# Compass, Inc.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Compass, Inc.](/companies/comp.md) (CIK 1563190)
- Form: 10-Q
- Filed: 2022-11-14
- Accepted by EDGAR: Nov 14, 2022, 08:45 ET
- Period: 2022-09-30
- Accession: 0001563190-22-000189
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1563190/000156319022000189/comp-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1563190/000156319022000189/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $1.49bn | us-gaap:Revenues |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $4.91bn | us-gaap:Revenues |
| Research and development | 3 months, 2022-07-01 to 2022-09-30 | $81.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-01-01 to 2022-09-30 | $296.9m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | −$151.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | −$436.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $900.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $2.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | −$1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | −$154.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | −$443.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | −$0.36 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | −$1.04 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | −$0.36 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | −$1.04 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 432,459,739 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 425,338,530 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | −$173.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $56.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-09-30 | $354.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $541.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $1.59bn | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $443.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $947.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-09-30 | $637.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 59,867 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report and our audited consolidated financial statements and the related notes and the discussion under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2021 included in the 2021 Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause or contribute to these differences include, but are not limited to, those discussed in the section entitled “Special Note Regarding Forward-Looking Statements”. You should review the disclosure under the section entitled “Risk Factors” in Part I, Item 1A, “Risk Factors” in our 2021 Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.*

### OVERVIEW

Management’s discussion and analysis of financial condition and results of operations, or MD&A, is provided as a supplement to the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report and is intended to provide an understanding of our results of operations, financial condition and changes in our results of operations and financial condition. Our MD&A is organized as follows:

- *Introduction.* This section provides a general description of our company and its business, recent developments affecting our company and discussions of how seasonal factors, the COVID-19 pandemic and macroeconomic conditions may impact our results.
- *Results of Operations.* This section provides our analysis and outlook for the significant line items on our statements of operations, as well as other information that we deem meaningful to understand our results of operations on a consolidated basis.
- *Key Business Metrics and Non-GAAP Financial Measures.* This section provides a discussion of key business metrics and non-GAAP financial measures we use to evaluate our business and measure our performance, in addition to the measures presented in our condensed consolidated financial statements.
- *Liquidity and Capital Resources.* This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that existed as of September 30, 2022.
- *Critical Accounting Estimates and Policies.* This section discusses those accounting policies that are considered important to the evaluation and reporting of our financial condition and results of operations, and whose application requires us to exercise subjective and often complex judgments in making estimates and assumptions.
- *Recent Accounting Pronouncements.* This section provides a summary of the most recent authoritative accounting standards and guidance that have either been recently adopted by our company or may be adopted in the future.

### INTRODUCTION

### Our Company

Compass, Inc. (the “Company”) was incorporated in Delaware on October 4, 2012 under the name Urban Compass, Inc. On January 8, 2021, the board of directors of the Company approved a change to the Company’s name from Urban Compass, Inc. to Compass, Inc.

### Our Business and Business Model

We are a technology-enabled brokerage that provides an end-to-end platform of software, services and support to empower our residential real estate agents to deliver exceptional service to seller and buyer clients. Real estate agents are themselves business owners, and Compass agents utilize the platform to grow their respective businesses, save time and manage their business more effectively. Our platform includes an integrated suite of cloud-based software for customer relationship management, marketing, client service, brokerage services and other critical functionality, all custom-built for the real estate industry and enabling our core brokerage services. The platform also uses proprietary data, analytics, artificial intelligence and machine learning to deliver high value recommendations and outcomes for Compass agents and their clients.

Our business model is directly aligned with the success of our agents. We attract agents to our brokerage and partner with them as independent contractors who affiliate their real estate licenses with us, operating their businesses on our platform and under our brand. We currently generate substantially all of our revenue from commissions paid by clients at the time that a home is transacted, which agents use to assist home sellers and buyers in listing, marketing, selling and finding homes as well as through the provision of services adjacent to the transaction, such as title, escrow and mortgage. While adjacent services comprise a small portion of our revenue to date, we are well-positioned to capture meaningful revenue from adjacent services as we continue to expand and diversify our offerings within the real estate ecosystem.

### Update Related to the Restructuring Activities

During the three months ended June 30, 2022, we enacted certain workforce reductions previously disclosed and began winding down Modus and during the three months ended September 30, 2022, we took additional smaller non-material workforce reduction actions and committed to and communicated an additional separate workforce reduction (collectively, the "Workforce Reductions"). The Workforce Reductions are part of a broader plan to take meaningful actions to improve the alignment between our organizational structure and our long-term business strategy, drive cost efficiencies enabled by our technology and other competitive advantages and continue to drive toward profitability and positive free cash flow. In addition to the aforementioned Workforce Reductions, restructuring actions have included and are expected to include, but not be limited to, a reduction in U.S. hiring and backfills resulting from attrition; a reduction in spend through third party vendors; eliminating the use of incentives when recruiting new agents and reducing incentives for existing agents; a planned pause in M&A activity and new market expansion; and a review of occupancy costs with a view to consolidating offices and reducing related costs.

As a result of restructuring actions taken during the three and nine months ended September 30, 2022, we incurred restructuring costs of $29.0 million and $47.9 million, respectively, resulting from severance and other termination benefits for employees whose roles are being eliminated, lease terminations costs as a result of the accelerated amortization of various right-of-use assets and other restructuring costs, including those costs related to the wind-down of Modus. These costs have been presented within the Restructuring costs line in the condensed consolidated statements of operations. We incurred additional non-cash charges of approximately $0.9 million and $7.1 million, respectively, for the three and nine months ended September 30, 2022 associated with the discontinued use of certain intangible assets associated with Modus and charges pertaining to the write-down of fixed assets for certain real estate leases that have been exited, or partially exited. These costs have been included within the Depreciation and amortization line in the condensed consolidated statements of operations.

### Initial Public Offering

On April 6, 2021, we completed our IPO and our Class A common stock began trading on the New York Stock Exchange on April 1, 2021 under the symbol “COMP”. In connection with the IPO, we issued and sold 26.3 million shares of our Class A common stock at a public offering price of $18.00 per share. We received aggregate proceeds of $438.7 million from the IPO, net of the underwriting discount and offering costs of approximately $11.0 million.

On March 31, 2021, in connection with the effectiveness of the IPO Registration Statement, we recognized $148.5 million in stock-based compensation expense for (i) certain restricted stock units ("RSUs") that contained both service-based and liquidity event-based vesting conditions as the liquidity event-based vesting condition was satisfied upon effectiveness of the IPO Registration Statement and (ii) certain stock options and RSU awards with service, performance and market-based vesting conditions that include stock price targets to be met after the listing of our stock on a public exchange.

### Operational Highlights for the three months ended September 30, 2022

We continue to attract and retain the most talented agents to our platform, which is critical to our long-term success. We grow our revenue by attracting high-performing agents looking to grow their business and increasing the productivity of our agents. While we are not investing in technology at the same rate as in the past, we continue to invest in our proprietary, integrated platform designed for real estate agents, to enable them to grow their business and save them time and money. This value proposition allows us to recruit more agents, help them grow their business and retain them on our platform at industry leading retention rates.

We had over 29,000 agents on our platform as of September 30, 2022. A subset of our agents are considered principal agents, which we define as either agents who are leaders of their respective agent teams or individual agents operating independently on our platform.

For the three months ended September 30, 2022, the Average Number of Principal Agents1 was 13,314, an increase of 1,698, or 14.6%, from the three months ended September 30, 2021. The principal agent additions came in both new and existing markets.

During the three months ended September 30, 2022, our agents closed 54,606 Total Transactions1, a decrease of 12.4% when compared to the three months ended September 30, 2021. The decline was primarily driven by the macroeconomic conditions that contributed to the slowdown in the U.S. residential real estate market. See the section entitled “Impact of the Macroeconomic Conditions on the U.S. Residential Real Estate Market and Our Business - Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more details surrounding these macroeconomic conditions.

Our Gross Transaction Value1 for the three months ended September 30, 2022 was $57.3 billion, a decrease of 17.1% when compared to the three months ended September 30, 2021. Gross Transaction Value is primarily driven by home values in the markets we serve and by changes in the number of our agents in those markets, as well as seasonality and the aforementioned macroeconomic factors.

For the three months ended September 30, 2022, our Gross Transaction Value represented 4.2%2 of residential real estate transacted in the U.S., compared to 4.3% for the three months ended September 30, 2021. We calculate our national market share by dividing our Gross Transaction Value, or the total dollar value of transactions closed by agents on our platform, by two times (to account for the sell-side and buy-side of each transaction) the aggregate dollar value of U.S. existing home sales as reported by the National Association of Realtors ("NAR"). Should we elect to resume expansion into new markets in the future, faster data integration and ingestion, more efficient agent onboarding, and the ability to customize our solutions to local market requirements will allow us to enter new markets more quickly and effectively over time. We have a dedicated expansion team responsible for launching new markets that partners closely with our enterprise sales team to rapidly identify talented agents in each new market. The priority with which we enter new markets will be based on the addressable size of each market, agent feedback and local market dynamics, and improvement of macroeconomic conditions. Expansion within existing markets is particularly cost efficient as we are able to leverage existing infrastructure, personnel and our agent network.

### Seasonality and Cyclicality

The residential real estate market is seasonal, which directly impacts our agents’ businesses. While individual markets may vary, transaction volume is typically highest in spring and summer, and then declines gradually in late fall and winter. We experience the most significant financial effect from this seasonality in the first and fourth quarters of each year, when our revenue is typically lower relative to the second and third quarters. The effect of this seasonality on our revenue has a larger effect on our results of operations as many of our operating expenses (excluding commissions) are somewhat fixed in nature and do not vary directly in line with our revenue. We believe that this seasonality has affected and will continue to affect our quarterly results; however, to date its effect may have been masked by our rapid growth.

The broader residential real estate industry is cyclical, and individual markets can have their own dynamics that diverge from broad market conditions. The real estate industry can be impacted by the strength or weakness of the economy, changes in interest rates or mortgage lending standards, or extreme economic or political conditions. Our revenue growth rate tends to increase as the real estate industry performs well and to decrease when the real estate industry performs poorly.

1For the definitions of Average Number of Principal Agents, Total Transactions and Gross Transaction Value please refer to the section entitled “Key Business Metrics” included elsewhere in this Quarterly Report.

2 On July 21, 2022, NAR restated monthly average (mean) sales prices ("ASP") of existing homes from January 2020 through June 2022 to reflect their change in methodology to better account for outliers of high priced homes noting that the monthly average (mean) sales prices are NAR's best estimates and given the outliers, they are less reliable. This resulted in higher monthly ASP of existing homes than what was reported prior and increases in total market Gross Transaction Value than what was reported prior. As a result of the changes in the NAR methodology, our previously reported national market share for the three months ended September 30, 2021 changed from 5.4% to 4.3%. Our national market share for the three months ended September 30, 2022 and 2021 reported in this Form 10-Q was calculated using ASP data based on the updated NAR methodology.

### Impact of the COVID-19 Pandemic on Our Business

The ongoing COVID-19 pandemic has had, and continues to have, an impact around the world, including in the U.S. and has had an adverse impact on the residential real estate market during its early days. While we did not see adverse impacts of the COVID-19 pandemic on our business and financial results in the three and nine months ended September 30, 2022, the extent of the future impact of the ongoing COVID-19 pandemic on our business and financial results will depend largely on future developments, which are highly uncertain and difficult to predict. See the section entitled “Risk Factors—Risks Related to Our Business and Operations—The extent of the future impact of the ongoing COVID-19 pandemic on our business and financial results will depend largely on future developments, which are highly uncertain and difficult to predict” included in the 2021 Form 10-K.

### Impact of the Macroeconomic Conditions on the U.S. Residential Real Estate Market and Our Business

Throughout 2022, a number of macroeconomic conditions contributed to the slowdown in the U.S. residential real estate market, impacting our business and financial results during the three and nine months ended September 30, 2022, as described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These conditions include, but are not limited to, the conflict in Ukraine, volatility in the U.S. equity markets, rising inflation, rapidly rising mortgage interest rates, and the Federal Reserve Board increasing the federal funds rate by an aggregate of 3.75% through November 2022 with possible further increases by the end of the year. These conditions have contributed towards slowed consumer demand and declining home affordability and began to have an impact on price appreciation. Any further slowdown or additional challenging conditions in the U.S. residential real estate market could have a significant impact on our business and financial results in the fourth quarter of 2022 and beyond. While we continue to assess the effects of the current slowdown on our business and financial results, the ultimate impact will depend on future developments, which are highly uncertain and difficult to predict, as well as the actions that we have taken, or will take, to minimize any current and future impact.

### RESULTS OF OPERATIONS

The following table sets forth our consolidated statements of operations data for the periods indicated:

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 |  | 2021 |  | Nine Months Ended September 30, 2022 |  | 2021 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $1,493.7 | 100.0% | $1,743.6 | 100.0% | $4,910.8 | 100.0% | $4,808.9 | 100.0% |
| Operating expenses: |  |  |  |  |  |  |  |  |
| Commissions and other related expense (1) | 1,218.0 | 81.5 | 1,430.6 | 82.0 | 4,017.3 | 81.8 | 3,963.2 | 82.4 |
| Sales and marketing (1) | 144.4 | 9.7 | 130.6 | 7.5 | 444.3 | 9.0 | 366.2 | 7.6 |
| Operations and support (1) | 95.1 | 6.4 | 97.0 | 5.6 | 308.9 | 6.3 | 263.7 | 5.5 |
| Research and development (1) | 81.5 | 5.5 | 89.7 | 5.1 | 296.9 | 6.0 | 259.8 | 5.4 |
| General and administrative (1) | 56.5 | 3.8 | 79.5 | 4.6 | 167.0 | 3.4 | 231.8 | 4.8 |
| Restructuring costs | 29.0 | 1.9 | — | — | 47.9 | 1.0 | — | — |
| Depreciation and amortization | 21.0 | 1.4 | 16.7 | 1.0 | 65.1 | 1.3 | 45.1 | 0.9 |
| Total operating expenses | 1,645.5 | 110.2 | 1,844.1 | 105.8 | 5,347.4 | 108.9 | 5,129.8 | 106.7 |
| Loss from operations | (151.8) | (10.2) | (100.5) | (5.8) | (436.6) | (8.9) | (320.9) | (6.7) |
| Investment income, net | 1.1 | 0.1 | 0.1 | — | 1.5 | — | 0.1 | — |
| Interest expense | (0.9) | (0.1) | (0.7) | — | (2.3) | — | (1.8) | — |
| Loss before income taxes and equity in loss of unconsolidated entity | (151.6) | (10.1) | (101.1) | (5.8) | (437.4) | (8.9) | (322.6) | (6.7) |
| Benefit from income taxes | — | — | 1.3 | 0.1 | 1.4 | — | 3.3 | 0.1 |
| Equity in loss of unconsolidated entity | (2.5) | (0.2) | — | — | (7.5) | (0.2) | — | — |
| Net loss | (154.1) | (10.3) | (99.8) | (5.7) | (443.5) | (9.0) | (319.3) | (6.6) |
| Net (income) loss attributable to non-controlling interests | (0.1) | — | — | — | 0.1 | — | — | — |
| Net loss attributable to Compass, Inc. | $(154.2) | (10.3%) | $(99.8) | (5.7%) | $(443.4) | (9.0%) | $(319.3) | (6.6%) |

(1) Includes stock-based compensation expense as follows:

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Commissions and other related expense | $12.7 | $26.3 | $36.1 | $82.6 |
| Sales and marketing | 10.8 | 10.3 | 32.7 | 27.9 |
| Operations and support | 3.9 | 4.5 | 12.3 | 12.3 |
| Research and development | 9.4 | 13.2 | 45.2 | 76.2 |
| General and administrative | 13.3 | 16.8 | 46.8 | 93.9 |
| Total stock-based compensation expense | $50.1 | $71.1 | $173.1 | $292.9 |

29

Stock-based compensation for the nine months ended September 30, 2021 includes the following amounts related to a one-time acceleration of stock-based compensation expense in connection with the IPO:

|  | IPO Related Expense |
| --- | ---: |
| Commissions and other related expense | $41.7 |
| Sales and marketing | 1.8 |
| Operations and support | 3.1 |
| Research and development | 46.9 |
| General and administrative | 55.0 |
| Total stock-based compensation expense | $148.5 |

### Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

### Revenue

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $1,493.7 | $1,743.6 | $(249.9) | (14.3%) | $4,910.8 | $4,808.9 | $101.9 | 2.1% |

Revenue was $1,493.7 million and $4,910.8 million during the three and nine months ended September 30, 2022, a decrease of $249.9 million, or 14.3%, and an increase of $101.9 million, or 2.1%, compared to the prior year periods, respectively. The decrease for the three months ended September 30, 2022 was primarily driven by the macroeconomic conditions that contributed to the current slowdown in the U.S. residential real estate market. The increase for the nine months ended September 30, 2022 was primarily driven by an increase in the number of agents that joined our platform during 2021 and 2022, a higher volume of transactions from both new and existing agents, partially offset by the aforementioned macroeconomic conditions. The Average Number of Principal Agents for the three and nine months ended September 30, 2022 grew to 13,314 and 12,956, increases of 14.6% and 21.2% from the year ago periods, respectively.

### Operating Expenses

#### Commissions and other related expense

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commissions and other related expense | $1,218.0 | $1,430.6 | $(212.6) | (14.9%) | $4,017.3 | $3,963.2 | $54.1 | 1.4% |
| Percentage of revenue | 81.5% | 82.0% |  |  | 81.8% | 82.4% |  |  |

Commissions and other related expense was $1,218.0 million and $4,017.3 million during the three and nine months ended September 30, 2022, a decrease of $212.6 million, or 14.9%, and an increase of $54.1 million, or 1.4%, compared to the prior year periods, respectively. Included in Commissions and other related expense were non-cash expenses related to stock-based compensation of $12.7 million and $36.1 million for the three and nine months ended September 30, 2022 and $26.3 million and $82.6 million for the three and nine months ended September 30, 2021, respectively. The decline in stock-based compensation expense for the three months ended September 30, 2022 when compared to the prior year period was primarily due to lower agent participation in the Agent Equity Program. The decline in stock-based compensation expense for the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021 was primarily related to a one-time acceleration of stock-based compensation expense of $41.7 million incurred on March 31, 2021 in connection with our IPO and a decline in year over year agent participation in the Agent Equity Program. Commissions and other related expense excluding such non-cash stock-based compensation expense, was $1,205.3 million and $3,981.2 million, or 80.7% and 81.1% of revenue, for the three and nine months ended September 30, 2022 and $1,404.3 million and $3,880.6 million, or 80.5% and 80.7% of revenue, for the three and nine months ended September 30, 2021, respectively. The decrease in absolute dollars of Commission and other related expense, excluding non-cash stock-based compensation, for the three months ended

September 30, 2022 when compared to the prior year period was primarily driven by the macroeconomic conditions that contributed to the slowdown in the U.S. residential real estate market. The increase in absolute dollars of Commissions and other related expense, excluding non-cash stock-based compensation, for the nine months ended September 30, 2022 was primarily driven by our higher revenue and Total Transactions partially offset by the macroeconomic conditions that contributed to the slowdown in the U.S. residential real estate market. The unfavorable increase in Commissions and other related expense, excluding non-cash stock-based compensation expense, expressed as a percentage of revenue in the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021, respectively, was primarily due to lower Agent Equity Program contributions in the current year periods compared to the year ago periods.

#### Sales and marketing

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Sales and marketing | $144.4 | $130.6 | $13.8 | 10.6% | $444.3 | $366.2 | $78.1 | 21.3% |
| Percentage of revenue | 9.7% | 7.5% |  |  | 9.0% | 7.6% |  |  |

Sales and marketing expense was $144.4 million and $444.3 million during the three and nine months ended September 30, 2022, an increase of $13.8 million, or 10.6%, and $78.1 million, or 21.3%, compared to the prior year periods, respectively. Included in Sales and marketing expense were non-cash expenses related to stock-based compensation of $10.8 million and $32.7 million for the three and nine months ended September 30, 2022 and $10.3 million and $27.9 million for the three and nine months ended September 30, 2021, respectively. While stock-based compensation expense for the three month periods ended September 30, 2022 and 2021 remained relatively flat, the increase in stock-based compensation expense during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was due to expense for awards related to increased headcount partially offset by a one-time acceleration of stock-based compensation expense of $1.8 million incurred on March 31, 2021 in connection with our IPO. Sales and marketing expense, excluding non-cash stock-based compensation expense, was $133.6 million and $411.6 million, or 8.9% and 8.4% of revenue, for the three and nine months ended September 30, 2022 and $120.3 million and $338.3 million, or 6.9% and 7.0% of revenue, for the three and nine months ended September 30, 2021, respectively. The increase in absolute dollars and as a percentage of revenue, excluding non-cash stock-based compensation expense, during the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 was partially due to an increase in occupancy costs, compensation and other personnel-related costs due to increased headcount and increased agent marketing and advertising.

#### Operations and support

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Operations and support | $95.1 | $97.0 | $(1.9) | (2.0%) | $308.9 | $263.7 | $45.2 | 17.1% |
| Percentage of revenue | 6.4% | 5.6% |  |  | 6.3% | 5.5% |  |  |

Operations and support expense was $95.1 million and $308.9 million during the three and nine months ended September 30, 2022, a decrease of $1.9 million, or 2.0%, and an increase of $45.2 million, or 17.1%, compared to the prior year periods, respectively. Included in Operations and support expense were non-cash expenses related to stock-based compensation of $3.9 million and $12.3 million for the three and nine months ended September 30, 2022 and $4.5 million and $12.3 million for the three and nine months ended September 30, 2021, respectively. Excluding a one-time acceleration of stock-based compensation expense of $3.1 million incurred on March 31, 2021 in connection with our IPO, stock-based compensation expense remained flat year over year. Operations and support expense excluding such non-cash stock-based compensation expense was $91.2 million and $296.6 million, or 6.1% and 6.0% of revenue, for the three and nine months ended September 30, 2022 and $92.5 million and $251.4 million, or 5.3% and 5.2% of revenue, for the three and nine months ended September 30, 2021, respectively. During the three months ended September 30, 2022, Operations and support, excluding non-cash stock-based compensation expense, remained relatively flat when compared to the prior year period. The increase in absolute dollars, excluding such non-cash stock-based compensation expense, during the nine months ended September 30, 2022 was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount. The increase as a percentage of revenue, excluding such non-cash stock-based compensation expense, for both the three and nine months ended September 30, 2022 was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount compared to the year ago periods combined with a decrease in revenue for the three months ended September 30, 2022 compared to the year ago period.

#### Research and development

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $81.5 | $89.7 | $(8.2) | (9.1%) | $296.9 | $259.8 | $37.1 | 14.3% |
| Percentage of revenue | 5.5% | 5.1% |  |  | 6.0% | 5.4% |  |  |

Research and development expense was $81.5 million and $296.9 million during the three and nine months ended September 30, 2022, a decrease of $8.2 million, or 9.1%, and an increase of $37.1 million, or 14.3%, compared to the prior year periods, respectively. Included in Research and development expense were non-cash expenses related to stock-based compensation of $9.4 million and $45.2 million for the three and nine months ended September 30, 2022 and $13.2 million and $76.2 million for the three and nine months ended September 30, 2021, respectively. The decrease in stock-based compensation expense for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 was primarily driven by workforce reductions taken in connection with our restructuring activities. The decrease in stock-based compensation expense for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 was primarily due to a one-time acceleration of stock-based compensation expense of $46.9 million incurred on March 31, 2021 in connection with our IPO, partially offset by increased expense for awards resulting from increased headcount. Research and development expense, excluding such non-cash stock-based compensation expense, was $72.1 million and $251.7 million, or 4.8% and 5.1% of revenue, for the three and nine months ended September 30, 2022 and $76.5 million and $183.6 million, or 4.4% and 3.8% of revenue, for the three and nine months ended September 30, 2021, respectively. While Research and development expense, excluding non-cash stock-based compensation expense, for the three month periods ended September 30, 2022 and 2021 remained relatively flat, the increase of Research and development expense, excluding non-cash stock-based compensation expense, in absolute dollars and as a percentage of revenue during the nine months ended September 30, 2022 was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount during the nine months ended September 30, 2022.

#### General and administrative

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| General and administrative | $56.5 | $79.5 | $(23.0) | (28.9%) | $167.0 | $231.8 | $(64.8) | (28.0%) |
| Percentage of revenue | 3.8% | 4.6% |  |  | 3.4% | 4.8% |  |  |

General and administrative expense was $56.5 million and $167.0 million during the three and nine months ended September 30, 2022, a decrease of $23.0 million, or 28.9%, and $64.8 million, or 28.0%, compared to the prior year periods, respectively. General and administrative expense includes charges of $10.5 million in connection with the Realogy Holdings Corp. matter and $21.3 million in connection with the Avi Dorfman and RentJolt, Inc. matter (collectively, the "Litigation Matters") for the three and nine months ended September 30, 2022 and 2021, respectively. Also included in General and administrative expense were non-cash expenses related to stock-based compensation of $13.3 million and $46.8 million for the three and nine months ended September 30, 2022 and $16.8 million and $93.9 million for the three and nine months ended September 30, 2021, respectively. While stock-based compensation expense for the three months ended September 30, 2022 compared to the year ago period in 2021 remained relatively flat, the decrease in stock-based compensation expense for the nine months ended September 30, 2022 as compared to the year ago period was primarily due to a one-time acceleration of stock-based compensation expense of $55.0 million incurred on March 31, 2021 in connection with our IPO partially offset by increased expense for awards resulting from increased headcount. General and administrative expense, excluding such non-cash stock-based compensation expense and the Litigation Matters, was $32.7 million and $109.7 million, or 2.2% and 2.2% of revenue, for the three and nine months ended September 30, 2022 and $41.4 million and $116.6 million, or 2.4% and 2.4% of revenue, for the three and nine months ended September 30, 2021, respectively. The decrease in absolute dollars and as a percentage of revenue, excluding such non-cash stock-based compensation expense and the Litigation Matters, during the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 was primarily due to our cost reduction initiatives taken during the nine months ended September 30, 2022.

#### Restructuring costs

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Restructuring costs | $29.0 | $— | $29.0 | 100.0% | $47.9 | $— | $47.9 | 100.0% |
| Percentage of revenue | 1.9% | —% |  |  | 1.0% | —% |  |  |

Restructuring costs in the three and nine months ended September 30, 2022 primarily consisted of costs associated with workforce reduction actions and the wind-down of Modus. See Note 12 - "Restructuring Activities" in our condensed consolidated financial statements included elsewhere in this Quarterly Report, for information.

#### Depreciation and amortization

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Depreciation and amortization | $21.0 | $16.7 | $4.3 | 25.7% | $65.1 | $45.1 | $20.0 | 44.3% |
| Percentage of revenue | 1.4% | 1.0% |  |  | 1.3% | 0.9% |  |  |

Depreciation and amortization expense increased by $4.3 million, or 25.7%, and $20.0 million, or 44.3%, for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021, respectively. These increases were primarily driven by an increase in the amortization of intangible assets related to the impact of acquisitions completed during the year ended December 31, 2021 and incremental depreciation of recent capital expenditures.

### Investment income, net

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment income, net | $1.1 | $0.1 | $1.0 | 1000.0% | $1.5 | $0.1 | $1.4 | 1400.0% |

Investment income, net has increased slightly during the three and nine months ended September 30, 2022 and 2021 as a result of increased average interest rates on our short-term interest-bearing investments.

### Interest expense

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest expense | $(0.9) | $(0.7) | $(0.2) | 28.6% | $(2.3) | $(1.8) | $(0.5) | 27.8% |

Interest expense was $0.9 million and $2.3 million for the three and nine months ended September 30, 2022, respectively. This amount was driven by the interest expense incurred on both our Concierge Facility and Revolving Credit Facility, including the commitment fees related to the available borrowing capacities on such facilities.

### Benefit from income taxes

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Benefit from income taxes | $— | $1.3 | $(1.3) | (100.0%) | $1.4 | $3.3 | $(1.9) | (57.6%) |

Benefit from income taxes decreased by $1.3 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. For the nine months ended September 30, 2022, Benefit from income taxes decreased by $1.9 million when compared to the nine months ended September 30, 2021. These decreases resulted from a reduction in current year acquisition related activities.

### Equity in loss of unconsolidated entity

*(in millions, except percentages)*

|  | Three Months Ended September 30, 2022 | 2021 | $ Change | % Change | Nine Months Ended September 30, 2022 | 2021 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Equity in loss of unconsolidated entity | $(2.5) | $— | $(2.5) | 100.0% | $(7.5) | $— | $(7.5) | 100.0% |

During the three and nine months ended September 30, 2022, Equity in losses of unconsolidated entity was $2.5 million and $7.5 million, respectively, from our joint venture, which was formed in July 2021.

K**EY BUSINESS METRICS AND NON-GAAP FINANCIAL MEASURES**

In addition to the measures presented in our condensed consolidated financial statements, we use the following key business metrics and non-GAAP financial measures to evaluate our business, measure our performance, develop financial forecasts, and make strategic decisions.

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Total Transactions | 54,606 | 62,349 | 168,819 | 168,360 |
| Gross Transaction Value (in billions) | $57.3 | $69.1 | $187.8 | $189.9 |
| Average Number of Principal Agents | 13,314 | 11,616 | 12,956 | 10,686 |
| Net loss attributable to Compass, Inc. (in millions) | $(154.2) | $(99.8) | $(443.4) | $(319.3) |
| Net loss attributable to Compass, Inc. margin | (10.3%) | (5.7%) | (9.0%) | (6.6%) |
| Adjusted EBITDA(1) (in millions) | $(42.2) | $12.2 | $(134.7) | $52.9 |
| Adjusted EBITDA margin(1) | (2.8%) | 0.7% | (2.7%) | 1.1% |

(1) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of Net loss attributable to Compass, Inc. to Adjusted EBITDA, see the section titled “—Non-GAAP Financial Measures” below.

### Key Business Metrics

### Total Transactions

Total Transactions is a key measure of the scale of our platform, which drives our financial performance. We define Total Transactions as the sum of all transactions closed on our platform in which our agent represented the buyer or seller in the purchase or sale of a home. We include a single transaction twice when one or more of our agents represent both the buyer and seller in any given transaction. This metric excludes rental transactions.

Our Total Transactions for the three months ended September 30, 2022 declined to 54,606, or 12.4%, and slightly increased during the nine months ended September 30, 2022 to 168,819, or 0.3%, from the year ago periods, respectively. The decline for the three months ended September 30, 2022 was primarily driven by the macroeconomic conditions that contributed to the slowdown in the U.S. residential real estate market while the nine months ended September 30, 2022 has slightly increased as we recruited new agents in both existing and new markets, retained top-performing agents and existing agents increased their productivity on our platform.

### Gross Transaction Value

Gross Transaction Value is a key measure of the scale of our platform and success of our agents, which ultimately impacts revenue. Gross Transaction Value is the sum of all closing sale prices for homes transacted by agents on our platform. We include the value of a single transaction twice when our agents serve both the home buyer and home seller in the transaction. This metric excludes rental transactions.

Gross Transaction Value is primarily driven by home values in the markets we serve and by changes in the number of our agents in those markets, as well as seasonality and macroeconomic factors.

Our Gross Transaction Value for the three and nine months ended September 30, 2022 was $57.3 billion and $187.8 billion, representing decreases of 17.1% and 1.1% from the year ago periods, respectively. The decline for the three months ended September 30, 2022 was primarily driven by the macroeconomic conditions that contributed to the slowdown in the U.S. residential real estate market while the nine months ended September 30, 2022 only slightly decreased as the macroeconomic conditions were partially offset by production from new agents in both existing and new markets, the retention of top-performing agents and existing agents increasing their productivity on our platform.

### Average Number of Principal Agents

The Average Number of Principal Agents represents the number of agents who are leaders of their respective agent teams or individual agents operating independently on our platform during a given period. The Average Number of Principal Agents is an indicator of the potential future growth of our business, as well as the size and strength of our platform. This figure is calculated by taking the average of the number of principal agents at the end of each month included in the period. We use the Average Number of Principal Agents, in combination with our other key metrics such as Total Transactions and Gross Transaction Value, as a measure of agent productivity.

Our Average Number of Principal Agents for the three and nine months ended September 30, 2022 was 13,314 and 12,956, representing increases of 14.6% and 21.2% from the year ago periods, respectively. Our principal agents generate revenue across a diverse set of real estate markets in the U.S.

### Non-GAAP Financial Measures

### Adjusted EBITDA and Adjusted EBITDA margin

Adjusted EBITDA is a non-GAAP financial measure that represents our Net loss attributable to Compass, Inc. adjusted for depreciation and amortization, investment income, net, interest expense, stock-based compensation expense, income tax (expense) benefit and other items. During the periods presented, other items included (i) restructuring charges associated with lease termination and severance costs, (ii) acquisition-related expenses related to adjustments to the fair value of contingent consideration and acquisition consideration treated as compensation expense over underlying retention periods and (iii) litigation charges in connection with the Realogy Holdings Corp. matter and the Avi Dorfman and RentJolt, Inc. matter. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenue.

We use Adjusted EBITDA and Adjusted EBITDA margin in conjunction with GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance. We believe Adjusted EBITDA and Adjusted EBITDA margin are also helpful to investors, analysts and other interested parties because these measures can assist in providing a more consistent and comparable overview of our operations across our historical financial periods. Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, however, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Because of these limitations, you should consider Adjusted EBITDA and Adjusted EBITDA margin alongside other financial performance measures, including Net loss attributable to Compass, Inc. and our other GAAP results. In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed to imply that our future results will be unaffected by the types of items excluded from the calculation of Adjusted EBITDA and Adjusted EBITDA margin. Adjusted EBITDA and Adjusted EBITDA margin are not presented in accordance with GAAP and the use of these terms varies from others in our industry.

The following table provides a reconciliation of Net loss attributable to Compass, Inc. to Adjusted EBITDA (in millions):

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net loss attributable to Compass, Inc. | $(154.2) | $(99.8) | $(443.4) | $(319.3) |
| Adjusted to exclude the following: |  |  |  |  |
| Depreciation and amortization | 21.0 | 16.7 | 65.1 | 45.1 |
| Investment income, net | (1.1) | (0.1) | (1.5) | (0.1) |
| Interest expense | 0.9 | 0.7 | 2.3 | 1.8 |
| Stock-based compensation | 50.1 | 71.1 | 173.1 | 292.9 |
| Benefit from income taxes | — | (1.3) | (1.4) | (3.3) |
| Restructuring costs | 29.0 | — | 47.9 | — |
| Acquisition-related expenses(1) | 1.6 | 3.6 | 12.7 | 14.5 |
| Litigation charge(2) | 10.5 | 21.3 | 10.5 | 21.3 |
| Adjusted EBITDA | $(42.2) | $12.2 | $(134.7) | $52.9 |
| Net loss attributable to Compass, Inc. margin | (10.3%) | (5.7%) | (9.0%) | (6.6%) |
| Adjusted EBITDA margin | (2.8%) | 0.7% | (2.7%) | 1.1% |

(1) Includes adjustments related to the change in fair value of contingent consideration and adjustments related to acquisition consideration treated as compensation expense over the underlying retention periods. See Note 3 - "Acquisitions" to our condensed consolidated financial statements included elsewhere in this Quarterly Report for more information.

(2) Represents a charge of $10.5 million incurred during the three and nine months ended September 30, 2022 in connection with the Realogy Holdings Corp. matter and a $21.3 million expense incurred during the three and nine months ended September 30, 2021 in connection with the settlement of the Avi Dorfman and RentJolt, Inc. matter.

Adjusted EBITDA was a loss of $42.2 million and $134.7 million during the three and nine months ended September 30, 2022 compared to income of $12.2 million and $52.9 million during the three and nine months ended September 30, 2021, respectively. The decrease in Adjusted EBITDA during the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021 was primarily due to the growth in operating expenses as a percentage of revenue resulting from investments in research and development and continued geographic expansion into new markets and a slow down in revenue resulting from the current macroeconomic conditions impacting the U.S. residential real estate market as described in more detail under the section entitled “Impact of the Macroeconomic Conditions on the U.S. Residential Real Estate Market and Our Business - Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

The following tables provide supplemental information to the Reconciliation of Net loss attributable to Compass, Inc. to Adjusted EBITDA presented above. These tables identify how certain Operating expenses related financial statement line items contained within the accompanying condensed consolidated statements of operations elsewhere in this Quarterly Report are impacted by the items excluded from Adjusted EBITDA (in millions):

|  | Three Months Ended September 30, 2022 Commissions and other related expense | Sales and marketing | Operations and support | Research and development | General and administrative |
| --- | ---: | ---: | ---: | ---: | ---: |
| GAAP Basis | $1,218.0 | $144.4 | $95.1 | $81.5 | $56.5 |
| Adjusted to exclude the following: |  |  |  |  |  |
| Stock-based compensation | (12.7) | (10.8) | (3.9) | (9.4) | (13.3) |
| Acquisition-related expenses | — | — | (1.6) | — | — |
| Litigation charge | — | — | — | — | (10.5) |
| Non-GAAP Basis | $1,205.3 | $133.6 | $89.6 | $72.1 | $32.7 |

37

|  | Three Months Ended September 30, 2021 Commissions and other related expense | Sales and marketing | Operations and support | Research and development | General and administrative |
| --- | ---: | ---: | ---: | ---: | ---: |
| GAAP Basis | $1,430.6 | $130.6 | $97.0 | $89.7 | $79.5 |
| Adjusted to exclude the following: |  |  |  |  |  |
| Stock-based compensation | (26.3) | (10.3) | (4.5) | (13.2) | (16.8) |
| Acquisition-related expenses | — | — | (3.6) | — | — |
| Litigation charge | — | — | — | — | (21.3) |
| Non-GAAP Basis | $1,404.3 | $120.3 | $88.9 | $76.5 | $41.4 |

|  | Nine Months Ended September 30, 2022 Commissions and other related expense | Sales and marketing | Operations and support | Research and development | General and administrative |
| --- | ---: | ---: | ---: | ---: | ---: |
| GAAP Basis | $4,017.3 | $444.3 | $308.9 | $296.9 | $167.0 |
| Adjusted to exclude the following: |  |  |  |  |  |
| Stock-based compensation | (36.1) | (32.7) | (12.3) | (45.2) | (46.8) |
| Acquisition-related expenses | — | — | (12.7) | — | — |
| Litigation charge | — | — | — | — | (10.5) |
| Non-GAAP Basis | $3,981.2 | $411.6 | $283.9 | $251.7 | $109.7 |

|  | Nine Months Ended September 30, 2021 Commissions and other related expense | Sales and marketing | Operations and support | Research and development | General and administrative |
| --- | ---: | ---: | ---: | ---: | ---: |
| GAAP Basis | $3,963.2 | $366.2 | $263.7 | $259.8 | $231.8 |
| Adjusted to exclude the following: |  |  |  |  |  |
| Stock-based compensation | (82.6) | (27.9) | (12.3) | (76.2) | (93.9) |
| Acquisition-related expenses | — | — | (14.5) | — | — |
| Litigation charge | — | — | — | — | (21.3) |
| Non-GAAP Basis | $3,880.6 | $338.3 | $236.9 | $183.6 | $116.6 |

38

### LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have primarily generated negative cash flows from operations and have primarily financed our operations from net proceeds from the sale of convertible preferred stock and common stock. As of September 30, 2022, we had cash and cash equivalents of $354.9 million and an accumulated deficit of $2.0 billion.

We expect that operating losses and negative cash flows from operations may continue in certain periods in the foreseeable future as a result of the current slowdown in the U.S. residential real estate market as described in more detail under the section entitled “Impact of the Macroeconomic Conditions on the U.S. Residential Real Estate Market and Our Business - Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We believe our existing cash and cash equivalents, the Concierge Facility (which, as disclosed in the footnotes to the condensed consolidated financial statements, may be used to support our Compass Concierge Program) and the Revolving Credit Facility will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months and beyond.

Our future capital requirements will depend on many factors, including, but not limited to, growth in the number of our agents and the associated costs to attract, support and retain them, our decision to resume expansion into new geographic markets, continued investment in adjacent services and other new revenue streams, future acquisitions, the timing of investments in technology and personnel to support the overall growth in our business and the extent and duration of the current and any future slowdown in the U.S. residential real estate market. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected. See the sections entitled “Risk Factors—Risks Related to Ownership of Our Class A Common Stock—We may need to raise additional capital to continue to grow our business and we may not be able to raise additional capital on terms acceptable to us, or at all” and “Risk Factors—Risks Related to Our Business and Operations—Covenants in our debt agreements may restrict our borrowing capacity or operating activities and adversely affect our financial condition” included in the 2021 Form 10-K.

### Financial Obligations

See Note 5 - "Debt" in our condensed consolidated financial statements included elsewhere in this Quarterly Report, for information on our indebtedness as of September 30, 2022.

### Cash Flows

The following table summarizes our cash flows for the periods indicated (in millions):

|  | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(173.9) | $48.3 |
| Net cash used in investing activities | (86.9) | (160.9) |
| Net cash (used in) provided by financing activities | (2.6) | 463.9 |
| Net (decrease) increase in cash and cash equivalents | $(263.4) | $351.3 |

#### Operating Activities

For the nine months ended September 30, 2022, net cash used in operating activities was $173.9 million. The outflow was primarily due to a $443.5 million Net loss adjusted for $249.7 million of non-cash charges, partially offset by cash inflows due to changes in assets and liabilities of $19.9 million.

For the nine months ended September 30, 2021, net cash provided by operating activities was $48.3 million. The inflow was primarily due to a $319.3 million Net loss adjusted for $343.4 million of non-cash charges and cash inflows due to changes in assets and liabilities of $24.2 million.

#### Investing Activities

During the nine months ended September 30, 2022, net cash used in investing activities was $86.9 million consisting of $56.9 million in capital expenditures, $15.0 million in payments for acquisitions, net of cash acquired, and $15.0 million for investments in an unconsolidated entity.

During the nine months ended September 30, 2021, net cash used in investing activities was $160.9 million consisting of $127.3 million in payments for acquisitions, net of cash acquired, and $33.6 million in capital expenditures.

#### Financing Activities

During the nine months ended September 30, 2022, net cash used in financing activities was $2.6 million primarily consisting of $19.5 million in taxes paid related to the net share settlement of equity awards, $13.9 million in payments related to acquisitions, including contingent consideration payments and $0.4 million in paid deferred debt issuance costs for our credit facilities, partially offset by $20.3 million in net proceeds from drawdowns and repayments on the Concierge Facility, $8.6 million in proceeds from the exercise of stock options and $2.3 million in proceeds from the issuance of common stock under the Employee Stock Purchase Plan.

During the nine months ended September 30, 2021, net cash provided by financing activities was $463.9 million, primarily consisting of $439.6 million in net proceeds from the issuance of common stock upon our initial public offering, $19.1 million in proceeds from the exercise and early exercise of stock options, $10.3 million in net proceeds from drawdowns on the Concierge Facility and $5.0 million in proceeds from the capital contribution of non-controlling interests, partially offset by $8.2 million in payments of contingent consideration related to acquisitions and $1.9 million in paid deferred debt issuance costs for our credit facilities.

### Off-Balance Sheet Arrangements

We administer escrow and trust deposits which represent undistributed amounts for the settlement of real estate transactions. We are contingently liable for these escrow and trust deposits totaling $186.1 million and $172.1 million as of September 30, 2022 and December 31, 2021, respectively. We did not have any other off-balance sheet arrangements as of or during the periods presented.

### CRITICAL ACCOUNTING ESTIMATES AND POLICIES

### Critical Accounting Estimates and Policies

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

There have been no material changes to our critical accounting policies and estimates disclosed in our 2021 Form 10-K. For additional information about our critical accounting policies and estimates, see the disclosure included in our 2021 Form 10-K, as well as Note 1 and Note 2 to our condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report.

### RECENT ACCOUNTING PRONOUNCEMENTS

For a description of our recently adopted accounting pronouncements and accounting pronouncements issued but not yet adopted, see Note 2 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report.

## Market risk

As filed, 1,904 characters.

Market risk represents the risk of loss that may impact our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in interest rates or inflation.

#### Interest Rate Risk

Our cash and cash equivalents as of September 30, 2022 consisted of $354.9 million in cash and cash equivalents. Certain of our cash and cash equivalents are interest-earning instruments that carry a degree of interest rate risk. The goals of our investment policy are liquidity and capital preservation. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash and cash equivalents.

We are also subject to interest rate exposure on our Concierge Facility and Revolving Credit Facility. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. Our Concierge Facility bears interest equal to Term SOFR plus a credit adjustment spread of 0.11448%, plus a margin of 2.35%. As of September 30, 2022, we had a total outstanding balance of $36.5 million under these debt facilities. Based on the amounts outstanding, a 100-basis point increase or decrease in market interest rates over a twelve-month period would not result in a material change to our interest expense.

#### Foreign Currency Exchange Risk

As our operations in India have been limited, and we do not maintain a significant balance of foreign currency, we do not currently face significant risk with respect to foreign currency exchange rates.

## Controls and procedures

As filed, 8,883 characters.

#### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (or principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer (who is also serving as our interim principal financial officer) concluded that our disclosure controls and procedures were not effective as of September 30, 2022 due to the material weaknesses in our internal control over financial reporting described below. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the condensed consolidated financial statements for the periods covered by and included in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

#### Previously Reported Material Weaknesses

As disclosed in the section entitled “Risk Factors” in Part I, Item 1A, in our 2021 Form 10-K, we previously identified material weaknesses in our internal control over financial reporting. These material weaknesses primarily relate to our failure to design, maintain, and document sufficient oversight of activities related to our internal control over financial reporting due to a lack of an appropriate level of experience and training in internal control over financial reporting commensurate with public company requirements; formal accounting policies procedures, and controls related to substantially all of our business processes to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over account reconciliations, segregation of duties and the preparation and review of journal entries; and IT general controls for information systems and applications that are relevant to the preparation of the consolidated financial statements. We have concluded that these material weaknesses arose because, as a private company, we did not have the necessary business processes, systems, personnel, and related internal controls necessary to satisfy the accounting and financial reporting requirements of a public company.

Accordingly, we have determined that these control deficiencies constituted material weaknesses in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements would not be prevented or detected on a timely basis. These deficiencies could result in additional misstatements to our consolidated financial statements that would be material and would not be prevented or detected on a timely basis.

#### Remediation Plans

We have commenced measures to remediate the identified material weaknesses. These measures include adding experienced personnel as well as improving the control environment around financial systems and processes. We intend to continue to take steps to remediate the material weaknesses described above and further evolve our accounting processes. We will not be able to remediate these material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time. The following remedial actions were taken through September 30, 2022:

- hired a Vice President of Internal Audit to oversee our internal controls program and work with management in its design and implementation of internal control over financial reporting;
- hired a Senior Manager of IT Internal Audit to work directly with IT leadership in its design and implementation of IT related internal controls over financial reporting;
- walked through our key financial business processes and financial systems, identified risks to financial reporting, identified and tested the design of key internal controls over financial reporting, and developed detailed action plans to address deficiencies; and
- engaged a global accounting advisory firm to assist with the documentation, evaluation, remediation and testing of our internal control over financial reporting.

The following are remedial actions that management is undertaking for the remainder of 2022:

- complete the evaluation of our internal controls over financial reporting with respect to operating effectiveness;
- formalize our accounting policies, including training relevant personnel, related to, but not limited to, account reconciliations and manual journal entries; and
- continue to roll out formalized IT procedures and controls for key financial systems, including training relevant personnel, related to segregation of duties, user access, data interfaces, change management, and program development.

While we believe that these efforts will improve our internal control over financial reporting, the implementation of our remediation is ongoing and will require testing of the operating effectiveness of internal controls over a sustained period of financial reporting cycles.

We believe we are making progress toward achieving the effectiveness of our internal controls and disclosure controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will remediate the material weaknesses in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their operating effectiveness. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal control over financial reporting.

#### Management's Report on Internal Control over Financial Reporting

We are taking actions to remediate the material weaknesses relating to our internal control over financial reporting, as described above. Except as otherwise described herein, there was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

#### Inherent Limitation on the Effectiveness of Internal Controls and Procedures

Our management, including our Chief Executive Officer (who is also serving as our interim principal financial officer), does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

## Risk factors

As filed, 599 characters.

We are subject to various risks and uncertainties, which could materially affect our business, results of operations, financial condition, future results, and the trading price of our common stock. You should read carefully the information appearing in Part I, Item 1A, Risk Factors in our 2021 Form 10-K. There have been no material changes to the risk factors set forth in our 2021 Form 10-K. However, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition and/or operating results.

Filed Nov 14, 2022.
Source: SEC EDGAR, the filing index for accession 0001563190-22-000189. Last ingested by Listed: Nov 10, 2026, 03:23 ET. No prices; not investment advice.