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As filed with the Securities and Exchange Commission on July 7, 2021

Registration No. 333-257373

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Latch, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of
incorporation or organization)

 

5072

(Primary Standard Industrial

Classification Code Number)

 

85-3087759

(I.R.S. Employer
Identification No.)

508 West 26th Street, Suite 6G

New York, New York 10011

(917) 338-3915

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Priyen Patel

Vice President of Legal

508 West 26th Street, Suite 6G

New York, New York 10011

(917) 338-3915

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Marc D. Jaffe

Ryan J. Maierson

Nick S. Dhesi

Latham & Watkins LLP

1271 Avenue of the Americas

New York, New York 10020

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☒

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class
of Securities to be Registered
  Amount to be
Registered(1)
  Proposed Maximum
Offering Price Per
Share
  Proposed Maximum
Aggregate
Offering Price
 

Amount of

Registration Fee

Primary Offering:

               

Common Stock, par value $0.0001 per share

  15,333,301(2)   $11.50 (3)   $176,332,961.50   $19,237.93

Common Stock, par value $0.0001 per share

  1,000,000(4)   $12.47(5)   $12,470,000   $1,360.48

Secondary Offering:

               

Common Stock, par value $0.0001 per share

  81,264,674(6)   $12.22 (7)   $993,054,316.28   $108,342.23

Warrants to purchase Common Stock

  5,333,334 (8)   —     —       (9)

Total

         

$1,181,857,277.78

 

$128,940.64(10)

 

 

(1)

Pursuant to Rule 416 under the Securities Act (as defined below), this registration statement also covers any additional number of shares of Common Stock (as defined below) issuable upon stock splits, stock dividends or other distribution, recapitalization or similar events with respect to the shares of Common Stock being registered pursuant to this registration statement.

(2)

Consists of (a) 5,333,334 shares of Common Stock issuable upon the exercise of 5,333,334 Private Placement Warrants (as defined below) by the holders thereof and (b) 9,999,967 shares of Common Stock issuable upon the exercise of 9,999,967 Public Warrants (as defined below) by the holders thereof.

(3)

The price per share is based upon the exercise price per Warrant (as defined below) of $11.50 per share.

(4)

Consists of 1,000,000 shares of Common Stock reserved for issuance upon the exercise of Options (as defined below).

(5)

Pursuant to Rule 457(c) under the Securities Act, and solely for the purpose of calculating the registration fee, the proposed maximum offering price per share is $12.47, which is the average of the high ($12.70) and low ($12.24) prices of the Common Stock on Nasdaq (as defined below) on June 30, 2021.

(6)

Represents the resale of 81,264,674 shares of Common Stock by the Selling Securityholders (as defined below), which includes 5,333,334 shares of Common Stock issuable upon the exercise of Private Placement Warrants by the holders thereof.

(7)

Pursuant to Rule 457(c) under the Securities Act, and solely for the purpose of calculating the registration fee, the proposed maximum offering price per share is $12.22, which is the average of the high ($12.73) and low ($11.71) prices of the Common Stock on Nasdaq on June 21, 2021.

(8)

Represents the resale by the Selling Securityholders of 5,333,334 Private Placement Warrants.

(9)

In accordance with Rule 457(g), the entire registration fee for the Warrants is allocated to the shares of Common Stock underlying the Warrants, and no separate fee is payable for the Warrants.

(10)

Includes a registration fee of $127,580.16 previously paid with respect to the shares of Common Stock listed in the calculation of registration fee table for the registration statement on Form S-1 filed by the Registrant on June 25, 2021. An additional registration fee of $1,360.48 is being paid with respect to the additional 1,000,000 shares of Common Stock being registered hereby.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion Preliminary Prospectus dated July 7, 2021.

PROSPECTUS

LOGO

Latch, Inc.

Up to 16,333,301 Shares of Common Stock Issuable Upon Exercise of Warrants and Options

Up to 81,264,674 Shares of Common Stock

Up to 5,333,334 Warrants

 

 

This prospectus relates to the issuance by us of up to an aggregate of up to 16,333,301 shares of our common stock, $0.0001 par value per share (“Common Stock”), which consists of (i) up to 5,333,334 shares of Common Stock that are issuable upon the exercise of 5,333,334 warrants (the “Private Placement Warrants”) originally issued in a private placement in connection with the initial public offering of TS Innovation Acquisitions Corp., a Delaware corporation (“TSIA”), by the holders thereof, (ii) up to 9,999,967 shares of Common Stock that are issuable upon the exercise of 9,999,967 warrants (the “Public Warrants,” and together with the Private Placement Warrants, the “Warrants”) originally issued in the initial public offering of TSIA, by the holders thereof, and (iii) up to 1,000,000 shares of Common Stock reserved for issuance upon the exercise of options to purchase Common Stock (“Options”) held by certain of our former employees. We will receive the proceeds from any exercise of any Warrants or Options for cash.

This prospectus also relates to the offer and sale from time to time by the selling securityholders (including their transferees, donees, pledgees and other successors-in-interest) named in this prospectus (the “Selling Securityholders”) of (i) up to 81,264,674 shares of Common Stock (including up to 5,333,334 shares of Common Stock that may be issued upon exercise of the Private Placement Warrants) and (ii) up to 5,333,334 Warrants. We will not receive any proceeds from the sale of shares of Common Stock or Warrants by the Selling Securityholders pursuant to this prospectus.

We are registering the securities for resale pursuant to the Selling Securityholders’ registration rights under certain agreements between us and the Selling Securityholders. Our registration of the securities covered by this prospectus does not mean that the Selling Securityholders will offer or sell any of the shares of Common Stock or Warrants. The Selling Securityholders may offer, sell or distribute all or a portion of their shares of Common Stock or Warrants publicly or through private transactions at prevailing market prices or at negotiated prices. We provide more information about how the Selling Securityholders may sell the shares of Common Stock or Warrants in the section entitled “Plan of Distribution.”

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), and are subject to reduced public company reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company.

Our Common Stock and Public Warrants are listed on the Nasdaq Stock Market LLC (“Nasdaq”) under the symbols “LTCH” and “LTCHW,” respectively. On July 6, 2021, the closing price of our Common Stock was $12.47 and the closing price for our Public Warrants was $3.75.

We will bear all costs, expenses and fees in connection with the registration of the shares of Common Stock. The Selling Securityholders will bear all commissions and discounts, if any, attributable to their sales of the shares of Common Stock.

 

 

Our business and investment in our Common Stock involve significant risks. These risks are described in the section titled “Risk Factors” beginning on page 6 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                .


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TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     ii  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     iv  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     5  

RISK FACTORS

     6  

USE OF PROCEEDS

     40  

DIVIDEND POLICY

     41  

MARKET INFORMATION

     42  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION FOR TSIA AND LEGACY LATCH

     43  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     55  

BUSINESS

     77  

MANAGEMENT

     87  

EXECUTIVE COMPENSATION

     94  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     104  

PRINCIPAL STOCKHOLDERS

     108  

SELLING SECURITYHOLDERS

     111  

DESCRIPTION OF CAPITAL STOCK

     121  

PLAN OF DISTRIBUTION

     131  

LEGAL MATTERS

     134  

EXPERTS

     135  

WHERE YOU CAN FIND MORE INFORMATION

     136  

INDEX TO FINANCIAL STATEMENTS

     F-1  

INFORMATION NOT REQUIRED IN PROSPECTUS

     II-1  

SIGNATURES

     II-6  

 

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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we filed with the U.S. Securities and Exchange Commission, or the SEC, using a “shelf” registration process. By using a shelf registration statement, the Selling Securityholders may sell up to 81,264,674 shares of Common Stock and up to 5,333,334 Warrants from time to time in one or more offerings as described in this prospectus. We will not receive any proceeds from the sale by such Selling Securityholders of the securities offered by them described in this prospectus. This prospectus also relates to the issuance by us of the shares of Common Stock issuable upon the exercise of the Warrants and the issuance by us of the shares of Common Stock reserved for issuance upon the exercise of Options held by certain of our former employees. We will not receive any proceeds from the sale of shares of Common Stock underlying the Warrants or Options pursuant to this prospectus, except with respect to amounts received by us upon the exercise of the Warrants or Options for cash.

We may also file a prospectus supplement or post-effective amendment to the registration statement of which this prospectus forms a part that may contain material information relating to these offerings. The prospectus supplement or post-effective amendment may also add, update or change information contained in this prospectus with respect to that offering. If there is any inconsistency between the information in this prospectus and the applicable prospectus supplement or post-effective amendment, you should rely on the prospectus supplement or post-effective amendment, as applicable. Before purchasing any securities, you should carefully read this prospectus, any post-effective amendment, and any applicable prospectus supplement, together with the additional information described under the heading “Where You Can Find More Information.”

Neither we, nor the Selling Securityholders, have authorized anyone to provide you with any information or to make any representations other than those contained in this prospectus, any post-effective amendment, or any applicable prospectus supplement prepared by or on behalf of us or to which we have referred you. We and the Selling Securityholders take no responsibility for and can provide no assurance as to the reliability of any other information that others may give you. We and the Selling Securityholders will not make an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus, any post-effective amendment and any applicable prospectus supplement to this prospectus is accurate only as of the date on its respective cover. Our business, financial condition, results of operations and prospects may have changed since those dates. This prospectus contains, and any post-effective amendment or any prospectus supplement may contain, market data and industry statistics and forecasts that are based on independent industry publications and other publicly available information. Although we believe these sources are reliable, we do not guarantee the accuracy or completeness of this information and we have not independently verified this information. In addition, the market and industry data and forecasts that may be included in this prospectus, any post-effective amendment or any prospectus supplement may involve estimates, assumptions and other risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” contained in this prospectus, any post-effective amendment and the applicable prospectus supplement. Accordingly, investors should not place undue reliance on this information.

We own or have rights to trademarks, trade names and service marks that we use in connection with the operation of our business. In addition, our name, logos and website name and address are our trademarks or service marks. Solely for convenience, in some cases, the trademarks, trade names and service marks referred to in this prospectus are listed without the applicable ®, and SM symbols, but we will assert, to the fullest extent under applicable law, our rights to these trademarks, trade names and service marks. Other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

On June 4, 2021 (the “Closing Date”), we consummated the previously announced merger pursuant to that certain Agreement and Plan of Merger, dated as of January 24, 2021 (the “Merger Agreement”), by and among the Company (formerly known as TS Innovation Acquisitions Corp.), Latch Systems, Inc. (formerly known as Latch, Inc.) (“Legacy Latch”), and Lionet Merger Sub Inc., a Delaware corporation (“Merger Sub”), pursuant to which Merger Sub merged with and into Legacy Latch, with Legacy Latch becoming our wholly owned

 

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subsidiary (the “Business Combination” and, collectively with the other transactions described in the Merger Agreement, the “Transactions”). On the Closing Date, and in connection with the closing of the Transactions (the “Closing”), we changed our name to Latch, Inc.

As used in this prospectus, unless otherwise indicated or the context otherwise requires, references to “we,” “us,” “our,” the “Company,” “Registrant,” and “Latch” refer to the consolidated operations of Latch, Inc. and its subsidiaries. References to “TSIA” refer to the Company prior to the consummation of the Business Combination and references to “Legacy Latch” refer to Latch Systems, Inc. prior to the consummation of the Business Combination.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this prospectus, including statements concerning possible or assumed future actions, business strategies, events or results of operations, and any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the risks, uncertainties and assumptions described under the section in this prospectus titled “Risk Factors.” These forward-looking statements are subject to numerous risks, including, without limitation, the following:

 

   

the impact of the COVID-19 pandemic on our business, financial condition and results of operations;

 

   

our ability to realize the benefits of the Business Combination;

 

   

legal proceedings, regulatory disputes, and governmental inquiries;

 

   

privacy and data protection laws, privacy or data breaches, or the loss of data;

 

   

the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, demographic trends and employee availability;

 

   

any defects in new products or enhancements to existing products;

 

   

our ability to continue to develop new products and innovations to meet constantly evolving customer demands;

 

   

our ability to hire, retain, manage and motivate employees, including key personnel;

 

   

our ability to enhance future operating and financial results;

 

   

compliance with laws and regulations applicable to our business;

 

   

our ability to upgrade and maintain our information technology systems;

 

   

our ability to acquire and protect intellectual property; and

 

   

our ability to successfully deploy the proceeds from the Business Combination.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and

 

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uncertainties. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances, or otherwise.

You should read this prospectus completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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PROSPECTUS SUMMARY

This summary highlights, and is qualified in its entirety by, the more detailed information and financial statements included elsewhere in this prospectus. This summary does not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus carefully, especially the “Risk Factors” section beginning on page 6 and our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our Common Stock or Warrants.

Overview

Latch is an enterprise technology company focused on revolutionizing how people experience spaces by making spaces better places to live, work, and visit. Latch has created a full-building operating system, LatchOS, which addresses the essential requirements of modern buildings. Our LatchOS system streamlines building operations, enhances the resident experience, and enables efficient interactions with service providers. Our product offerings, designed to optimize the resident experience, include smart access, delivery and guest management, smart home and sensors, connectivity, and resident experience. We combine hardware, software, and services into a holistic system that makes spaces more enjoyable for residents, more efficient and profitable for building operators, and more convenient for service providers.

LatchOS enables spaces across North America. Throughout 2020, approximately 1 in 10 newly constructed multi-family apartment home units in the United States were equipped with Latch products and installed across 35 states and Canada, from affordable housing in Baltimore, to historic buildings in Manhattan, to luxury towers in the Midwest. Latch works with real estate developers, large and small, ranging from the largest real estate companies in the world to passionate local owners.

We engage with customers early in their new construction or renovation process, helping establish Latch as the technology consultant for the building. LatchOS is made up of modules, enabling essential capabilities for modern buildings. Building owners have the flexibility to select LatchOS modules to match their specific building or portfolio’s needs. LatchOS software starting pricing ranges from $7-12 per apartment per month, depending on which capabilities the building owner selects, for the LatchOS modules Smart Access, Smart Home, and Guest Management. Customers also purchase our first party and partner devices upfront to go along with the LatchOS modules they choose.

Our sales strategy is simple, repeatable, scalable, and unique. We engage directly with our customers to ensure they have the best possible experience with Latch and our partners from sale to installation to the lease-up. Latch engages with customers early in their construction or renovation process, establishing Latch as a technology advisor to the building. This engagement enables us to provide more technology advice early in the development process and creates high revenue visibility. Our customers sign letters of intent (“LOIs”) specifying which software and devices they want to receive and on which dates. This approach leads to multi-year software contracts, direct feedback loops with our customers and their residents, local and regional market insights, and a complete picture of the ever-changing demands of building operators. The installation timeline can range from six to 18 months after signing the LOI, depending on the construction schedule. We continuously evolve our products and add new features between signing the LOI and the time of installation.

Currently, we primarily serve the rental homes markets in North America. Based on internal research and external reporting, we estimate there are approximately 32 million multi-family apartment home units in North America. Today we primarily serve new construction and retrofit buildings. Since our launch in 2017, we have seen the share of our business coming from retrofit opportunities increase significantly: a trend we expect to continue over the medium term. We also serve the single-family rental market through our existing relationships


 

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with large real estate developers and owners. Based on internal research and external reporting, we estimate there are 15 million single-family rental home units in North America.

Background

We were incorporated as Strategic Acquisitions Corp. on September 18, 2020 and changed our name to TS Innovation Acquisitions Corp. on September 21, 2020. On June 4, 2021, we closed the Business Combination with Legacy Latch, as a result of which Legacy Latch became a wholly-owned subsidiary of ours, and we changed our name to Latch, Inc. While we are the legal acquirer of Legacy Latch in the Business Combination, Legacy Latch is deemed to be the accounting acquirer, and the historical financial statements of Legacy Latch became the historical financial statements of the Company upon the Closing of the Transactions.

At the effective time of the Business Combination (the “Effective Time”), each share of Legacy Latch preferred stock and common stock issued and outstanding immediately prior to the Effective Time converted into the right to receive 0.8971 shares of our Common Stock. In addition, each share of our Class B common stock, par value $0.0001 per share, issued and outstanding immediately prior to the Effective Time converted into one share of Common Stock (of which 738,000 shares are subject to certain vesting conditions).

On January 24, 2021, in connection with the execution of the Merger Agreement, TSIA entered into subscription agreements (collectively, the “Subscription Agreements”) with certain parties subscribing for shares of TSIA’s Class A common stock, par value $0.0001 per share (“TSIA Class A Common Stock,” and such parties, the “Subscribers”), pursuant to which the Subscribers agreed to purchase, and TSIA agreed to sell to the Subscribers, (i) an aggregate of 19,000,000 shares of TSIA Class A Common Stock, for a purchase price of $10.00 per share and at an aggregate purchase price of $190,000,000, plus (ii) a number of shares of TSIA Class A Common Stock at a purchase price of $10.00 per share. Immediately prior to the closing of the Business Combination, we issued and sold 19,255,030 shares of our Common Stock to the Subscribers for aggregate gross proceeds to us of approximately $192.6 million (the “PIPE Investment”).

The rights of holders of our Common Stock and Warrants are governed by our second amended and restated certificate of incorporation (the “certificate of incorporation”), our amended and restated bylaws (the “bylaws”), and the Delaware General Corporation Law (the “DGCL”), and, in the case of the Warrants, the Warrant Agreement, dated as of November 9, 2020, between the Company and Continental Stock Transfer & Trust Company (the “Warrant Agreement”). See the section entitled “Description of Capital Stock.”

Risk Factors

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include the following:

 

   

We are an early-stage company with a history of losses. We have not been profitable historically and may not achieve or maintain profitability in the future.

 

   

Our rapid growth and the quickly changing markets in which we operate make it difficult to evaluate our current business and future prospects, which may increase the risk of investing in our stock.

 

   

If we are unable to develop new solutions, adapt to technological change, sell our software, services, and products into new markets or further penetrate existing markets, our revenue may not grow as expected.

 

   

If our security controls are breached or unauthorized or inadvertent access to customer information or other data or to control or view systems are otherwise obtained, our products, software or services may be perceived as insecure, our business may be harmed, and we may incur significant liabilities.


 

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We operate in the emerging and evolving smart building technology industry, which may develop more slowly or differently than we expect. If the smart building technology industry does not grow as we expect, or if we cannot expand our platforms and solutions to meet the demands of this market, our revenue may decline, fail to grow or fail to grow at an accelerated rate, and we may incur operating losses.

 

   

We are in the process of expanding our international operations, which exposes us to significant risks.

 

   

The markets in which we participate could become competitive and many companies, including large technology companies, point solution providers such as traditional lock companies, and other managed service providers, may target the markets in which we do business, including the smart building technology industry. If we are unable to compete effectively with these potential competitors, our sales and profitability could be adversely affected.

 

   

Customers may choose to adopt point products that provide control of discrete functions rather than adopting our integrated LatchOS platform. If we are unable to increase market awareness of the benefits of our unified solutions, our revenue may not continue to grow, or it may decline.

 

   

If we are unable to acquire necessary intellectual property or adequately protect our intellectual property, we could be competitively disadvantaged.

 

   

Accusations of infringement of third-party intellectual property rights could materially and adversely affect our business.

 

   

We collect, store, process, and use personal information and other customer data, which subjects us to legal obligations and laws and regulations related to security and privacy, and any actual or perceived failure to meet those obligations could harm our business.

 

   

We rely on a limited number of suppliers, manufacturers, and logistics partners for our products. A loss of any of these partners could negatively affect our business.

 

   

Increases in component costs, long lead times, supply shortages, and supply changes could disrupt our supply chain and have an adverse effect on our business, financial condition, and operating results

 

   

Our smart building technology is subject to varying state and local regulations, which may be updated from time to time.

Corporate Information

We were incorporated under the laws of the state of Delaware on September 18, 2020 under the name Strategic Acquisitions Corp. and changed our name to TS Innovation Acquisitions Corp. on September 21, 2020. Upon the closing of the Business Combination, we changed our name to Latch, Inc. Our principal executive offices are located at 508 West 26th Street, Suite 6G, New York, New York 10001, and our telephone number is (917) 338-3915. Our website address is www.latch.com. The information contained in, or accessible through, our website does not constitute a part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

 


 

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Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, as amended (the “JOBS Act”). An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

the option to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus;

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

   

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote of stockholders on executive compensation, stockholder approval of any golden parachute payments not previously approved and having to disclose the ratio of the compensation of our chief executive officer to the median compensation of our employees.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of the initial public offering of our securities. However, if (i) our annual gross revenue exceeds $1.07 billion, (ii) we issue more than $1.0 billion of non-convertible debt in any three-year period or (iii) we become a “large accelerated filer” (as defined in Rule 12b-2 under the Exchange Act) prior to the end of such five-year period, we will cease to be an emerging growth company. We will be deemed to be a “large accelerated filer” at such time that we (a) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700.0 million or more as of the last business day of our most recently completed second fiscal quarter, (b) have been required to file annual and quarterly reports under the Exchange Act, for a period of at least 12 months and (c) have filed at least one annual report pursuant to the Exchange Act.

We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have elected to use the extended transition period for complying with new or revised accounting standards. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.


 

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THE OFFERING

 

Shares of Common Stock offered by us

15,333,301 shares issuable upon exercise of Warrants and 1,000,000 shares of Common Stock reserved for issuance upon the exercise of Options.

 

Shares of Common Stock offered by the Selling Securityholders

81,264,674 shares.

 

Shares of Common Stock outstanding prior to the exercise of all Warrants and the issuance of shares of Common Stock reserved for issuance upon the exercise of Options

141,260,318 shares (as of June 21, 2021).

 

Shares of Common Stock outstanding assuming the exercise of all Warrants and the issuance of shares of Common Stock reserved for issuance upon the exercise of Options

157,593,619 shares (as of June 21, 2021).

 

Warrants offered by the Selling Securityholders

5,333,334 Warrants.

 

Warrants outstanding

15,333,301 Warrants (as of June 21, 2021).

 

Exercise price per share pursuant to the Warrants

$11.50

 

Use of proceeds

We will not receive any proceeds from the sale of shares by the Selling Securityholders. We will receive the proceeds from any exercise of the Warrants or Options for cash, which we intend to use for general corporate and working capital purposes.

 

Risk factors

You should carefully read the “Risk Factors” beginning on page 6 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our Common Stock or Warrants.

 

Nasdaq symbol for our Common Stock

“LTCH”

 

Nasdaq symbol for our Warrants

“LTCHW”

 

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RISK FACTORS

You should carefully consider the risks and uncertainties described below and the other information in this prospectus before making an investment in our Common Stock or Warrants. Our business, financial condition, results of operations, or prospects could be materially and adversely affected if any of these risks occurs, and as a result, the market price of our Common Stock and Warrants could decline and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below.

Risks Related to Our Business and Industry

We are an early-stage company with a history of losses. We have not been profitable historically and may not achieve or maintain profitability in the future.

We experienced net losses in each year since inception, including net losses of $66.0 million and $50.2 million, respectively, for the years ended December 31, 2020 and 2019. We believe we will continue to incur operating losses and negative cash flow in the near-term as we continue to invest significantly in our business, in particular to enhance and develop new LatchOS modules, services, and products to position us for future growth. Additionally, we have incurred substantial losses and expended significant resources upfront to market, promote and sell our solutions and products and expect to continue to do so in the future. We also expect to continue to invest for future growth, including for customer acquisition, technology infrastructure, services development, international expansion, and expansion into new verticals. In addition, as a public company, we incur significant accounting, legal, and other expenses.

We expect to continue to incur losses for at least the foreseeable future and will have to generate and sustain increased revenues to achieve future profitability. Achieving profitability will require us to increase revenues, manage our cost structure, and avoid significant liabilities. Revenue growth may slow, revenues may decline, or we may incur significant losses in the future for a number of possible reasons, including general macroeconomic conditions, increasing competition (including competitive pricing pressures), a decrease in the growth of the markets in which we compete, or if we fail for any reason to continue to capitalize on growth opportunities. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, service delivery, and quality problems and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed and the price of our Common Stock and Warrants could be volatile or decline.

Our operating results and financial condition may fluctuate from period to period.

Our operating results and financial condition fluctuate from quarter-to-quarter and year-to-year and are likely to continue to vary due to a number of factors, many of which will not be within our control. Both our business and the smart building technology industry are changing and evolving rapidly, and our historical operating results may not be useful in predicting our future operating results. If our operating results do not meet the guidance that we provide to the marketplace or the expectations of securities analysts or investors, the market price of our Common Stock and Warrants will likely decline. Fluctuations in our operating results and financial condition may be due to a number of factors, including:

 

   

the portion of our revenue attributable to software-as-a-service (“SaaS”) versus hardware and other sales;

 

   

fluctuations in demand, including due to seasonality, for our platform and solutions;

 

   

changes in pricing by us in response to competitive pricing actions;

 

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the ability of our hardware vendors to continue to manufacture high-quality products and to supply sufficient products to meet our demands;

 

   

the timing and success of introductions of new solutions, products or upgrades by us or our competitors;

 

   

changes in our business and pricing policies or those of our competitors;

 

   

the ability to accurately forecast revenue;

 

   

our ability to control costs, including our operating expenses and the costs of the hardware we purchase;

 

   

competition, including entry into the industry by new competitors and new offerings by existing competitors;

 

   

our ability to successfully manage any future acquisitions and integrations of businesses;

 

   

issues related to introductions of new or improved products such as shortages of prior generation products or short-term decreased demand for next generation products;

 

   

the amount and timing of expenditures, including those related to expanding our operations, increasing research and development, introducing new solutions or paying litigation expenses;

 

   

the ability to effectively manage growth within existing and new markets domestically and abroad;

 

   

changes in the payment terms for our platform and solutions;

 

   

the strength of regional, national and global economies;

 

   

changes in the fair values of our financial instruments (including the Warrants); and

 

   

the impact of natural disasters or manmade problems such as terrorism.

Due to the foregoing factors, and the other risks discussed in this prospectus, you should not rely on quarter-over-quarter and year-over-year comparisons of our operating results as an indicator of our future performance.

Our rapid growth and the quickly changing markets in which we operate make it difficult to evaluate our current business and future prospects, which may increase the risk of investing in our Common Stock or Warrants.

We have grown rapidly since 2017 when we introduced our smart building technology. We have encountered and expect to continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly changing markets. If our assumptions regarding these uncertainties are incorrect or change in reaction to changes in our markets, or if we do not manage or address these risks successfully, our results of operations could differ materially from our expectations, and our business could suffer.

Growth may place significant demands on our management and our operational and financial infrastructure and require us to commit substantial financial, operational and technical resources to attract, service, and retain an increasing number of customers. If we are unable to hire, retain, manage and motivate our employees, we may not be able to grow effectively, and our business, results of operations and financial condition could be adversely affected.

We have recently experienced substantial growth in our business. This growth has placed and may continue to place significant demands on our management, and our operational and financial infrastructure. As our operations grow in size, scope, and complexity, we will need to increase our sales and marketing efforts and add additional sales and marketing personnel and senior management in various regions worldwide and improve and upgrade our systems and infrastructure to attract, service, and retain an increasing number of customers. For

 

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example, we plan to explore opportunities for international expansion and extend our offerings to current customers by introducing new software, services and products. The expansion of our systems and infrastructure will require us to commit substantial financial, operational, and technical resources in advance of an increase in the volume of business, with no assurance that the volume of business will increase. Any such additional capital investments will increase our cost base.

Continued growth could also strain our ability to maintain reliable service levels for our customers, develop and improve our operational, financial and management controls, enhance our billing and reporting systems and procedures and recruit, train and retain highly skilled personnel. Competition for highly skilled personnel is often intense, especially in New York City and San Francisco, where we have a substantial presence and need for highly skilled personnel. We may not be successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs, including, but not limited to, senior management, engineers, designers, product managers, operations, logistics, and supply chain personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. The loss of services of senior management or other key employees could significantly delay or prevent the achievement of our development and strategic objectives. In particular, we depend to a considerable degree on the vision, skills, experience, and effort of our co-founder, Chairman, and Chief Executive Officer, Luke Schoenfelder. The replacement of senior management or other key personnel would likely involve significant time and costs, and such loss could significantly delay or prevent the achievement of our business objectives and future growth.

In addition, our existing systems, processes, and controls may not prevent or detect all errors, omissions, or fraud. We may also experience difficulties in managing improvements to our systems, processes, and controls or in connection with third-party software licensed to help us with such improvements. Any future growth, particularly any additional international expansion, would add complexity to our organization and require effective communication and coordination throughout our organization. Additionally, our productivity and the quality of our solutions and services may be adversely affected if we do not integrate and train our new employees quickly and effectively. If we fail to achieve the necessary level of efficiency in our organization as we grow, our business, results of operations and financial condition could be materially and adversely affected.

Our future operating results will rely in part upon the successful execution of our strategic partnerships, which may not be successful. If these companies choose not to partner with us, our business and results of operations may be harmed.

A strategic partnership between two independent businesses is a complex, costly, and time-consuming process that will require significant management attention and resources. Realizing the benefits of our strategic partnerships, particularly our relationships with Google Nest, Honeywell, ecobee, Jasco, Leviton and Sonos, among others, will depend in part on our ability to work with our strategic partners to develop, integrate, market and sell co-branded solutions. In particular, working with major technology platforms and their products and services may take an extended period of time to deliver. Setting up and maintaining the operations and processes necessary for these strategic partnerships may cause us to incur significant costs, disrupt our business and, if implemented ineffectively, would limit the expected benefits to us. In addition, the process of bringing third-party solutions to market may take longer than anticipated, which could negate or reduce our anticipated benefits and revenue opportunities, and it may be necessary in the future to renegotiate agreements relating to various aspects of these solutions or other third-party solutions. The failure to successfully and timely implement and operate our strategic partnerships could harm our ability to realize the anticipated benefits of these partnerships and could adversely affect our business, financial condition, cash flows and results of operations. In addition, if these third-party solution providers choose not to partner with us, choose to integrate their solutions with our competitors’ platforms, or are unable or unwilling to update their solutions, our business, financial condition, cash flows and results of operations could be harmed.

 

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If our security controls are breached or unauthorized or inadvertent access to customer information or other data or to control or view systems are otherwise obtained, our products, software or services may be perceived as insecure, our business may be harmed, and we may incur significant liabilities.

Use of our solutions involves the storage, transmission and processing of personal, payment, credit and other confidential and private information of our customers, and may in certain cases permit access to our customers’ homes or property or help secure them. We also maintain and process confidential and proprietary information in our business, including our employees’ and contractors’ personal information and confidential business information. We rely on proprietary and commercially available systems, software, tools and monitoring to protect against unauthorized use or access of the information we process and maintain. Our services and the networks and information systems we utilize in our business are at risk for breaches as a result of third-party action, employee or partner error, malfeasance, or other factors.

Criminals and other nefarious actors are using increasingly sophisticated methods, including cyber-attacks, phishing, social engineering and other illicit acts to capture, access, or alter various types of information, to engage in illegal activities such as fraud and identity theft, and to expose and exploit potential security and privacy vulnerabilities in corporate systems and websites. Unauthorized intrusion into the portions of our systems and networks and data storage devices that process and store customer confidential and private information, the loss of such information or the deployment of malware or other harmful code to our services or our networks or systems may result in negative consequences, including the actual or alleged malfunction of our products, software or services. In addition, third parties, including our partners, could also be sources of security risks to us in the event of a failure of their own security systems and infrastructure. The threats we and our partners face continue to evolve and are difficult to predict due to advances in computer capabilities, new discoveries in the field of cryptography and new and sophisticated methods used by criminals. There can be no assurances that our defensive measures will prevent cyber-attacks or that we will discover network or system intrusions or other breaches on a timely basis or at all. We cannot be certain that we will not suffer a compromise or breach of the technology protecting the systems or networks that house or access our software, services and products or on which we or our partners process or store personal information or other sensitive information or data, or that any such incident will not be believed or reported to have occurred. Any such actual or perceived compromises or breaches to systems, or unauthorized access to our customers’ data, products, software or services, or acquisition or loss of data, whether suffered by us, our partners or other third parties, whether as a result of employee error or malfeasance or otherwise, could harm our business. They could, for example, cause interruptions in operations, loss of data, loss of confidence in our services, software and products and damage to our reputation, and could limit the adoption of our software, services and products. They could also subject us to costs, regulatory investigations and orders, litigation, contract damages, indemnity demands and other liabilities and materially and adversely affect our customer base, sales, revenues and profits. Any of these could, in turn, have a material adverse impact on our business, financial condition, cash flows or results of operations.

If such an event results in unauthorized access to or loss of any data subject to data privacy and security laws and regulations, then we could be subject to substantial fines by U.S. federal and state authorities, foreign data privacy authorities around the world and private claims by companies or individuals. A cyber-attack may cause additional costs, such as investigative and remediation costs, and the costs of providing individuals and/or data owners with notice of the breach, legal fees, and the costs of any additional fraud detection activities required by law, a court or a third-party. Additionally, some of our customer contracts require us to indemnify customers from damages they may incur as a result of a breach of our systems. There can be no assurance that the limitation of liability provisions in our contracts for a security breach would be enforceable or would otherwise protect us from any such liabilities or damages with respect to any particular claim.

Further, if a high profile security breach occurs with respect to another provider of smart building solutions, our customers and potential customers may lose trust in the security of our services or in the smart building technology industry generally, which could adversely impact our ability to retain existing customers or attract new ones. Even in the absence of any security breach, customer concerns about security, privacy or data protection may deter them from using our software, services and products.

 

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Our insurance policies covering errors and omissions and certain security and privacy damages and claim expenses may not be sufficient to compensate for all potential liability. Although we maintain cyber liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.

Our new integrated direct selling and deployment strategy may subject us to additional risks.

Historically, our channel partners have contracted with building owners to own the full scope of installation and service of our smart access products. However, we have launched a new integrated direct selling and deployment strategy targeted at our larger enterprise accounts in which we directly own the full scope of installation and service of our products with the building. This new strategy may involve significant risks and uncertainties, including distraction of management from other business operations, significant research and development costs and time, sales and marketing, and other resources to be dedicated to the new strategy at the expense of time dedicated to our other business operations, generation of insufficient revenue to offset expenses associated with the new strategy, inadequate return of capital, increased exposure to liability for improper installation, and other risks that we may not have adequately anticipated. Because new strategies and initiatives are inherently risky, our new integrated direct selling and deployment strategy may not be successful and could materially adversely affect our business, results of operations and financial condition.

We may be unable to attract new customers and maintain customer satisfaction with current customers, which could have an adverse effect on our business and rate of growth.

We have experienced significant customer growth over the past several years. Our continued business and revenue growth is dependent on our ability to continuously attract and retain customers, and we cannot be sure that we will be successful in these efforts, or that customer retention levels will not materially decline. There are a number of factors that could lead to a decline in customer levels or that could prevent us from increasing our customer levels, including:

 

   

our failure to introduce new features, products, or services that customers find engaging or our introduction of new products or services, or changes to existing products and services that are not favorably received;

 

   

harm to our brand and reputation;

 

   

pricing and perceived value of our offerings;

 

   

our inability to deliver quality products, software, and services;

 

   

our customers engaging with competitive software, services and products;

 

   

technical or other problems preventing customers from using our software, services and products in a rapid and reliable manner or otherwise affecting the customer experience;

 

   

deterioration of the real estate industry, including declining levels of new construction of multi-family and single family rental buildings and reduced spending in the real estate industry;

 

   

unsatisfactory experiences with the delivery, installation, or service of our products; and

 

   

deteriorating general economic conditions or a change in consumer spending preferences or buying trends.

Additionally, further expansion into international markets such as Germany, France, and the United Kingdom will create new challenges in attracting and retaining customers that we may not successfully address. As a result of these factors, we cannot be sure that our customer levels will be adequate to maintain or permit the expansion of our operations. A decline in customer levels could have an adverse effect on our business, financial condition, and operating results.

 

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We rely on certain third-party providers of licensed software and services that are important to the operations of our business.

Certain aspects of the operation of our business depend on third-party software and service providers. We rely on certain software technology that we license from third parties and use in our software, services and products to perform key functions and provide critical functionality. With regard to licensed software technology, we are, to a certain extent, dependent upon the ability of third parties to maintain, enhance or develop their software and services on a timely and cost-effective basis, to meet industry technological standards, to deliver software and services that are free of defects or security vulnerabilities, and to ensure their software and services are free from disruptions or interruptions. Further, these third-party services and software licenses may not always be available to us on commercially reasonable terms or at all.

If our agreements with third-party software or services vendors are not renewed or the third-party software or services become obsolete, fail to function properly, are incompatible with future versions of our products or services, are defective or otherwise fail to address our needs, there is no assurance that we would be able to replace the functionality provided by the third-party software or services with software or services from alternative providers. Furthermore, even if we obtain licenses to alternative software or services that provide the functionality we need, we may be required to replace hardware installed at our customers’ apartment buildings or homes to affect our integration of or migration to alternative software products. Any of these factors could have a material adverse effect on our financial condition, cash flows or results of operations.

We rely on our channel partner network for successful deployment of our products as onsite product specialists, and the inability of our channel partners to perform installation and deployment services, or the loss of key channel partners, could adversely affect our operating results.

Our certified channel partners are third-party onsite product specialists that provide specific knowledge and expertise to assist in the sale and deployment of Latch products. We provide our channel partners with specific training and programs to assist them in selling and deploying our software, services and products, but there can be no assurance that these steps will be effective. In addition, our channel partners may be unsuccessful in selling and supporting our software, services and products. In the future, these partners may also market, sell, and support products and services that are competitive with ours and may devote more resources to the marketing, sales and support of such competitive products. We cannot assure you that we will retain these channel partners or that we will be able to secure additional or replacement channel partners. The loss of one or more of our significant channel partners or a decline in the number or size of orders from any of them could harm our results of operations. In addition, any new channel partner requires training and may take several weeks or more to achieve productivity. Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality of our software, services, or products to customers or violates laws or our corporate policies. If we fail to effectively manage our existing sales channels, if our channel partners are unsuccessful in fulfilling the orders for our products, or if we are unable to enter into arrangements with, and retain a sufficient number of, high quality channel partners in each of the regions in which we sell products and services and keep them motivated to sell our products, our ability to sell our products and results of operations will be harmed.

Potential customer turnover in the future, or costs we incur to retain and upsell our customers, could materially and adversely affect our financial performance.

Our customers have no obligation to renew their contracts for our software services after the expiration of the initial term, which on average is more than six years. In the event that these customers do renew their contracts, they may choose to renew for fewer units, shorter contract lengths, or for less expensive subscriptions. We cannot predict the renewal rates for customers that have entered into software contracts with us.

Customer turnover, as well as reductions in the number of units for which a customer subscribes, each could have a significant impact on our results of operations, as does the cost we incur in our efforts to retain our

 

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customers and encourage them to upgrade their services and increase the number of their units that use our software, services, and products. Our turnover rate could increase in the future if customers are not satisfied with our software, services, and products, the value proposition of our services or our ability to otherwise meet their needs and expectations. Turnover and reductions in the number of booked units may also increase due to factors beyond our control, including the failure or unwillingness of customers to pay for our software, services, and products due to financial constraints and the impact of a slowing economy. There is no guarantee that the number of booked units will convert into actual deliveries, or will convert into deliveries within the timeframe we anticipate. If a significant number of customers terminate, reduce, or fail to renew their software contracts, or if a number of booked units do not convert to deliveries, we may be required to incur significantly higher marketing expenditures than we currently anticipate in order to increase the number of new customers or to upsell existing customers, and such additional marketing expenditures could harm our business and results of operations.

Our future success also depends in part on our ability to sell additional functionalities to our current customers and to sell into our customers’ future projects. This may require increasingly sophisticated and more costly sales efforts, technologies, tools and a longer sales cycle. Any increase in the costs necessary to upgrade, expand and retain existing customers could materially and adversely affect our financial performance. If our efforts to convince customers to add units and, in the future, to purchase additional functionalities are not successful, our business may suffer. In addition, such increased costs could cause us to increase our rates, which could increase our turnover rate.

If we are unable to develop new solutions, adapt to technological change, sell our software, services and products into new markets or further penetrate our existing markets, our revenue may not grow as expected.

Our ability to increase sales will depend, in large part, on our ability to enhance and improve our platforms, software, services, and products, introduce new software, services, and products in a timely manner, sell into new markets and further penetrate our existing markets. The success of any enhancement or new platform, software, services and products depends on several factors, including the timely completion, introduction and market acceptance of enhanced or new software, services and products, the ability to maintain and develop relationships with partners and vendors, the ability to attract, retain and effectively train sales and marketing personnel, the effectiveness of our marketing programs, and the ability of our software, services, and products to maintain compatibility with a wide range of connected devices. Any new product or service we develop or acquire may not be introduced in a timely or cost-effective manner, and may not achieve the broad market acceptance necessary to generate significant revenue. Any new markets into which we attempt to sell our software, services and products, including new vertical markets (e.g., commercial office) and new countries or regions, may not be receptive. Our ability to further penetrate our existing markets depends on the quality, availability and reliability of our software, services and products and our ability to design our software, services and products to meet customer demand. Similarly, if any of our potential competitors implement new technologies before we are able to implement ours, those competitors may be able to provide more effective products, possibly at lower prices. Any delay or failure in the introduction of new or enhanced solutions could harm our business, financial condition, cash flows and results of operations.

We operate in the emerging and evolving smart building technology industry, which may develop more slowly or differently than we expect. If the smart building technology industry does not grow as we expect, or if we cannot expand our platforms and solutions to meet the demands of this market, our revenue may decline, fail to grow or fail to grow at an accelerated rate, and we may incur operating losses.

The market for integrated smart building solutions, such as home automation, security monitoring, video monitoring, energy management and building services, is in an early stage of development, and it is uncertain how rapidly or how consistently this market will develop and the degree to which our platforms and solutions will be accepted into the markets in which we operate. Some customers may be reluctant or unwilling to use our platforms and solutions for a number of reasons, including satisfaction with traditional solutions, concerns about additional costs, concerns about data privacy, and lack of awareness of the benefits of our platforms and

 

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solutions. Our ability to expand the sales of our platforms and solutions into new markets depends on several factors, including the reputation and recognition of our platforms and solutions, the timely completion, introduction and market acceptance of our platforms and solutions, the ability to attract, retain and effectively train sales and marketing personnel, the ability to develop relationships with service providers, the effectiveness of our marketing programs, the costs of our platforms and solutions and the success of our competitors. If we are unsuccessful in developing and marketing our platforms and solutions into new markets, or if customers do not perceive or value the benefits of our platforms and solutions, the market for our platforms and solutions might not continue to develop or might develop more slowly than we expect, either of which would harm our revenue and growth prospects.

We are in the process of expanding our international operations, which exposes us to significant risks.

We currently have operations in the United States and Canada and are planning to expand our international operations to Germany, France, and the United Kingdom, and may further grow our international presence in the future. The future success of our business will depend, in part, on our ability to expand our operations and customer base worldwide. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the United States. Due to our limited experience with international operations and developing and managing sales and distribution channels in international markets, our international expansion efforts may not be successful. In addition, we will face risks in doing business internationally that could materially and adversely affect our business, including:

 

   

our ability to comply with differing and evolving technical and environmental standards, telecommunications regulations, building and fire codes, and certification requirements outside the United States;

 

   

difficulties and costs associated with staffing and managing foreign operations;

 

   

our ability to effectively price our products and subscriptions in competitive international markets;

 

   

potentially greater difficulty collecting accounts receivable and longer payment cycles;

 

   

the need to adapt and localize our products and subscriptions for specific countries;

 

   

the need to offer customer care in various native languages;

 

   

reliance on third parties over which we have limited control;

 

   

availability of reliable network connectivity in targeted areas for expansion;

 

   

lower levels of adoption of credit or debit card usage for Internet related purchases by foreign customers and compliance with various foreign regulations related to credit or debit card processing and data protection requirements;

 

   

difficulties in understanding and complying with local laws, regulations, and customs in foreign jurisdictions;

 

   

restrictions on travel to or from countries in which we operate or inability to access certain areas;

 

   

export controls and economic sanctions;

 

   

changes in diplomatic and trade relationships, including tariffs and other non-tariff barriers, such as quotas and local content rules;

 

   

U.S. government trade restrictions, including those which may impose restrictions, including prohibitions, on the exportation, re-exportation, sale, shipment or other transfer of programming, technology, components, and/or services to foreign persons;

 

   

our ability to comply with different and evolving laws, rules, and regulations, including the European Union General Data Protection Regulation (the “GDPR”) and other data privacy and data protection laws, rules and regulations;

 

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compliance with various anti-bribery and anti-corruption laws such as the Foreign Corrupt Practices Act and U.K. Bribery Act of 2010;

 

   

more limited protection for intellectual property rights in some countries;

 

   

adverse tax consequences;

 

   

fluctuations in currency exchange rates;

 

   

exchange control regulations, which might restrict or prohibit our conversion of other currencies into U.S. Dollars;

 

   

restrictions on the transfer of funds;

 

   

new and different sources of competition;

 

   

political and economic instability created by the U.K.’s departure from the European Union;

 

   

deterioration of political relations between the United States and other countries in which we may operate; or

 

   

political or social unrest, economic instability, conflict or war in such countries, or sanctions implemented by the United States against countries in which we operate, all of which could have a material adverse effect on our operations.

We have limited experience with international regulatory environments and market practices and may not be able to penetrate or successfully operate in the markets we choose to enter. In addition, we may incur significant expenses as a result of our international expansion, and we may not be successful. We may face limited brand recognition in certain parts of the world that could lead to non-acceptance or delayed acceptance of our software, services, and products by customers in new markets. Our failure to successfully manage these risks could harm our international operations and have an adverse effect on our business, financial condition, and operating results.

The markets in which we participate could become competitive and many companies, including large technology companies, point solution providers such as traditional lock companies, and other managed service providers, may target the markets in which we do business, including the smart building technology industry. If we are unable to compete effectively with these potential competitors, our sales and profitability could be adversely affected.

The smart building technology industry in which we participate may become competitive and competition may intensify in the future.

Our ability to compete depends on a number of factors, including:

 

   

our platforms and solutions’ functionality, performance, ease of use, reliability, availability, and cost effectiveness relative to that of our competitors’ products;

 

   

our success in utilizing new and proprietary technologies to offer solutions and features previously not available in the marketplace;

 

   

our success in identifying new markets, applications and technologies;

 

   

our ability to attract and retain partners;

 

   

our name recognition and reputation;

 

   

our ability to recruit software engineers and sales and marketing personnel; and

 

   

our ability to protect our intellectual property.

 

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Customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. In the event a customer decides to evaluate a smart building solution, the customer may be more inclined to select one of our competitors if such competitor’s product offerings are broader or at a better price point than those that we offer.

In connection with the Business Combination, we identified material weaknesses in our internal control over financial reporting which, if not corrected, could affect the reliability of our consolidated financial statements and have other adverse consequences.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the financial statements would not be prevented or detected on a timely basis.

We have identified material weaknesses in our internal control over financial reporting that we are currently working to remediate, which relate to: (a) our general segregation of duties, including the review and approval of journal entries; (b) the lack of a formalized risk assessment process; and (c) selection and development of control activities, including over information technology.

Our management has concluded that these material weaknesses in our internal control over financial reporting were due to the fact that we were a private company with limited resources and did not have the necessary business processes and related internal controls formally designed and implemented coupled with the appropriate resources with the appropriate level of experience and technical expertise to oversee our business processes and controls.

Our management is in the process of developing a remediation plan. The material weaknesses will be considered remediated when our management designs and implements effective controls that operate for a sufficient period of time and our management has concluded, through testing, that these controls are effective. Our management will continue to monitor the effectiveness of our remediation plans and will make the changes we determine to be appropriate.

If not remediated, these material weaknesses could result in material misstatements to our annual or interim consolidated financial statements that might not be prevented or detected on a timely basis, or in the delayed filing of required periodic reports.

On April 12, 2021, the staff of the SEC issued a statement regarding the accounting and reporting considerations for Warrants issued by special purpose acquisition companies entitled “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)” (the “SEC Statement”). Following the issuance of the SEC Statement, on April 29, 2021, TSIA concluded that it was appropriate to restate its previously issued audited financial statements as of and for the period ended December 31, 2020, and as part of such process, TSIA identified a material weakness in its internal controls over financial reporting. As the accounting acquirer in the Business Combination, we will have to address any unremediated material weakness in internal controls over the financial reporting at TSIA, including this material weakness with respect to accounting for TSIA’s Warrants.

If we are unable to assert that our internal control over financial reporting is effective, or if our Independent Registered Public Accounting Firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our Common Stock and Warrants could be adversely affected and we could become subject to litigation or investigations by Nasdaq, the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

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We may expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, result in additional dilution to our stockholders, increase expenses, disrupt our operations and harm our results of operations.

Our business strategy may, from time to time, include acquiring or investing in complementary services, technologies or businesses. We cannot assure you that we will successfully identify suitable acquisition candidates, integrate or manage disparate technologies, lines of business, personnel and corporate cultures, realize our business strategy or the expected return on our investment, or manage a geographically dispersed company. Any such acquisition or investment could materially and adversely affect our results of operations. Acquisitions and other strategic investments involve significant risks and uncertainties, including:

 

   

the potential failure to achieve the expected benefits of the combination or acquisition;

 

   

unanticipated costs and liabilities;

 

   

difficulties in integrating new software, services and products, businesses, operations and technology infrastructure in an efficient and effective manner;

 

   

difficulties in maintaining customer relations;

 

   

the potential loss of key employees of the acquired businesses;

 

   

the diversion of the attention of our senior management from the operation of our daily business;

 

   

the potential adverse effect on our cash position to the extent that we use cash for the purchase price;

 

   

the potential significant increase of our interest expense, leverage, and debt service requirements if we incur additional debt to pay for an acquisition;

 

   

the potential issuance of securities that would dilute our stockholders’ percentage ownership;

 

   

the potential to incur large and immediate write-offs and restructuring and other related expenses; and

 

   

the inability to maintain uniform standards, controls, policies and procedures.

Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that we will realize the anticipated benefits of any acquisition or investment. In addition, our inability to successfully operate and integrate newly acquired businesses appropriately, effectively, and in a timely manner could impair our ability to take advantage of future growth opportunities and other advances in technology, as well as on our revenues, gross margins and expenses.

Customers may choose to adopt point products that provide control of discrete functions rather than adopting our integrated LatchOS platform. If we are unable to increase market awareness of the benefits of our unified solutions, our revenue may not continue to grow, or it may decline.

Many vendors have emerged, and may continue to emerge, to provide point products with advanced functionality for use in buildings, such as a video doorbell, thermostat, or lights that can be controlled by an application on a smartphone. We expect more and more electronics and appliance products to be network-aware and connected—each very likely to have its own smart device (phone or tablet) application. Customers may be attracted to the relatively low costs of these point solution products and the ability to expand their building control solution over time with minimal upfront costs, which may reduce demand for our integrated solutions. If so, building managers that are our current customers may switch and offer the point products and services of competing companies, which would adversely affect our sales and profitability. If a significant number of customers in our target market choose to adopt point products rather than our integrated solutions, then our business, financial condition, cash flows and results of operations will be harmed, and we may not be able to achieve sustained growth or our business may decline.

 

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Changes in effective tax rates, or adverse outcomes resulting from examination of our income or other tax returns, could adversely affect our results of operations and financial condition.

Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expiration of, or lapses in, the research and development tax credit laws;

 

   

expiration or non-utilization of net operating loss carryforwards;

 

   

tax effects of share-based compensation;

 

   

expansion into new jurisdictions;

 

   

potential challenges to and costs related to implementation and ongoing operation of our intercompany arrangements;

 

   

changes in tax laws and regulations and accounting principles, or interpretations or applications thereof; and

 

   

certain non-deductible expenses as a result of acquisitions.

Any changes in our effective tax rate could adversely affect our results of operations.

We may be unable to use some or all of our net operating loss carryforwards, which could materially and adversely affect our reported financial condition and results of operations.

As of December 31, 2020, we had approximately $18.2 million in federal net operating loss carryforwards available to offset future taxable income that will begin to expire in 2034 and approximately $132.4 million in federal net operating loss carryforwards available to offset future taxable income that have an indefinite life. As of December 31, 2020, we had approximately $138.3 million in state net operating loss carryforwards available to offset future taxable income. Some of these state net operating losses have an indefinite life and others are subject to different expiration rules.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders, who each own at least 5% of our stock, increase their collective ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. We have not yet undertaken an analysis of whether the transactions contemplated by the Merger Agreement gave rise to an “ownership change” for purposes of Section 382 of the Internal Revenue Code or whether there are any existing limitations on use with respect to our net operating losses.

It is possible that we will not generate taxable income in time to use our net operating loss carryforwards that are subject to expiration (or that we will not generate taxable income at all). If we have previously had, or have in the future, one or more Section 382 “ownership changes,” we may not be able to utilize a material portion of our net operating losses, even if we achieve profitability. If we are limited in our ability to use our net operating losses in future years in which we have taxable income, we will pay more taxes than if we were able to fully utilize our net operating losses. This could materially and adversely affect our results of operations.

We may require additional capital to pursue our business objectives and to respond to business opportunities, challenges, or unforeseen circumstances. If capital is not available to us, our business, results of operations, and financial condition may be adversely affected.

We intend to continue to make expenditures and investments to support the growth of our business and may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or

 

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unforeseen circumstances, including the need to develop new products or software or enhance our existing products and software, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them on terms that are acceptable to us, or at all. Any debt financing that we secure in the future could involve restrictive covenants, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, the restrictive covenants in credit facilities we may secure in the future may restrict us from being able to conduct our operations in a manner required for our business and may restrict our growth, which could have an adverse effect on our business, financial condition, or results of operations.

We cannot assure you that we will be able to comply with any such restrictive covenants. In the event that we are unable to comply with these covenants in the future, we would seek an amendment or waiver of the covenants. We cannot assure you that any such waiver or amendment would be granted. In such an event, we may be required to repay any or all of our existing borrowings, and we cannot assure you that we will be able to borrow under our existing credit agreements, or obtain alternative funding arrangements on commercially reasonable terms, or at all.

In addition, volatility in the credit markets may have an adverse effect on our ability to obtain debt financing. Any future issuances of equity or convertible debt securities could result in significant dilution to our existing stockholders, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our Common Stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges, or unforeseen circumstances could be significantly limited, and our business, results of operations, financial condition and prospects could be materially and adversely affected.

If we are unable to acquire necessary intellectual property or adequately protect our intellectual property, we could be competitively disadvantaged.

Our intellectual property, including our patents, trademarks, copyrights, trade secrets and other proprietary rights, constitutes a significant part of our value. Our success depends, in part, on our ability to protect our proprietary technology, brands and other intellectual property against dilution, infringement, misappropriation and competitive pressure by defending our intellectual property rights. To protect our intellectual property rights, we rely on a combination of patent, trademark, copyright and trade secret laws of the United States, Canada and countries in Europe and Asia and a combination of confidentiality procedures, contractual provisions and other methods, all of which offer only limited protection. In addition, we make efforts to acquire rights to intellectual property necessary for our operations. However, there can be no assurance that these measures will be successful in any given case, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States.

We own a portfolio of issued U.S. patents and pending U.S. and foreign patent applications that relate to a variety of smart building technology utilized in our business. We may file additional patent applications in the future in the United States and internationally. The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner all the way through to the successful issuance of a patent. We may choose not to seek patent protection for certain innovations and may choose not to pursue patent protection in certain jurisdictions. In addition, issuance of a patent does not guarantee that we have an absolute right to practice the patented invention.

If we fail to acquire the necessary intellectual property rights or adequately protect or assert our intellectual property rights, competitors may dilute our brands or manufacture and market similar software, services and products or convert our customers, which could adversely affect our market share and results of operations. We may not receive patents or trademarks for all our pending patent and trademark applications, and existing or

 

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future patents or licenses may not provide competitive advantages for our software, services and products. Furthermore, it is possible that our patent applications may not issue as granted patents, that the scope of our issued patents will be insufficient or not have the coverage originally sought, or that our issued patents will not provide us with any competitive advantages. Our competitors may challenge, invalidate or avoid the application of our existing or future intellectual property rights that we obtain or license. In addition, patent rights may not prevent our competitors from developing, using or selling products or services that are similar to or address the same market as our software, services and products. The loss of protection for our intellectual property rights could reduce the market value of our brands and our software, services and products, reduce new customer originations or upgrade sales to existing customers, lower our profits, and could have a material adverse effect on our business, financial condition, cash flows or results of operations.

Our policy is to require our employees that were hired to develop material intellectual property included in our products to execute written agreements in which they assign to us their rights in potential inventions and other intellectual property created within the scope of their employment (or, with respect to consultants and service providers, their engagement to develop such intellectual property), but we cannot assure you that we have adequately protected our rights in every such agreement or that we have executed an agreement with every such party. Finally, in order to benefit from the protection of patents and other intellectual property rights, we must monitor and detect infringement, misappropriation or other violations of our intellectual property rights and pursue infringement, misappropriation or other claims in certain circumstances in relevant jurisdictions, all of which are costly and time-consuming. As a result, we may not be able to obtain adequate protection or to effectively enforce our issued patents or other intellectual property rights.

In addition to patents and registered trademarks, we rely on trade secret rights, copyrights and other rights to protect our unpatented proprietary intellectual property and technology. Despite our efforts to protect our proprietary technologies and our intellectual property rights, unauthorized parties, including our employees, consultants, service providers or subscribers, may attempt to copy aspects of our products or obtain and use our trade secrets or other confidential information. We generally enter into confidentiality agreements with our employees and third parties that have access to our material confidential information, and generally limit access to and distribution of our proprietary information and proprietary technology through certain procedural safeguards. These agreements may not effectively prevent unauthorized use or disclosure of our intellectual property or technology, could be breached or otherwise may not provide meaningful protection for our trade secrets and know-how related to the design, manufacture or operation of our products and may not provide an adequate remedy in the event of unauthorized use or disclosure. We cannot assure you that the steps taken by us will prevent misappropriation of our intellectual property or technology or infringement of our intellectual property rights. Competitors may independently develop technologies or products that are substantially equivalent or superior to our solutions or that inappropriately incorporate our proprietary technology into their products or they may hire our former employees who may misappropriate our proprietary technology or misuse our confidential information. In addition, if we expand the geography of our service offerings, the laws of some foreign countries where we may do business in the future do not protect intellectual property rights and technology to the same extent as the laws of the United States, and these countries may not enforce these laws as diligently as government agencies and private parties in the United States.

From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement, misappropriation or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition. If we are unable to protect our intellectual property and technology, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date.

 

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Accusations of infringement of third-party intellectual property rights could materially and adversely affect our business.

There has been substantial litigation in the areas in which we operate regarding intellectual property rights, and we may be sued for infringement from time to time in the future. Also, in some instances, we have agreed to indemnify our customers for expenses and liability resulting from claimed intellectual property infringement by our solutions. From time to time, we may receive requests for indemnification in connection with allegations of intellectual property infringement and we may choose, or be required, to assume the defense and/or reimburse our customers for their expenses, settlement and/or liability. We cannot assure you that we will be able to settle any future claims or, if we are able to settle any such claims, that the settlement will be on terms favorable to us. Our broad range of technology may increase the likelihood that third parties will claim that we, or our customers infringe their intellectual property rights.

We have in the past received, and may in the future receive, notices of allegations of infringement, misappropriation or misuse of other parties’ proprietary rights. Furthermore, regardless of their merits, accusations and lawsuits like these may require significant time and expense to defend, may negatively affect customer relationships, may divert management’s attention away from other aspects of our operations and, upon resolution, may have a material adverse effect on our business, results of operations, financial condition, and cash flows.

Certain technology necessary for us to provide our solutions may, in fact, be patented by other parties either now or in the future. If such technology were validly patented by another person, we would have to negotiate a license for the use of that technology. We may not be able to negotiate such a license at a price that is acceptable to us or at all. The existence of such a patent, or our inability to negotiate a license for any such technology on acceptable terms, could force us to cease using the technology and cease offering subscriptions incorporating the technology, which could materially and adversely affect our business and results of operations.

If we, or any of our solutions, were found to be infringing on the intellectual property rights of any third party, we could be subject to liability for such infringement, which could be material. We could also be prohibited from using or selling certain subscriptions, prohibited from using certain processes, or required to redesign certain products, each of which could have a material adverse effect on our business and results of operations.

These and other outcomes may:

 

   

result in the loss of a substantial number of existing customers or prohibit the acquisition of new customers;

 

   

cause us to pay license fees for intellectual property we are deemed to have infringed;

 

   

cause us to incur costs and devote valuable technical resources to redesigning our products;

 

   

cause our cost of revenues to increase;

 

   

cause us to accelerate expenditures to preserve existing revenues;

 

   

materially and adversely affect our brand in the marketplace and cause a substantial loss of goodwill;

 

   

cause us to change our business methods or subscriptions; and

 

   

require us to cease certain business operations or offering certain products or features.

Our products and services may be affected from time to time by design and manufacturing defects that could adversely affect our business and result in harm to our reputation.

We offer complex software and hardware products and services that can be affected by design and manufacturing defects. Sophisticated full building operating system software and applications, such as those

 

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offered by us, have issues that can unexpectedly interfere with the intended operation of hardware or software products. Defects may also exist in components and products that we source from third parties. Any such defects could make our software, services and products unsafe, create a risk of property damage and personal injury, and subject us to the hazards and uncertainties of product liability claims and related litigation. In addition, from time to time, we may experience outages, service slowdowns, or errors that affect our software and full building operating system offerings. As a result, our services may not perform as anticipated and may not meet customer expectations. There can be no assurance that we will be able to detect and fix all issues and defects in the hardware, software, and services we offer. Failure to do so could result in widespread technical and performance issues affecting our products and services and could lead to claims against us. We maintain general liability insurance; however, design and manufacturing defects, and claims related thereto, may subject us to judgments or settlements that result in damages materially in excess of the limits of our insurance coverage. In addition, we may be exposed to recalls, product replacements or modifications, write-offs of inventory, property, plant and equipment, or intangible assets, and significant warranty and other expenses such as litigation costs and regulatory fines. If we cannot successfully defend any large claim, maintain our general liability insurance on acceptable terms, or maintain adequate coverage against potential claims, our financial results could be adversely impacted. Further, given that some of our solutions are considered security systems, quality problems could subject us to substantial liability, adversely affect the experience for users of our software, services and products, and result in harm to our reputation, loss of competitive advantage, poor market acceptance, reduced demand for our software, services and products, delay in new product and service introductions, and lost revenue.

Our new software, services and products may not be successful.

We launched our first smart building products in 2017. Since that time, we have launched a number of other offerings and anticipate launching additional software, services and products in the future, such as expanding into new verticals (e.g., commercial offices) or introducing new LatchOS modules aimed at capturing residents’ digital services spending. The software, services and products we may launch in the future may not be well-received by our customers, may not help us to generate new customers, may adversely affect the attrition rate of existing customers, may increase our customer acquisition costs and may increase the costs to service our customers. Any profits we may generate from these or other new products, software or services may be lower than profits generated from our existing software, services, and products and may not be sufficient for us to recoup our development or customer acquisition costs incurred. New software, services and products may also have lower gross margins, particularly to the extent that they do not fully utilize our existing infrastructure. In addition, new software, services and products may require increased operational expenses or customer acquisition costs and present new and difficult technological and intellectual property challenges that may subject us to claims or complaints if subscribers experience service disruptions or failures or other quality issues. To the extent our new software, services and products are not successful, it could have a material adverse effect on our business, financial condition, cash flows or results of operations.

If we fail to continue to develop our brand or our reputation is harmed, our business may suffer.

We believe that continuing to strengthen our current brand will be critical to achieving widespread acceptance of our software, services, and products and will require continued focus on active marketing efforts. The demand for and cost of online and traditional advertising have been increasing and may continue to increase. Accordingly, we may need to increase our investment in, and devote greater resources to, advertising, marketing, and other efforts to create and maintain brand loyalty among users, especially as we launch new LatchOS modules aimed to capture resident’s digital services spending. Brand promotion activities may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses incurred in building our brand. In addition, if we do not handle customer complaints effectively, our brand and reputation may suffer, we may lose our customers’ confidence, and they may choose to terminate, reduce or not to renew their subscriptions. Many of our customers also participate in social media and online blogs about smart building technology solutions, including our products, and our success depends in part on our ability to minimize negative and generate positive customer feedback through such online channels where existing and potential customers

 

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seek and share information. If we fail to promote and maintain our brand, our business could be materially and adversely affected.

Our applications run on mobile operating systems, networks, and devices that we do not control.

Our customers access our platform through the Latch App and Latch Manager App (collectively, “Latch Apps”). There is no guarantee that popular mobile devices and operating systems will continue to support the Latch Apps. We are dependent on the interoperability of the Latch Apps with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade the functionality of our digital offering or give preferential treatment to competitors could adversely affect our platform’s usage on mobile devices. Additionally, in order to deliver high-quality mobile content, it is important that our digital offering is designed effectively and works well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards, which could harm our business.

Potential problems with our information systems, third-party systems, and infrastructure that we rely on could interfere with our business and operations.

We rely on our information systems and third parties’ information systems and infrastructure (such as cloud computing platforms and databases) for hosting and making our software products available, processing customer orders, distribution of our products, billing our customers, processing credit card transactions, customer relationship management, supporting financial planning and analysis, accounting functions and financial statement preparation, and otherwise running our business. Information systems may experience interruptions, including interruptions of related services from third-party providers, which may be beyond our control. Such business interruptions could cause us to fail to meet customer requirements. All information systems, both internal and external, are potentially vulnerable to damage or interruption from a variety of sources, including without limitation, computer viruses, security breaches, energy blackouts, natural disasters, terrorism, war, telecommunication failures, employee or other theft, and third-party provider failures. Any errors or disruption in our information systems and those of the third parties upon which we rely could have a significant impact on our business. In addition, we may implement further and enhanced information systems in the future to meet the demands resulting from our growth and to provide additional capabilities and functionality. The implementation of new systems and enhancements is frequently disruptive to the underlying business of an enterprise, and can be time-consuming and expensive, increase management responsibilities, and divert management attention.

We collect, store, process, and use personal information and other customer data, which subjects us to legal obligations and laws and regulations related to security and privacy, and any actual or perceived failure to meet those obligations could harm our business.

We collect, process, store, and use a wide variety of data from current and prospective customers, including personal information, such as home addresses and geolocation. Federal, state, and international laws and regulations governing privacy, data protection, and e-commerce transactions require us to safeguard our customers’ personal information. The scope of such laws and regulations is rapidly changing. We are also subject to the terms of our privacy policies and contractual obligations to third parties related to privacy, data protection and information security. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection, and information security. However, the regulatory framework for privacy, data protection, and information security is, and is likely to remain, uncertain for the foreseeable future, and it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.

We also expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection, and information security proposed and enacted in various jurisdictions. Various states

 

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throughout the United States are increasingly adopting or revising privacy, information security and data protection laws and regulations that could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of customer, consumer and/or employee information, as well as any other third-party information we receive, and some of our current or planned business activities. For example, California recently enacted legislation, the California Consumer Privacy Act of 2018 (“CCPA”), that affords consumers who are California residents expanded privacy protections and control over the collection, use and sharing of their personal information. The CCPA went into effect on January 1, 2020, and gives California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA also provides for a private right of action for data breaches that may increase data breach litigation. Relatedly, the California Privacy Rights Act (the “CPRA”) was recently adopted by California voters. The CPRA significantly amends the CCPA and imposes additional data protection obligations on covered companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. The substantive requirements for businesses subject to the CPRA will go into effect on January 1, 2023, and become enforceable on July 1, 2023.

Additionally, the interpretations of existing federal and state consumer protection laws relating to online collection, use, dissemination, and security of personal information adopted by the Federal Trade Commission (the “FTC”), state attorneys general, private plaintiffs, and courts have evolved, and may continue to evolve, over time. Consumer protection laws require us to publish statements that describe how we handle personal information and choices individuals may have about the way we handle their personal information. If such information that we publish is considered untrue, we may be subject to government claims of unfair or deceptive trade practices, which could lead to significant liabilities and consequences. Furthermore, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce and thus violate Section 5(a) of the Federal Trade Commission Act of 1914 (the “FTC Act”). The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities.

In Canada, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) and similar provincial laws may impose obligations with respect to processing personal information. PIPEDA requires companies to obtain an individual’s consent when collecting, using or disclosing that individual’s personal information. Individuals have the right to access and challenge the accuracy of their personal information held by an organization, and personal information may only be used for the purposes for which it was collected. If an organization intends to use personal information for another purpose, it must again obtain that individual’s consent. Failure to comply with PIPEDA could result in significant fines and penalties. In Europe, the GDPR went into effect in May 2018 and imposes strict requirements for processing the personal data of individuals within the European Economic Area. Companies that must comply with the GDPR face increased compliance obligations and risk, including more robust regulatory enforcement of data protection requirements and potential fines for noncompliance of up to €20 million or 4% of the annual global revenues of the noncompliant company, whichever is greater. Relatedly, from January 1, 2021, companies have to comply with both the GDPR and the GDPR as incorporated into United Kingdom national law, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of global turnover. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, and it is unclear how United Kingdom data protection laws and regulations will develop in the medium to longer term, and how data transfers to and from the United Kingdom will be regulated in the long term. Currently there is a four to six-month grace period agreed in the EU and United Kingdom Trade and Cooperation Agreement, ending June 30, 2021, at the latest, whilst the parties discuss an adequacy decision. However, it is not clear whether (and when) an adequacy decision may be granted by the European Commission enabling data transfers from EU

 

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member states to the United Kingdom long term without additional measures. These changes may lead to additional costs and increase our overall risk exposure.

With data privacy and security laws and regulations imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations, we may face challenges in addressing their requirements and making necessary changes to our policies and practices and may incur significant costs and expenses in an effort to do so. Any failure or perceived failure by us to comply with our privacy policies, our data privacy or security related obligations to our customers or any of our other legal obligations relating to data privacy or security may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others, and could result in significant liability, loss of relationships with key third parties, or cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

Although we have established security procedures to protect customer information, our or partners’ security and testing measures may not prevent security breaches. Further, advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility security, or other developments may result in a compromise or breach of the technology we use to protect customer data. Any compromise of our security or breach of our customers’ privacy could harm our reputation or financial condition and, therefore, our business.

In addition, a party who circumvents our security measures or exploits inadequacies in our security measures, could, among other effects, misappropriate customer data or other proprietary information, cause interruptions in our operations, or expose customers to computer viruses or other disruptions. Actual or perceived vulnerabilities may lead to claims against us. To the extent that the measures we or our third-party business partners have taken prove to be insufficient or inadequate, we may become subject to litigation, breach notification obligations, or regulatory or administrative sanctions, which could result in significant fines, penalties, or damages and harm to our reputation. Depending on the nature of the information compromised, in the event of a data breach or other unauthorized access to our customer data, we may also have obligations to notify customers about the incident, and we may need to provide some form of remedy, such as a subscription to a credit monitoring service, for the individuals affected by the incident. A growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises customer data.

Furthermore, we may be required to disclose personal data pursuant to demands from individuals, privacy advocates, regulators, government agencies, and law enforcement agencies in various jurisdictions with conflicting privacy and security laws. This disclosure or refusal to disclose personal data may result in a breach of privacy and data protection policies, notices, laws, rules, court orders, and regulations and could result in proceedings or actions against us in the same or other jurisdictions, damage to our reputation and brand, and inability to provide our products and services to customers in certain jurisdictions. Additionally, changes in the laws and regulations that govern our collection, use, and disclosure of customer data could impose additional requirements with respect to the retention and security of customer data, could limit our marketing activities, and have an adverse effect on our business, financial condition, and operating results.

We rely on a limited number of suppliers, manufacturers, and logistics partners for our products. A loss of any of these partners could negatively affect our business.

We rely on a limited number of suppliers to manufacture and transport our products, including in some cases only a single supplier for some of our products and components. Our reliance on a limited number of manufacturers for our products increases our risks, since we do not currently have alternative or replacement manufacturers beyond these key parties. In the event of interruption from any of our manufacturers, we may not be able to increase capacity from other sources or develop alternate or secondary sources without incurring

 

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material additional costs and substantial delays. Furthermore, many of these manufacturers’ primary facilities are located in Asia. Thus, our business could be adversely affected if one or more of our suppliers is impacted by a natural disaster or other interruption at a particular location.

If we experience a significant increase in demand for our products, or if we need to replace an existing supplier or logistics partner, we may be unable to supplement or replace them on terms that are acceptable to us, which may undermine our ability to deliver our products to customers in a timely manner. For example, it may take a significant amount of time to identify a manufacturer that has the capability and resources to build our products to our specifications in sufficient volume. Identifying suitable suppliers, manufacturers, and logistics partners is an extensive process that requires us to become satisfied with their quality control, technical capabilities, responsiveness and service, financial stability, regulatory compliance, and labor and other ethical practices. Accordingly, a loss of any of our significant suppliers, manufacturers, or logistics partners could have an adverse effect on our business, financial condition and operating results.

We have limited control over our suppliers, manufacturers, and logistics partners, which may subject us to significant risks, including the potential inability to produce or obtain quality products and services on a timely basis or in sufficient quantity.

We have limited control over our suppliers, manufacturers, and logistics partners, which subjects us to risks, such as the following:

 

   

inability to satisfy demand for our products;

 

   

reduced control over delivery timing and product reliability;

 

   

reduced ability to monitor the manufacturing process and components used in our products;

 

   

limited ability to develop comprehensive manufacturing specifications that take into account any materials shortages or substitutions;

 

   

variance in the manufacturing capability of our third-party manufacturers;

 

   

price increases;

 

   

failure of a significant supplier, manufacturer, or logistics partner to perform its obligations to us for technical, market, or other reasons;

 

   

insolvency, bankruptcy or liquidation of a significant supplier, manufacturer, or logistics partner;

 

   

difficulties in establishing additional supplier, manufacturer, or logistics partner relationships if we experience difficulties with our existing suppliers, manufacturers, or logistics partners;

 

   

shortages of materials or components;

 

   

misappropriation of our intellectual property;

 

   

exposure to natural catastrophes, political unrest, terrorism, labor disputes, and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured or the components thereof are sourced;

 

   

changes in local economic conditions in the jurisdictions where our suppliers, manufacturers, and logistics partners are located;

 

   

the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, duties, tariffs, taxes, and other charges on imports, as well as trade restrictions and restrictions on currency exchange or the transfer of funds; and

 

   

insufficient warranties and indemnities on components supplied to our manufacturers or performance by our partners.

 

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The occurrence of any of these risks, especially during seasons of peak demand, could cause us to experience a significant disruption in our ability to produce and deliver our products to our customers.

Increases in component costs, long lead times, supply shortages, and supply changes could disrupt our supply chain and have an adverse effect on our business, financial condition, and operating results.

Meeting customer demand partially depends on our ability to obtain timely and adequate delivery of components for our smart building products. All of the components that go into the manufacturing of our products are sourced from a limited number of third-party suppliers, and some of these components are provided by a single supplier. Our manufacturers generally purchase these components on our behalf, subject to certain approved supplier lists, and we do not have long-term arrangements with some of our component suppliers. We are therefore subject to the risk of shortages and long lead times in the supply of these components and the risk that our suppliers discontinue or modify components used in our products. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in design, quantities, and delivery schedules. We may in the future experience component shortages, and the predictability of the availability of these components may be limited. In the event of a component shortage or supply interruption from suppliers of these components, we may not be able to develop alternate sources in a timely manner. Developing alternate sources of supply for these components may be time-consuming, difficult, and costly, and we may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to fill our orders in a timely manner. Any interruption or delay in the supply of any of these parts or components, or the inability to obtain these parts or components from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to meet our scheduled products deliveries to our customers.

Moreover, volatile economic conditions may make it more likely that our suppliers may be unable to timely deliver supplies, or at all, and there is no guarantee that we will be able to timely locate alternative suppliers of comparable quality at an acceptable price. Increases in our component costs could have a material effect on our gross margins. The loss of a significant supplier, an increase in component costs, or delays or disruptions in the delivery of components could adversely impact our ability to generate future revenue and earnings and have an adverse effect on our business, financial condition, and operating results.

Some of our products and services contain open source software, which may pose particular risks to our proprietary software, technologies, products, and services in a manner that could harm our business.

We use open source software in our products and services and anticipate using open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software product to publicly disclose all or part of the source code to such software product or to make available any derivative works of the open source code on unfavorable terms or at no cost. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. Additionally, we could face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license, or cease offering the implicated products or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require us to expend significant additional research and development resources, and we cannot guarantee that we will be successful.

Additionally, the use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. There is typically no support available for open source software, and we cannot ensure that the authors of such open source software will implement or push updates to address security risks or will not abandon further

 

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development and maintenance. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title or performance, cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have processes to help alleviate these risks, including a review process for screening requests from our developers for the use of open source software, but we cannot be sure that all open source software is identified or submitted for approval prior to use in our products and services. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have an adverse effect on our business, financial condition, and operating results.

From time to time, we may be subject to legal proceedings, regulatory disputes, and governmental inquiries that could cause us to incur significant expenses, divert our management’s attention, and materially harm our business, financial condition, and operating results.

From time to time, we may be subject to claims, lawsuits, government investigations, and other proceedings involving products liability, competition and antitrust, intellectual property, privacy, consumer protection, securities, tax, labor and employment, commercial disputes, and other matters that could adversely affect our business operations and financial condition. As our business grows, we may see a rise in the number and significance of these disputes and inquiries. Litigation and regulatory proceedings, and particularly the intellectual property infringement matters that we could face, may be protracted and expensive, and the results are difficult to predict. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any of these legal proceedings may result in significant settlement costs or judgments, penalties and fines, or require us to modify our products or services, make content unavailable, or require us to stop offering certain features, all of which could negatively affect our membership and revenue growth. See the section titled “Business—Legal Proceedings.

The results of litigation, investigations, claims, and regulatory proceedings cannot be predicted with certainty, and determining reserves for pending litigation and other legal and regulatory matters requires significant judgment. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, financial condition, and operating results.

Our business is subject to the risk of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by manmade problems such as terrorism.

Our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins, and similar events. The third-party systems and operations and manufacturers we rely on are subject to similar risks. For example, a significant natural disaster, such as an earthquake, fire, or flood, could have an adverse effect on our business, financial condition and operating results, and our insurance coverage may be insufficient to compensate us for losses that may occur. Acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could also cause disruptions in our or our suppliers’ and manufacturers’ businesses or the economy as a whole. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting locations that store significant inventory of our products or that house our servers. As we rely heavily on our computer and communications systems, and the internet to conduct our business and provide high-quality customer service, these disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt suppliers’ and manufacturers’ businesses, which could have an adverse effect on our business, financial condition, and operating results.

The outbreak of the COVID-19 coronavirus pandemic, or COVID-19, could have an adverse effect on our business, results of operations, and financial condition.

COVID-19 has caused significant volatility in financial markets and has caused what is likely to be an extended global recession. Public health problems resulting from COVID-19 and precautionary measures

 

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instituted by governments and businesses to mitigate its spread, including travel restrictions and quarantines, could contribute to a general slowdown in the global economy, adversely impact our customers, third-party suppliers and other business partners, and disrupt our operations. Changes in our and our customers’ operations in response to COVID-19 or employee illnesses resulting from the pandemic has resulted in and may continue to result in inefficiencies or delays, including in sales, delivery, and product development efforts, and additional costs related to business continuity initiatives, that cannot be fully mitigated through succession and business continuity planning, employees working remotely or teleconferencing technologies. For example, in the first quarter of 2020, we initiated a restructuring plan as part of our efforts to reduce operating expenses and preserve liquidity due to the uncertainty and challenges stemming from the COVID-19 pandemic. This restructuring included an approximate 25% reduction in headcount, which resulted in severance and benefit costs for affected employees and other miscellaneous direct and indirect costs. As a result of our strong 2020 performance, we have begun to rehire some of our employees who were terminated at the outset of the pandemic in connection with the restructuring, which may lead to increased expenses associated with the increasing headcount. Additionally, the COVID-19 pandemic has disrupted and may in the future continue to disrupt our hardware deliveries due to delays in construction timelines at our customers’ building sites.

COVID-19 and related governmental reactions have had and may continue to have a negative impact on our business, liquidity, results of operations, and stock price due to the occurrence of some or all of the following events or circumstances, among others:

 

   

our inability to manage our business effectively due to key employees becoming ill, working from home inefficiently, and being unable to travel to our facilities;

 

   

our and our customers’, third-party suppliers’ and other business partners’ inability to operate worksites, including construction sites, manufacturing facilities and shipping and fulfillment centers, due to employee illness or reluctance to appear at work, or “stay-at-home” regulations;

 

   

interruptions in manufacturing (including the sourcing of key components) and shipment of our products;

 

   

disruptions of the operations of our third-party suppliers, which could impact our ability to purchase components at efficient prices and in sufficient amounts;

 

   

reduced demand for our products and services, including due to any prolonged economic downturn that may occur;

 

   

our inability to raise additional capital or the dilution of our Common Stock if we raise capital by issuing equity securities;

 

   

volatility in the market price of our Common Stock and Warrants; and

 

   

incurrence of significant increases to employee health care and benefits costs.

The extent of the impact of COVID-19 on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak, the impact on capital and financial markets, and the related impact on the financial circumstances of our customers, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

Our smart building technology is subject to varying state and local regulations, which may be updated from time to time.

Our smart building technology is subject to certain state and local regulations, which may be updated from time to time. For example, our software, services and products are subject to regulations relating to building and fire codes and public safety and may eventually be subject to state and local regulation regarding access control systems. The regulations to which we are subject may change, additional regulations may be imposed, or existing

 

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regulations may be applied in a manner that creates special requirements for the implementation and operation of our software, services, and products that may significantly impact or even eliminate some of our revenues or markets. In addition, we may incur material costs or liabilities in complying with any such regulations. Furthermore, some of our customers must comply with numerous laws and regulations, which may affect their willingness and ability to purchase our software, services and products. The modification of existing laws and regulations or interpretations thereof or the adoption of future laws and regulations could adversely affect our business, cause us to modify or alter our methods of operations and increase our costs and the price of our software, services and products. In addition, we cannot provide any assurance that we will be able, for financial or other reasons, to comply with all applicable laws and regulations. If we fail to comply with these laws and regulations, we could become subject to substantial penalties or restrictions that could materially and adversely affect our business.

We may fail to comply with import and export, bribery and money laundering laws, regulations and controls.

We conduct our business in the United States and Canada and source our products from Asia and the United States. We are subject to regulation by various federal, state, local and foreign governmental agencies, including, but not limited to, agencies and regulatory bodies or authorities responsible for monitoring and enforcing product safety and consumer protection laws, data privacy and security laws and regulations, employment and labor laws, workplace safety laws and regulations, environmental laws and regulations, antitrust laws, federal securities laws and tax laws and regulations.

We are subject to the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. Travel Act, and possibly other anti-bribery laws, including those that comply with the Organization for Economic Cooperation and Development, or OECD, Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and other international conventions. Anti-corruption laws are interpreted broadly and prohibit the Company from authorizing, offering, or providing directly or indirectly improper payments or benefits to recipients in the public or private sector. Certain laws could also prohibit us from soliciting or accepting bribes or kickbacks. We can be held liable for the corrupt activities of our employees, representatives, contractors, partners and agents, even if we did not explicitly authorize such activity. Although we have implemented policies and procedures designed to ensure compliance with anti-corruption laws, there can be no assurance that all of our employees, representatives, contractors, partners, and agents will comply with these laws and policies.

Our operations require us to import from Asia and export to Canada, which geographically stretches our compliance obligations. We are also subject to anti-money laundering laws such as the USA PATRIOT Act and may be subject to similar laws in other jurisdictions. Our products are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. We may also be subject to import/export laws and regulations in other jurisdictions in which we conduct business or source our products. If we fail to comply with these laws and regulations, we and certain of our employees could be subject to substantial civil or criminal penalties, including the possible loss of export or import privileges; fines, which may be imposed on us and responsible employees or managers; and, in extreme cases, the incarceration of responsible employees or managers.

Changes in laws that apply to us could result in increased regulatory requirements and compliance costs which could harm our business, financial condition, cash flows and results of operations. In certain jurisdictions, regulatory requirements may be more stringent than in the United States. Noncompliance with applicable regulations or requirements could subject us to whistleblower complaints, investigations, sanctions, settlements, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions, suspension or debarment from contracting with certain governments or other customers, the loss of export privileges, multi-jurisdictional liability, reputational harm, and other collateral consequences. If any governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal

 

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litigation, our business, financial condition, cash flows and results of operations could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and an increase in defense costs and other professional fees.

Our operating results could be adversely affected if we are unable to accurately forecast customer demand for our products and services and adequately manage our inventory.

To ensure adequate inventory supply, we must forecast inventory needs and expenses and place orders sufficiently in advance with our suppliers and contract manufacturers, based on our estimates of future demand for particular products and services. Failure to accurately forecast our needs may result in manufacturing delays or increased costs. Our ability to accurately forecast demand could be affected by many factors, including changes in customer demand for our products and services, changes in demand for the software, services and products of our competitors, unanticipated changes in general market conditions, and the weakening of economic conditions or customer confidence in future economic conditions, such as those caused by the current COVID-19 outbreak. This risk will be exacerbated by the fact that we may not carry a significant amount of inventory and may not be able to satisfy short-term demand increases. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale.

Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margins to suffer and could impair the strength of our brand. Further, lower than forecasted demand could also result in excess manufacturing capacity or reduced manufacturing efficiencies, which could result in lower margins. Conversely, if we underestimate customer demand, our suppliers and manufacturers may not be able to deliver products to meet our requirements or we may be subject to higher costs in order to secure the necessary production capacity. An inability to meet customer demand and delays in the delivery of our products to our customers could result in reputational harm and damaged customer relationships and have an adverse effect on our business, financial condition, and operating results.

If we are unable to sustain pricing levels for our software, services, and products, our business could be adversely affected.

If we are unable to sustain pricing levels for our software subscriptions and products, whether due to competitive pressure or otherwise, our gross margins could be significantly reduced. Further, our decisions around the development of new software, services and products are grounded in assumptions about eventual pricing levels. If there is price compression in the market after these decisions are made, it could have a negative effect on our business.

Insurance policies may not cover all of our operating risks and a casualty loss beyond the limits of our coverage could negatively impact our business.

We are subject to all of the operating hazards and risks normally incidental to the provision of our products and services and business operations. In addition to contractual provisions limiting our liability to customers and third parties, we maintain insurance policies in such amounts and with such coverage and deductibles as required by law and that we believe are reasonable and prudent. Nevertheless, such insurance may not be adequate to protect us from all the liabilities and expenses that may arise from claims for personal injury, death, or property damage arising in the ordinary course of our business, and current levels of insurance may not be able to be maintained or available at economical prices. If a significant liability claim is brought against us that is not covered by insurance, then we may have to pay the claim with our own funds, which could have a material adverse effect on our business, financial condition, cash flows or results of operations.

 

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Downturns in general economic and market conditions and reductions in spending may reduce demand for our software, services, and products, which could harm our revenue, results of operations and cash flows.

Our revenue, results of operations and cash flows depend on the overall demand for our software, services and products. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, construction slowdowns, energy costs, international trade relations and other geopolitical issues, the availability and cost of credit and the global housing and mortgage markets could cause a decrease in consumer discretionary spending and business investment and diminish growth expectations in the U.S. economy and abroad.

During weak economic times, the available pool of potential customers may decline as the prospects for new multifamily apartment and single family rental construction and residential building renovation projects diminish, which may have a corresponding impact on our growth prospects. In addition, there is an increased risk during these periods that an increased percentage of property developers will file for bankruptcy protection, which may harm our revenue, profitability and results of operations. In addition, we may determine that the cost of pursuing any claim may outweigh the recovery potential of such claim. Prolonged economic slowdowns and reductions in new residential and commercial building construction and renovation projects may result in diminished sales of our software, services and products. Further worsening, broadening or protracted extension of an economic downturn could have a negative impact on our business, revenue, results of operations and cash flows.

We may face exposure to foreign currency exchange rate fluctuations.

While we have historically transacted in U.S. Dollars with the majority of our customers and suppliers, we have transacted in some foreign currencies, such as the Canadian Dollar, Chinese Renminbi and the New Taiwan Dollar, and may transact in more foreign currencies in the future. Accordingly, changes in the value of foreign currencies relative to the U.S. Dollar may affect our revenue and operating results. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and operating results. In addition, to the extent that fluctuations in currency exchange rates cause our operating results to differ from our expectations or the expectations of our investors, the trading price of our Common Stock and Warrants could decline.

Risks Related to Our Common Stock and Warrants

Our issuance of additional shares of Common Stock, Warrants or other convertible securities may dilute your ownership interest in us and could adversely affect our stock price.

From time to time in the future, we may issue additional shares of our Common Stock, Warrants or other securities convertible into Common Stock pursuant to a variety of transactions, including acquisitions. Additional shares of our Common Stock may also be issued upon exercise of outstanding stock options and Warrants. The issuance by us of additional shares of our Common Stock, Warrants or other securities convertible into our Common Stock would dilute your ownership interest in us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our Common Stock and Warrants. Subject to the satisfaction of vesting conditions and the expiration of our lock-up, shares issuable upon exercise of options will be available for resale immediately in the public market without restriction.

In the future, we expect to obtain financing or to further increase our capital resources by issuing additional shares of our capital stock or offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity, or shares of preferred stock. Issuing additional shares of our capital stock, other equity securities, or securities convertible into equity may dilute the economic and voting rights of our existing stockholders, reduce the market price of our Common Stock and Warrants, or both. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred stock, if issued, could have a preference with

 

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respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our Common Stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. As a result, holders of our Common Stock and Warrants bear the risk that our future offerings may reduce the market price of our Common Stock and Warrants and dilute their percentage ownership.

Future sales, or the perception of future sales, of our Common Stock and Warrants by us or our existing securityholders in the public market could cause the market price for our Common Stock and Warrants to decline.

The sale of substantial amounts of shares of our Common Stock or Warrants in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Common Stock and Warrants. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

In connection with the Business Combination, Latch stockholders are subject to certain restrictions on transfer with respect to the shares of Common Stock issued as part of the merger consideration beginning at Closing and ending on the date that is one year after the completion of the Business Combination, subject to certain price- and time-based releases.

Upon the expiration or waiver of the lock-up provisions described above, shares held by certain of our stockholders will be eligible for resale, subject to, in the case of certain stockholders, volume, manner of sale and other limitations under Rule 144.

As restrictions on resale end, the market price of shares of our Common Stock and Warrants could drop significantly if the holders of these shares or Warrants sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Common Stock or other securities.

In addition, the shares of our Common Stock reserved for future issuance under the Latch, Inc. 2021 Incentive Award Plan (the “2021 Incentive Plan”) will become eligible for sale in the public market once those shares are issued, subject to provisions relating to various vesting agreements, lock-up provisions and, in some cases, limitations on volume and manner of sale applicable to affiliates under Rule 144, as applicable. The number of shares reserved for future issuance under the 2021 Incentive Plan is equal to (i) 22,500,611 shares plus (ii) an annual increase for ten years on the first day of each calendar year beginning January 1, 2022, equal to the lesser of (A) 5% of the aggregate number of shares our Common Stock outstanding on the final day of the immediately preceding calendar year and (B) such smaller number of shares as is determined by our board of directors. The maximum number of shares of Common Stock that may be issued pursuant to the exercise of incentive stock options to purchase shares of our Common Stock (“ISOs”) granted under the 2021 Incentive Plan will be equal to 120,329,359 shares. We expect to file one or more registration statements on Form S-8 under the Securities Act to register shares of our Common Stock or securities convertible into or exchangeable for shares of our Common Stock issued pursuant to our equity incentive plans. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market.

Anti-takeover provisions in our governing documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our Common Stock.

Our certificate of incorporation, our bylaws and Delaware law each contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of

 

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directors. Among other things, our certificate of incorporation and/or our bylaws include the following provisions:

 

   

a staggered board, which means that our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause;

 

   

limitations on convening special stockholder meetings, which make it difficult for our stockholders to adopt desired governance changes;

 

   

a prohibition on stockholder action by written consent, which means that our stockholders are only able to take action at a meeting of stockholders and are not able to take action by written consent for any matter;

 

   

a forum selection clause, which means certain litigation against us can only be brought in Delaware;

 

   

the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without further action by our stockholders; and

 

   

advance notice procedures, which apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the DGCL, which prevents interested stockholders, such as certain stockholders holding more than 15% of our outstanding Common Stock, from engaging in certain business combinations unless (i) prior to the time such stockholder became an interested stockholder, the board of directors approved the transaction that resulted in such stockholder becoming an interested stockholder, (ii) upon consummation of the transaction that resulted in such stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the Common Stock, or (iii) following board approval, such business combination receives the approval of the holders of at least two-thirds of our outstanding Common Stock not held by such interested stockholder at an annual or special meeting of stockholders.

Any provision of our certificate of incorporation, our bylaws or Delaware law that has the effect of delaying, preventing or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our Common Stock and could also affect the price that some investors are willing to pay for our Common Stock.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our Common Stock and Warrants less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act. As an emerging growth company, we may follow reduced disclosure requirements and do not have to make all of the disclosures that public companies that are not emerging growth companies do. We will remain an emerging growth company until the earlier of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (b) the last day of the fiscal year following the fifth anniversary of the date of the completion of the initial public offering of TSIA; (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC, which means the market value of our Common Stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act;

 

   

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s

 

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report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote of stockholders on executive compensation, stockholder approval of any golden parachute payments not previously approved and having to disclose the ratio of the compensation of our chief executive officer to the median compensation of our employees.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards; and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We may choose to take advantage of some, but not all, of the available exemptions for emerging growth companies. We cannot predict whether investors will find our Common Stock or Warrants less attractive if we rely on these exemptions. If some investors find our Common Stock or Warrants less attractive as a result, there may be a less active trading market for our Common Stock and Warrants and our share and Warrant price may be more volatile.

Our certificate of incorporation and our bylaws provide that the Court of Chancery of the State of Delaware is the sole and exclusive forum for substantially all disputes between us and our stockholders, which limits our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our certificate of incorporation and our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the (a) Court of Chancery (the “Chancery Court”) of the State of Delaware (or, in the event that the Chancery Court does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for: (i) any derivative action, suit or proceeding brought on our behalf; (ii) any action, suit or proceeding asserting a claim of breach of fiduciary duty owed by any of our directors, officers, or stockholders to us or to our stockholders; (iii) any action, suit or proceeding asserting a claim arising pursuant to the DGCL, our certificate of incorporation or our bylaws; or (iv) any action, suit or proceeding asserting a claim governed by the internal affairs doctrine; and (b) subject to the foregoing, the federal district courts of the United States is the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Notwithstanding the foregoing, such forum selection provisions shall not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts of the United States have exclusive jurisdiction. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition.

Additionally, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As noted above, our certificate of incorporation and our bylaws provide that the federal district courts of the United States shall have jurisdiction over any action arising under the Securities Act. Accordingly, there is uncertainty as to whether a court would enforce such provision. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.

 

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The market price of our Common Stock and Warrants may be volatile or may decline regardless of our operating performance. You may lose some or all of your investment.

The market price of our Common Stock and Warrants is likely to be volatile. The stock market recently has experienced extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies. You may not be able to resell your shares at an attractive price due to a number of factors such as those listed in this section and the following:

 

   

the impact of the COVID-19 pandemic on our financial condition and the results of operations;

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual earnings or those of other companies in our industry compared to market expectations;

 

   

conditions that impact demand for our products;

 

   

future announcements concerning our business, our customers’ businesses or our competitors’ businesses;

 

   

the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

   

the size of our public float;

 

   

coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;

 

   

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

changes in laws or regulations that adversely affect our industry or us;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

changes in senior management or key personnel;

 

   

issuances, exchanges or sales, or expected issuances, exchanges or sales, of our capital stock;

 

   

changes in our dividend policy;

 

   

adverse resolution of new or pending litigation against us; and

 

   

changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.

These broad market and industry factors may materially reduce the market price of our Common Stock and Warrants, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our Common Stock and Warrants is low. As a result, you may suffer a loss on your investment.

In the past, following periods of market volatility, stockholders have instituted securities Class Action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.

If securities analysts do not publish research or reports about us, or if they issue unfavorable commentary about us or our industry or downgrade our Common Stock or Warrants, the price of our Common Stock and Warrants could decline.

The trading market for our Common Stock and Warrants depends, in part, on the research and reports that third-party securities analysts publish about us and the industries in which we operate. We may be unable or slow

 

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to attract research coverage, and if one or more analysts cease coverage of us, the price and trading volume of our securities would likely be negatively impacted. If any of the analysts that may cover us change their recommendation regarding our Common Stock or Warrants adversely, or provide more favorable relative recommendations about our competitors, the price of our Common Stock and Warrants would likely decline. If any analyst that may cover us ceases covering us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the price or trading volume of our Common Stock and Warrants to decline. Moreover, if one or more of the analysts who cover us downgrades our Common Stock or Warrants, or if our reporting results do not meet their expectations, the market price of our Common Stock and Warrants could decline.

The obligations associated with being a public company involve significant expenses and require significant resources and management attention, which may divert from our business operations.

We are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal control over financial reporting. As a result, we will incur increased legal, accounting and other expenses that Legacy Latch did not previously incur. Our entire management team and many of our other employees will need to devote substantial time to compliance and may not effectively or efficiently manage our transition into a public company.

In addition, the need to establish the corporate infrastructure demanded of a public company may also divert management’s attention from implementing our business strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal control over financial reporting, including IT controls, and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain our culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations. In addition, we cannot predict or estimate the amount of additional costs we may incur to comply with these requirements. We anticipate that these costs will materially increase our general and administrative expenses.

These rules and regulations result in our incurring legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, on our board committees or as executive officers.

As a public reporting company, we are subject to rules and regulations established from time to time by the SEC regarding our internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results or report them in a timely manner.

We are subject to the rules and regulations established from time to time by the SEC and Nasdaq. These rules and regulations require, among other things that we establish and periodically evaluate procedures with respect to our internal control over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel.

 

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In addition, as a public company, we are required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting.

We do not intend to pay dividends on our Common Stock for the foreseeable future.

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and growth of the business, and therefore, do not anticipate declaring or paying any cash dividends on Common Stock in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our business prospects, results of operations, financial condition, cash requirements and availability, debt repayment obligations, capital expenditure needs, contractual restrictions, covenants in the agreements governing current and future indebtedness, industry trends, the provisions of Delaware law affecting the payment of dividends and distributions to stockholders and any other factors or considerations the board of directors deems relevant.

You may only be able to exercise the Public Warrants on a “cashless basis” under certain circumstances, and if you do so, you will receive fewer shares of Common Stock from such exercise than if you were to exercise such Warrants for cash.

The Warrant Agreement provides that in the following circumstances holders of Warrants who seek to exercise their Warrants will not be permitted to do for cash and will, instead, be required to do so on a cashless basis in accordance with Section 3(a)(9) of the Securities Act: (i) if the shares of Common Stock issuable upon exercise of the Warrants are not registered under the Securities Act in accordance with the terms of the Warrant Agreement; (ii) if we have so elected and the shares of Common Stock are at the time of any exercise of a Warrant not listed on a national securities exchange such that they satisfy the definition of “covered securities” under Section 18(b)(1) of the Securities Act; and (iii) if we have so elected and we call the Public Warrants for redemption. If you exercise your Public Warrants on a cashless basis, you would pay the Warrant exercise price by surrendering the Warrants for that number of shares of Common Stock equal to (A) the quotient obtained by dividing (x) the product of the number of shares of Common Stock underlying the Warrants, multiplied by the excess of the “Fair Market Value” (as defined in the next sentence) over the exercise price of the Warrants by (y) the Fair Market Value and (B) 0.361 per whole Warrant. The “Fair Market Value” is the volume weighted average price of the Common Stock for the 10 trading days ending on the third trading day prior to the date on which the notice of exercise is received by the Warrant agent or on which the notice of redemption is sent to the holders of Warrants, as applicable. As a result, you would receive fewer shares of Common Stock from such exercise than if you were to exercise such Warrants for cash.

We may amend the terms of the Warrants in a manner that may have an adverse effect on holders of Public Warrants with the approval by the holders of at least 50% of the then outstanding Public Warrants. As a result, the exercise price of your Warrants could be increased, the exercise period could be shortened and the number of shares of Common Stock purchasable upon exercise of a Warrant could be decreased, all without your approval.

Our Warrants were issued in registered form under a Warrant Agreement between Continental Stock Transfer & Trust Company, as Warrant agent, and us. The Warrant Agreement provides that the terms of the Warrants may be amended without the consent of any holder for the purpose of (i) curing any ambiguity or curing, correcting or supplementing any defective provision or (ii) adding or changing any provisions with respect to matters or questions arising under the Warrant Agreement as the parties to the Warrant Agreement may deem necessary or desirable and that the parties deem to not adversely affect the rights of the registered holders of the Warrants, provided that the approval by the holders of at least 50% of the then-outstanding Public Warrants is required to make any change that adversely affects the rights of the registered holders of Public Warrants. Accordingly, we may amend the terms of the Public Warrants in a manner adverse to a holder of

 

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Public Warrants if holders of at least 50% of the then outstanding Public Warrants approve of such amendment. Although our ability to amend the terms of the Public Warrants with the consent of at least 50% of the then outstanding Public Warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the Warrants, convert the Warrants into cash or shares, shorten the exercise period or decrease the number of shares of Common Stock purchasable upon exercise of a Warrant.

Our Warrant Agreement designates the courts of the State of New York or the U.S. District Court for the Southern District of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of the Warrants, which could limit the ability of Warrant holders to obtain a favorable judicial forum for disputes with us.

Our Warrant Agreement provides that, subject to applicable law, (i) any action, proceeding or claim against us arising out of or relating in any way to the Warrant Agreement, including under the Securities Act, will be brought and enforced in the courts of the State of New York or the U.S. District Court for the Southern District of New York, and (ii) that we irrevocably submit to such jurisdiction, which jurisdiction shall be the exclusive forum for any such action, proceeding or claim. We will waive any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum.

Notwithstanding the foregoing, these provisions of the Warrant Agreement will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the United States are the sole and exclusive forum. Any person or entity purchasing or otherwise acquiring any interest in any of our Warrants shall be deemed to have notice of and to have consented to the forum provisions in our Warrant Agreement. If any action, the subject matter of which is within the scope the forum provisions of the Warrant Agreement, is filed in a court other than a court of the State of New York or the U.S. District Court for the Southern District of New York (a “foreign action”) in the name of any holder of our Warrants, such holder shall be deemed to have consented to: (x) the personal jurisdiction of the state and federal courts located in the State of New York in connection with any action brought in any such court to enforce the forum provisions (an “enforcement action”), and (y) having service of process made upon such Warrant holder in any such enforcement action by service upon such Warrant holder’s counsel in the foreign action as agent for such Warrant holder.

This choice-of-forum provision may limit a Warrant holder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our Warrant Agreement inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.

We may redeem your unexpired Warrants prior to their exercise at a time that is disadvantageous to you, thereby making your Warrants worthless.

We have the ability to redeem outstanding Warrants at any time after they become exercisable and prior to their expiration, (a) at a price of $0.01 per Warrant, provided that the closing price of our Common Stock equals or exceeds $18.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date on which we give proper notice of such redemption to the Warrant holders and provided certain other conditions are met, or (b) at a price of $0.10 per Warrant, provided that the closing price of our Common Stock equals or exceeds $10.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date on which we give proper notice of such redemption to the Warrant holders and provided certain other conditions are met. If and when the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable

 

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state securities laws. Redemption of the outstanding Warrants could force you to (i) exercise your Warrants and pay the exercise price therefor at a time when it may be disadvantageous for you to do so, (ii) sell your Warrants at the then-current market price when you might otherwise wish to hold your Warrants or (iii) accept the nominal redemption price which, at the time the outstanding Warrants are called for redemption, is likely to be substantially less than the market value of your Warrants. None of the Private Placement Warrants will be redeemable by us so long as they are held by the Sponsor or its permitted transferees.

 

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USE OF PROCEEDS

We are filing the registration statement of which this prospectus is a part to permit holders of the shares of our Common Stock and our Warrants described in the section entitled “Selling Securityholders” to resell such shares of Common Stock and Warrants. We will not receive any proceeds from the sale of shares of Common Stock or Warrants by the Selling Securityholders.

The Selling Securityholders will pay all incremental selling expenses relating to the sale of their shares of Common Stock and Warrants, including underwriters’ or agents’ commissions and discounts, brokerage fees, underwriter marketing costs and all reasonable fees and expenses of any legal counsel representing the Selling Securityholders, except that we will pay the reasonable fees and expenses of one legal counsel for the Selling Securityholders, in the event of an underwritten offering of their securities. We will bear all other costs, fees and expenses incurred in effecting the registration of the securities covered by this prospectus, including, without limitation, all registration and filing fees, printing and delivery fees, Nasdaq listing fees and fees and expenses of our counsel and our accountants.

We are also registering shares of our Common Stock that may be issued upon exercise of Warrants and shares of our Common Stock reserved for issuance upon the exercise of Options held by certain of our former employees. We will receive the proceeds from any exercise of Warrants or Options for cash. We intend to use the proceeds from the exercise of Warrants or Options for cash for general corporate and working capital purposes.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and growth of the business, and therefore, do not anticipate declaring or paying any cash dividends on our Common Stock in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our business prospects, results of operations, financial condition, cash requirements and availability, debt repayment obligations, capital expenditure needs, contractual restrictions, covenants in the agreements governing current and future indebtedness, industry trends, the provisions of Delaware law affecting the payment of dividends and distributions to stockholders and any other factors or considerations the board of directors deems relevant.

 

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MARKET INFORMATION

Our Common Stock and Warrants are listed on Nasdaq under the symbols “LTCH” and “LTCHW,” respectively. Prior to the consummation of the Business Combination, the TSIA Class A common stock, units and warrants were listed on Nasdaq under the symbols “TSIA,” “TSIAU” and “TSIAW,” respectively. As of June 21, 2021, there were 405 holders of record of our Common Stock and two holders of record of our Warrants. The actual number of stockholders of our Common Stock and the actual number of holders of our Warrants is greater than the number of record holders and includes holders of our Common Stock or Warrants whose shares of Common Stock or Warrants are held in street name by brokers and other nominees.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

FOR TSIA AND LEGACY LATCH

Introduction

The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” in connection with the completion of the Business Combination and the consummation of the Transactions.

TSIA is a blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more businesses. TSIA was incorporated in Delaware on September 18, 2020.

Latch is an enterprise technology company focused on revolutionizing the way people experience spaces by making spaces better places to live, work, and visit. Latch has created a full-building operating system, LatchOS, that addresses the essential needs of modern buildings by streamlining building operations, enhancing the resident experience, and enabling more efficient interactions with service providers.

The unaudited pro forma condensed combined balance sheet as of March 31, 2021 combines the historical balance sheet of TSIA and the historical balance sheet of Legacy Latch on a pro forma basis as if the Business Combination and related transactions, summarized below, had been consummated on March 31, 2021. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 and three months ended March 31, 2021 combines the historical statements of operations of TSIA and Legacy Latch for such periods on a pro forma basis as if the Business Combination and related transactions, summarized below, had been consummated on January 1, 2020, the beginning of the earliest period presented:

 

   

The merger of Merger Sub, the wholly owned subsidiary of TSIA, with and into Legacy Latch, with Legacy Latch as the surviving company;

 

   

The conversion of all outstanding Legacy Latch shares, warrants, convertible debt, and redeemable convertible preferred stock into Legacy Latch common stock that will roll over into the Post-Combination Company;

The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”

 

   

The conversion of all outstanding TSIA shares, preferred stock, and warrants into TSIA common stock that will roll over into the Post- Combination Company; and

 

   

The issuance of the Post-Combination Company’s shares to be distributed at $10 per share as follows: 100,000,000 shares to Legacy Latch, 29,994,084 shares to TSIA, 19,000,000 shares to the Subscribers, 6,762,000 shares to the Sponsor, and 738,000 shares to the Sponsor, which are subject to certain vesting conditions including that the VWAP of the Post-Combination Company equals or exceeds $14.00 for any 20 trading days within a 30 trading day period on or prior to the five year anniversary of the consummation of the Business Combination. The 738,000 shares subject to vesting will not be considered outstanding until vesting conditions are achieved.

The historical financial information of TSIA was derived from the unaudited financial statements of TSIA as of and for the three months ended March 31, 2021 (included elsewhere in this prospectus) and the audited financial statements for the period from September 18, 2020 (inception) through December 31, 2020 (included elsewhere in this prospectus). The historical financial information of Legacy Latch was derived from the unaudited condensed consolidated financial statements of Legacy Latch as of and for the three months ended

 

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March 31, 2021 (included elsewhere in this prospectus) and the audited consolidated financial statements for the year ended December 31, 2020 (included elsewhere in this prospectus). This information should be read together with TSIA’s and Legacy Latch’s audited 2020 financial statements and unaudited financial statements for the quarter ended March 31, 2021, and related notes, the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and other financial information included elsewhere in this prospectus.

The pro forma combined financial statements do not necessarily reflect what the Post-Combination Company’s financial condition or results of operations would have been had the Business Combination occurred on the dates indicated. The pro forma combined financial information also may not be useful in predicting the future financial condition and results of operations of the Post-Combination Company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

Accounting for the Business Combination

The Business Combination was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with accounting principles generally accepted in the United States of America. Under this method of accounting, TSIA was treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy Latch issuing shares for the net assets of TSIA, accompanied by a recapitalization. The net assets of TSIA were recognized at fair value (which is consistent with carrying value), with no goodwill or other intangible assets recorded.

Legacy Latch was determined to be the accounting acquirer based on evaluation of the following facts and circumstances:

 

   

Legacy Latch’s shareholders have the majority of the voting power in the Post-Combination Company

 

   

Legacy Latch appointed the majority of the board of directors of the Post-Combination Company

 

   

Legacy Latch’s existing management comprises the management of the Post-Combination Company

 

   

Legacy Latch will comprise the ongoing operations of the Post-Combination Company

 

   

Legacy Latch is the larger entity based on historical revenues and business operations

 

   

The Post-Combination Company assumed Latch’s name.

Description of the Business Combination

Pursuant to the Merger Agreement, the aggregate stock consideration issued by the Post-Combination Company in the Business Combination was $1.558 billion, consisting of 155,756,084 newly issued shares, of the Post-Combination Company valued at $10.00 per share. Legacy Latch received $1.0 billion in the form of 100,000,000 newly issued shares of the Post-Combination Company. TSIA public shareholders received $299.9 million in the form of 29,994,084 newly issued shares, the Subscribers received $190.0 million in the form of 19,000,000 newly issued shares, and the Sponsor received $67.6 million in the form of 6,762,000 newly issued shares in exchange for TSIA’s existing Class B common stock. The following represents the consideration at closing of the Business Combination:

 

(in millions)       

Share issuance to Legacy Latch shareholders

   $ 1,000.0  

Share issuance to TSIA shareholders

     299.9  

Share issuance to Subscriber(s)

     190.0  

Share issuance to Sponsor

     67.6  
  

 

 

 

Share Consideration—at Closing

   $ 1,557.5  

 

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The value of share consideration issuable at the Closing was determined by application of the Exchange Ratio of 0.8971, which is based on the implied $10.00 per share prior to the Business Combination.

In connection with the execution of the Merger Agreement, Sponsor and TSIA’s directors and officers (the “Sponsor Agreement Parties”) entered into the Sponsor Agreement. The Sponsor Agreement sets forth both the lock-up periods and vesting provisions for the outstanding Founder Shares and Private Placement Warrants. The Sponsor Agreement Parties have agreed, subject to certain exceptions, not to transfer the Founder Shares until the earlier of (A) one year after the completion of the Business Combination and (B) subsequent to the Business Combination, (x) the date on which the last reported sales price of the common stock equals or exceeds $12 per share for any 20-trading days within any 30-trading day period commencing at least 150 days after the closing date of the Business Combination or (y) the date on which Latch completes a liquidation, merger, capital stock exchange, reorganization or similar transaction that results in Latch’s stockholders having the right to exchange their shares of common stock for cash, securities or other property. In addition, the Sponsor Agreement Parties have agreed not to transfer the Private Placement Warrants (or any shares of common stock issuable upon exercise thereof) until 30 days after the completion of the Business Combination. Refer to the vesting provisions for the Founder Shares documented in the footnotes of the shares table below.

Basis of Pro Forma Presentation

The following summarizes the pro forma Post-Combination Company shares outstanding taking into consideration actual redemptions:

 

    

(Shares)

   %  

Post-Combination Company shares issued to Legacy Latch stockholders

   100,000,000      64.2

Post-Combination Company shares issued to TSIA public stockholders

   29,994,084      19.3

Post-Combination Company shares issued to Subscribers

   19,000,000      12.2

Post-Combination Company shares issued to the Sponsor and certain TSIA’s directors(1)

   6,762,000      4.3
  

 

  

Pro Forma Shares Outstanding

   155,756,084      100

 

(1)

Post-Combination Combined Company shares to TSIA sponsor includes 6,762,000 shares outstanding in the Combined Company upon consummation of the Business Combination, and excludes an additional 738,000 shares which are subject to certain vesting conditions including a Combined Company share price that equals or exceeds $14.00 for any 20 trading days within a 30 trading day period on or prior to the five year anniversary of the consummation of the Business Combinations. The 738,000 shares will not be considered outstanding until vesting conditions are achieved.

The following unaudited pro forma condensed combined balance sheet as of March 31, 2021, the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020, and the unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2021 are based on the historical financial statements of TSIA and Legacy Latch. The unaudited pro forma adjustments are based on information currently available. The assumptions and estimates underlying the unaudited pro forma adjustments are described in the accompanying notes. Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial information. Certain amounts that appear in this section may not sum due to rounding.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

(In thousands)

 

     As of March 31, 2021                   As of March 31,
2021
 
     Legacy
Latch
(Historical)
     TSIA
(Historical)
     Transaction
Accounting
Adjustments
           Pro Forma
Combined
 

ASSETS

             

Current assets

             

Cash and cash equivalents

   $ 46,542      $ 739      $ 300,005       (A)      $ 502,726  
           (10,500     (B)     
           (18,247     (C)     
           190,000       (D)     
           (5,754     (D)     
           (59     (L)     

Accounts receivable, net

     9,165        —          —            9,165  

Inventories, net

     7,747        —          —            7,747  

Prepaid expenses and other current assets

     6,520        583        —            7,103  
     

 

 

    

 

 

      

 

 

 

Total Current Assets

     69,974        1,322        455,445          526,741  

Cash held in Trust Account

     —          300,005        (300,005     (A)        —    

Property and equipment, net

     951        —          —            951  

Internally developed software, net

     8,408        —          —            8,408  

Other non-current assets

     1,116        —          —            1,116  

Total Assets

     80,449        301,327        155,440          537,216  
     

 

 

    

 

 

      

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities

             

Accounts payable

   $ 5,530      $ 3,193      $ —          $ 8,723  

Accrued expenses

     7,112        —          —            7,112  

Due to related party

     —          47        —            47  

Deferred revenue

     3,189        —          —            3,189  

Other current liabilities

     470                470  

Total Current Liabilities

     16,301        3,240        —            19,541  
  

 

 

    

 

 

    

 

 

      

 

 

 

Deferred revenue

     14,613        —          —            14,613  

Term loan, net

     6,011        —          (1,640     (E)        4,371  

Convertible notes, net

     56,305        —          (56,305     (F)        —    

Warrant liability

        32,254        (20,200     (M)        12,054  

Deferred underwriters’ discount

     —          10,500        (10,500     (B)        —    

Other non-current liabilities

     1,670        —          (1,111     (F)        559  

Total Liabilities

     94,900        45,994        (89,756        51,138  
  

 

 

    

 

 

    

 

 

      

 

 

 

Commitments and Contingencies

             

Class A common stock subject to possible redemption—TSIA

     —          250,333        (250,333     (J)        —    

Redeemable convertible preferred stock

     160,605        —          (160,605     (G)        —    

Stockholders’ Equity

             

Common stock—Legacy Latch

     —          —          —         (E)        —    
           —         (F)     
           1       (G)     
           (1     (H)     

Preferred stock—TSIA

     —          —          —            —    

 

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     As of March 31, 2021                  As of March 31,
2021
 
     Legacy
Latch
(Historical)
    TSIA
(Historical)
    Transaction
Accounting
Adjustments
           Pro Forma
Combined
 

Class A common stock—TSIA

     —         —         2       (D)        16  
         10       (H)     
         1       (I)     
         3       (J)     
         —         (L)     

Class B common stock—TSIA

     —         1       (1     (I)        —    

Additional paid-in capital

     25,230       21,475       (16,615     (C)        681,675  
         189,998       (D)     
         (5,754     (D)     
         1,640       (E)     
         51,111       (F)     
         160,604       (G)     
         (9     (H)     
         250,330       (J)     
         (16,476     (K)     
         20,200       (M)     
         (59     (L)     

Accumulated other comprehensive income

     2       —         —            2  

Accumulated deficit

     (200,288     (16,476     (1,632     (C)        (195,615
         6,305       (F)     
         16,476       (K)     
  

 

 

   

 

 

   

 

 

      

 

 

 

Total Stockholders’ Equity

     (175,056     5,000       656,134          486,078  
  

 

 

   

 

 

   

 

 

      

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 80,449     $ 301,327     $ 155,440        $ 537,216  
  

 

 

   

 

 

   

 

 

      

 

 

 

See accompanying notes to unaudited pro forma condensed combined financial information.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

 

    Three Months
Ended March 31,
2021 Legacy
Latch
(Historical)
    Three Months
Ended March 31,
2021 TSIA
(Historical)
    Transaction
Accounting
Adjustments
           Three Months
Ended March 31,
2021 Pro Forma
Combined
 

Revenue:

          

Hardware revenue

  $ 5,014     $ —        $ —           $ 5,014  

Software revenue

    1,615       —          —             1,615  

Total revenue

    6,629       —          —             6,629  

Cost of revenue:

          

Cost of hardware revenue

    6,028       —          —             6,028  

Cost of software revenue

    134       —          —             134  

Total cost of revenue

    6,162       —          —             6,162  

Operating expenses:

          

Research and development

    9,615       —          —             9,615  

Sales and marketing

    3,750       —          —             3,750  

General and administrative (2)

    17,696         (2,098     (AAA      15,598  

Formation and operating costs (2)

    —          2,479       (178     (AAA      2,301  

Depreciation and amortization

    653       —          —             653  

Total operating expenses

    31,714       2,479       (2,275        31,918  

Loss from operations

    (31,247     (2,479     2,275          (31,451

Other income:

          

Change in fair value of warrant liabilities

    —          (6,610     3,543       (DDD      (3,067

Interest income (expense), net

    (3,318     3       (3     (BBB      (3,318

Other income (expense)

    (3,536     —          3,597       (CCC      61  

Other income, net

    (6,854     (6,607     7,137          (6,324

Income/(loss) before income taxes

    (38,101     (9,086     9,412          (37,775

Benefit (provision) for income taxes(1)

    —          —          —             —     
 

 

 

   

 

 

   

 

 

      

 

 

 

Net income (loss)

  $ (38,101   $ (9,086   $ 9,412        $ (37,775
 

 

 

   

 

 

   

 

 

      

 

 

 

Per Share:

          

Basic and diluted net loss per common share

  $ (3.27   $ (—           $ (0.24

Weighted average shares outstanding, basic and diluted

    11,636       —               155,756  

Basic and diluted net loss per common share, Class A common stock

  $ —        $ —            

Weighted average shares outstanding, basic and diluted, Class A common stock

    —          30,000         

Basic and diluted net loss per common share, Class B common stock

  $ —        $ (1.21       

Weighted average shares outstanding, basic and diluted, Class B common stock

    —          7,500         

 

(1)

The pro forma income statement adjustments do not have an income tax effect due to the pro forma net loss position and existing valuation allowance.

(2)

Legacy Latch and TSIA incurred $2,098 and $178, respectively, for transaction expenses related to the Business Combination for the three months ended March 31, 2021, which have also been included within the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020, but are not expected to reoccur beyond 12 months after the Business Combination.

See accompanying notes to unaudited pro forma condensed combined financial information.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

 

    Twelve Months
Ended December 31,
2020 Legacy Latch
(Historical)
    For the Period from
September 18, 2020
(inception) thru
December 31, 2020
TSIA (Historical)
    Transaction
Accounting
Adjustments
           Twelve Months
Ended December 31,
2020 Pro Forma
Combined
 

Revenue:

          

Hardware revenue

  $ 14,264     $ —       $ —          $ 14,264  

Software revenue

    3,797       —         —            3,797  

Total revenue

    18,061       —         —            18,061  

Cost of revenue:

          

Cost of hardware revenue

    19,933       —         —            19,933  

Cost of software revenue

    306       —         —            306  

Total cost of revenue

    20,239       —         —            20,239  

Operating expenses:

          

Research and development

    25,314       —         —            25,314  

Sales and marketing

    13,126       —         —            13,126  

General and administrative (2)

    19,797       900       3,907       (AA      24,604  

Depreciation and amortization

    1,382       —         —            1,382  

Total operating expenses

    59,619       900       3,907          64,426  

Loss from operations

    (61,797     (900     (3,907        (66,604

Other income:

          

Extinguishment of debt

    (199     —         —            (199

Change in fair value of warrant liabilities

    —         (5,756     3,691       (EE      (2,065

Transaction costs

      736            736  

Interest income (expense), net

    (3,172     2       (2     (BB      (3,172

Other income (expense)

    (818     —         6,305       (CC      6,350  
        863       (DD   

Other income, net

    (4,189     (5,018     10,857          1,650  

Income/(loss) before income taxes

    (65,986     (5,918     6,950          (64,954

Benefit (provision) for income
taxes(1)

    8       —         —            8  

Net income (loss)

  $ (65,994   $ (5,918   $ 6,950        $ (64,962

Per Share:

          

Basic and diluted net loss per common share

  $ (8.18   $ (—          $ (0.42

Weighted average shares outstanding, basic and diluted

    8,069       —              155,756  

Basic and diluted net loss per common share, Class A common stock

  $ —       $ —           

Weighted average shares outstanding, basic and diluted, Class A common stock

    —         30,000         

Basic and diluted net loss per common share, Class B common stock

  $ —       $ (0.99       

Weighted average shares outstanding, basic and diluted, Class B common stock

    —         7,500         

 

(1)

The pro forma income statement adjustments do not have an income tax effect due to the pro forma net loss position and existing valuation allowance.

(2)

Legacy Latch and TSIA incurred $1,568 and $778, respectively, for transaction expenses related to the Business Combination in the year ended December 31, 2020, which have been included within the unaudited pro forma condensed combined statement of operations, but are not expected to reoccur beyond 12 months after the Business Combination.

See accompanying notes to unaudited pro forma condensed combined financial information.

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

1.

Basis of Presentation

The Business Combination was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with GAAP. Under this method of accounting, TSIA was treated as the “acquired” company for financial reporting purposes. This determination was primarily based on evaluation of the following facts and circumstances: (i) Legacy Latch’s shareholders have the majority of the voting power of the Post-Combination Company; (ii) Legacy Latch appointed the majority of the board of directors of the Post-Combination Company; (iii) Legacy Latch’s existing management comprises the management of the Post Combination Company; (iv) Legacy Latch will comprise the ongoing operations of the Post Combination Company; (v) Legacy Latch is the larger entity based on historical revenues and business operations; and (vi) the Post-Combination Company assumed Latch’s name. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Legacy Latch issuing shares for the net assets of TSIA, accompanied by a recapitalization. The net assets of TSIA were stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination are those of Legacy Latch.

The unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2021 assumes that the Business Combination occurred on March 31, 2021. The unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2020 and three months ended March 31, 2021 present the pro forma effect of the Business Combination as if it had been completed on January 1, 2020. These periods are presented on the basis of Legacy Latch as the accounting acquirer.

The unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2021 has been prepared using, and should be read in conjunction with, the following:

 

   

TSIA’s unaudited Condensed Balance Sheet as of March 31, 2021 and the related notes for the period ended March 31, 2021, included elsewhere in this prospectus; and

 

   

Legacy Latch’s unaudited Condensed Consolidated Balance Sheet as of March 31, 2021 and the related notes for the quarter ended March 31, 2021, included elsewhere in this prospectus.

The unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2020 has been prepared using, and should be read in conjunction, with the following:

 

   

TSIA’s audited Statement of Operations for the period from September 18, 2020 (inception) through December 31, 2020 and the related notes, included elsewhere in this prospectus; and

 

   

Legacy Latch’s audited Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020 and the related notes, included elsewhere in this prospectus.

The unaudited Pro Forma Condensed Combined Statement of Operations for the quarter ended March 31, 2021 has been prepared using, and should be read in conjunction, with the following:

 

   

TSIA’s unaudited Condensed Statement of Operations for the three months ended March 31, 2021, and the related notes, included elsewhere in this prospectus; and

 

   

Legacy Latch’s unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2021 and the related notes, included elsewhere in this prospectus.

Management has made significant estimates and assumptions in its determination of the pro forma adjustments (“Transaction Accounting Adjustments”). As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.

The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments

 

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to Financial Disclosures about Acquired and Disposed Businesses.” The pro forma financial information reflects transaction related adjustments management believes are necessary to present fairly Latch’s pro forma results of operations and financial position following the closing of the Business Combination and related transactions as of and for the periods indicated. The related transaction accounting adjustments are based on currently available information and assumptions management believes are, under the circumstances and given the information available at this time, reasonable, and reflective of adjustments necessary to report Latch’s financial condition and results of operations upon the closing of the Business Combination. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. Latch believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination and related transactions contemplated based on information available to management at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.

The unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings, or cost savings that may be associated with the Business Combination.

The unaudited condensed pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated.

The unaudited pro forma condensed combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the Post-Combination Company. They should be read in conjunction with the audited financial statements and notes thereto of each of TSIA and Legacy Latch included elsewhere in this prospectus.

 

2.

Accounting Policies

Upon consummation of the Business Combination, management will perform a comprehensive review of the two entities’ accounting policies. As a result of the review, management may identify differences between the accounting policies of the two entities which, when conformed, could have a material impact on the financial statements of the Post-Combination Company.

 

3.

Adjustments to Unaudited Pro Forma Condensed Combined Financial Information

The unaudited pro forma condensed combined financial information has been prepared to illustrate the effect of the Business Combination and has been prepared for informational purposes only.

The historical financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give pro forma effect to events that directly reflect the accounting for the transaction. Legacy Latch and TSIA have not had any historical relationship prior to the Business Combination, other than Tishman Speyer, an affiliate of the Sponsor, being a customer and investor in Legacy Latch in the ordinary course of business. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.

The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had the Post- Combination Company filed consolidated income tax returns during the periods presented.

The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined statement of operations are based upon the number of the Post-Combination Company’s shares outstanding, assuming the Business Combination occurred on January 1, 2020.

 

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Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet

The adjustments included in the unaudited pro forma condensed combined balance sheet as of March 31, 2021 are as follows:

 

  (A)

Reflects the reclassification of cash and cash equivalents held in the TSIA trust account that became available in connection with the Business Combination.

 

  (B)

Reflects the settlement of deferred underwriters’ fees incurred during the TSIA IPO that was due upon completion of the Business Combination.

 

  (C)

Reflects the transaction costs incurred by Legacy Latch and TSIA subsequent to March 31, 2021 including, but not limited to, advisory fees, legal fees and registration fees that were paid in connection with the consummation of the Business Combination.

 

  (D)

Represents the proceeds from the issuance of 19,000,000 shares of the Post-Combination Company at $10.00 per share to the Subscribers, offset by the PIPE placement fees of $5.8 million. The costs related to the issuance of the PIPE investment are adjusted against additional paid-in capital.

 

  (E)

Represents the settlement of Legacy Latch’s warrants immediately prior to the consummation of the Business Combination. The warrants were net settled in a cashless exchange for common stock of Legacy Latch.

 

  (F)

Represents the conversion of the outstanding principal amount of $50.0 million and accrued interest of $1.1 million on Legacy Latch’s convertible notes immediately prior to the consummation of the Business Combination into Legacy Latch common stock. The remaining adjustment of $6.3 million to retained earnings reflects the gain from the difference between the carrying amount of the convertible notes at conversion of $56.3 million and the associated outstanding principal of $50.0 million.

 

  (G)

Represents the conversion of Legacy Latch’s redeemable convertible preferred stock immediately prior to the consummation of the Business Combination into Latch common stock.

 

  (H)

Represents recapitalization of Legacy Latch’s equity and issuance of 100,000,000 shares of the Post-Combination Company’s common stock to Legacy Latch’s equity holders as consideration for the reverse recapitalization.

 

  (I)

Reflects the conversion of TSIA Class B common stock held by the initial stockholders to shares of TSIA Class A common stock.

 

  (J)

Represents the reclassification of historical TSIA’s Class A common stock previously subject to possible redemption from temporary equity into permanent equity immediately prior to the consummation of the Business Combination.

 

  (K)

Reflects the reclassification of TSIA’s historical retained earnings to additional paid-in-capital in connection with the consummation of the Business Combination.

 

  (L)

Reflects the actual redemptions of 5,916 public shares for aggregate redemption payments of $59,160 allocated to Class A Common Stock and additional paid-in capital using par value $0.0001 per share and at a redemption price of $10 per share.

 

  (M)

Latch has evaluated the accounting for TSIA’s public and private placement warrants for the Post Combination Company under ASC 480 and ASC 815. Latch has concluded that the public warrants qualify as equity instruments under ASC 815 after considering among other factors that after the Business Combination, the Post-Combination Company has a single class equity structure. Separately Latch has concluded that the private placement warrants will continue to be accounted for as a liability under ASC 815-40. The adjustment reflects the reclassification of TSIA’s public warrants from liabilities to equity in connection with the consummation of the Business Combination.

 

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Table of Contents

Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations

The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 are as follows:

 

  (AA)

Reflects the transaction costs incurred by Legacy Latch and TSIA in 2021 including, but not limited to, advisory fees, legal fees and registration fees. This is a non-recurring item.

 

  (BB)

Reflects the elimination of TSIA’s historical interest income earned on the Trust Account.

 

  (CC)

Represents the gain on the conversion of Legacy Latch’s outstanding convertible notes immediately prior to the consummation of the Business Combination into Latch common stock. The adjustment represents the difference between carrying amount of the convertible notes as of March 31, 2021 at conversion of $56.3 million and the outstanding principal of $50.0 million. This is a non-recurring item.

 

  (DD)

Reflects the reversal of the loss on re-measurement at fair value of the derivative liability related to Legacy Latch’s convertible notes and the liability related to Legacy Latch’s warrants recognized in Legacy Latch’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020.

 

  (EE)

Reflects the reversal of the unrealized loss on change in fair value of warrants related to public warrants recognized in TSIA’s Historical Statement of Operations for the period from September 18, 2020 (Inception) through December 31, 2020 on the basis of Latch’s conclusion that the public warrants are equity instruments after the Business Combination.

The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the quarter ended March 31, 2021 are as follows:

 

  (AAA)

Reflects the reversal of transaction costs incurred by Legacy Latch and TSIA in Q1 2021 that were reflected in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020, including, but not limited to, advisory fees, legal fees and registration fees. This is a non-recurring item.

 

  (BBB)

Reflects the elimination of TSIA’s historical interest income earned on the Trust Account.

 

  (CCC)

Reflects the reversal of the loss on re-measurement at fair value of the derivative liability related to Legacy Latch’s convertible notes and the liability related to Legacy Latch’s warrants recognized in Legacy Latch’s Condensed Consolidated Statement of Operations and Comprehensive Loss for the quarter ended March 31, 2021.

 

  (DDD)

Reflects the reversal of the unrealized loss on change in fair value of warrants related to public warrants recognized in TSIA’s Historical Condensed Statement of Operations for the quarter ended March 31, 2021 on the basis of Latch’s conclusion that the public warrants are equity instruments after the Business Combination.

 

4.

Earnings per Share

Represents the net earnings per share calculated using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination, assuming the shares were outstanding since January 1, 2020. As the Business Combination, including related equity purchases, is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average shares outstanding for basic and diluted net income (loss) per share assumes that the shares issued in connection with the Business Combination were outstanding for the entire period presented.

 

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The unaudited pro forma condensed combined financial information has been prepared taking into consideration actual redemptions:

 

(Net loss presented in thousands of dollars)

Pro Forma Basic and Diluted

Loss Per Share

   Three Months
Ended March 31,
2021
    Twelve Months
Ended
December 31,
2020
 

Pro Forma net loss attributable to shareholders

   $ (37,775   $ (64,962

Weighted average shares outstanding, basic and diluted

     155,756       155,756  

Basic and diluted net loss per share

   $ (0.24   $ (0.42

Pro Forma Weighted Average Shares—Basic and Diluted

            

Post-Combination Company shares issued to Legacy Latch stockholders

     100,000,000       100,000,000  

Post-Combination Company shares issued to TSIA public shareholders

     29,994,084       29,994,084  

Total Post-Combination Company shares issued to Subscribers

     19,000,000       19,000,000  

Total Post-Combination Company shares issued to the Sponsor and certain of TSIA’s directors

     6,762,000       6,762,000  
  

 

 

   

 

 

 

Pro Forma Weighted Average Shares—Basic and Diluted

     155,756,084       155,756,084  

As a result of the pro forma net loss, the earnings per share amounts exclude the anti-dilutive impact from the following securities:

 

   

The 10,000,000 public warrants sold during the TSIA IPO that were converted in the Merger into warrants to purchase up to a total of 10,000,000 Post-Combination Company shares, which are exercisable at $11.50 per share;

 

   

The 5,333,334 Private Placement Warrants that will be exercisable for one share of Latch’s common stock at an exercise price of $11.50 per share.

 

   

The 18,890,548 options outstanding in Legacy Latch as of March 31, 2021, of which 9,852,829 are vested and 9,037,719 are unvested.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of financial condition and results of operations together with the consolidated financial statements and the related notes and other financial information of Latch included elsewhere in this prospectus. Some of the information contained in this discussion and analysis contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth in the section of the prospectus captioned “Risk Factors” and elsewhere in this prospectus, actual results may differ materially from those anticipated in these forward-looking statements.

Overview

Latch is an enterprise technology company focused on revolutionizing how people experience spaces by making spaces better places to live, work, and visit. Latch has created a full-building operating system, LatchOS, which addresses the essential requirements of modern buildings. Our LatchOS system streamlines building operations, enhances the resident experience, and enables efficient interactions with service providers. Our product offerings, designed to optimize the resident experience, include smart access, delivery and guest management, smart home and sensors, connectivity, and resident experience. We combine hardware, software, and services into a holistic system that makes spaces more enjoyable for residents, more efficient and profitable for building operators, and more convenient for service providers.

LatchOS enables spaces across North America. Throughout 2020, approximately 1 in 10 newly constructed multi-family apartment home units in the United States were equipped with Latch products and installed across 35 states and Canada, from affordable housing in Baltimore, to historic buildings in Manhattan, to luxury towers in the Midwest. Latch works with real estate developers, large and small, ranging from the largest real estate companies in the world to passionate local owners.

We engage with customers early in their new construction or renovation process, helping establish Latch as the technology consultant for the building. LatchOS is made up of modules, enabling essential capabilities for modern buildings. Building owners have the flexibility to select LatchOS modules to match their specific building or portfolio’s needs. LatchOS software starting pricing ranges from $7-12 per apartment per month, depending on which capabilities the building owner selects, for the LatchOS modules Smart Access, Smart Home, and Guest Management. Customers also purchase our hardware devices upfront to go along with the LatchOS modules they choose.

The LatchOS ecosystem has been created to serve all the stakeholders at a building and today LatchOS modules consists of the following modules:

 

   

Smart Access. Latch’s smart access software capabilities include complete resident, building staff, guest, service provider and construction access management powered by the Latch R, M, and C devices. These devices serve every door in a building, from apartment doors to elevators, from parking garages to gyms.

 

   

Delivery & Guest Management. Going beyond smart access, Latch Intercom solves the access problem for unexpected guests and deliveries enabling visitors to quickly connect with residents or building operators with just a few clicks. The Latch Delivery Assistant takes this further to the package room with a remote, virtual doorman facilitating secure package management.

 

   

Smart Home & Sensors. Latch’s enterprise device management enables smart home capabilities from thermostat, lighting, leak detection and other sensor integration, monitoring, and centralized device management for building owners and private resident control right in the Latch App. The integration of the LatchOS platform with smart home device manufacturers like Google Nest, ecobee, Honeywell, Jasco, Leviton, and more, provide our customers with a wide choice in smart home devices that can be controlled through LatchOS.

 

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Connectivity. Connecting devices, operations, and residents reliably to the network across buildings can be complex. Latch Intercom and Latch Hub’s cellular connectivity bring internet access to new and existing building infrastructure from new construction to retrofits.

 

   

Resident Experience. Residents can control all of the Latch-enabled devices in their spaces through the Latch App right from the moment they arrive. Latch’s mobile applications also enable resident onboarding, streamlining the move-in experience. The average Latch App user already interacts with the Latch App multiple times per day, giving us an incredible foundation from which to engage and transact further with the residents over time as we introduce new functionalities and services to the Latch mobile applications.

After Latch has been installed and set up at a building, the building managers add all their residents as users to the Latch system. Our mobile applications then enable the residents to unlock all connected spaces in Latch buildings from the front door, package rooms, common spaces, elevators, and garages to their unit entrance, control their thermostat and smart home devices from the app, see who rang the bell at the front door through the intercom and let guests in through the app. In the near future, we believe interacting with service providers, buying renters insurance or choosing their internet package will all be possible from the Latch App. Residents become highly engaged users across all the capabilities that Latch provides them in their spaces.

Beyond enabling a new set of experiences at buildings for residents and building operators, Latch turns the purchase experience of smart building technology for building owners from a complex sale with multiple vendors into a simple process with Latch as a single vendor with one single contract and straightforward billing. LatchOS enables a unified management experience for building operators with a single interface to manage all Latch experiences instead of having a separate interface for each vendor and solution. Latch also enables a unified resident experience with a single interface through the Latch App for all resident-facing interactions and Latch experiences in our customers’ buildings. Devices that are part of the Latch ecosystem work better together since our curated set of partner devices and our smart building operating system, LatchOS, seamlessly integrate instead of a patchwork of devices from different vendors with different standards and interfaces that create technology silos and limited experiences.

Our sales strategy is simple, repeatable, scalable, and unique. We engage directly with our customers to ensure they have the best possible experience with Latch and our partners from sale to installation to the lease-up. Latch engages with customers early in their construction or renovation process, establishing Latch as a technology advisor to the building. This engagement enables us to provide more technology advice early in the development process and creates high revenue visibility. Our customers sign LOIs specifying which software and devices they want to receive and on which dates. This approach leads to multi-year software contracts, direct feedback loops with our customers and their residents, local and regional market insights, and a complete picture of the ever-changing demands of building operators. The installation timeline can range from six to 18 months after signing the LOI, depending on the construction schedule. We continuously evolve our products and add new features between signing the LOI and the time of installation.

Currently, we primarily serve the rental homes markets in North America. Based on internal research and external reporting, we estimate there are approximately 32 million multi-family apartment home units in North America. Today we primarily serve new construction and retrofit buildings. Since our launch in 2017, we have seen the share of our business coming from retrofit opportunities increase significantly: a trend we expect to continue over the medium term. We also serve the single-family rental market through our existing relationships with large real estate developers and owners. Based on internal research and external reporting, we estimate there are 15 million single-family rental home units in North America.

Developments in the First Quarter of 2021

We launched the C2 series door-mounted access control product to make retrofits and ongoing operations easier for every project. We have booked over 20,000 units and delivered over 1,000 units to customers across

 

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the country. The C2 includes: a patent-pending turn mechanism ensuring smooth locking and unlocking; a three-piece modular design simplifying and reducing costs of installation; 24 months of battery life decreasing building staff time and operational costs; and improved functionality and quality at a lower price to both customers and Latch.

We launched NFC unlock on Android through an over the air update, delivering a much desired feature for the industry and deepening our integrations with the Google ecosystem. As a result of owning the full technology stack—hardware, firmware and software, we can more easily and quickly deploy new features that add immediate value to both building owners and residents. This strategic technology approach provides significant advantages and future opportunities. NFC unlock on Android has an average ~850ms unlock time and more consistent performance despite Android device fragmentation.

COVID-19 Update

In March 2020, the outbreak of COVID-19 was declared a pandemic. Measures taken by various governments to contain the virus have affected economic activity. We have taken a number of measures to monitor and mitigate the effects of COVID-19, such as safety and health measures for our people (such as social distancing and working from home) and securing the supply of materials that are essential to our production process. The COVID-19 pandemic disrupted and may intermittently continue to disrupt our hardware deliveries due to delays in construction timelines at our customer’s building sites. In addition, the COVID-19 pandemic resulted in a global slowdown of economic activity and a recession in the United States, and the economic situation remains fluid as parts of the economy appear to be recovering while others continue to struggle. While the nature of the situation is dynamic, the Company has considered the impact when developing its estimates and assumptions. Actual results and outcomes may differ from management’s estimates and assumptions.

In the first quarter of fiscal year 2020, we initiated a restructuring plan as part of our efforts to reduce operating expenses and preserve liquidity due to the uncertainty and challenges stemming from the COVID-19 pandemic. We incurred costs in connection with involuntary termination benefits associated with our corporate-related initiatives and cost-saving opportunities. The reduction in force (“RIF”) involved an approximate 25% reduction in headcount, which resulted in severance and benefits costs for affected employees and other miscellaneous direct costs. These amounts are recorded principally in research and development, sales and marketing, and general and administrative based on the department the expense relates to within the Consolidated Statements of Operations and Comprehensive Loss. As a result of our strong performance in 2020 and through 2021, we have rehired some of the staff that was terminated at the outset of the pandemic.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to provide certain relief in response to the COVID-19 pandemic. The CARES Act includes numerous tax provisions and other stimulus measures. Among the various provisions in the CARES Act, the Company is utilizing the payroll tax deferrals. In the second quarter of fiscal 2020, Legacy Latch received and repaid $3.4 million in loans under the CARES Act.

The Business Combination

On January 24, 2021, we entered into the Merger Agreement with TSIA and Merger Sub. On June 4, 2021, upon the closing of the Merger, Merger Sub merged with and into Latch, with Latch surviving as the surviving company pursuant to the provisions of the DGCL. Upon consummation of the Transactions, the new combined company was renamed Latch, Inc.

The Business Combination is accounted for as a reverse capitalization in accordance with GAAP. Under the guidance in ASC 805, Business Combinations, TSIA is treated as the “acquired” company for financial reporting purposes. We are deemed the accounting predecessor of the combined business and the successor SEC registrant, meaning that our financial statements for previous periods will be disclosed in the registrant’s future periodic

 

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reports filed with the SEC. The Business Combination will have a significant impact on our future reported financial position and results as a consequence of the reverse capitalization. The most significant changes in Latch’s future reported financial position and results are a net increase in cash (as compared to our Condensed Consolidated Balance Sheets as of March 31, 2021) of approximately $453 million, which includes approximately $190 million in proceeds from the PIPE Investment, which was consummated substantially simultaneously with the Business Combination, offset by additional transaction costs for the Business Combination. The transaction costs for the Business Combination are approximately $45.8 million, including $36.8 million that was funded in connection with the closing of the Business Combination, of which $10.5 million represents deferred underwriter fees related to TSIA’s initial public offering. See “Unaudited Pro Forma Combined Financial Information for TSIA and Legacy Latch” in this prospectus for additional information.

Products and Platform

Our platform, LatchOS, is a full building operating system that brings together all the elements that make up the modern building experience for building managers, vendors, and residents. The LatchOS ecosystem consists of two general elements: software and devices. Our software, hardware, and services in turn enable the essential features for every stakeholder in the Latch ecosystem.

Latch has three software products in the market today: The Latch Resident Mobile Applications, Latch Manager Web, and the Latch Manager Mobile Application. These three products encompass the software that powers the LatchOS platform and allows for devices and services to operate in harmony. We also have a collection of first-party devices and third-party partner devices and services that can integrate into the LatchOS system to be managed, controlled and/or operated through our software products.

Software Products

Latch Mobile Applications

The Latch mobile applications are the primary tools for residents to unlock doors, give access to guests or service providers, control and manage smart devices, interact and communicate with the building, consumer services and transact with Latch. Latch offers a subset of these experiences through the Apple Watch as well.

Latch Manager Web and Manager Mobile Applications

Latch Manager Web is LatchOS’s central orchestration application for building operators. Our fully integrated system lets property managers support the resident experience from a single source. From the Latch Manager Web, property managers can control access sharing, resolve issues remotely, save time and money on rental unit turnover, and ensure their residents are secure.

First Party Hardware Devices

M, C, R Series

The M, C and R series are door-mounted access control products that interface with industry-standard lock hardware. They are designed to meet and exceed every project requirement. They are built to industry standards, compliant with code requirements, and suited for interior or exterior use.

Other Devices

Latch Intercom integrates seamlessly into the Latch core access systems and allows audio and video calls for remote unlocking. The Latch Camera is a dome camera that integrates seamlessly into Latch Intercom and core access systems to allow for video calls for remote unlocking. Latch Hub is an all-in-one connectivity

 

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solution that enables smart access, smart home, and sensor devices to do more at every building. The Latch Leak Detectors offer a simple and scalable solution to enable leak prevention, detection, and quick resolution for building owners and residents.

Works with Latch: 3rd Party Devices, Software and Partnerships

The LatchOS platform is compatible with a collection of industry-leading smart home devices, allowing these devices to be managed, controlled, and viewed from the LatchOS platform. Latch has selected several initial smart home devices with which to integrate (currently or in the near term), including smart home devices manufactured by Google Nest, Honeywell, ecobee, Jasco, Leviton, and Sonos, based on Latch’s assessment that these devices are aligned with Latch’s vision around enterprise device management privacy and security, design, and brand when it comes to building operators and residents. Latch has entered into agreements with Google Nest, Honeywell and ecobee and plans to enter into an agreement with Sonos. Such agreements include application programming interface (API) licensing terms that allow partner devices to be managed, controlled, and viewed from the LatchOS platform as appropriate for desired functionality. Such agreements include other terms that are customary in API license agreements, including intellectual property ownership and licensing provisions, joint marketing and advertising arrangements, indemnification obligations, confidentiality restrictions, and data protection requirements. Jasco and Leviton smart lighting products can be controlled by the LatchOS platform through the Zigbee protocol; therefore, no separate API license agreement is necessary between Latch and Jasco and Leviton in order to integrate the LatchOS platform with their smart lighting products.

We understand at Latch that operating a building can be complex and it can take many different processes, systems, and tools to manage a great building. A majority of buildings we work with use property management software to manage their back-office operations. In order to accommodate those complex use-cases, we have forged partnerships with the top property management software companies, such as Yardi and RealPage, and enabled integrations between such software and our software and devices so the building can operate seamlessly between the two systems at the building.

Latch leverages its cutting-edge smart access platform to unlock new use-cases in adjacent real estate verticals and with partners that serve buildings. Our smart access platform integrates with partners such as Tour24, Pinwheel and UPS to enable unattended showings and secure package delivery, and it has also allowed us to build a robust B2B2C distribution channel for us to transact with residents through the Latch App and offer future consumer and on-demand services.

Key Factors Affecting Our Performance

We believe that our future success will be dependent on many factors, including those further discussed below. While these areas represent opportunities for Latch, they also represent challenges and risks that we must successfully address in order to operate our business.

Investing in Research and Development (“R&D”) and enhancing our customer experience. Our performance is significantly dependent on the investments we make in research and development, including our ability to attract and retain highly skilled research and development personnel. We must continually develop and introduce innovative new hardware products, mobile applications and other new offerings. If we fail to innovate and enhance our brand and our products, our market position and revenue will likely be adversely affected.

Product introductions and expansion of our platform. We will need to expend additional resources to continue introducing new products, features, and functionality to enhance the value of our platform. To date, product introductions have often had a positive impact on our operating results due primarily to increases in revenue associated with sales of new products in the quarters following their introduction. For example, we have recently introduced a number of product enhancements and features, including Latch Intercom and our Smart

 

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Home integration software. In the future, we intend to continue to release new products and enhance our existing products, and we expect that our operating results will be impacted by these releases.

Category adoption, expansion of our total addressable market, and market growth. Our future growth depends in part on the continued consumer adoption of hardware and software products which improve resident experience, and the growth of this market. In addition, our long-term growth depends in part on our ability to expand into adjacent markets and international territories in the future.

Key Business Metrics

We review the following key business metrics to measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions which will impact the future operational results of the Company. Increases or decreases in our key business metrics may not correspond with increases or decreases in our revenue.

The limitations our Key Business Metrics have as an analytical tool are: (1) they might not accurately predict our future GAAP financial results (2) we might not realize all or any part of the anticipated value reflected in its Total Bookings, and (3) other companies, including companies in our industry, may calculate our Key Business Metrics or similarly titled measures differently, which reduces its usefulness as a comparative measure.

 

     Three months ended
March 31,
     $ Change      % Change  
     2021      2020  
     (In thousands, except home units)  

U.S. GAAP Measures:

           

Revenue

   $ 6,629      $ 2,726      $ 3,903        143

Net Loss

   $ (38,101    $ (15,941    $ (22,160      (139 %) 

Key Performance Indicators:

           

Hardware Bookings

   $ 28,217      $ 14,425      $ 13,792        96

Software Bookings

   $ 43,479      $ 23,572      $ 19,907        84

Total Bookings

   $ 71,696      $ 37,997      $ 33,699        89

Booked ARR

   $ 38,882      $ 17,647      $ 21,235        120

Booked Home Units—Cumulative

     368,994        176,902        192,092        109

Adjusted EBITDA

   $ (13,892    $ (13,907    $ 14        —    

 

     Years ended
December 31,
               
     2020      2019      $ Change      % Change  
     (In thousands, except home units)  

U.S. GAAP Measures:

           

Revenue

   $ 18,061      $ 14,887      $ 3,174        21

Net Loss

   $ (65,994    $ (50,226    $ (15,768      (31 )% 

Key Performance Indicators:

           

Hardware Bookings

   $ 72,511      $ 40,800      $ 31,711        78

Software Bookings

   $ 92,454      $ 69,809      $ 22,645        32

Total Bookings

   $ 164,965      $ 110,609      $ 54,356        49

Booked ARR

   $ 31,134      $ 14,486      $ 16,648        115

Booked Home Units—Cumulative

     304,749        144,699        160,050        111

Adjusted EBITDA

   $ (54,842    $ (44,930    $ (9,912      (22 )% 

Bookings

We use Bookings to measure sales volume and velocity of our hardware and software products. Bookings represent written but non-binding LOIs from our customers to purchase Latch hardware products and software

 

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services, not reflecting discounts. We sell software services with all our access hardware products. Based on historical experience, we believe there is sufficient or reasonable certainty about the customers’ ability and intent to fulfill these commitments with a target delivery date no longer than 24 months following LOI signature.

Hardware Bookings

Hardware Bookings represent the total revenue commitment to be recognized at time of shipment of the product. We calculate Hardware Bookings by multiplying the total booked units by the sales price (excluding discounts) for each respective unit. There is typically a lag between Hardware Bookings and recognition of GAAP revenue due to installation timelines with a target delivery date no longer than 24 months following LOI signature.

Software Bookings

Software Bookings represent the total revenue commitment over the life of the software agreement. We calculate Software Bookings by multiplying the total booked units by the subscription price (excluding discounts) and the contract term as outlined in the LOI. There is typically a lag between Software Bookings and recognition of GAAP revenue due to installation timelines and the recognition of Software Revenue over the course of the contract with a target delivery date no longer than 24 months following LOI signature. Our long-term software contracts typically average more than six years in length.

Booked ARR

We use Booked Annual Recurring Revenue (“ARR”) to assess the general health and trajectory of our recurring software. Booked ARR is defined as the cumulative value of annual recurring revenue from Latch software subscriptions that are under a signed LOI. We calculate Booked ARR by multiplying the total number of units that have been booked by the annual listed subscription pricing (excluding discounts) at the time of booking. LOIs typically deliver within six to 18 months of signing, depending on construction timelines. Booked ARR is adjusted for bookings that do not ship within a normal construction timeframe. It should be viewed differently from Software Booking as it represents only the average annual software revenue, not the lifetime contract value.

Booked Home Units—Cumulative

We use Booked Home Units—Cumulative to measure the number of homes signed to operate on our platform, market penetration in the rental homes market, and the size opportunity to grow revenue from increasing sales of additional hardware, software, and service revenue into signed homes. Booked Home Units represent the total number of apartment units or similar dwellings installed cumulatively, as well as committed to be installed, with Latch products. Booked Home Units are adjusted for bookings that do not ship within a normal construction timeframe. LOIs typically deliver within six to 18 months of signing, depending on construction timelines.

Adjusted EBITDA

We define Adjusted EBITDA as our net loss, excluding the impact of stock-based compensation expense, depreciation and amortization expense, interest income, interest expense, provision for income taxes, restructuring, one-time litigation expenses, loss on extinguishment of debt, change in fair value of derivative instruments, and our transaction related expenses. We believe excluding the impact of these expenses 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 prospectus Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets, and to develop operational goals for managing our business. Accordingly, we believe that

 

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Adjusted EBITDA provides useful information to investors, analysts, and others in understanding and evaluating our operating results in the same manner as our management and board of directors. See “Non-GAAP financial measures” for additional information and reconciliation of this measure.

Components of Results of Operations

Revenue

We currently generate revenue from two sources: (1) hardware devices that are both Latch built (“first-party”) and partner built (“third-party”) and (2) software products used by property managers via Web or mobile and by residents via mobile.

Hardware Revenue

We generate hardware revenue primarily from the sale of our portfolio of devices both first-party and third-party for our smart access and smart building solutions. We sell hardware to building developers through our channel partners who act as the intermediary and installer. We recognize hardware revenue when the hardware is shipped to our channel partners, which is when control is transferred to the building developer. We provide warranties related to the intended functionality of the products and those warranties typically allow for the return of defective hardware up to one year for electrical components and five years for mechanical components past the date of sale. We are currently in the process of beginning to launch our new generation of hardware products with much lower production costs, which we expect will improve our future hardware margins.

Software Revenue

We generate software revenue primarily through the sale of our software-as-a-service, or SaaS, over our cloud-based platform on a subscription-based arrangement. Subscription fees vary depending on the optional features selected by customers as well as the term length. SaaS arrangements generally have term lengths of month-to-month, two-year, five-year and ten-year and include a fixed-fee paid upfront except for the month-to-month arrangements. As a result of significant discounts provided on the longer-term software contracts paid up front, we have determined that there is a significant financing component and have therefore broken out the interest component. Revenue is primarily recognized on a ratable basis over the subscription period of the contractual arrangement beginning when or as control of the promised services is available or transferred to the customer. We expect software revenue to increase as a percentage of total revenue over time.

Cost of Revenue

Cost of hardware revenue consists primarily of product costs, including manufacturing costs, duties and other applicable importing costs, shipping and handling costs, packaging, warranty costs, assembly costs, and warehousing costs, as well as other non-inventoriable costs including personnel-related expenses associated with supply chain logistics and channel partner fees. Cost of software revenue consists primarily of outsourced hosting costs and personnel-related expenses associated with monitoring and managing the outsourced hosting service provider. Our cost of revenue excludes depreciation and amortization shown in operating expenses.

In 2019, the Trump administration imposed significant changes to U.S. trade policy with respect to China. Tariffs have subjected certain Latch products manufactured overseas to additional import duties. The amount of the import tariff has changed numerous times, and may change again in the future, based on action by U.S. presidential administrations. We continue to monitor the change in tariffs. If tariffs are increased, such actions may increase our cost of hardware revenue and reduce our hardware revenue margins further in the future.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, general and administrative, and depreciation and amortization expenses.

 

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Research and Development Expenses

Research and development expenses consist primarily of personnel and related expenses for our employees working on our product, design and engineering teams, including salaries, bonuses, benefits, payroll taxes, travel and stock-based compensation. Also included are non-personnel costs such as amounts paid to our third-party contract manufacturers for tooling, engineering and prototype costs of our hardware products, fees paid to third party consultants, R&D supplies and rent. We expect our research and development expenses to increase in absolute dollars as we continue to make significant investments in developing new products and enhancing existing products.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel and related expenses for our employees working on our sales, customer success, deployment and marketing teams, including salaries, bonuses, benefits, payroll taxes, travel, commissions and stock-based compensation. Also included are non-personnel costs such as marketing activities (trade shows and events, conferences, and digital advertising), professional fees, rent and customer support. We expect our sales and marketing expense to increase in absolute dollars as the restrictions related to COVID-19 begin to be lifted and as we continue to invest in our sales force to drive increased market share through new customer acquisition and provide best in class support to our existing customer base.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel and related expenses for our executive, legal, human resources, finance, and IT functions, including salaries, bonuses, benefits, payroll taxes, travel, and stock-based compensation. Additional expenses included in this category are non-personnel costs such as legal fees, rent, professional fees, audit fees, bad debt expense and insurance costs. During the first quarter of 2021, we incurred stock-based compensation expense from a non-recurring secondary purchase as described in the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2021 set forth herein. Excluding this impact, we expect our general and administrative expenses to increase in absolute dollars due to our plans to remediate our material weaknesses which were identified in the years ended December 31, 2020 and 2019, as well as the continued growth of our business and related infrastructure as well as legal, accounting, director and officer insurance premiums, investor relations and other costs associated with operating as a public company.

Depreciation and Amortization Expenses

Depreciation and amortization expenses consist primarily of depreciation expense related to investments in property and equipment and internally developed capitalized software.

Other Income (Expense), Net

Other income (expense), net consists of interest expense associated with the significant financing component of our longer-term software contracts, interest expense associated with our debt financing arrangements, interest income on highly liquid short-term investments, gain or loss on extinguishment of debt, and gain or loss on change in fair value of derivatives.

Income Taxes

The provision for income taxes consists primarily of income taxes related to state jurisdictions in which we conduct business. We maintain a full valuation allowance on our deferred tax assets as we have concluded that it is more likely than not that the deferred assets will not be utilized.

 

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Results of Operations for the three months ended March 31, 2021 and 2020

The following table sets forth our historical operating results for the periods indicated. The period-to-period comparison of operating results is not necessarily indicative of results for future periods:

 

     Three months ended
March 31,
     $ Change      % Change  
     2021      2020  
     (In thousands, other than share and per share data)  

Revenue:

           

Hardware revenue

   $ 5,014      $ 2,032      $ 2,982        147

Software revenue

     1,615        694        921        133  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     6,629        2,726        3,903        143  

Cost of revenue:(1)

           

Cost of hardware revenue

     6,028        3,203        2,825        88  

Cost of software revenue

     134        59        75        127  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

     6,162        3,262        2,900        89  

Operating expenses:

           

Research and development

     9,615        5,604        4,011        72  

Sales and marketing

     3,750        4,392        (642      (15

General and administrative

     17,696        5,076        12,620        249  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization

     653        273        380        139  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     31,714        15,345        16,369        107  

Loss from operations

     (31,247      (15,881      (15,366      (97

Other income (expense):

           

Interest expense, net

     (3,318      (60      (3,258      N.M.  

Other expense

     (3,536      —          (3,536      (100

Total other income (expense)

     (6,854      (60      (6,794      N.M.  

Loss before income taxes

     (38,101      (15,941      (22,160      (139

Income taxes

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

     (38,101      (15,941      (22,160      (139

Other comprehensive income (loss)

           

Foreign currency translation adjustment

     7        —          7        100  

Comprehensive income (loss)

   $ (38,094    $ (15,941    $ (22,153      (139 )% 

Earnings (loss) per common share:

           
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted net loss per share

   $ (3.27    $ (2.02    $ (1.25      (62 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding:

           

Basic and Diluted

     11,636,136        7,882,647        

 

(1)

Exclusive of depreciation and amortization shown in operating expenses below.

N.M.—Not meaningful

Comparison of three months ended March 31, 2021 and March 31, 2020

Revenue

Revenue increased by $3.9 million to $6.6 million for the first quarter of 2021 as compared to $2.7 million the for the first quarter of 2020, driven by a $3.0 million increase in hardware revenue and a $0.9 million increase in software revenue. We experienced delays in unit deliveries in the first half of 2020 as a result of the impact of COVID-19 on the residential multi-family construction market; however, as the construction market

 

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and economy continued to reopen, access unit deliveries increased 124% in the first quarter of 2021 compared to the first quarter of 2020. These increased deliveries were the primary driver of our 147% hardware revenue growth in the first quarter of 2021 compared to the first quarter of 2020. Similarly high software revenue growth of 133% in the first quarter of 2021 reflects the continued growth in the home units install base as a result of the delivered hardware units in 2020 and 2021.

Cost of Revenue

Cost of revenue increased by $2.9 million to $6.2 million for the first quarter of 2021 as compared to $3.3 million for the first quarter of 2020, primarily as a result of the increase in cost of hardware revenue of $2.8 million, which was primarily related to the higher hardware revenue partially offset by lower tariff costs and a one-time charge for excess inventory at our contract manufacturer recorded in the first quarter of 2020.

Research and Development Expenses

Research and development expenses increased by $4.0 million to $9.6 million for the first quarter of 2021 as compared to $5.6 million for the first quarter of 2020, primarily due to a $3.8 million stock-based compensation charge incurred in connection with the sale of shares to investors by certain Company employees and non-employee service providers.

Sales and Marketing Expenses

Sales and marketing expenses decreased by $0.6 million to $3.8 million for the first quarter of 2021 as compared to $4.4 million for the first quarter of 2020, reflecting $0.4 million in lower compensation costs due to the reduction in force as a result of the impact of COVID-19 and $0.2 million in reduced marketing activity.

General and Administrative Expenses

General and administrative expenses increased by $12.6 million to $17.7 million for the first quarter of 2021 as compared to $5.1 million for the first quarter of 2020, primarily due to a $10.1 million stock-based compensation charge incurred in connection with the sale of shares to investors by certain Company employees and non-employee service providers. In addition, we incurred $1.9 million of transaction costs and professional advisory fees in connection with the Business Combination.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased by $0.4 million to $0.7 million for the first quarter of 2021 as compared to $0.3 million for the first quarter of 2020, primarily due to the increase in amortization of internally developed software released in 2020 and 2021.

Total Other Income (Expense), Net

Other expenses increased by $6.8 million to $6.9 million for the first quarter of 2021 as compared to $0.1 million for the first quarter of 2020, primarily due to a $3.6 million unfavorable change in the fair value of the derivative liability related to our convertible notes and $3.3 million higher interest expense primarily related to our convertible notes.

 

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Results of Operations for the years ended December 31, 2020 and 2019

The following table summarizes our historical Consolidated Statements of Operations and Comprehensive Income (Loss) data. The period to period comparison of operating results is not necessarily indicative of results for future periods:

 

     Years ended
December 31,
               
     2020      2019      $ Change      % Change  
     (In thousands, other than share and per share data)  

Revenue:

           

Hardware revenue

   $ 14,264      $ 13,501      $ 763        6

Software revenue

     3,797        1,386        2,411        174  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     18,061        14,887        3,174        21  

Cost of revenue:(1)

           

Cost of hardware revenue

     19,933        17,084        2,849        17  

Cost of software revenue

     306        213        93        44  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of revenue

     20,239        17,297        2,942        17  

Operating expenses:

           

Research and development

     25,314        18,340        6,974        38  

Sales and marketing

     13,126        13,084        42        —    

General and administrative

     19,797        15,146        4,651        31  

Depreciation and amortization

     1,382        723        659        91  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     59,619        47,293        12,326        26  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from operations

     (61,797      (49,703      (12,094      (24

Other income (expense):

           

Extinguishment of debt

     (199      (916      717        78  

Interest income (expense), net

     (3,172      443        (3,615      (816

Other income (expense)

     (818      —          (818      (100
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (expense)

     (4,189      (473      (3,716      (786

Loss before income taxes

     (65,986      (50,176      (15,810      (32

Income taxes

     8        50        (42      (84
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

     (65,994      (50,226      (15,768      (31
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

           

Foreign currency translation adjustment

     9        —          9        100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ (65,985    $ (50,226    $ (15,759      (31 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per common share:

           

Basic net loss per share

   $ (8.18    $ (6.86      (1.32      (19 )% 

Diluted net loss per share

   $ (8.18    $ (6.86      (1.32      (19 )% 

Weighted average shares outstanding:

           

Basic

     8,069,009        7,317,824        

Diluted

     8,069,009        7,317,824        

 

(1)

Exclusive of depreciation and amortization shown in operating expenses below.

Comparison of years ended December 31, 2020 and December 31, 2019

Revenue

Revenue increased by $3.2 million driven primarily by an increase in software revenue, and to a lesser extent, hardware revenue. Software revenue increased $2.4 million primarily reflecting the continued growth in

 

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the home units install base as a result of the delivered hardware units in 2020. Hardware revenue increased $0.8 million, primarily due to the release of Intercom and Smart Home devices in the second half of 2020. We experienced delays in unit deliveries in the first half of 2020 as a result of the impact of COVID-19 on the residential multi-family construction market; however, as the construction market and economy began to reopen, unit deliveries increased 144% in the second half of 2020 compared to the first half of the year.

Cost of Revenue

Cost of revenue increased $2.9 million, primarily as a result of the increase in cost of hardware revenue of $2.8 million, which was primarily related to higher hardware revenue driven by the release of new product offerings in 2020, a one-time charge for excess inventory at our contract manufacturer of $0.5 million and increased shipping costs.

Research and Development Expenses

The increase in research and development expenses of $7.0 million was primarily due to an increase in employees in research and development functions. Our personnel and related costs, including salary, benefits, and stock-based compensation, increased by $3.8 million compared to the prior year due to the investments we made in new hardware and the LatchOS platform. In addition, our contract manufacturing costs increased by $2.6 million compared to the prior year primarily due to the release of our new Intercom device in the second half of 2020 and for our new generation of smart access hardware devices expected to release in 2021.

Sales and Marketing Expenses

Sales and marketing expenses were relatively flat reflecting $0.8 million in reduced marketing activity and a $0.7 million decrease in travel related expenses for our sales force as a result of the impact of COVID-19, partially offset by $0.5 million of restructuring costs incurred in 2020 and higher personnel related costs of $0.5 million.

General and Administrative Expenses

The increase in general and administrative expenses of $4.7 million reflects $1.5 million of expenses incurred in connection with the Business Combination, including transaction costs and professional advisory fees. In addition, our personnel and related costs, including salary, benefits, and stock-based compensation, increased by $1.3 million, reflecting investments to build out our corporate infrastructure, as well as $1.0 million of higher IT costs as a result of new system implementations and software licenses to scale our operations.

Depreciation and Amortization Expenses

The increase in depreciation and amortization expenses of $0.7 million was primarily due to the increase in amortization of internally developed software in 2020.

Total Other Income (Expense), Net

The increase in other expenses of $3.7 million was primarily due to higher interest expense and an unfavorable change in the fair value of the derivative liability related to our convertible notes. In addition, our interest expense was higher related to the significant financing component of our longer-term software contracts.

Liquidity and Capital Resources

We have incurred losses since our inception. Our operations have been financed primarily through net proceeds from the issuance of our redeemable convertible preferred stock and convertible debt, as well as

 

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borrowings under our term loan. As of March 31, 2021, we had an accumulated deficit of $200.3 million, working capital of $53.7 million, $46.5 million in cash and cash equivalents, and remaining availability of $10.0 million under our revolving line of credit.

We subcontract with other companies to manufacture our products. During the normal course of business, we and our manufacturers procure components based upon a forecasted production plan. If we cancel all or part of the orders, we may be liable to our suppliers and manufacturers for the cost of the unutilized component orders or components purchased by our manufacturers. Historically, we do not believe there have been any material liabilities that have resulted from cancellation of purchase orders.

Our short-term liquidity needs primarily include working capital for sales and marketing, research and development, and continued innovation. Our future capital requirements will depend on many factors, including our levels of revenue, the expansion of sales and marketing activities, market acceptance of our products, the results of business initiatives, the timing of new product introductions, and overall economic conditions.

We believe our existing cash and cash equivalent balances and committed credit lines will be sufficient to meet our working capital and capital expenditure needs and debt service obligations for at least the next 12 months. In the future, we may attempt to raise additional capital through the sale of additional equity or debt financing, but cannot assure you we will be successful, nor can we assure that financing would be at similar interest rates in the future. The sale of additional equity would be dilutive to our stockholders. Additional debt financing could result in increased debt service obligations and more restrictive financial and operational covenants.

Indebtedness

2020 Convertible Notes

Between August 11, 2020 and October 23, 2020, Legacy Latch issued a series of convertible promissory notes to various investors pursuant to a Note Purchase Agreement dated August 11, 2020, subsequently amended with a Note Purchase Agreement dated October 23, 2020, with a maturity date of April 23, 2022 (subject to the holder’s option to extend the maturity date for a period of one year), for an aggregate principal amount of $50 million. The notes accrued interest at a rate of 5% per annum for the first 6 months, 7% per annum for the following 6 months, and 9% per annum from month 13 until maturity, that was due and payable upon the earlier to occur of the maturity date or an event of default, unless otherwise converted prior to maturity or an event of default.

The terms of the notes provided for the principal and accrued interest to automatically convert into the type of preferred stock issued in a sale of preferred stock (“Next Equity Financing”) at a conversion price equal to the lesser of 80% of the price paid per share by the investors in the Next Equity Financing, or $650 million divided by Legacy Latch’s then fully-diluted capitalization (exclusive of the notes and any other then-outstanding convertible notes or other convertible instruments issued by Legacy Latch) prior to the Next Equity Financing. Upon (i) a merger or consolidation of Legacy Latch or a subsidiary of Legacy Latch, (ii) the sale of substantially all of Legacy Latch’s assets, (iii) the liquidation, dissolution or winding up of Legacy Latch (collectively, a “Corporate Transaction”), or (iv) the closing of Legacy Latch’s initial public offering or a merger, acquisition or other business combination involving Legacy Latch and a publicly traded special purpose acquisition company (a “Qualified Public Company Event”), all outstanding principal and interest of the note shall, at the holder’s option, be due and payable in full or be converted into common stock of Legacy Latch at a conversion price equal to the lesser of 80% of the price per share offered for the shares of common stock upon a Corporate Transaction or Qualified Public Company Event, or $650 million divided by Legacy Latch’s then-outstanding capitalization (exclusive of (1) the notes and any other then-outstanding convertible notes issued by Legacy Latch and (2) out-of-the money or unvested options or warrants).

Legacy Latch determined that the features providing for conversion into stock sold in a Next Equity Financing, upon a Corporate Transaction, or upon a Qualified Public Company Event at a stated discount

 

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represent embedded derivatives which require separate accounting recognition in accordance with subtopic ASC 815-15, Embedded Derivatives. The fair value of the embedded derivative on the date of issuance of $12.2 million was recorded as a derivative liability and combined with the debt host contract with an offset recorded as a discount against convertible notes, net.

Under the terms of the Merger Agreement, as of June 4, 2021 the outstanding principal and accrued but unpaid interest due on Legacy Latch’s convertible notes automatically converted into a number of shares of Common Stock in accordance with the applicable Legacy Latch convertible note.

Revolving Line of Credit and Term Loan

In September 2020, Legacy Latch obtained a revolving line of credit and a term loan, both of which were secured by a first-perfected security interest in substantially all of the assets of Legacy Latch.

The revolving line of credit provided a credit extension of up to $5 million and bore interest at the greater of the prime rate plus 2% or 5.25% per annum, as long as Legacy Latch maintained an Adjusted Quick Ratio of 1.25. If the Adjusted Quick Ratio fell below 1.25, then the revolving line of credit would bear interest at the greater of the prime rate plus 3% or 6.25% per annum. Legacy Latch could only borrow up to 80% of eligible accounts receivable. The revolving line of credit was set to mature on September 21, 2022, at which time all outstanding principal and interest would be due in full. The proceeds of the borrowing under the revolving line of credit could be used for working capital and general corporate purposes.

The available amount under the term loan was an initial $5 million with two additional tranches of $2.5 million each, which Legacy Latch could draw down on in annual increments from closing. The term loan would have born interest at the greater of the prime rate plus 3% or 6.25% per annum. The term loan was set to mature on December 1, 2024, at which time all outstanding principal and interest would have been due in full. In connection with the execution of the term loan, Legacy Latch issued warrants to purchase 231,000 shares of common stock, which were exercisable for a 12-year period. The initial strike price was $.91 per share. On June 4, 2021, the Company paid in full the outstanding principal and accrued interest on the term loan, and the warrants converted via net exercise into shares of Legacy Latch common stock.

Cash Flows for the three months ended March 31, 2021 and 2020

The following table sets forth a summary of our cash flows for the three months ended March 31, 2021 and 2020:

 

     Three months ended March 31,  
             2021                      2020          
     (In thousands)  

Net cash used in operating activities

   $ (14,330    $ (16,457

Net cash used in investing activities

     (1,736      (1,879

Net cash provided by financing activities

     2,088        10,344  

Effect of exchange rates on cash

     (9      —    
  

 

 

    

 

 

 

Net change in cash and cash equivalents

   $ (13,987    $ (7,992
  

 

 

    

 

 

 

Operating Activities

Net cash used in operating activities decreased by $2.2 million to $14.3 million for the first quarter of 2021 from $16.5 million for the first quarter of 2020, primarily due to approximately $3.0 million in increased accounts receivable collections partially offset by increased expenses incurred in connection with the Business Combination.

 

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Investing Activities

In the first quarter of 2021, net cash used in investing activities consisted principally of capitalized internally developed software costs of $1.4 million, primarily reflecting the continued new functionality being added to our LatchOS platform for future product releases, and the purchase of property and equipment of $0.3 million.

In the first quarter of 2020, net cash used in investing activities consisted of capitalized software development costs of $1.7 million as a result of new functionality and products being built for our LatchOS platform, and the purchase of property and equipment and intangible assets.

Financing Activities

In the first quarter of 2021, net cash provided by financing activities consisted of the net proceeds from the issuance of common stock in connection with exercises of stock options.

In the first quarter of 2020, net cash provided by financing activities consisted principally of the net proceeds from the issuance of Series B-1 preferred stock.

Cash Flows for the years ended December 31, 2020 and 2019

The following table sets forth a summary of our cash flows for the years ended December 31, 2020 and 2019:

 

     Years ended
December 31,
 
     2020      2019  
     (In thousands)  

Net cash used in operating activities

   $ (53,642    $ (47,625

Net cash used in investing activities

     (5,468      (3,766

Net cash provided by financing activities

     65,408        66,087  

Effect of exchange rates on cash

     13        —    
  

 

 

    

 

 

 

Net change in cash and cash equivalents

   $ 6,311      $ 14,696  
  

 

 

    

 

 

 

Operating Activities

The increase of $6.0 million in net cash used in operating activities reflects the $15.7 million increase in the net loss, after adjusting for non-cash items, partially offset by:

 

   

a higher increase in accounts receivable of $5.2 million in 2019 associated with increased adoption of products;

 

   

a higher investment of $1.1 million in inventories in 2019, primarily associated with the launch of the next generation of the M series product in 2019;

 

   

a $2.3 million increase in deferred revenue in 2020 reflecting the growth in long-term software contracts; and

 

   

a $1.4 million net increase in accounts payable and accrued expenses reflecting the accrual of expenditures incurred related to the Business Combination and to support general business growth, and the related timing of payments.

Investing Activities

In 2020, net cash used in investing activities consisted principally of capitalized internally developed software costs of $5.0 million, primarily reflecting the continued new functionality being added to our LatchOS platform for future product releases.

 

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In 2019, net cash used in investing activities consisted of capitalized software development costs of $2.9 million as a result of new functionality and products being built for our LatchOS platform and the purchase of property and equipment of $0.9 million.

Financing Activities

In 2020, net cash provided by financing activities consisted principally of the net proceeds from the issuance of convertible promissory notes of $50.0 million, Series B-1 preferred stock of $10.3 million, term loan of $4.9 million, as well as proceeds and subsequent repayment of funds pursuant to the Paycheck Protection Program under the CARES Act.

In 2019, net cash provided by financing activities consisted principally of the net proceeds from the issuance of Series B-1 preferred stock of $56.5 million and convertible promissory notes of $9.0 million.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2021, December 31, 2020 and December 31, 2019.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities in the consolidated financial statements. We base these estimates and judgments on historical experience, projected future cash flows and various other factors that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions, and to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that of our significant accounting policies, which are described in Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe that the following accounting policies are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

We currently generate revenue primarily from two sources, hardware devices and software products.

Revenue is recognized upon transfer of control of promised goods or services to customers at the transaction price. We estimate the transaction price, including variable consideration, at the commencement of the contract and recognize revenue over the contract term.

To determine the transaction price, we analyze all of the performance obligations included in the contract. We consider the terms of the contract and our customary business practices, which typically include financing components or non-cash consideration. At times, our contracts include consideration payable to a customer in the form of fixed discounts or rebates. We record the consideration payable to a customer as a reduction to the transaction price resulting in a reduction to revenue over the service period.

If we enter into contracts that contain multiple promised services, we evaluate which of the promised services represent separate performance obligations based on whether or not the promised services are distinct

 

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and whether or not the services are separable from other promises in the contract. If these criteria are met, then we allocate the transaction price to the performance obligations using the relative stand-alone selling price method at contract inception.

Hardware Revenue

We generate hardware revenue primarily from the sale of our portfolio of devices for our smart access and smart building solutions. We sell hardware to building developers through our channel partners who act as the intermediary and installer. We recognize hardware revenue when the hardware is shipped to our channel partners, which is when control is transferred to the building developer.

We provide warranties related to the intended functionality of the products, and those warranties typically allow for the return of defective hardware up to one year for electrical components and five years for mechanical components past the date of sale.

We determined these warranties are not separate performance obligations as they cannot be purchased separately and do not provide a service, but rather an assurance that the hardware will function as expected. We record a reserve as a component of cost of revenue based on historical returns of defective products. For the years ended December 31, 2020 and 2019, our reserve for hardware warranties was approximately 2% and 2%, respectively, of our cost of hardware revenue. Due to our limited operating history, the ability to forecast future operating results, including the estimation of product returns, may differ materially from actual results. We also provide certain customers on a wholesale arrangement with a right of return for non-defective products, which is treated as a reduction of hardware revenue based on our expectations and historical experience.

Software Revenue

We generate software revenue primarily through the sale of our software-as-a-service, or SaaS, over our cloud-based platform on a subscription-based arrangement. Subscription fees vary depending on the optional features selected by customers as well as the term length. SaaS arrangements generally have term lengths of month-to-month, two-year, five-year and ten-year and include a fixed-fee paid upfront except for the month-to-month arrangements. As a result of significant discounts provided on the longer term software contracts paid upfront, we have determined that there is a significant financing component and have therefore broken out the interest component and recorded as a component of interest income (expense), net on the consolidated statements of operations.

The services provided by us for the subscription-based arrangements are considered stand-ready performance obligations where customers benefit from the services evenly throughout the service period. Revenue is primarily recognized on a ratable basis over the subscription period of the contractual arrangement beginning when or as control of the promised services is available or transferred to the customer.

Stock-Based Compensation

We record stock-based compensation expense based upon the award’s grant date fair value. We estimate the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, which requires us to estimate the risk-free interest rate, expected term, expected stock price volatility and dividend yield.

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.

The expected term represents the period of time the stock options are expected to be outstanding and is based on the “simplified method.” Under the “simplified method,” the expected term of an option is presumed to

 

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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.

Historically, since we have not had a trading history of our Common Stock, the expected volatility was derived from the average historical stock volatilities 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. We intend to continue to consistently apply this process using the same or similar companies to estimate the expected volatility until sufficient historical information regarding the volatility of the share price of our Common Stock becomes available.

We do not expect any material changes in the near term to the underlying assumptions used to calculate stock-based compensation expense. However, if changes in these assumptions occur, and, should those changes be significant, they could have a material impact on our stock-based compensation expense.

Common Stock Valuations

In the absence of a public trading market, the fair value of Legacy Latch common stock was determined by our board of directors, with input from management, taking into account our most recent valuations from an independent third-party valuation specialist. Our board of directors intended all stock options granted to have an exercise price per share not less than the per share fair value of our common stock on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we use in the valuation models were based on future expectations combined with management judgment, and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

 

   

relevant precedent transactions involving our capital stock;

 

   

contemporaneous valuations performed at periodic intervals by unrelated third-party specialists;

 

   

the liquidation preferences, rights, preferences, and privileges of our redeemable convertible preferred stock relative to the common stock;

 

   

our actual operating and financial performance;

 

   

current business conditions and projections;

 

   

our stage of development;

 

   

the likelihood and timing of achieving a liquidity event for the shares of common stock underlying the stock options, such as an initial public offering, given prevailing market conditions;

 

   

any adjustment necessary to recognize a lack of marketability of the common stock underlying the granted options;

 

   

recent secondary stock sales and tender offers;

 

   

the market performance of comparable publicly-traded companies; and

 

   

the U.S. and global capital market conditions.

In valuing our common stock at various dates, our board of directors determined the equity value of our business using various valuation methods including combinations of income and market approaches with input from management.

Application of these approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows,

 

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discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.

For valuations after the completion of the Business Combination, our board of directors will determine the fair value of each share of underlying Common Stock based on the closing price of our Common Stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.

Impairment of Internally Developed Software

Our fixed assets are primarily comprised of capitalized software development. We evaluate the recoverability of our long-lived assets, including capitalized software, for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of long-lived assets are measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Capitalized software is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. 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.

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 statements 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.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Warrant Liabilities

We account for the warrants issued in connection with the initial public offering of TSIA in accordance with Accounting Standards Codification (“ASC”) 815-40, “Derivatives and Hedging-Contracts in Entity’s Own Equity” (“ASC 815”), under which the warrants do not meet the criteria for equity classification and must be recorded as liabilities. As the warrants meet the definition of a derivative as contemplated in ASC 815, the warrants are measured at fair value at issuance and at each reporting date in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the Statement of Operations in the period of change. In accordance with ASC 825-10, “Financial Instruments”, we have concluded that a portion of the transaction costs which directly related to the initial public offering of TSIA and the Warrant Private Placement, which were previously charged to stockholders’ equity, should be allocated to the warrants based on their relative fair value against total proceeds, and recognized as transaction costs in the statement of operations.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to the financial statements included elsewhere in this prospectus for more information.

 

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Non-GAAP Financial Measures

To supplement our financial statements presented in accordance with GAAP and to provide investors with additional information regarding our financial results, we have presented in this prospectus Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies.

We define Adjusted EBITDA as our net loss, excluding the impact of stock-based compensation expense, depreciation and amortization expense, interest income, interest expense, provision for income taxes, restructuring, one-time litigation expenses, loss on extinguishment of debt, gain or loss on change in fair value of derivative instruments, and our transaction related expenses. The most directly comparable GAAP measure is net loss. We monitor and have presented in this prospectus Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, to establish budgets, and to develop operational goals for managing our business. In particular, we believe excluding the impact of these expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance. 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 and future prospectus.

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 our non-GAAP financial measures as tools for comparison.

The following table reconciles Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Reconciliation of Net loss to Adjusted EBITDA for the three months ended March 31, 2021 and 2020:

 

     Three months ended March 31,  
             2021                      2020          
     (In thousands)  

Net loss

   $ (38,101    $ (15,941

Depreciation and amortization

     653        273  

Interest (income)/expense, net

     3,318        60  

Change in fair value of derivative liability

     3,597        —    

Restructuring costs(1)

     —          310  

Transaction-related costs(2)

     2,148        —    

Litigation costs(3)

     —          1,035  

Stock-based compensation and warrant expense(4)

     14,493        356  
  

 

 

    

 

 

 

Adjusted EBITDA

   $ (13,892    $ (13,907
  

 

 

    

 

 

 

 

(1)

Legacy Latch initiated a restructuring plan in the first quarter of 2020 as part of its efforts to reduce operating expenses and preserve liquidity due to the uncertainty and challenges stemming from the COVID-19 pandemic. The RIF involved an approximate 25% reduction in headcount which resulted in severance and benefit costs for affected employees and other miscellaneous direct costs.

 

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(2)

Transaction costs related to the Business Combination. These costs are included within general and administrative and sales and marketing within the Condensed Consolidated Statements of Operations and Comprehensive Loss.

(3)

Legal and settlement fees incurred in connection with non-ordinary course litigation and other disputes. These costs are included within general and administrative within the Condensed Consolidated Statements of Operations and Comprehensive Loss.

(4)

Stock-based compensation and warrant expense associated with equity compensation plans including $13.8 million related to the secondary purchase transaction during the three months ended March 31, 2021. See Note 13, Stock Based Compensation, to the unaudited condensed consolidated financial statements included elsewhere in this prospectus.

Reconciliation of Net loss to Adjusted EBITDA for the years ended December 31, 2020 and 2019:

 

     Years ended
December 31,
 
     2020      2019  
     (In thousands)  

Net loss

   $ (65,994    $ (50,226

Depreciation and amortization

     1,382        723  

Interest (income)/expense, net

     3,172        (443

Income taxes

     8        50  

Loss on extinguishment of debt

     199        916  

Change in fair value of derivative liability

     863        —    

Restructuring costs(1)

     1,065        —    

Transaction-related costs(2)

     1,568        —    

Litigation costs(3)

     1,046        478  

Stock-based compensation and warrant expense(4)

     1,848        3,572  
  

 

 

    

 

 

 

Adjusted EBITDA

   $ (54,843    $ (44,930
  

 

 

    

 

 

 

 

(1)

Legacy Latch initiated a restructuring plan as part of its efforts to reduce operating expenses and preserve liquidity due to the uncertainty and challenges stemming from the COVID-19 pandemic. The RIF involved an approximate 25% reduction in headcount which resulted in severance and benefit costs for affected employees and other miscellaneous direct costs.

(2)

Transaction costs related to the Business Combination. These costs are included within general and administrative and sales and marketing within the Consolidated Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2020.

(3)

Legal and settlement fees incurred in connection with non-ordinary course litigation and other disputes. These costs are included within general and administrative within the Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2020 and 2019.

(4)

Stock-based compensation and warrant expense associated with equity compensation plans.

 

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BUSINESS

Company Overview

Latch is an enterprise technology company focused on revolutionizing how people experience spaces by making spaces better places to live, work, and visit. Latch has created a full-building operating system, LatchOS, which addresses the essential requirements of modern buildings. Our LatchOS system streamlines building operations, enhances the resident experience, and enables efficient interactions with service providers. Our product offerings, designed to optimize the resident experience, include smart access, delivery and guest management, smart home and sensors, connectivity, and resident experience. We combine hardware, software, and services into a holistic system that makes spaces more enjoyable for residents, more efficient and profitable for building operators, and more convenient for service providers.

LatchOS enables spaces across North America. Throughout 2020, approximately 1 in 10 newly constructed multi-family apartment home units in the United States were equipped with Latch products and installed across 35 states and Canada, from affordable housing in Baltimore, to historic buildings in Manhattan, to luxury towers in the Midwest. Latch works with real estate developers, large and small, ranging from the largest real estate companies in the world to passionate local owners.

We engage with customers early in their new construction or renovation process, helping establish Latch as the technology consultant for the building. LatchOS is made up of modules, enabling essential capabilities for modern buildings. Building owners have the flexibility to select LatchOS modules to match their specific building or portfolio’s needs. LatchOS software starting pricing ranges from $7-12 per apartment per month, depending on which capabilities the building owner selects, for the LatchOS modules Smart Access, Smart Home, and Guest Management. Customers also purchase our first party and partner devices upfront to go along with the LatchOS modules they choose.

The LatchOS ecosystem has been created to serve all the stakeholders at a building and today LatchOS modules consists of the following modules:

 

   

Smart Access. Latch’s smart access software capabilities include complete resident, building staff, guest, service provider and construction access management powered by the Latch R, M, and C devices. These devices serve every door in a building, from apartment doors to elevators, from parking garages to gyms.

 

   

Delivery & Guest Management. Going beyond smart access, Latch Intercom solves the access problem for unexpected guests and deliveries enabling visitors to quickly connect with residents or building operators with just a few clicks. The Latch Delivery Assistant takes this further to the package room with a remote, virtual doorman facilitating secure package management.

 

   

Smart Home & Sensors. Latch’s enterprise device management enables smart home capabilities from thermostat, lighting, leak detection and other sensor integration, monitoring, and centralized device management for building owners and private resident control right in the Latch App. The integration of the LatchOS platform with smart home device manufacturers like Google Nest, ecobee, Honeywell, Jasco, Leviton, and more, provide our customers with a wide choice in smart home devices that can be controlled through LatchOS.

 

   

Connectivity. Connecting devices, operations, and residents reliably to the network across buildings can be complex. Latch Intercom and Latch Hub’s cellular connectivity bring internet access to new and existing building infrastructure from new construction to retrofits.

 

   

Resident Experience. Residents can control all of the Latch-enabled devices in their spaces through the Latch App right from the moment they arrive. Latch’s mobile applications also enable resident onboarding, streamlining the move-in experience. The average Latch App user already interacts with the Latch App multiple times per day, giving us an incredible foundation from which to engage and

 

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transact further with the residents over time as we introduce new functionalities and services to the Latch mobile applications.

After Latch has been installed and set up at a building, the building managers add all their residents as users to the Latch system. Our mobile applications then enable the residents to unlock all connected spaces in Latch buildings from the front door, package rooms, common spaces, elevators, and garages to their unit entrance, control their thermostat and smart home devices from the app, see who rang the bell at the front door through the intercom and let guests in through the app. In the near future, we believe interacting with service providers, buying renters insurance or choosing their internet package will all be possible from the Latch App. Residents become highly engaged users across all the capabilities that Latch provides them in their spaces.

Beyond enabling a new set of experiences at buildings for residents and building operators, Latch turns the purchase experience of smart building technology for building owners from a complex sale with up to eight or more vendors into a simple process with Latch as a single vendor with one single contract and straightforward billing. LatchOS enables a unified management experience for building operators with a single interface to manage all Latch experiences instead of having a separate interface for each vendor and solution. Latch also enables a unified resident experience with a single interface through the Latch App for all resident-facing interactions and Latch experiences in our customers’ buildings. Devices that are part of the Latch ecosystem work better together since our curated set of partner devices and our smart building operating system, LatchOS, seamlessly integrate instead of a patchwork of devices from different vendors with different standards and interfaces that create technology silos and limited experiences.

Choosing Latch may also have a real impact on the economics of operating a building: increasing revenue and reducing expenses for operators. We estimate that operators may see revenue increases by up to $200-500 per apartment per year through the premium resident experience and market positioning that Latch enables, accelerated lease up, decelerated turnover, increased rent/amenity fee upside, ancillary monetization opportunities and future-proofing of their building. In addition, we estimate our products may reduce expenses by up to $100-300 per apartment per year through the consolidation of manual systems, eliminating recurring rekeying expenses and lockout responses, simplifying resident onboarding and offboarding, creating more efficient package delivery management, and enabling straightforward service provider access sharing and oversight. Though not all building operators may recognize these revenue increases and expense reductions, Latch provides real opportunity for building operators to increase profits through the use of our products.

Our sales strategy is simple, repeatable, scalable, and unique. We engage directly with our customers to ensure they have the best possible experience with Latch and our partners from sale to installation to the lease-up. Latch engages with customers early in their construction or renovation process, establishing Latch as a technology advisor to the building. This engagement enables us to provide more technology advice early in the development process and creates high revenue visibility. Our customers sign LOIs specifying which software and devices they want to receive and on which dates. This approach leads to multi-year software contracts, direct feedback loops with our customers and their residents, local and regional market insights, and a complete picture of the ever-changing demands of building operators. The installation timeline can range from six to 18 months after signing the LOI, depending on the construction schedule. We continuously evolve our products and add new features between signing the LOI and the time of installation.

With respect to deployment, our certified channel partners are third-party onsite product specialists that provide specific knowledge and expertise to assist in the sale and deployment of Latch products. In consideration for these services provided, we pay the channel partners a fee at our discretion based on a standard price list which is generally applicable to all channel partners with the amounts varying based on product and sales type. Fees generally range from 20% to 40% of the sales price of the hardware. We provide our channel partners with specific training and programs to assist them in selling and deploying our software, services, and products. The certified channel partners also work on behalf of our customers. In this capacity they will take custody of our hardware on behalf of our customers and install and service our smart access products. These services are

 

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provided pursuant to a contract that is directly between the channel partners and our customers. In such circumstances, our customers directly pay our channel partners for the foregoing services and Latch does not receive any revenue from the foregoing services.

Our channel partners agree to our channel policies and procedures, which include the code of conduct for our channel partners, customary confidentiality and intellectual property ownership provisions, branding and marketing guidelines, certification requirements, and warranty claim procedures. We work with approximately 180 channel partners and our contracts with our channel partners incorporate our channel policies and procedures and usually have one-year terms which are renewable annually.

Industry Background

Markets Served

Currently, we primarily serve the rental homes markets in North America. Based on internal research and external reporting, we estimate there are approximately 32 million multi-family apartment home units in North America. Today we primarily serve new construction and retrofit buildings. Since our launch in 2017, we have seen the share of our business coming from retrofit opportunities increase significantly: a trend we expect to continue over the medium term. We also serve the single-family rental market through our existing relationships with large real estate developers and owners. Based on internal research and external reporting, we estimate there are 15 million single-family rental home units in North America.

Fragmented Technology Market for Multifamily

The multifamily technology market is fragmented resulting in software tools and devices that do not work well with each other. To assemble a complete building solution, building operators are required to patch multiple solutions together. Building owners are often sourcing this smart building technology from eight or more vendors and point solution providers to satisfy their technology needs and create a modern building experience. Orchestrating the procurement can be an expensive and time-consuming process from evaluation to the decision on the final technology solution.

Expensive and Cumbersome Legacy Solutions

Historically, our customers used traditional keyed mortise lock and deadbolt products, traditional access control at the base building, and hardwired, traditional intercom products to outfit and secure their apartment homes. These products had not changed in decades before we launched our suite of Latch products. Legacy solutions introduce significant levels of friction and maintenance for operators, with on-going rekeying, credential management, guest management, and unit turnover costs incurred through the regular course of business.

Our Market Opportunity

Real estate is the world’s largest asset class. The broad ecosystem of institutionally owned and managed buildings represents a significant opportunity for us. We see opportunities to improve and augment our existing product suite to fit the needs of customers and stakeholders across the real estate ecosystem. We envision a world where the Latch system unifies every space in each stakeholder’s path, from the home to the office and more.

 

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Today, we primarily serve the multifamily markets with our existing set of LatchOS software modules. Multifamily real estate ownership in North America is highly fragmented, with the top 50 multifamily owners only holding 14.5% of total home units in North America. As a result, we view our addressable market in three broad categories:

New Multifamily Construction

According to U.S. census data, over the five-year period from January 2015 through December 2019, an average of approximately 330,000 new multifamily home units, which represents new construction completions for buildings with five home units or more, were built each year.

Multifamily Retrofits

According to U.S. census data, over the period from 2009 to 2019, occupied apartment stock has grown from approximately 17 million home units to approximately 32 million home units.

Institutionally Owned Single-Family Rental

Our set of solutions is also highly complementary to the single-family rental market given our software products provide portfolio-wide management of all of our devices installed in a customer’s home units. Large single-family rental portfolios are particularly well-suited for this type of solution as a result of lower asset density as compared to multifamily. We see a significant opportunity to become the marquee partner for single-family rental owners to achieve efficiencies in managing large portfolios of rental assets.

Products and Platform

Our platform, LatchOS, is a full building operating system that brings together all the elements that make up the modern building experience for building managers, vendors, and residents. The LatchOS ecosystem consists of two general elements: software and devices. Our software, hardware, and services in turn enable the essential features for every stakeholder in the Latch ecosystem.

Latch has three software products in the market today: Latch Resident Mobile Applications, Latch Manager Web, and the Latch Manager Mobile Application. These three products encompass the software that powers the LatchOS platform and allows for devices and services to operate in harmony.

We typically enter into software agreements with our customers, with software licensing fees ranging from $7-12 per apartment per month. The exact costs vary based on the LatchOS modules selected by the customer. The initial term of our software agreements ranges from two to ten years, with an average initial term of approximately six years. The software agreements typically contain an automatic renewal term equal in length to the agreements’ initial term but provide that either party may terminate the agreement at the end of a given term by written notice to the other party. The software agreements also typically include indemnification, confidentiality and warranty terms customary for software agreements in our sector.

We also have a collection of first-party devices and third-party partner devices and services that can integrate into the LatchOS system to be managed, controlled and/or operated through our software products.

Software Products

Latch Mobile Applications

The Latch mobile applications are the primary tools for residents to unlock doors, give access to guests or service providers, control and manage smart devices, interact and communicate with the building, utilize consumer services and transact with Latch. Latch offers a subset of these experiences through the Apple Watch as well.

 

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Latch Manager Web and Manager Mobile Applications

Manager Web is LatchOS’s central orchestration application for building operators. Our fully integrated system lets property managers support the resident experience from a single source. From the Manager Web, property managers can control access sharing, resolve issues remotely, save time and money on rental unit turnover, and ensure their residents are secure.

First Party Hardware Devices

M, C, R Series

The M, C and R series are door-mounted access control products that interface with industry-standard lock hardware. They are designed to meet and exceed every project requirement. They are built to industry standards, compliant with code requirements, and suited for interior or exterior use.

Other Devices

Latch Intercom integrates seamlessly into the Latch core access systems and allows audio and video calls for remote unlocking. The Latch Camera is a dome camera that integrates seamlessly into the Latch Intercom and core access systems to allow for video calls for remote unlocking. Latch Hub is an all-in-one connectivity solution that enables smart access, smart home, and sensor devices to do more at every building. The Latch Leak Detectors offer a simple and scalable solution to enable leak prevention, detection, and quick resolution for building owners and residents.

Works with Latch: 3rd Party Devices, Software and Partnerships

The LatchOS platform is compatible with a collection of industry-leading smart home devices, allowing these devices to be managed, controlled, and viewed from the LatchOS platform. Latch has selected several initial smart home devices with which to integrate (currently or in the near term), including smart home devices manufactured by Google Nest, Honeywell, ecobee, Jasco, Leviton, and Sonos, based on Latch’s assessment that these devices are aligned with Latch’s vision around enterprise device management privacy and security, design, and brand when it comes to building operators and residents. Latch has entered into agreements with Google Nest, Honeywell and ecobee and plans to enter into an agreement with Sonos. Such agreements include application programming interface (API) licensing terms that allow partner devices to be managed, controlled, and viewed from the LatchOS platform as appropriate for desired functionality. Such agreements include other terms that are customary in API license agreements, including intellectual property ownership and licensing provisions, joint marketing and advertising arrangements, indemnification obligations, confidentiality restrictions, and data protection requirements. Jasco and Leviton smart lighting products can be controlled by the LatchOS platform through the Zigbee protocol; therefore, no separate API license agreement is necessary between Latch and Jasco and Leviton in order to integrate the LatchOS platform with their smart lighting products.

We understand at Latch that operating a building can be complex and it can take many different processes, systems, and tools to manage a great building. A majority of buildings we work with use Property Management Software to manage their back-office operations. In order to accommodate those complex use-cases, we have forged partnerships with the top Property Management Software companies, such as Yardi and RealPage, and enabled integrations between such software and our software and devices so the building can operate seamlessly between the two systems at the building.

Latch leverages its cutting-edge smart access platform to unlock new use-cases in adjacent real estate verticals and with partners that serve buildings. Our smart access platform integrates with partners such as Tour24, Pinwheel and UPS to enable unattended showings and secure package delivery, and it has also allowed us to build a robust B2B2C distribution channel for us to transact with residents through the Latch App and offer future consumer and on-demand services.

 

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Our Competitive Strengths

Strong and Sticky Software Distribution Model

We believe we offer the premier platform for distributing enterprise software into the portfolios of multifamily owners and developers. Each of our hardware products has an associated long-term software contract averaging greater than six years in length. Through our software, our customers receive enterprise management of all Latch supported hardware products and residents receive unified control of devices, home unit access, and amenity access all from within the Latch App.

Compelling Recurring Revenue Model

Each Latch customer must sign a software contract with Latch in order to utilize our suite of products and services through LatchOS. We have yet to churn a customer despite having already gone through a renewal cycle, and our average contract length is more than six years. Most of our customers prepay their SaaS contract subscription fees which gives us long-term predictability of our SaaS revenue.

Trusted Technology Partner for Rental Home Operators

We take what normally are disparate solutions and devices and combine them into a powerful system in which we believe all components work better together. The power of LatchOS is combining software and devices into a unified system that works for apartment building owners. This vertical-specific software approach gives our customers a single vendor, single contract, and a single interface to manage more and more of the essential needs in their buildings.

Passionate, Founder-Led Team

Our co-founders and management team have broad and deep experience at some of the world’s leading technology companies, and over 50% of our team have backgrounds in engineering, product, and design.

Visible, Long-term Sales

Our customers sign LOIs outlining the software and devices they want to buy for their building up to 24 months in advance of installation. This visibility provides predictable demand planning, forecasting, and mapping customer demands for certain products and services.

Efficient Customer Acquisition

Our targeted account-based sales model allows us to sell rapidly and deeply into the portfolios of North America’s largest rental home developers and owners. This strategy allowed us to grow cumulative booked home units by more than 100% over the twelve months ended December 31, 2020, with four consecutive quarters of record bookings. In addition, we have been able to acquire valuable customers with relatively low sales and marketing expenses due to strong product-market fit and an efficient sales strategy, resulting in a 6.8x lifetime customer value to customer acquisition cost ratio. We define lifetime customer value as total expected revenue collected per home unit reduced by the related cost of revenue over the home unit life. We define customer acquisition cost as total sales and marketing expense per new home unit acquisition. We use the lifetime customer value to customer acquisition cost ratio to measure customer acquisition efficiency. Other companies including companies in our industry may calculate this ratio or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Our platform gives us the opportunity to sell our customers’ residents additional products and services in the future, including laundry pick-up, in-home cleaning, handyman services and more. By acquiring the building as a customer and the building owners onboarding their residents as part of their business operations, we do not pay

 

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any additional costs to acquire the residents of the building as our customers. Latch plans to generate revenue from such services by offering the services through the Latch mobile applications and charging fees to the residents and/or service providers performing the services. Latch plans to partner with local service providers to perform these services and may directly perform these services in the future.

Our Mobile Applications

Our mobile applications give us the opportunity to sell additional products and services directly to residents in our customers’ buildings. By acquiring the building as a customer and the building owners onboarding their residents as part of their business operations, we do not incur any additional costs to acquire the residents of the building as customers.

Our Intellectual Property Portfolio

Our robust intellectual property portfolio, which includes patents, trademarks, copyrights, and trade secrets, enables us to protect our proprietary technology, brands, and other intellectual property against dilution, infringement, misappropriation, and competitive pressure. Specifically, we own several patents and pending patent applications in the United States that cover the material aspects of the LatchOS platform, including Smart Access, Delivery & Guest Management, Smart Home & Sensors, and Resident Experience. None of these patents are expected to expire prior to 2035. We also own patents and pending patent applications in the United States covering the ornamental design of our hardware products. None of such patents are expected to expire prior to 2030. We also own foreign counterparts related to the foregoing patents and pending patent applications. Additionally, our proprietary software and firmware are protected as trade secrets.

Our Growth Strategy

Our main objective is to increase the number of customers on the LatchOS platform and increase utilization of our platform by each customer and user, both operations staff and residents. To achieve this objective, we pursue the following strategies:

Further Penetration of North American Multifamily and Single-Family Rental Markets

As of December 31, 2020, our cumulative home unit bookings represent less than 1% of the total U.S. apartment stock. We plan to expand further in these markets organically via two primary strategies. First, we aim to continue to acquire new customers through our direct sales strategy. Second, we plan to build onto our existing customer relationships and sell deeper into our customer’s portfolios through existing portfolio retrofits, new construction, and upsells of additional LatchOS modules to existing buildings.

Geographic Expansion

Today, we only operate in the United States and Canada. While these geographies present sizable opportunities for Latch, our solution set is well-positioned to enter new geographic markets such as Europe. We see a near-term opportunity to expand into France, Germany, and the United Kingdom with the support of Tishman Speyer and current customers as our anchor partners in these regions.

New Products and Services

Our existing suite of hardware and software is just the beginning of our product expansion. Our dedicated team of designers, engineers, and product managers are creating new and innovative products and features for the Latch ecosystem. Once a customer is using LatchOS, new software modules can be seamlessly activated over the air via our management interface. We build our products with the goal of making the experience for all stakeholders seamless and intuitive and hold ourselves to the highest standards of excellence and innovation in our product development. We are also in active dialogue with other industry participants on how Latch can expand its offering with new products through partnerships with other companies.

 

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Capturing Digital Consumer Services Spending

A tremendous amount of spending occurs inside of the home, from a wide range of on demand services to dry cleaning, to home cleaning, to maintenance, to individual internet connectivity, to renter’s insurance, and even to rent payment related services. The power of LatchOS is that we believe we can bring all of these services to the resident in a single interface through the Latch App. We have several new products and resident services in development that we will continue to release to Latch residents to better serve these stakeholders and make their spaces better places to live.

New Real Estate End-Markets

The rental home market is just our first step. We envision a world where the Latch system unifies every space in each stakeholder’s path, from the home to the office and more. The opportunity to provide a Latch-enabled solution to new markets such as commercial office, hospitality and more are attractive opportunities toward achieving this long-term vision.

Employees

Our employees are critical to our success. As of June 22, 2021, we had approximately 287 full-time employees based in the United States and 14 full-time employees based in Taiwan. We also engage numerous consultants and contractors to supplement our permanent workforce. A majority of our employees are engaged in engineering, software and product development, sales and related functions. To date, we have not experienced any work stoppages and consider our relationship with our employees to be in good standing. None of our domestic or international employees are subject to a collective bargaining agreement or represented by a labor union.

Facilities

We are headquartered in New York City, where we lease three office spaces totaling approximately 4,200 square feet that we currently use as engineering lab space. The lease covering approximately 800 square feet expires February 2022, the lease covering approximately 1,200 square feet expires October 31, 2021, and the lease covering approximately 2,200 square feet expires April 30, 2022. We intend to lease a larger office in New York City for our headquarters following the conclusion of governmental restrictions on gatherings relating to the COVID-19 pandemic.

In addition to our New York City headquarters, we currently lease approximately 3,300 square feet of office space in San Francisco and 150 square feet of workspace in Los Angeles. Both our San Francisco office and Los Angeles workspace are used primarily as office and workspace for our employees based in each city. The lease for our San Francisco office expires in June 2021 and we have the option to extend the term of the lease by one year. The term of the lease for our Los Angeles workspace is month-to-month. We also lease several storage units in a New York City warehouse that are used primarily for holding inventory. The term of the lease for our New York storage units is month-to-month.

In addition to our facilities located in the United States, we lease approximately 3,500 square feet of office space in Taipei, Taiwan that is used primarily as office space for our employees based in Taiwan. The lease for our Taipei office expires in June 2021.

We believe that our facilities are adequate to meet our needs for the immediate future and that suitable additional space will be available to accommodate any expansion of our operations as needed.

Government Regulation

We are subject to various laws, regulations and permitting requirements of authorities in the United States and Canada. We believe that we are in material compliance with all such laws, regulations and permitting requirements.

 

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United States

We or our channel partners are subject to various federal, state, and local regulations related to access control products, such as state and local building and fire codes, the American Disabilities Act, and requirements for UL and FCC certifications.

We or our partners may be subject to numerous federal and state laws and regulations, including data breach notification laws, data privacy and security laws, and consumer protection laws and regulations (e.g., Section 5 of the FTC Act) that govern the collection, use, disclosure, and protection of personal information. Privacy and security laws, self-regulatory schemes, regulations, standards, and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and restrictions on data processing. For example, California recently enacted the CCPA, which went into effect on January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents, including the right to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach. Relatedly, the CPRA was recently voted into law by California residents. The CPRA significantly amends the CCPA and imposes additional data protection obligations on covered companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. It also creates a new California data protection agency specifically tasked to enforce the law, which would likely result in increased regulatory scrutiny of California businesses in the areas of data protection and security. The substantive requirements for businesses subject to the CPRA will go into effect on January 1, 2023 and become enforceable on July 1, 2023. Further, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5 of the FTC Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities.

Canada

In Canada, PIPEDA and similar provincial laws may impose obligations with respect to processing personal information. PIPEDA requires companies to obtain an individual’s consent when collecting, using or disclosing that individual’s personal information. Individuals have the right to access and challenge the accuracy of their personal information held by an organization, and personal information may only be used for the purposes for which it was collected. If an organization intends to use personal information for another purpose, it must again obtain that individual’s consent. Failure to comply with PIPEDA could result in significant fines and penalties.

Competition

Given the emerging nature of the smart building industry, there are a number of companies developing partial solutions that may be similar to parts of the LatchOS ecosystem. The smart building industry is highly fragmented with many players ranging from companies focused on singular smart building experiences (i.e., smart home solutions, package room solutions, intercoms, etc.), to middleware companies that do not develop most of their own hardware and stitch together 3rd party solutions, leading to partial or incomplete smart building experiences. We believe the majority of these other companies are developing solutions that do not solve buildings’ needs comprehensively or meet the enterprise management and security requirements of large enterprise environments. We believe that our innovative product design, enterprise grade platform, focus on privacy and security, commercial traction, issued and pending patents, broad intellectual property portfolio and strong engineering and operations team provide us with a competitive advantage over these other smart building companies. We expect competition to intensify in the future as the market for full building operating systems matures.

 

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Legal Proceedings

We are, and from time to time we may become, involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition, or cash flows.

 

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MANAGEMENT

Management and Board of Directors

The following sets forth certain information, as of June 24, 2021, concerning the persons who serve as our executive officers and members of our board of directors.

 

Name

  

Age

      

Position

Directors

       

Luke Schoenfelder

     32        Director

Robert J. Speyer

     51        Director

Peter Campbell

     56        Director

Tricia Han

     49        Director

Raju Rishi

     54        Director

J. Allen Smith

     64        Director

Andrew Sugrue

     31        Director

Executive Officers

       

Luke Schoenfelder

     32        Chief Executive Officer

Michael Brian Jones

     31        Chief Technology Officer

Ali Hussain

     32        Chief Operating Officer

Garth Mitchell

     35        Chief Financial Officer and Treasurer

Directors

Luke Schoenfelder, Chief Executive Officer and Chairman of the Board of Directors

Mr. Schoenfelder is our Chief Executive Officer, Co-Founder and Chairman of the Board of Directors. As the chief executive, Mr. Schoenfelder guides our vision and mission, designing better experiences for each stakeholder at the modern building. Under his guidance, we have evolved from an industry-defining smart access company to a powerful software, hardware and service ecosystem that empowers building owners, property managers, and residents with more flexibility and convenience in how they interact with their spaces. From launching our first access device to partnering with technology leaders like Google Nest, Mr. Schoenfelder has expertly expanded our presence in the market. As a partner to the country’s top developers including Avalon Bay, Brookfield and Prometheus, Mr. Schoenfelder guides our team as they continue to develop and deploy comprehensive solutions. Prior to the founding of Latch, Mr. Schoenfelder developed technology products for the emerging world with backing from the Clinton Global Initiative, Habitat for Humanity and the Dell Social Innovation Fund from 2011 to 2013. Before that Mr. Schoenfelder worked at Apple within the Retail and Worldwide Governmental Affairs practices, supporting international market expansion from 2008 to 2012. Mr. Schoenfelder holds degrees from Georgetown University and Imperial College London, where he studied as a Marshall Scholar. We believe that Mr. Schoenfelder is qualified to serve on our board of directors due to his significant experience building and scaling smart building technology as Latch’s President and Chief Executive Officer since its inception and because, as a founder of Latch, he is essential to the long-term vision of the Company.

Robert J. Speyer, Director

Mr. Speyer is a prominent leader in the real estate industry, with more than 25 years of real estate experience, and has served on our board of directors since June 2021. Mr. Speyer serves as President and Chief Executive Officer of Tishman Speyer, a position he has held since 2008. Since assuming the role of Chief Executive Officer of Tishman Speyer, Mr. Speyer has grown Tishman Speyer into a leading global real estate investment management firm with assets under management of $56.8 billion as of September 30, 2020. Under his leadership, Tishman Speyer has delivered more than 61 million square feet of development and redevelopment

 

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across 28 key international markets and 121 investments and acquired an additional 24 million square feet of operating real estate assets across 25 investments, serving the needs of industry-leading tenants around the world. Mr. Speyer also serves as Chief Executive Officer and Chairman of Tishman Speyer Innovation Corp. II, a special purpose acquisition company, a position he has held since November 2020. Mr. Speyer also is the Chairman of the Advisory Board of the Mayor’s Fund to Advance New York City, appointed by Mayor Bloomberg in 2006 and reappointed by Mayor de Blasio in 2014. In addition, Mr. Speyer is Founding Member and Co-Chairman of Breakthrough Properties, a joint-venture with Bellco Capital focused on life science real estate development and management. He is also a member of the Executive Committee of the Partnership for New York City. In 2013, Mr. Speyer became the youngest ever Chairman of the Real Estate Board of New York, the city’s premier industry association, and served as Chairman for five years. We believe that Mr. Speyer is qualified to serve on our board of directors due to his extensive experience in the real estate industry and his significant executive leadership, business and investment experience.

Peter Campbell, Director

Mr. Campbell currently serves on the board of directors of Tufin Software Technologies, Ltd., a New York Stock Exchange-listed security policy management company headquartered in Tel Aviv, Israel, and has served on our board of directors since June 2021. From 2006 to 2019, Mr. Campbell served as Chief Financial Officer of Mimecast Ltd., a Nasdaq-listed company specializing in cloud-based email management, where he also served as a director from 2007 to 2015. He previously served as Chief Financial Officer of SR Telecom Inc. a Nasdaq and Toronto Stock Exchange-listed global broadband wireless systems manufacturer, where he was employed from 2002 to 2006. Prior to that, Mr. Campbell was an auditor at Ernst & Young LLP in Canada in the technology sector. Mr. Campbell is a CPA and holds a Bachelor of Commerce degree and a Graduate Diploma in accounting from the John Molson School of Business at Concordia University in Canada, where he also served as a lecturer. We believe that Mr. Campbell is qualified to serve on our board of directors due to his extensive financial, operational and investment expertise, including his experience serving as Chief Financial Officer of a publicly traded company and as an auditor at a global accounting firm, as well as his substantial experience serving on the board of directors of publicly traded companies.

Tricia Han, Director

Ms. Han has been the Chief Executive Officer of MyFitnessPal, a health and fitness tracking app, since April 2021, and has served on our board of directors since June 2021. She also serves on the board of directors of Empire State Realty Trust, a New York Stock Exchange-listed real estate investment trust company, and is a member of the compensation, finance and nominating and governance committees. She previously served on the board of directors of Nutrisystem, Inc., a Nasdaq-listed leading provider of health and wellness and weight management products and services, from 2018 to 2019. From February 2020 to April 2021, she served as Chief Product Officer of Care.com, the largest U.S. marketplace connecting families and caregivers. From 2017 to 2020, Ms. Han served as Chief Executive Officer of Daily Burn, a leading fitness tech brand. Prior to Daily Burn, Ms. Han served as Chief Product Officer at Dotdash (formerly About.com), one of the largest content publishers on the Internet, from 2013 to 2017. Care.com, Daily Burn and Dotdash are each operating businesses of IAC. Ms. Han also previously served as the Senior Vice President of Product Management at WebMD from 2012 to 2013, and as Vice President of Product Development and General Manager of Commerce for DailyCandy from 2009 to 2012. Her professional experience includes leading product management teams at a variety of technology start-ups including Vindigo, Rave Wireless, and Juno Online Services. Ms. Han helped build several widely-adopted mobile applications, including for The New York Times and MapQuest. She earned her Bachelor of Arts in 1993 from Cornell University. We believe that Ms. Han is qualified to serve on our board of directors due to her extensive experience as a chief product officer at several technology companies, her significant management, business, and executive leadership experience, and her substantial experience serving on the board of directors of publicly traded companies.

 

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Raju Rishi, Director

Mr. Rishi is a General Partner at RRE Ventures and has served on our board of directors since June 2021. In addition, Mr. Rishi has served on the board of directors of a number of private companies, including Bend Financial, a next generation health savings account provider, Redox, a modern API for healthcare, Knock.com, a real-estate sales platform, Greathorn, a cloud-based email security platform, imgix, an image optimization platform, PartnerStack, a partner and channel management platform, RxDefine, a platform that enables life science and medtech companies to digitally connect with consumers, and Tive, a platform that enables companies to track their supply chain through both cellular connected trackers and cloud software. Prior to joining RRE Ventures in 2015, Mr. Rishi was a Venture Partner at Sigma Prime Ventures in Boston from 2012 to 2015. Mr. Rishi has extensive career experience as an entrepreneur and operator. He is the founder of several startups in the mobile and enterprise software sectors. Prior to that, Mr. Rishi held executive roles at AT&T and Lucent. Mr. Rishi is a graduate of the Massachusetts Institute of Technology, where he holds B.S. and M.S. degrees in Materials Science and Engineering. We believe that Mr. Rishi is qualified to serve on our board of directors due to his extensive experience in identifying and investing in cutting-edge technology companies, his executive leadership, management, and business experience, and his experience serving on the board of directors of numerous private companies.

J. Allen Smith, Director

Mr. Smith has served on our board of directors since June 2021 and is the President of Cadre, a financial technology company that provides individuals and institutions direct access to large commercial real-estate properties. Prior to joining Cadre in 2020, Mr. Smith was the President and CEO of Four Seasons Hotels & Resorts (“Four Seasons”) from 2013 to 2018, where he oversaw significant growth in the business and financial performance of Four Seasons. Prior to that, Mr. Smith spearheaded Prudential Real Estate Investors’ growth into a global organization as Chief Executive Officer from 2008 to 2013, during which time he also played a substantial role in capital raising efforts. Mr. Smith is a graduate of Cornell University, where he holds an M.S in Hotel/ Motel Administration/ Management and a B.S. in Sociology. We believe that Mr. Smith is qualified to serve on our board of directors due to his extensive experience in the real estate and hospitality industries and his significant executive leadership, business, and investment experience.

Andrew Sugrue, Director

Mr. Sugrue is a Founding Partner at Avenir Growth Capital, a private investment firm with $1.5 billion in assets under management, and has served on our board of directors since June 2021. He also serves on the board of directors of a number of private companies, including Artsy, an online marketplace for fine art, Bevi, the maker of smart, bottleless flavored and sparkling beverage dispensers, Bustle Digital Group, a women focused digital media platform, Drizly, an alcohol delivery marketplace, Mark43, a software platform for public safety agencies, and Savage x Fenty, a direct to consumer lingerie brand launched by Rihanna. Prior to founding Avenir Growth Capital in 2017, Mr. Sugrue worked at Shumway Capital from 2016 to 2017, L Catterton from 2014 to 2016, and Peter J Solomon Company from 2012 to 2014. As a Robertson Scholar, he received a Master of Management Studies from the Fuqua School of Business at Duke University and a B.A. from the Honors Program at the University of North Carolina at Chapel Hill. We believe that Mr. Sugrue is qualified to serve on our board of directors due to his extensive experience in identifying and investing in category-defining technology companies and his experience serving on the board of directors of numerous private companies.

Executive Officers

Luke Schoenfelder, Chief Executive Officer and Chairman of the Board of Directors

See biographical information above in the Directors section.

 

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Michael Brian Jones, Chief Technology Officer

Mr. Jones is the Chief Technology Officer and Co-Founder of Latch and has served in this role since Legacy Latch’s incorporation in 2014. Mr. Jones is a full stack hardware engineer with experience building remote data acquisition systems that have been deployed in some of the world’s most challenging environments. From smart grid monitoring in Haiti to remote soil sensing in rural Mexico, Mr. Jones has built products that capture, synthesize and present data to enterprise customers of all sorts. Mr. Jones holds a degree in Mechanical Engineering from Rochester Institute of Technology.

Ali Hussain, Chief Operating Officer

Mr. Hussain is the Chief Operating Officer of Latch and heads all business operations and unified sales across Latch. Prior to joining Latch, Mr. Hussain was a management consultant at the Boston Consulting Group from 2012 to 2015, where he worked to merge two firms in the logistics space, helped optimize the Asia-based supply chain for an industrials company and train enterprise sales teams. Mr. Hussain holds degrees from Cornell University and Oxford University, where he studied as a Marshall Scholar.

Garth Mitchell, Chief Financial Officer and Treasurer

Mr. Mitchell is the Chief Financial Officer and Treasurer of Latch. Prior to joining Latch, Mr. Mitchell was a Senior Investment Analyst at Lucus Advisors from 2015 to 2019 focused on technology, media and telecom sectors, was the director of strategy and business development at Assembled Brands from 2014 to 2015, was a lead internet and software investment analyst at Millennium Partners from 2011 to 2014 and was a financial analyst at Lazard from 2009 to 2010. Mr. Mitchell holds a Bachelor of Arts in Economics from Morehouse College.

Corporate Governance

We structure our corporate governance in a manner we believe closely aligns our interests with those of our stockholders. Notable features of this corporate governance include:

 

   

we have independent director representation on our audit, compensation and nominating committees, and our independent directors meet regularly in executive sessions without the presence of our corporate officers or non-independent directors;

 

   

at least one of our directors qualifies as an “audit committee financial expert” as defined by the SEC; and

 

   

we have begun to and will continue to implement a range of other corporate governance best practices, including implementing a robust director education program.

Independence of the Board of Directors

Nasdaq listing standards require that a majority of our board of directors be independent. An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that Ms. Han and Messrs. Speyer, Campbell, Rishi, Smith and Sugrue are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors will have regularly scheduled meetings at which only independent directors are present.

Composition of the Board of Directors

Our business and affairs are managed under the direction of our board of directors. Our board of directors is staggered in three classes, with two directors in Class I (Mr. Rishi and Mr. Smith), two directors in Class II (Ms. Han and Mr. Sugrue), and three directors in Class III (Mr. Schoenfelder, Mr. Campbell and Mr. Speyer).

 

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Board Committees

Our board of directors directs the management of our business and affairs, as provided by Delaware law, and conducts its business through meetings of the board of directors and standing committees. We have a standing audit committee, nominating and corporate governance committee and compensation committee. In addition, from time to time, special committees may be established under the direction of the board of directors when necessary to address specific issues.

Audit Committee

Our audit committee is responsible for, among other things:

 

   

appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm;

 

   

discussing with our independent registered public accounting firm their independence from management;

 

   

reviewing, with our independent registered public accounting firm, the scope and results of their audit;

 

   

approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm;

 

   

overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the quarterly and annual financial statements that we file with the SEC;

 

   

overseeing our financial and accounting controls and compliance with legal and regulatory requirements;

 

   

reviewing our policies on risk assessment and risk management;

 

   

reviewing related person transactions; and

 

   

establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters.

Our audit committee consists of Peter Campbell, Raju Rishi and J. Allen Smith, with Peter Campbell serving as chair. Rule 10A-3 of the Exchange Act and Nasdaq rules require that our audit committee must be composed entirely of independent members. Our board of directors has affirmatively determined that Peter Campbell, Raju Rishi and J. Allen Smith each meet the definition of “independent director” for purposes of serving on the audit committee under Rule 10A-3 of the Exchange Act and Nasdaq rules. Each member of our audit committee also meets the financial literacy requirements of Nasdaq listing standards. In addition, our board of directors has determined that Peter Campbell and J. Allen Smith each qualify as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K. Our board of directors adopted a written charter for the audit committee, which is available on our corporate website at investors.latch.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.

Compensation Committee

Our compensation committee is responsible for, among other things:

 

   

reviewing and approving the corporate goals and objectives, evaluating the performance of and reviewing and approving, (either alone or, if directed by the board of directors, in conjunction with a majority of the independent members of the board of directors) the compensation of our Chief Executive Officer;

 

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overseeing an evaluation of the performance of and reviewing and setting or making recommendations to our board of directors regarding the compensation of our other executive officers;

 

   

reviewing and approving or making recommendations to our board of directors regarding our incentive compensation and equity-based plans, policies and programs;

 

   

reviewing and approving all employment agreement and severance arrangements for our executive officers;

 

   

making recommendations to our board of directors regarding the compensation of our directors; and

 

   

retaining and overseeing any compensation consultants.

Our compensation committee consists of Raju Rishi and J. Allen Smith, with Raju Rishi serving as chair. Our board of directors has affirmatively determined that Raju Rishi and J. Allen Smith each meet the definition of “independent director” for purposes of serving on the compensation committee under Nasdaq rules, and are “non-employee directors” as defined in Rule 16b-3 of the Exchange Act. Our board of directors adopted a written charter for the compensation committee, which is available on our corporate website at investors.latch.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee is responsible for, among other things:

 

   

identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors;

 

   

overseeing succession planning for our Chief Executive Officer and other executive officers;

 

   

periodically reviewing our board of directors’ leadership structure and recommending any proposed changes to our board of directors;

 

   

overseeing an annual evaluation of the effectiveness of our board of directors and its committees; and

 

   

developing and recommending to our board of directors a set of corporate governance guidelines.

Our nominating and corporate governance committee consists of Andrew Sugrue and Tricia Han, with Andrew Sugrue serving as chair. Our board of directors has affirmatively determined that Andrew Sugrue and Tricia Han each meet the definition of “independent director” under Nasdaq rules. Our board of directors adopted a written charter for the nominating and corporate governance committee, which is available on our corporate website at investors.latch.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.

Risk Oversight

Our board of directors is responsible for overseeing our risk management process. Our board of directors focuses on our general risk management strategy, the most significant risks facing us, and oversees the implementation of risk mitigation strategies by management. Our audit committee is also responsible for discussing our policies with respect to risk assessment and risk management. Our board of directors believes its administration of its risk oversight function has not negatively affected our board of directors’ leadership structure.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee (or other committee performing equivalent functions) of any entity that has one or more executive officers serving

 

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on our compensation committee. In addition, none of our executive officers serves as a member of the compensation committee of the board of directors (or other committee performing equivalent functions) of any entity that has one or more executive officers serving on our board of directors.

Code of Business Conduct and Ethics

We adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is posted on our corporate website at investors.latch.com. In addition, we intend to post on our website all disclosures that are required by law or Nasdaq listing standards concerning any amendments to, or waivers from, any provision of the code. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.

 

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EXECUTIVE COMPENSATION

Overview

Our Named Executive Officers for the year ended December 31, 2020, include Luke Schoenfelder, our Chief Executive Officer, and Ali Hussain and Garth Mitchell, our two most highly compensated executive officers other than our current Chief Executive Officer, who were serving as executive officers as of December 31, 2020 (collectively, the “Named Executive Officers” or “NEOs”). This Executive Compensation section sets forth certain information regarding total compensation earned by our Named Executive Officers for the year ended December 31, 2020, as well as stock option awards held by our Named Executive Officers as of December 31, 2020. To date, the compensation packages for our Named Executive Officers primarily consist of base salary, an annual cash incentive bonus, stock option awards and health and welfare benefits.

Summary Compensation Table For 2020

The following table sets forth summary information regarding the total compensation earned during the year ended December 31, 2020 for the Named Executive Officers.

 

Name and principal position

   Year      Salary ($)      Bonus
($)(1)
     Option
awards
($)(2)
     All other
compensation
($)(3)
     Total
($)
 

Luke Schoenfelder, CEO

     2020        270,000.80        —             —          270,000.80  

Ali Hussain, COO

     2020        280,000.47        —             —          280,000.47  

Garth Mitchell, CFO

     2020        285,000.00        100,000.00           —          385,000.00  

 

(1)

Represents a discretionary performance bonus awarded to Mr. Mitchell for the year ended December 31, 2020.

(2)

None of the Named Executive Officers received stock option awards during the year ended December 31, 2020.

(3)

None of the Named Executive Officers received matching contributions to our 401(k) savings plan during the year ended December 31, 2020.

Narrative to Summary Compensation Table

Latch reviews compensation annually for all employees, including its Named Executive Officers. Our compensation practices historically have been designed to be comparable with the compensation packages of our competitors in the market while also taking into consideration the historical compensation levels of each executive, along with his or her individual performance as compared to its expectations and objectives. We seek to implement compensation policies and practices that link a portion of each executive’s cash compensation to our short-term performance objectives, and we have also provided a portion of their compensation as long-term incentive compensation in the form of equity awards in Latch. Latch does not target a specific competitive position or a specific mix of compensation among base salary, bonus or long-term incentives.

The compensation committee of Latch’s board of directors (the “Compensation Committee”) has historically determined compensation for the Named Executive Officers. In November 2019, the Compensation Committee reviewed the 2018 Venture Capital Executive Compensation Survey to determine appropriate recommendations for the executive compensation of the Named Executive Officers. Compensation amounts shown in the Summary Compensation Table for 2020 above reflect amounts paid to our Named Executive Officers for 2020 and do not necessarily reflect amounts that are expected to be paid in 2021 and beyond.

 

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Employment Agreements for Named Executive Officers

Overview; Salaries and Bonuses

In connection with the Business Combination, on January 24, 2021, each of the Named Executive Officers entered into an employment agreement, which became effective upon the consummation of the Business Combination. The Named Executive Officers are entitled to base salary and a target bonus of a certain percentage of his base salary as follows:

 

Name

   Base Salary ($)      Target Bonus
Percentage (%)
 

Luke Schoenfelder

     500,000        10  

Ali Hussain

     400,000        13  

Garth Mitchell

     400,000        13  

In addition to the salaries and bonus targets set forth above, each of the Named Executive Officers is also eligible to participate in and receive awards under the 2021 Incentive Plan. The amount, form and terms and conditions of any such awards under the 2021 Incentive Plan will be determined by the Compensation Committee.

Severance and Restrictive Covenants

Pursuant to their employment agreements, in the event of a termination of a Named Executive Officer’s employment for any reason, the executive would generally be entitled to receive earned but unpaid salary, accrued but unpaid annual bonus, any owed accrued expenses, as well as amounts payable under any benefit plans, programs or arrangements that such Named Executive Officer participates in or benefits from. In the event that a Named Executive Officer’s employment is terminated due to his death, in addition to the foregoing, he would be entitled to a pro-rated portion of his annual bonus, as determined by our board of directors. In the event that a Named Executive Officer’s employment is terminated either by us without “cause” (as defined in the applicable employment agreement) or by the Named Executive Officer for “good reason” (as defined in the applicable employment agreement), subject to his execution and non-revocation of a general release of claims and continued compliance with his restrictive covenant obligations, as described below, such Named Executive Officer would be entitled to: (i) the sum of his base salary and target bonus at the time of termination, payable over a 12-month period, (ii) his accrued annual bonus and the pro-rated portion of his annual bonus, based on the time between his termination and the end of the performance period, and (iii) payment for such Named Executive Officer’s premiums incurred for participation in COBRA coverage pursuant to a Latch-sponsored group health plan for a 12-month period.

In the event that a Named Executive Officer’s employment is terminated by us without cause or by the Named Executive Officer for good reason within three months prior to, or 24 months following, a “change in control” (as defined in the 2021 Incentive Plan), subject to his execution and non-revocation of a general release of claims and continued compliance with his restrictive covenant obligations, as described below, such Named Executive Officer would be entitled to: (i) the sum of his base salary and target bonus at the time of termination, payable generally in a lump sum within 30 days following the date of his termination, (ii) his accrued annual bonus and the pro-rated portion of his target bonus, based on the time between his termination and the end of the performance period, (iii) payment for such Named Executive Officer’s premiums incurred for participation in COBRA coverage pursuant to a Latch-sponsored group health plan for a 12-month period and (iv) full acceleration of his outstanding equity incentive awards.

Each Named Executive Officer is subject to certain restrictive covenants under his employment agreement, including but not limited to confidentiality, non-disparagement and one-year non-compete and non-solicitation covenants.

 

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Director Compensation

No compensation was provided for the non-employee directors during the year ended December 31, 2020. J. Allen Smith previously received awards of stock options under our 2016 Stock Plan (as defined below) and, as of December 31, 2020, held 81,200 stock options.

Outstanding Equity Awards as of December 31, 2020

The following table sets forth certain information about outstanding equity awards granted by Legacy Latch to the Named Executive Officers outstanding as of December 31, 2020.

 

     Option award  
     Grant Date     Number of
securities
underlying
unexercised
options (#)
exercisable
     Number of
securities
underlying
unexercised
options (#)
unexercisable
     Option
exercise
price(2) ($)
     Option
expiration
date
 

Luke Schoenfelder

     11/7/2018 (1)(3)      2,034,215        1,453,012        0.61        11/6/2028  
     5/12/2016 (1)(4)      2,000,896        —          0.20        5/11/2026  

Ali Hussain

     11/7/2018 (1)(3)      480,872        343,480        0.61        11/6/2028  

Garth Mitchell

     12/3/2019 (1)(5)      100,272        269,966        0.91        12/2/2029  
     2/19/2019 (1)(6)      298,192        352,409        0.61        2/18/2029  

 

(1)

These option awards were granted under our 2016 Stock Plan, the terms of which are described below under “2016 Stock Plan.”

(2)

All of the option awards listed in the table above were granted with a per share exercise price equal to the fair market value of one share of our Common Stock on the date of grant, as determined in good faith by our board of directors with the assistance of a third-party valuation expert.

(3)

1/48th of the total number of shares subject to the option vested on September 9, 2018, and the remaining shares subject to the option vest at a rate of 1/48th of the total number of shares subject to the option on each month thereafter, subject to continued service to Legacy Latch through each vesting date. In connection with an involuntary termination of employment within 12 months following a change of control, 100% of the total number of unvested shares subject to the option will become immediately vested and exercisable.

(4)

The stock option is fully vested.

(5)

1/48th of the total number of shares subject to the option vested on January 1, 2020, and the remaining shares subject to the option vest at a rate of 1/48th of the total number of shares subject to the option on each month thereafter, subject to continued service to Legacy Latch through each vesting date. In connection with an involuntary termination of employment within 12 months following a change of control, 100% of the total number of unvested shares subject to the option will become immediately vested and exercisable.

(6)

1/4th of the total number of shares subject to the option vested on February 18, 2020, and the remaining shares subject to the option vest at a rate of 1/48th of the total number of shares subject to the option on each month thereafter, subject to continued service to Legacy Latch through each vesting date.

Latchable, Inc. 2016 Stock Plan

In January 2016, we adopted the Latchable, Inc. 2016 Stock Plan (the “2016 Plan” and, together with the Latchable, Inc. 2014 Stock Incentive Plan, the “Prior Plans”) pursuant to which our board of directors was authorized (i) to grant either ISOs or non-qualified stock options to purchase shares of our Common Stock (“NSOs”) to our employees and (ii) to grant NSOs to outside directors and consultants. 24,412,947 shares had been authorized for issuance under the 2016 Plan at the time the 2021 Incentive Plan (described below) became effective. From and after the effectiveness of the 2021 Incentive Plan, no new awards will be made under the 2016 Plan.

 

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Stock options granted under the 2016 Plan were granted with an exercise price equal to the stock’s fair market value at the date of grant. Stock options outstanding under the 2016 Plan generally have 10-year terms and vest over a four-year period starting from the date specified in each agreement.

Purpose

The purpose of the 2016 Plan was to offer persons selected by us an opportunity to acquire a proprietary interest in our success, or to increase such interest, by acquiring shares of our Common Stock.

Administration

The 2016 Plan was administered by our board of directors.

Subject to the provisions of the 2016 Plan, our board of directors had full authority and discretion to take any actions it deemed necessary or advisable for the administration of the 2016 Plan. Notwithstanding anything to the contrary in the 2016 Plan, with respect to the terms and conditions of awards granted to participants outside the United States, our board of directors was given authority to vary from the provisions of the 2016 Plan to the extent it determined it necessary and appropriate to do so; provided that there could be no variances from those 2016 Plan terms requiring stockholder approval. All decisions, interpretations and other actions of the board of directors were final and binding on all purchasers, all optionees and all persons deriving their rights from a purchaser or optionee.

Eligibility

Only employees, outside directors and consultants were eligible for the grant of NSOs or the direct award or sale of shares. Only employees were eligible for the grant of ISOs.

A person who owned more than 10% of the total combined voting power of all classes of outstanding stock of Latch was not eligible for the grant of an ISO unless (i) the exercise price was at least 110% of the fair market value of a share on the date of grant and (ii) such ISO by its terms was not exercisable after the expiration of five years from the date of grant.

Stock Awards

Each award of shares under the 2016 Plan is evidenced by a Stock Grant Agreement between the grantee and us. Each sale of shares under the 2016 Plan (other than upon exercise of an option) is evidenced by a Stock Purchase Agreement between the purchaser and us.

Any right to purchase shares under the 2016 Plan (other than an option) shall automatically expire if not exercised by the purchaser within 30 days (or such other period as may be specified in the Award Agreement) after the grant of such right was communicated to the purchaser by us.

Our board of directors determined the purchase price of shares to be offered under the 2016 Plan at its sole discretion.

Exercise Price & Date

The exercise price of an option is less than 100% of the fair market value of a share on the date of grant, and in the case of an ISO a higher percentage may be required by the eligibility requirements. Subject to the preceding sentence, the exercise price was determined by our board of directors at its sole discretion.

 

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No option is exercisable unless the optionee (i) has delivered an executed copy of the Stock Option Agreement to us or (ii) otherwise agrees to be bound by the terms of the Stock Option Agreement. Our board of directors had authority to determine the exercisability provisions of the Stock Option Agreement at its sole discretion.

Termination of Service

If an optionee’s service terminates for any reason other than the optionee’s death, then the optionee’s vested options shall expire on the earliest of the following dates: (i) the expiration date (ii) the date 12 months after the optionee’s death, or such earlier or later date as our board of directors may determine (but in no event earlier than six months after the optionee’s death).

Stockholder Rights

An optionee, or a transferee of an optionee, shall have no rights as a stockholder with respect to any shares covered by the optionee’s option until such person files a notice of exercise, pays the exercise price and satisfies all applicable withholding taxes pursuant to the terms of such option.

Amendment or Termination

Our board of directors may amend, suspend or terminate the 2016 Plan at any time and for any reason.

No shares shall be issued or sold and no option granted under the 2016 Plan after the termination thereof, except upon exercise of an option (or any other right to purchase shares) granted under the 2016 Plan prior to such termination. The termination of the 2016 Plan, or any amendment thereof, shall not affect any share previously issued or any option previously granted under the 2016 Plan.

Latch, Inc. 2021 Incentive Plan

The purpose of the 2021 Incentive Plan is to enhance our ability to attract, retain and motivate persons who make (or are expected to make) important contributions by providing these individuals with equity ownership opportunities and/or equity-linked compensatory opportunities. Equity awards and equity-linked compensatory opportunities are intended to motivate high levels of performance and align the interests of directors, employees and consultants with those of stockholders by giving directors, employees and consultants the perspective of an owner with an equity or equity-linked stake in the Company and providing a means of recognizing their contributions to our success. The following summarizes the material terms of the 2021 Incentive Plan adopted in connection with the Business Combination as the long-term incentive compensation plan.

Eligibility and Administratio