decrease in third-party expense associated with overlapping costs related to the transition of engineering contractors beginning in the second half of 2024 through the first half of 2025, (ii) a $0.8 million decrease in RSU expense, (iii) a $0.8 million decrease in severance costs related to restructuring in 2024, and (iv) a $0.6 million decrease in contract manufacturing cost.
Sales and Marketing Expenses
Sales and marketing expenses increased by $2.8 million for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase was primarily related to HelloTech, including a $2.5 million increase in compensation expense and a $0.7 million increase in digital marketing expense. The increases were partially offset by a $0.3 million decrease in severance costs related to restructuring in 2024.
General and Administrative Expenses
General and administrative expenses decreased by $20.4 million for the year ended December 31, 2025 compared to the year ended December 31, 2024. The decrease was primarily due to (i) a $9.7 million decrease in investigation, legal and settlement fees, (ii) a $4.9 million decrease in audit fees, (iii) a $3.3 million decrease in professional and consulting fees primarily related to accounting services, (iv) a $2.3 million decrease in compensation expense, (v) a $0.8 million decrease in office and rent expense, (vi) a $0.6 million decrease in taxes and license expense related to a sales tax refund in 2025, (vii) a $0.6 million decrease in severance costs related to restructuring in 2024, and (viii) a $0.5 million decrease in travel expense. The decreases were partially offset by a $1.8 million increase in stock compensation expense and $0.6 million increase in bad debt expense.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased by $1.9 million for the year ended December 31, 2025 compared to the year ended December 31, 2024. Property and equipment depreciation expense decreased by $0.8 million, amortization expense decreased by $0.7 million in 2025 related to intangible assets, and internal use depreciation decreased by $0.5 million.
Impairment of Goodwill
During the year ended December 31, 2025, we recorded a $16.6 million impairment of goodwill to our reporting unit, reducing the goodwill balance to $13.6 million as of December 31, 2025.
51
Table of Contents
Impairment of Intangibles Assets
During the year ended December 31, 2024, we recorded an impairment of $2.8 million related to the James ride share application.
Total Other (Expense) Income, Net
Total other (expense) income, net decreased by $2.8 million for the year ended December 31, 2025 compared to the year ended December 31, 2024. The decrease was primarily due to a $4.3 million decrease in interest income resulting from lower average principal investment balances, partially offset by a $1.0 million decrease in interest expense related to the significant financing component of longer-term software contracts and a $0.5 million decrease in interest expense related to the payoff of promissory notes in early 2024.
Liquidity and Capital Resources
We have incurred losses since our inception. To date, our principal sources of liquidity have been the net proceeds received as a result of the 2021 Business Combination and payments received from our customers.
As of December 31, 2025 and December 31, 2024, our unrestricted cash and cash equivalents and current and non-current available-for-sale securities were approximately $34.6 million and $75.4 million, respectively. Our available-for-sale securities investment portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. Our investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.
As of December 31, 2025 and December 31, 2024, we also had approximately $27.3 million and $30.5 million in net inventory, respectively.
Our short-term liquidity needs have primarily included working capital for salaries, including sales and marketing and research and development, as well as inventory purchases from our contract manufacturers.
Beginning in the second quarter of 2022 and continuing through the date of this Form 10-K, we have incurred, and may continue to incur, significant professional fees, primarily consisting of legal, forensic accounting, management consulting and related advisory services as a result of the Investigation and the SEC Investigation, as well as accounting related consulting services, independent registered accounting firm fees and advisory services related to the Restatement and comprehensive review of our previously issued financial statements. Additionally, we have incurred significant costs in connection with stockholder lawsuits. See Note 17. Commitments and Contingencies, in Part II, Item 8. “Financial Statements.” Such litigation involves significant defense and other costs and, if decided adversely to us or settled, has resulted or could result in significant monetary damages or expenditures. Although we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations, our insurance coverage does not cover all claims that have been or may be brought against us.
Near-Term Liquidity Position
As mentioned in Item 1A. “Risk Factors,” “The presence of various risks and uncertainties associated with our liquidity position may adversely affect our ability to sustain operations,”the following risks and uncertainties associated with our liquidity position may adversely affect our ability to sustain our operations as of the Filing Date:
•The continued incurrence of significant expenses related to legal and other professional services in connection with the SEC Investigation and the possibility that the SEC may levy civil penalties or fines;
•Potential expenditures associated with defending, negotiating or resolving the service provider demand described in Note 17. Commitments and Contingencies, in Part II, Item 8. “Financial Statements;”
•Unexpected expenditures related to the Derivative Actions;
•The incurrence of significant expenses related to other legal or regulatory proceedings, whether actual or threatened;
•The failure to achieve revenue expectations, including as a result of:
◦Pricing compression for our products;
◦Market adoption of the DOOR application;
◦The success of the HelloTech business;
◦The impact of elevated interest rates on potential customers, who may eliminate or delay expenditures for the products or services we offer; and
52
Table of Contents
◦Market perception of our offerings;
•Costs of revenue and operating expenses exceeding expectations;
•The failure to maintain the liquidity ratio required by the Loan Agreement;
•The inability to fully leverage prepaid inventory; or
•The catastrophic loss of inventory due to theft, natural disaster or otherwise.
Due to the risks and uncertainties described above, we continue to monitor our liquidity position. We recognize the challenge of maintaining sufficient liquidity to sustain our operations and remain in compliance with the liquidity ratio required by the Loan Agreement. However, notwithstanding our liquidity position as of the Filing Date, and while it is difficult to predict our future liquidity requirements with certainty, we expect to be able to use our current cash and cash equivalents and available-for-sale securities to fund our operational cash requirements for at least 12 months beyond the Filing Date. Other significant factors that affect our overall management of liquidity include certain actions controlled by management, such as capital expenditures and acquisitions. See Note 15. Leases, Note 16. Debt and Note 17. Commitments and Contingencies, in Part II, Item 8. “Financial Statements.”
In response to the risks and uncertainties described above, we may attempt to secure additional outside capital. However, we can provide no assurance we will be able to secure any outside capital in the future at all, or on terms that are acceptable. Additionally, our securities are currently traded on the OTCID Market. Because of applicable restrictions, there is a minimal public market for our securities, and our ability to raise additional capital may be impaired because of the less liquid nature of the over-the-counter markets. We plan to continue to closely monitor our cash flow forecast and, if necessary, may implement certain incremental cost savings measures to preserve liquidity.
Commitments and Contractual Obligations
We are obligated to make payments as part of certain contracts that we have entered into during the normal course of business. Following the Property Management Acquisitions, in February 2024 we entered into a three-year advisory agreement with a partner pursuant to which the partner provides DPM with certain management and advisory services related to DPM’s property management business. Pursuant to such agreement, we are required to pay the partner $0.5 million annually. As of December 31, 2025, we had a remaining obligation of $0.6 million under the advisory agreement.
Indebtedness
Promissory Notes
In connection with the July 2023 acquisition of Honest Day’s Work, Inc. (“HDW”), in July 2023 we issued to HDW’s stockholders as merger consideration $22.0 million aggregate principal amount of unsecured promissory notes (the “Promissory Notes”). The Promissory Notes accrued paid-in-kind interest at a rate of 10% per annum and were scheduled to mature on July 3, 2025, unless earlier accelerated in connection with an event of default (including certain events of delisting from Nasdaq) or change of control. On April 26, 2024, we repaid the Promissory Notes in full without penalty. We paid an aggregate of $23.9 million in principal and accrued interest to the holders of the Promissory Notes.
Term Loan with Customers Bank
On July 15, 2024, we entered into the Loan Agreement with Customers Bank. Pursuant to the Loan Agreement, Customers Bank issued the Loan, which is a term loan in the principal amount of $6.0 million. The Loan Agreement, which was entered into in connection with the HelloTech Merger, did not result in our receipt of any loan proceeds. Interest is payable on the Loan at a rate equal to the greater of (a) the prime rate published in The Wall Street Journal or (b) 6.0%, and the maturity date is July 15, 2029 (the “Maturity Date”).
Payments under the Loan were interest-only through January 15, 2025. Thereafter, we are required to pay equal monthly installments of principal plus accrued interest until the Maturity Date. There is no penalty for prepayment of the Loan.
Pursuant to the Loan Agreement, Customers Bank was granted security interests in substantially all of our assets, excluding intellectual property, and the Loan Agreement contains customary affirmative and negative covenants.
HelloTech is required to maintain an operating account with Customers Bank with a sufficient balance to support monthly payments. Additionally, we are required to maintain a liquidity ratio of at least 4.00, tested monthly, which is calculated as the quotient of our unrestricted cash and cash equivalents (subject to certain limitations with respect to cash of foreign subsidiaries), divided by all outstanding indebtedness owed to Customers Bank.
53
Table of Contents
The Loan Agreement contains various covenants that, among other things, limit our ability to:
• engage in certain asset dispositions;
• permit a change in control;
• merge or consolidate;
• incur indebtedness or grant liens on our assets;
• declare or pay dividends, distributions or redemptions;
• make loans or investments; and
• engage in certain transactions with affiliates.
If an event of default exists under the Loan Agreement, Customers Bank will be able to accelerate the maturity of the Loan and exercise other rights and remedies. Events of default include, but are not limited to, the following events:
• failure to pay any principal or interest within three business days of the due date;
• failure to perform or otherwise comply with the covenants and obligations in the Loan Agreement, subject, in certain instances, to certain grace periods;
• bankruptcy or insolvency events, or
• the rendering of judgments that remain undischarged, unvacated, unbonded, unsatisfied or unstayed for a certain period.
As of December 31, 2025 and December 31, 2024, the outstanding principal of the Loan was $4.8 million and $6.0 million, respectively. We were in compliance with the covenants under the Loan Agreement as of December 31, 2025 and December 31, 2024.
On July 15, 2024, in a private placement concurrent with the Loan Agreement, we issued a warrant to Customers Bank to purchase 1,000,000 shares of our common stock. The Bank Warrant has an exercise price of $1.25 per share, was exercisable upon issuance and will expire six years from the date of issuance, or July 15, 2030.
Cash Flows
The following table sets forth a summary of our cash flows for the years ended December 31, 2025 and 2024 (in thousands):
Year ended December 31,
Net cash used in operating activities $ (35,893) $ (75,406)
Net cash provided by investing activities 1,686 72,886
Net cash used in financing activities (1,223) (22,000)
Effect of exchange rates on cash (153) 48
Net change in cash and cash equivalents $ (35,583) $ (24,472)
Operating Activities. Net cash used in operating activities for the year ended December 31, 2025 decreased by $39.5 million compared to the year ended December 31, 2024. The decrease was primarily attributable to a $19.5 million reduction in net loss adjusted for non-cash items, a $19.3 million decrease in cash outflows resulting from the settlement in 2024 of an investment payable outstanding at December 31, 2023, and a $12.8 million decrease in inventory purchases. These favorable changes were partially offset by $7.2 million increase of cash payments related to accrued litigation settlements and $3.4 million of payments for audit services, and a $1.4 million unfavorable change in working capital primarily related to accounts payable, accounts receivable and other current liabilities. Management continues to focus on cost discipline, inventory management and liquidity preservation as it seeks to reduce operating cash usage.
Investing Activities. Net cash provided by investing activities decreased by $71.2 million for the year ended December 31, 2025 compared to the year ended December 31, 2024. Cash flows from investing activities primarily consist of the net purchases and sales of available-for-sale securities. The decrease was primarily attributable to the use of investment proceeds to fund operating losses, with the remaining proceeds reinvested in shorter-term securities classified as cash equivalents to maintain liquidity and preserve capital.
54
Table of Contents
Financing Activities. For the year ended December 31, 2025, net cash used in financing activities decreased by $20.8 million compared to the year ended December 31, 2024. The decrease represents the difference between the $22.0 million repayment of the Promissory Notes in 2024 and the $1.2 million of debt servicing related to the Loan during the year ended December 31, 2025.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2025 or 2024 that had, or were reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.
Critical Accounting Estimates
Our consolidated financial statements, which include estimates, have been prepared in accordance with GAAP. Our critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial condition or results of operations. In making these determinations, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. It is reasonably likely that changes in these estimates could occur from period to period and result in a material impact on our consolidated financial statements. A summary of each of these critical accounting estimates follows.
Stock-Based Compensation
We record stock-based compensation expense related to stock options based upon the award’s grant date fair value. We estimate the fair value of stock options using the Black-Scholes-Merton or Monte Carlo option-pricing model depending on the terms of the award. Both option-pricing models require estimates of highly subjective assumptions, which affect the fair value of each stock option.
The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of our stock options.
When using the Black-Scholes options pricing model, the expected term of stock options represents the period of time the stock options are expected to be outstanding based on the “simplified method.” Under the “simplified method,” the expected term of an option is presumed to be the mid-point between the vesting date and the end of the contractual term. We use the “simplified method” due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the stock options.
Since we have minimal trading history of our common stock, the expected stock price volatility was derived from the average historical stock volatility of several unrelated public companies within our industry that we consider to be comparable to our business over a period equivalent to the expected term of the awards.
The assumptions used in calculating the fair values of stock option grants represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. If material changes in these assumptions occur, they could have a material impact on our stock-based compensation expense.
Inventory Valuation
We regularly monitor inventory quantities on hand and in transit and reserve for excess and obsolete inventories using estimates based on historical and projected sales trends, specific categories of inventory and age of inventory. If actual conditions or product demands are less favorable than our assumptions, additional inventory reserves may be required.
Net inventories not expected to be sold according to a one year forecasted sales projection are classified as other non-current assets on the accompanying Consolidated Balance Sheets. Inventory on hand that exceeds a three year forecasted sales projection is recorded as an excess and obsolete inventory reserve. This reserve is comprised of inventory greater than can be used to meet future needs (excess) or for which the product is outdated or otherwise not expected to be sold (obsolete).
We also review our inventory to ensure that its carrying value does not exceed its net realizable value (“NRV”), with NRV based on the estimated selling price of inventory in the ordinary course of business, less estimated costs of completion, disposal and transportation. Each of these estimates requires management to make subjective and complex judgments. When our expectations indicate that the carrying value of inventory exceeds its NRV, we estimate the amount by which carrying
55
Table of Contents
value exceeds NRV and record additional cost of revenue for the difference. Should our estimates used in these calculations, such as sales forecasts, estimated selling prices or disposal costs, change, additional write-downs may occur.
Goodwill
Goodwill is tested for impairment annually as of December 31, or more frequently whenever events or circumstances make it more likely than not that an impairment may have occurred. The impairment test requires management to estimate the fair value of the Company’s single reporting unit and compare it to its carrying value.
To determine the fair value of the Company’s reporting unit, the estimated fair value is calculated as the Company’s business enterprise value (“BEV”), plus (i) cash and marketable securities, less (ii) debt, plus (iii) non-operating assets, net. Quoted market prices in active markets are typically the best evidence of fair value and should be used as the basis for the measurement, if available. However, due to the limited trading activity and price volatility of the Company’s common stock, which was trading on the OTC Expert Market as of the valuation date, together with the Company’s non-current filing status, management determined that trading prices did not represent a reliable indicator of fair value. Accordingly, the Company, together with a third-party valuation specialist, concluded that the income valuation approach using a discounted cash flow (“DCF”) methodology was the appropriate valuation technique. The DCF analysis estimates business enterprise value (“BEV”) based on projected future cash flows and an appropriate discount rate.
This DCF analysis requires significant judgment and assumptions, including with respect to projected revenue growth, operating margins, working capital requirements, terminal growth rate and discount rate. Small changes in these assumptions could materially affect the estimated fair value of the reporting unit and could result in additional impairment charges in future periods. We believe the assumptions and estimates used in the DCF analysis were reasonable and appropriate based on information known or knowable as of the valuation date.
For the year ended December 31, 2025, the Company performed the DCF analysis with the assistance of a third-party valuation specialist. The DCF analysis resulted in an estimated BEV of approximately $28.3 million. After adjusting for cash and cash equivalents of approximately $34.6 million and debt of approximately $4.8 million, the estimated fair value of the reporting unit was approximately $58.1 million.
Although projected operating cash flows supported a positive BEV, the estimated fair value as of December 31, 2025 declined compared to the prior year due to updated operating assumptions reflecting the Company’s 2025 performance and market conditions. In addition, total cash and cash equivalents declined significantly during the year, decreasing from $75.4 million at December 31, 2024 to $34.6 million at December 31, 2025. Because estimated fair value is determined by adjusting BEV for net cash, the decline in BEV combined with the materially reduced cash balance resulted in an estimated fair value below the Company’s carrying value of approximately $74.7 million As a result, the Company recorded a goodwill impairment charge of $16.6 million for the year ended December 31, 2025. At December 31, 2025, the balance of goodwill of $13.6 million remains recorded in the accompanying Consolidated Balance Sheet.
In the 2024 annual impairment test, estimated fair value exceeded the carrying value by approximately $24.5 million, or 22.1%, and therefore no impairment was recorded. The 2024 conclusion was supported by a higher net cash position and higher cash flows projections based on information available at the time.
We believe a market participant would consider our net cash position (cash less debt) as relevant in evaluating our BEV calculation. BEV was reasonably in line with our net cash position as of December 31, 2025, which corroborates our estimated fair value.
We also evaluated the assumptions used in our DCF calculation with the assistance of an independent third-party valuation specialist. We compared key operating metrics used in the DCF model to observable data from guideline public companies (“GPCs”). While EBITDA margins used in the calculation reflect improvement over prior years, the projected terminal EBITDA margin used in the model reflects profitability assumptions below those implied by GPCs, indicating that the model incorporates conservative operating margin expectations. Additionally, projected capital expenditures used in the DCF model were consistent with the Company’s historical levels and are within a reasonable range relative to the GPCs.
Based on this comparative analysis, management concluded that the operating assumptions used in the DCF valuation model were reasonable and not more optimistic than those implied by GPCs, supporting the estimated fair value of the reporting unit.
56
Table of Contents
Business Combinations
We account for business combinations using the acquisition method of accounting, in which the purchase price is allocated to the assets acquired and liabilities assumed and recorded at their estimated fair values at the date of acquisition. Management is required to make significant assumptions and estimates in determining the fair value of the assets acquired, particularly the intangible assets. Purchased intangible assets are primarily comprised of acquired trade names and customer relationships that are recorded at fair value at the date of acquisition. We utilize third-party valuation specialists to assist us in the determination of the fair value of the intangibles. The fair value of acquired trade names is determined using the relief-from-royalty method, which relies on the use of estimates and assumptions about projected revenue growth rates, royalty rates and discount rates. The fair value of customer relationships is determined using the multi-period excess earnings method, which relies on the use of estimates and assumptions about projected revenue growth rates, customer attrition rates, profit margins and discount rates. Intangible assets are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight-line method. Determining the useful lives of intangible assets also requires management to make various assumptions and is inherently uncertain. There is a measurement period of up to one year in which to finalize the fair value determinations, and preliminary fair value estimates may be revised if new information is obtained during this period.
Litigation
We are subject to various legal proceedings, investigations and claims. We routinely assess the likelihood of any adverse judgments or outcomes of these matters, as well as ranges of probable losses. A determination of the amount of the accruals required, if any, for these contingencies is made after analysis of each known issue. The analysis, which involves the advice of counsel, includes consideration of various factors such as the amount and timing of any potential exposure, interpretations of applicable laws, regulations or contractual terms, the likelihood or status of proceedings, the merits of the arguments, negotiations or discussions with the applicable counterparties and results of similar fact patterns experienced by us or third parties. Accruals are subject to change based upon changes in the above factors. Certain of the accrued expenses on the accompanying Consolidated Balance Sheet as of December 31, 2025 associated with the Derivative Actions are based upon a settlement amount agreed to between the applicable parties that remains subject to court approval. However, in the event court approval does not occur, the expense amount is subject to change.
Recent Accounting Pronouncements
See Note 25. Recently Issued Accounting Standards, in Part II, Item 8. “Financial Statements” for information about recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
57
Table of Contents
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 243) 59
Consolidated Balance Sheets as of December 31, 2025 and 2024 61
Notes to Consolidated Financial Statements 65
58
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Latch, Inc.
Olivette, Missouri
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Latch, Inc. (the “Company”) as of December 31, 2025 and 2024, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2025 and 2024, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Transactions
As disclosed in Note 2 and Note 5 to the consolidated financial statements, the Company’s total revenue was $70.12 million for the year ended December 31, 2025. The Company recognizes revenue (i) at a point in time upon transfer of control for hardware sales, (ii) over the term of the subscription period beginning when control of the promised service is transferred to the customer for software sales, and (iii) over the period services are provided for professional services.
59
Table of Contents
We identified the auditing of the accuracy and existence of hardware, software and professional services revenue transactions as a critical audit matter. Auditing the accuracy and existence of each revenue stream was especially challenging due to the audit effort in performing procedures related to testing the accuracy and existence of the hardware, software and professional services revenue transactions given the significance of net revenue and the large volume of transactions.
The primary procedures we performed to address this critical audit matter included:
–Evaluating the accuracy and existence of revenue transactions, on a sample basis, by obtaining and inspecting customer contracts and comparing to supporting documentation to assess the appropriateness of the transactions.
–Confirming directly with customers, on a sample basis, pricing, terms and delivery of software and professional services contracts and performing alternative procedures for confirmations not received.
–Recalculating sales prices on a sample basis based on the terms and conditions of underlying contracts.
Annual Goodwill Impairment Testing
As disclosed in Note 2 to the consolidated financial statements, goodwill is assessed for impairment annually, or more frequently if indicators arise. The Company's quantitative evaluation of goodwill for impairment involves the comparison of the fair value of the reporting unit to its carrying value. Fair value was calculated as the Company’s business enterprise value (“BEV”), plus (i) cash and marketable securities, less (ii) debt, plus (iii) non-operating assets, net. The Company used the income approach to develop and calculate the BEV.
We identified certain assumptions used in determining the fair value of the Company’s BEV for the quantitative impairment test as a critical audit matter. The principal consideration for our determination is the significant judgment used to evaluate certain assumptions, specifically (i) projected operating expenses for a certain year and (ii) selected discount rate. Auditing these assumptions involved especially challenging auditor judgment and effort, including the extent of specialized skills and knowledge required.
The primary procedures we performed to address this critical audit matter included:
–Evaluating management’s estimate of projected operating expenses for a certain year utilizing assumptions based on the Company’s historical results and their planned course of action.
–Utilizing personnel with specialized knowledge and skill with valuation to assist in evaluating the reasonableness of the selected discount rate.
We have served as the Company’s auditor since 2025.
/s/ BDO USA, P.C.
St. Louis, MO
March 31, 2026
60
Table of Contents
Latch, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share amounts)
Assets
Current assets
Available-for-sale securities — 5,187
Prepaid expenses and other current assets 7,098 30,523
Property and equipment, net 835 1,073
Internally-developed software, net 8,382 10,748
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt 1,314 1,314
Other non-current liabilities 2,077 2,251
Commitments and contingencies (see Note 17)
Stockholders’ equity
Treasury stock (1) (1)
Accumulated other comprehensive income 39 21
Total liabilities and stockholders’ equity $ 106,802 $ 196,424
(1)Shares issued and outstanding as of December 31, 2025 and December 31, 2024 exclude 738,000 shares subject to vesting requirements held by TS Innovation Acquisitions Sponsor, L.L.C. (the “Sponsor”) related to the 2021 business combination (the “Sponsor Shares”).
See accompanying notes to the consolidated financial statements.
61
Table of Contents
Latch, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
Year ended December 31,
Revenue
Cost of revenue(1)
Operating expenses
Depreciation and amortization 5,277 7,202
Impairment of goodwill 16,600 —
Impairment of intangible assets, net — 2,849
Other (expense) income, net
Change in fair value of warrant liability 18 159
Interest (expense) income, net (1,113) 1,416
Total other (expense) income, net (1,026) 1,820
Provision for income taxes — 2
Other comprehensive income (loss)
Unrealized loss on available-for-sale securities (12) (35)
Foreign currency translation adjustment 30 8
Net loss per common share:
Basic and diluted net loss per common share $ (0.34) $ (0.37)
Weighted average shares outstanding:
(1)Exclusive of depreciation and amortization shown in operating expenses.
See accompanying notes to the consolidated financial statements.
62
Table of Contents
Latch, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(in thousands)
Shares Amount
Tax withholdings on settlement of equity awards (1,770) — — — — — —
Repurchase or restricted common stock (15,260) — 1 (1) — — —
Foreign translation adjustment — — — — 8 — 8
Stock-based compensation — — (331) — — — (331)
Unrealized loss on available-for-sale securities — — — — (35) — (35)
Foreign translation adjustment — — — — 30 — 30
Stock-based compensation — — 557 — — — 557
Unrealized loss on available-for-sale securities — — — — (12) — (12)
(1)Shares issued and outstanding exclude 738,000 Sponsor Shares subject to vesting requirements.
See accompanying notes to the consolidated financial statements.
63
Table of Contents
Latch, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31,
Operating activities
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 5,277 7,202
Non-cash interest income (161) (1,196)
Change in fair value of warrant liability (18) (159)
Realized loss on available-for-sale securities — 1
Change in unrealized (income) loss on marketable securities (9) 91
Impairment of goodwill 16,600 —
Impairment loss on intangible assets — 2,849
Provision for expected credit losses, net of recoveries 359 (144)
Provision for credit losses on contract assets (14) (134)
Stock-based compensation expense 551 (580)
Changes in assets and liabilities (excluding effects of acquisitions)
Prepaid expenses and other current assets 23,446 4,717
Other current liabilities (302) (1,841)
Other non-current liabilities (118) 43
Net cash used in operating activities (35,893) (75,406)
Investing activities
Purchase of available-for-sale securities (6,656) (20,293)
Business acquisitions, net of cash acquired — (950)
Purchase of property and equipment (79) (766)
Proceeds from sale of fixed assets 28 —
Capitalized internally-developed software (3,608) (6,141)
Net cash provided by investing activities 1,686 72,886
Financing activities
Repayment of term loan (1,223) —
Repayment of unsecured promissory notes — (22,000)
Net cash used in financing activities (1,223) (22,000)
Effect of exchange rates on cash (153) 48
Net change in cash and cash equivalents (35,583) (24,472)
Cash and cash equivalents
Supplemental disclosure of cash flow information
Cash paid during the year for:
Income taxes $ (8) $ 4
Supplemental disclosure of non-cash investing and financing activities
Net assets acquired as part of business acquisitions $ — $ 2,067
Debt assumed/issued as part of business acquisitions $ — $ 6,000
See accompanying notes to the consolidated financial statements.
64
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
1.DESCRIPTION OF BUSINESS
Latch, Inc. (collectively with its subsidiaries, the “Company”) is a technology company delivering an integrated ecosystem of hardware, software and services designed to enhance operations and experiences within buildings, primarily serving the multifamily rental market.
On June 4, 2021, the Company consummated a merger by and among the Company (formerly known as TS Innovation Acquisitions Corp. (“TSIA”)), Latch Systems, Inc. (“Legacy Latch”) and Lionet Merger Sub Inc., a wholly-owned subsidiary of TSIA (“Merger Sub”), pursuant to which Merger Sub merged with and into Legacy Latch, with Legacy Latch becoming a wholly-owned subsidiary of the Company (the “2021 Business Combination”). In connection with the 2021 Business Combination, the Company changed its name from TS Innovation Acquisitions Corp. to Latch, Inc.
In July 2023, the Company completed its acquisition of Honest Day’s Work, Inc. (“HDW”) in order to acquire HDW’s technology assets to accelerate the development of the Company’s platform, enable the Company to offer resident services and incorporate HDW’s team members (the “HDW Acquisition”). In connection with the HDW Acquisition, the Company formed two subsidiaries, one of which was the surviving entity of the HDW Acquisition and was renamed Honest Day’s Work, LLC.
In January 2024, in connection with the acquisition of a property management business, the Company formed Door Property Management, LLC (“DPM”). In June 2024, the Company formed a subsidiary into which HelloTech, Inc. (“HelloTech”) merged as the surviving entity (the “HelloTech Merger”). HelloTech is a service platform delivering on-demand, last-mile installation, setup and connected device support. The HelloTech platform, in combination with the technology Latch acquired in the HDW Acquisition, supports the Company’s professional services offering.
In August 2025, the Company rebranded as DOOR, although its legal name remains Latch, Inc. In connection with the rebrand to DOOR, Latch Systems, Inc., the Company’s primary operating entity and a wholly-owned subsidiary, changed its name to DOOR Systems, Inc. (“Legacy Latch” or “DOOR Systems,” as the context requires). The Company, referred to herein interchangeably as “Latch” or “DOOR,” operates as one reportable segment and derives revenues primarily from operations in North America.
Investigation and Restatement
During the quarter ended June 30, 2022, the audit committee of the Company’s board of directors (the “Board”) commenced an investigation (the “Investigation”) of certain of the Company’s key performance indicators and revenue recognition practices, including the accounting treatment, financial reporting and internal controls related thereto. Following the Investigation, the Company completed a comprehensive review of its previously issued financial statements (the “Financial Statement Review”). The Company identified errors related to, among other items: (i) revenue recognition on hardware and software sales, (ii) revenue recognition and billing on software licenses, (iii) recognition of various expenses, and (iv) errors in certain key performance indicators, including “bookings” and related metrics. As a result of the Investigation and Financial Statement Review, the Company restated certain of its financial statements (the “Restatement”) in its Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”).
Liquidity Position
The Company has incurred losses since the Company’s inception. Prior to the closing of the 2021 Business Combination, the Company’s operations were financed primarily through net proceeds from the issuance of the Company’s redeemable convertible preferred stock and convertible notes, as well as borrowings under the Company’s term loan. The Company received approximately $450.0 million in cash proceeds, net of fees and expenses funded in connection with the 2021 Business Combination, which included approximately $192.6 million from the sale of approximately 19.3 million newly-issued shares of common stock in connection with the 2021 Business Combination.
As of December 31, 2025 and 2024, the Company’s unrestricted cash and cash equivalents and available-for-sale securities were approximately $34.6 million and $75.4 million, respectively. The Company’s available-for-sale securities investment
65
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss.
Historically, the Company’s short-term liquidity needs have primarily included working capital for salaries, including sales and marketing and research and development, as well as component inventory purchases from the Company’s contract manufacturers. Beginning in the second quarter of 2022 and continuing through 2026, the Company has incurred, and may continue to incur, significant professional fees, primarily consisting of legal, forensic accounting, management consulting and related advisory services as a result of the Investigation and the SEC Investigation (as defined below), as well as accounting related consulting services, independent registered accounting firm fees and advisory services related to the Restatement and the Financial Statement Review. Additionally, the Company has incurred significant costs in connection with various pending litigation. Such litigation involves significant defense and other costs and, if decided adversely to the Company or settled, has resulted or could result in significant monetary damages or expenditures. Although the Company maintains insurance coverage in amounts and with deductibles that it believes are appropriate for its operations, its insurance coverage does not cover all claims that have been or may be brought against it.
In light of the Company’s liquidity position described above, the Company may attempt to secure additional outside capital. However, the Company can provide no assurance it will be able to secure any outside capital in the future at all, or on terms that are acceptable to the Company. Additionally, the Company’s securities are currently traded on the OTC Markets Group Inc.’s (“OTC”) OTCID Basic Market (the “OTCID Market”). Because of applicable restrictions, there is a minimal public market for the Company’s securities, and the Company’s ability to raise additional capital may be impaired because of the less liquid nature of the over-the-counter markets.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of Latch, Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated in consolidation.Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications would not have a material effect on the reported financial results.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expense during the reporting period. Significant estimates are used when accounting for stock-based compensation, inventory valuation, goodwill and intangible asset impairments, business combinations and litigation. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when facts and circumstances dictate. These estimates are based on information available as of the date of the consolidated financial statements; actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash and cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. As of December 31, 2025 and 2024, cash consisted primarily of funds held in the Company’s checking accounts, money market funds and commercial paper. The Company considers these money market funds and commercial paper to be Level 1 or Level 2 financial instruments based on availability of quoted prices.
In addition, the Company’s cash and cash equivalents are maintained at financial institutions in amounts that exceed federally insured limits. To date, the Company has not recognized any losses caused by uninsured balances.
66
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
Marketable Securities
The Company’s investments in marketable securities are classified and accounted for as available-for-sale and consist of high quality asset-backed securities, commercial paper, corporate bonds and U.S. Government debt securities. The Company’s marketable securities with remaining effective maturities of 12 months or less from the balance sheet date are classified as current; otherwise, they are classified as non-current on the accompanying Consolidated Balance Sheets. Commercial paper and corporate bonds and U.S. Government debt securities are classified as current assets while asset-backed securities are classified as non-current assets. Unrealized gains and losses on marketable securities classified as available-for-sale are recognized in other comprehensive income (loss). The Company periodically evaluates its investments to determine if impairment charges are required.
Accounts Receivable, Net and Contract Balances
The Company classifies its right to consideration in exchange for deliverables as either a receivable or a contract asset.
Accounts Receivable, Net
A receivable is a right to consideration that is unconditional. The Company recognizes accounts receivable when the right to consideration is unconditional, such that only the passage of time is required before payment is due. The Company extends credit based on an evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts outstanding longer than the contractual payment terms are considered past due. The fair value of accounts receivable approximates book value due to the short-term nature of the payment terms. Accounts receivable are stated at net realizable value, which represents the face value of the receivable less (i) an allowance for expected credit losses and (ii) a reserve for returns (see “—Revenue Recognition”).
The Company recognizes an accounts receivable allowance based on estimates of expected credit losses. The Company estimates the total expected credit loss over the lifetime of the receivables using historical loss data and by applying a loss-rate method using relevant available information from internal and external sources, including historical write-off activity, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in economic conditions. When certain amounts are deemed uncollectible, those balances are reserved in full.
The allowance for expected credit losses is measured on a pooled basis when similar risk characteristics exist. When assessing whether to measure certain financial assets on a pooled basis, the Company considers various risk characteristics, including the financial asset type, size and historical or expected credit loss pattern. The Company has considered customer identity, customer type and product lines and determined that further segmentation of the accounts receivable would not yield a materially different credit loss allowance. The Company only segments its receivables based on the age of the outstanding balance.
Contract Balances
The Company enters into contracts with its customers, which may give rise to contract assets (unbilled receivables) and contract liabilities (deferred revenue) due to timing differences between revenue recognition and billing.
Contract assets (unbilled receivables) represent amounts for which the Company has recognized revenue for contracts that have not yet been invoiced to customers where there is a remaining performance obligation. For hardware contracts, customers are billed after shipment of the hardware, with payment typically due within 45 days of the receipt of the invoice. For software contracts, customers are typically billed in advance of services on either an annual or monthly basis over the contract term. Payment is due within 30 days of the receipt of the invoice. For installation contracts, customers are billed after the service has been performed, with payment typically due within 30 days of the receipt of the invoice.
Unbilled receivables are recognized when the Company (i) provisions software access, (ii) provides services or (iii) ships hardware, in each case in advance of billing. The Company estimates and recognizes its expected credit losses on unbilled receivables. The Company presents its contract assets (unbilled receivables) net of any expected credit losses within prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets.
The Company records contract liabilities (deferred revenue) when the Company bills customers in advance of the performance obligations being satisfied, which is generally the case for the Company’s software contracts.
67
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
Inventories, Net
Inventories, net consist of raw materials and finished goods and are stated at the lower of cost or net realizable value with cost being determined using the average cost method. Finished goods are purchased from contract manufacturers and component suppliers.
The Company periodically assesses the valuation of inventory and writes down the value for estimated excess and obsolete inventory to their net realizable value based upon estimates of future demand and market conditions, when necessary. Net inventories in excess of one year of historical sales are classified as other non-current assets on the accompanying Consolidated Balance Sheets. Inventory on hand that exceeds a three year forecasted sales projection is recorded as an excess and obsolete inventory reserve. This reserve is comprised of inventory greater than the amount that can be used to meet future needs (excess) or for which the product is outdated or otherwise not expected to be sold (obsolete).
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are recorded at cost and primarily consist of prepaid inventory, unbilled receivables, insurance receivables and other various payments that the Company has made in advance for goods or services to be received in the future. Prepaid inventory charges are incurred to secure the production of inventory prior to delivery. Upon delivery of the inventory, these amounts are reclassified from prepaid inventory to the appropriate inventory accounts on the accompanying Consolidated Balance Sheets. Insurance receivables are collected from third-party insurance providers for covered litigation matters once applicable retentions or deductibles have been satisfied.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation.Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows:
Useful lifein years
Office furniture 5
Computers and equipment 3 - 5
Vehicles 5
Leasehold improvements 10
The Company capitalizes the cost of pre-production tooling that it owns. Pre-production tooling that the Company will not own or that will not be used in producing products under long-term supply arrangements, including the related engineering costs, is expensed as incurred.
Internally-Developed Software, Net
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 a project has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the application is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing, at which time amortization of the capitalized software begins. The Company also capitalizes costs related to specific software upgrades and enhancements when it is probable the expenditures will result in additional features and functionality. Internally-developed software is amortized on a straight-line basis over its estimated useful life, generally three to five years.
When the Company determines that a planned feature is discontinued or will not be implemented, costs are expensed. Maintenance costs are also expensed as incurred.
68
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
Goodwill
Goodwill is measured as the excess of consideration transferred over the fair value of the net assets acquired in the Company’s prior acquisitions. Goodwill reflects the value of expected synergies between the combined operations and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset.
Goodwill is tested for impairment annually as of December 31 or more frequently whenever events or circumstances make it more likely than not that an impairment may have occurred. Application of the goodwill impairment test requires significant judgment in several areas. Because the Company operates as a single reporting unit, the goodwill impairment test primarily involves estimating the fair value of that reporting unit and comparing it to its carrying value.
Under applicable accounting guidance, the Company has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying value. If the qualitative assessment leads to a determination that the reporting unit’s fair value is less than its carrying value, or if the Company elects to bypass the qualitative assessment altogether, it is then required to perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing the fair value with carrying value. The Company elected to bypass the qualitative assessment and proceed directly to a quantitative assessment.
To determine the fair value of the Company’s reporting unit, the estimated fair value is calculated as the Company’s business enterprise value (“BEV”), plus (i) cash and marketable securities, less (ii) debt, plus (iii) non-operating assets, net. The Company estimated the fair value of its reporting unit using the income approach, a discounted cash flow methodology, based on the present value of expected future cash flows.
The income approach estimates BEV using cash flow projections developed by management that are discounted to reflect relative risk. These discounted cash flow projections are calibrated to reflect market participant assumptions for valuation purposes and may differ from internal operating projections, as they incorporate risk-adjusted growth and margin expectations consistent with Accounting Standards Codification (“ASC”) 820, Fair Value Measurement (“ASC 820”). The projections used in the valuation reflect assumptions that market participants would use in pricing the reporting unit as of the measurement date and are based on information known or knowable as of the valuation date.
The key assumptions used in the analysis include, but are not limited to, projected revenue, projected operating expenses, working capital requirements, terminal growth rate, discount rate, revenue multiple and EBITDA multiple. Small changes in these assumptions could materially affect the estimated fair value of the reporting unit and could result in additional impairment charges in future periods. The discount rate incorporates a company specific risk premium (“CSRP”), which represents the incremental return that investors may require to compensate for the risks and uncertainties in the estimated future cash flows of such company. The discounted cash flow analysis incorporated significant unobservable inputs and therefore represents a Level 3 fair value measurement within the fair value hierarchy under ASC 820. The Company believes the assumptions and estimates used in the discounted cash flow analysis were reasonable and appropriate based on information known or knowable as of the valuation date.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, in which the purchase price is allocated to the assets acquired and liabilities assumed and recorded at their estimated fair values at the date of acquisition. Management is required to make significant assumptions and estimates in determining the fair value of the assets acquired, particularly the intangible assets. Purchased intangible assets are primarily comprised of acquired trade names and customer relationships that are recorded at fair value at the date of acquisition. The Company utilizes third-party valuation specialists to assist it in the determination of the fair value of the intangibles. The fair value of acquired trade names and developed technology is determined using the relief-from-royalty method, which relies on the use of estimates and assumptions about projected revenue growth rates, royalty rates and discount rates. The fair value of customer relationships is determined using the multi-period excess earnings method, which relies on the use of estimates and assumptions about projected revenue growth rates, customer attrition rates, profit margins and discount rates. Intangible assets are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight-line method. Determining the useful lives of intangible assets also requires management to make various assumptions and is inherently uncertain. There is a measurement period of up to one year in which to finalize the fair value determinations, and preliminary fair value estimates may be revised if new information is obtained during this period.
69
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
Intangible Assets, Net
Intangible assets, net are recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives using the straight-line method. The Company evaluates long-lived intangible assets for impairment whenever events or circumstances indicate that it is more likely than not that an impairment may have occurred. To estimate fair value, the Company considers both entity-specific factors and observable market data, in accordance with ASC 820. The valuation incorporates significant unobservable inputs and therefore represents a Level 3 fair value measurement. The analysis relies on assumptions that market participants would use in pricing the reporting unit, including projected revenue growth rates, operating margins, discount rate, terminal growth rate and the selection of guideline public companies. The assumptions used were based on information known or knowable as of the valuation date. Changes in these assumptions or in market conditions could materially affect the estimated fair value.
Leases
The Company accounts for its leases in accordance with ASC Topic 842, Lease Accounting (“ASC 842”). ASC 842 requires that leases be evaluated and classified as operating or finance leases for financial reporting purposes. The Company determines if an arrangement contains a lease at contract inception. As part of the lease determination process, the Company assesses several factors, including, but not limited to, whether there is a right to control and direct the use of the asset and whether the other party has a substantive substitution right. As the Company’s leases generally do not have identical or nearly identical contract provisions, the Company accounts for each of its leases at the contract level.
The Company recognizes a right-of-use (“ROU”) asset and lease liability at the lease commencement date and thereafter. ROU assets represent the right to use an underlying asset for the term of the lease, and lease liabilities represent the obligation to make lease payments throughout the term of the lease. The lease terms include any renewal options and termination options that the Company is reasonably assured to exercise, if applicable.
The Company’s leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate (“IBR”) based on the information available at the lease commencement date in determining the present value of future payments for those leases. The IBR is the rate of interest that the Company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of comparable value to the ROU asset in a similar economic environment. IBR therefore reflects what the Company “would have to pay,” which requires estimation when no observable rates are available or where the applicable rates need to be adjusted to reflect the terms and conditions of the lease. In calculating its IBR, the Company considers observed debt rates and the significant financing component of longer-term software contracts. The Company’s leases are generally not sensitive to changes in IBR due to their relatively short terms.
ROU assets resulting from operating leases are recorded within other non-current assets, and lease liabilities from operating leases are recorded within current liabilities and non-current liabilities, on the accompanying Consolidated Balance Sheets. The lease liability is calculated as the present value of the remaining future lease payments over the lease term, including reasonably assured renewal options.
The Company has made the policy election to not separate lease and non-lease components for any of its leases within its existing classes of assets. The Company will evaluate this election for any new leases involving a new underlying class of asset. The Company has also made the policy election to not recognize a lease liability or ROU asset for any leases with a term of 12 months or less. These lease payments are recognized on a straight-line basis over the lease term.
The Company has evaluated lease renewal options on a contract-by-contract basis to determine whether specific circumstances would result in the conclusion that any options are reasonably certain to be exercised. Generally, the Company does not enter into lease arrangements where the option to renew or terminate a lease is controlled by the lessor.
Rent expense is allocated among cost of revenue, research and development, sales and marketing, and general and administrative, based on the use of the underlying leased property.
Revenue
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following steps: (i) identify contracts with customers; (ii) determine whether the promised goods or
70
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
services are performance obligations; (iii) measure the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) the Company satisfies each performance obligation.
The Company determines that a contract exists when an agreement with a customer creates legally enforceable rights and obligations, which occurs when a contract has been approved by both parties, the parties are committed to perform their respective obligations, each party’s rights and payment terms are clearly identified, commercial substance exists and it is probable that the Company will collect the consideration to which it is entitled.
The Company identifies a performance obligation in a contract for each promised good that is separately identifiable from other promises in the contract and for which the customer can benefit from the good. The Company currently generates its revenues from three primary sources: (i) sales of hardware devices, (ii) licenses of software products, and (iii) professional services. The Company has determined the following goods and services to be distinct performance obligations because they can be and generally are sold by the Company on a standalone basis, and because other vendors sell similar technologies and services on a standalone basis.
Hardware
The Company generates hardware revenue primarily from the sale of its portfolio of devices. The Company sells hardware to customers, which include real estate developers, builders, building owners and property managers, directly or through its channel partners, who act as intermediaries, installers or wholesalers. The Company recognizes hardware revenue when control of the hardware has been transferred to the customer. The Company has determined that control transfers to a customer when hardware is shipped, as the Company’s standard delivery terms are Free on Board (“FOB”) Shipping Point. Certain customers may request FOB Destination, in which case control transfers to the customer upon delivery to the requested destination.
The Company generally 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 or refund warrantable devices. The Company determined these warranties are not separate performance obligations as they cannot be purchased separately and do not provide a service in addition to an assurance the hardware will function as expected. The Company records a reserve as a component of cost of hardware revenue based on historical costs of replacement units for returns of defective products. For the years ended December 31, 2025 and 2024, the reserve recorded for hardware warranties was approximately 3% and 3%, respectively, of cost of hardware revenue. The Company also provides certain customers a right of return for non-defective product, which is treated as a reduction of hardware revenue based on the Company’s expectations and historical experience. For the years ended December 31, 2025 and 2024, the allowance for returns resulted in a recovery of revenue of $0.1 million and $0.5 million, respectively.
Software
The Company generates software revenue primarily through the license of its software-as-a-service (“SaaS”) cloud-based platform to customers on a subscription-based arrangement, as well as from the resale of third-party software in connection with HelloTech services. Subscription fees vary depending on the features selected by customers as well as the term. SaaS arrangements generally have term lengths of one, two, five or ten years and include a fixed fee generally paid in advance, annually or monthly. When significant discounts are provided to customers on the longer-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 therefore has recorded the interest expense in interest expense, net on the accompanying Consolidated Statements of Operations and Comprehensive Loss. The interest expense related to the significant financing component is recorded using the effective interest method, which has higher interest expense at inception and declines over time to match the underlying economics of the transaction. The amount of interest expense related to this component was $2.5 million and $3.5 million for the years ended December 31, 2025 and 2024, respectively.
The SaaS licenses provided by the Company are considered stand-ready performance obligations where customers benefit from the services evenly throughout the service period. Revenue generally is recognized ratably over the subscription period beginning when or as control of the promised services is transferred to the customer.
71
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
Professional Services
The Company generates professional services revenue in three primary ways: (i) by facilitating smart access hardware installation and activation to multifamily building customers, (ii) through fees generated by installation and other services performed through the HelloTech platform, and (iii) through property management services performed by DPM for its multifamily building customers.
The Company provides smart access hardware installation and activation services to select customers. The revenues associated with these services are recognized over time based on a percentage of the installation completed and represent a transfer of services to a customer under contract.
Through the HelloTech platform, a network of independent contractors provides in-home technology services and support such as installation, repair and troubleshooting. Orders placed through the HelloTech platform are recognized as revenue as services are completed over time. Customers may purchase a HelloTech subscription for discounted in-home services. Subscription revenues are recognized ratably over the subscription term.
DPM provides property management services, including operating DPM customers’ buildings, which involves maintenance and repair, construction management, leasing and administrative services, typically pursuant to a property management agreement with an annual term. Property management service revenues are recognized ratably over the service period.
For each performance obligation identified, the Company estimates the standalone selling price, which represents the price at which the Company would sell the good or service separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price, taking into account available information such as market conditions, historical pricing data and internal pricing guidelines related to the performance obligations. The Company uses an observable selling price for hardware and software performance obligations and applies the residual approach for professional services obligations related to activation and installation of hardware. For subscription revenues through the HelloTech platform, the Company uses a cost-plus estimated margin approach for software obligations and an observable selling price for professional services.
The Company then allocates the transaction price among those obligations based on the estimation of standalone selling price. Historically for software revenue, the Company determined a significant financing component exists, as described below.
Deferred Contract Costs
The Company capitalizes commission expenses that are incremental to obtaining customer software contracts. Costs related to the initial signing of software contracts are amortized over the average customer life, which has been estimated to be ten years based upon contract duration, including renewals and extensions. Amounts expected to be recognized within one year of the balance sheet date are recorded as deferred contract costs, current and are included in prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets; the remaining portion is recorded as deferred contract costs, non-current and is included in other non-current assets on the accompanying Consolidated Balance Sheets. Amortization expense is included in sales and marketing expense on the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Cost of Revenue
Cost of hardware revenue consists primarily of product costs, including manufacturing costs, duties and other applicable importation 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. Costs of hardware revenue also include charges related to lower of cost or net realizable value adjustments and reserves for excess inventory and non-cancellable purchase commitments.
Cost of software revenue consists primarily of outsourced hosting costs and personnel-related expenses associated with monitoring and managing outsourced hosting service providers.
Cost of professional services revenue consists primarily of (i) third-party installation labor costs and parts and materials, (ii) labor costs associated with HelloTech independent technicians and credit card fees and (iii) costs related to third-party property service providers.
72
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
Cost of revenue excludes depreciation and amortization shown in operating expenses.
Research and Development
Research and development (“R&D”) expense consists primarily of personnel and related expenses for employees working on 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 third-party contract manufacturers for tooling, engineering and prototype costs of hardware products, fees paid to third-party consultants, R&D supplies, rent and restructuring costs. R&D costs that do not meet the criteria for capitalization are expensed as incurred.
Sales and Marketing
Sales and marketing expense consists primarily of personnel and related expenses for employees working on 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 advertising), professional fees, rent, restructuring costs and customer support.
General and Administrative
General and administrative expense consists primarily of personnel and related expenses for 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, Investigation and Restatement costs, restructuring costs, bad debt expense and insurance costs.
Total legal fees were $4.1 million and $13.7 million for the years ended December 31, 2025 and 2024, respectively.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of depreciation expense related to investments in property and equipment, internally-developed software and intangible assets.
Impairment of Long-Lived Assets other than Goodwill and Intangible Assets
The Company assesses long-lived assets for impairment in accordance with the provisions of ASC 360, Property, Plant and Equipment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. The amount of impairment loss, if any, is measured as the difference between the carrying value of the asset and its estimated fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary.
Restructuring
Costs associated with a restructuring plan generally consist of involuntary employee termination benefits, contract termination costs and other exit-related costs, including costs to close facilities. The Company records a liability for involuntary employee termination benefits when management has committed to a plan that establishes the terms of the arrangement and that plan has been communicated to employees. Costs to terminate a contract before the end of the term are recognized on the termination date, and costs that will continue to be incurred for the remaining term of a contract without economic benefit are recognized as of the cease-use date. Restructuring and related costs may also include the write-down of related assets, including operating lease ROU assets, when the sale or abandonment of the asset is a direct result of the plan. Other exit-related costs are recognized as incurred. Restructuring and related costs are recognized as an operating expense on the accompanying Consolidated Statements of Operations and Comprehensive Loss and are classified based on the Company’s classification policy for each category of operating expense.
Other (Expense) Income, Net
Other (expense) income, net consists of interest expense associated with the significant financing component of the Company’s longer-term software contracts, interest expense associated with the Company’s debt financing arrangements,
73
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
interest income on highly liquid short-term investments, and gain or loss on change in fair value of derivatives, warrant liabilities and trading securities.
Interest (expense) income, net is summarized as follows:
Year ended December 31,
Interest (expense) income, net $ (1,113) $ 1,416
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2025 and 2024, the Company recorded a full valuation allowance against its deferred tax assets.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in estimate occurs.
Stock-Based Compensation
The Company uses the Black-Scholes-Merton (“Black-Scholes”) option-pricing model to determine the fair value of stock options that vest over time. The Black-Scholes option-pricing model requires the use of the following highly subjective assumptions to determine the fair value of stock options:
•Expected Volatility—The Company estimates volatility for option grants by evaluating the average historical volatility of a peer group of companies for the period immediately preceding the option grant for a term that is approximately equal to the option’s expected term.
•Expected Term—The expected term of the Company’s options represents the period that the stock-based awards are expected to be outstanding. The Company has elected to use the midpoint between the stock option’s vesting term and contractual expiration period to compute the expected term, as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior.
•Risk-Free Interest Rate—The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a term that is equal to the option’s expected term at the grant date.
•Dividend Yield—The Company has not declared or paid dividends to date and does not anticipate declaring dividends. As such, the dividend yield has been estimated to be zero.
The Company estimates the fair value and requisite service period of performance-vesting stock option awards as of the grant date based on the Monte Carlo simulation model with the assistance of an independent third-party valuation specialist. The Monte Carlo simulation model is built on certain assumptions, including stock price volatility. The model included 100,000 iterations and various inputs including:
Starting stock price $0.40
Selected volatility 75%
Risk-free interest rate 3.85%
Dividend yield 0%
74
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
The Company cannot predict the prices at which its common stock will trade in the future, and achievement of market conditions may occur in periods different than estimated. Compensation costs related to awards with market conditions are recognized on a straight-line basis over the requisite service period regardless of whether the market condition is satisfied and are not reversed, provided that the requisite service period derived from the Monte-Carlo simulation has been completed. See Note 20. Stock-Based Compensation.
Fair Value Measurements
Fair value accounting is applied for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The levels of the fair value hierarchy are as follows:
•Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
•Level 2—Inputs are observable, either directly or indirectly, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
•Level 3—Inputs are generally unobservable and typically reflect management’s best estimate of assumptions that market participants would use in pricing the asset or liability.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest-level input that is significant to the fair value measurement in its entirety.
Earnings per Share
The calculation of earnings per share is based on the weighted average number of shares of common stock or common stock equivalents outstanding during the applicable period. The dilutive effect of common stock equivalents is excluded from basic earnings per share and is included in the calculation of diluted earnings per share. Potentially dilutive securities include convertible preferred stock, common stock options, common stock warrants and restricted stock units (“RSUs”).
The Company follows the two-class method when computing net loss per common share when shares are issued that meet the definition of participating securities. The two-class method determines net loss per common share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. For periods in which the Company reports net losses, diluted net loss per share is the same as basic net loss per share because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Diluted shares outstanding are calculated using the treasury stock method or the two-class method, depending on which method is more dilutive for a given period. Under the treasury stock method, the assumed proceeds, which include the exercise price of stock options or warrants plus the average unrecognized compensation cost for future service, are assumed to be used by the Company to repurchase shares of its common stock at the average share price for the fiscal period.
3.SEGMENT REPORTING
As of December 31, 2025, the Company had one operating and reportable segment, as it reports financial information on an aggregate and consolidated basis. The Company’s chief operating decision maker (“CODM”) as of such date was the Chief Executive Officer. The CODM reviews results to assess performance, make decisions and allocate the Company’s operating and capital resources as a whole, on a consolidated basis. All of the Company’s revenue is attributable to one operating
75
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
segment. The CODM does not distinguish among the Company’s principal business activities for the purpose of internal reporting and uses net loss to allocate resources in the annual budgeting and forecasting process, along with using that measure as a basis for evaluating financial performance quarterly. In addition, the CODM reviews the expense categories presented on the accompanying Consolidated Statements of Operations and Comprehensive Loss to manage the Company’s operations. The measure of segment assets is reported on the accompanying Consolidated Balance Sheets as total assets.
The accompanying Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2025 and 2024 reflect the one reportable segment.
Geographic Information
The Company’s revenues are primarily generated in the United States. Revenues outside of the United States were approximately $0.8 million and $0.5 million for the years ended December 31, 2025 and 2024, respectively. The Company does not have any long-lived assets located outside the United States.
4.ACQUISITIONS
Door Property Management
In March 2024, the Company announced the launch of DPM in conjunction with the acquisition of substantially all of the assets of the property management division of The Broadway Company, a Boston-based real estate investment company. Additionally, the Company purchased substantially all of the assets of the property management division of Boston Realty Advisors in May 2024. Together, these acquisitions (the “Property Management Acquisitions”) enable the Company to (i) operate all aspects of multifamily residential properties, from physical management to providing advanced technology solutions, and (ii) gain hands-on experience in property management to further refine and optimize its products and services.
The Property Management Acquisitions were accounted for as business combinations under ASC 805, Business Combinations (“ASC 805”) as of December 31, 2024. Accordingly, the acquired assets and liabilities were recorded at their estimated fair values on the respective acquisition dates. The Company incurred approximately $0.2 million in transaction-related expenses. The aggregate acquisition date fair value of the purchase consideration for the Property Management Acquisitions was comprised of the following:
Fair value of total consideration transferred $ 1,160
Total purchase consideration was funded from available Company funds. The purchase consideration allocation of the acquired assets, based on their estimated fair values as of the respective acquisition dates, is as follows:
Property and equipment $ 24
Intangible assets 605
Fair value of net assets acquired $ 1,160
Goodwill of approximately $0.5 million was recognized in connection with the Property Management Acquisitions, primarily reflecting expected synergies and economies of scale from combining the operations of the Company and DPM. The goodwill is expected to be deductible for income tax purposes.
HelloTech Merger
On June 21, 2024, the Company and LS HT Merger Sub, Inc., a wholly-owned subsidiary of the Company (“HT Merger Sub”), entered into an Agreement and Plan of Merger with HelloTech. On July 1, 2024, HT Merger Sub merged with and into HelloTech, with HelloTech continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the “HelloTech Merger”). HelloTech is a service platform delivering on-demand, last-mile installation, setup and connected device support. The HelloTech platform, in combination with the technology Latch acquired in the HDW Acquisition, supports the Company’s professional services offering.
As consideration for the HelloTech Merger, the Company (i) as further specified below, assumed outstanding debt with a principal balance of $6.9 million and a fair value of $6.0 million as of July 1, 2024 (the “Prior Loan”) with Customers Bank
76
Table of Contents
Latch, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share data)
and (ii) paid $0.3 million of HelloTech’s merger-related expenses. HelloTech’s stockholders and other equity holders (including option holders, warrant holders or holders of simple agreements for future equity) did not receive any consideration in connection with the HelloTech Merger.
The HelloTech Merger qualified as a business combination in accordance with ASC 805, and the Company was determined to be the acquirer. Accordingly, total consideration was first allocated to the fair value of assets acquired as of the date of acquisition, with the excess being recorded as goodwill. The Company incurred approximately $0.3 million in transaction-related expenses, in addition to those incurred by HelloTech but paid by the Company. Per ASC 805, the Prior Loan was an assumed liability, and consideration for the HelloTech Merger solely consists of cash paid for HelloTech’s merger-related expenses. The aggregate acquisition date fair value of the purchase consideration was comprised of the following:
Fair value of total consideration transferred $ 250
The purchase consideration allocation of the acquired assets, based on their respective estimated fair values as of the date of the HelloTech Merger, is as follows:
Cash and cash equivalents $ 462