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Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price.
−Removed: Except for the risk factors disclosed in Part I, Item 1A of 2022 Annual Report, which are hereby incorporated by reference into this Part II, Item 1A of this Form 10-Q, and the modified risk factors set forth below, there have been no material changes to the Company’s risk factors as disclosed in the 2022 Annual Report.
−Removed: Additions to the risk factors below are designated by underlined text and removals are designated by stricken text.
−Removed: Risks Related to Our Industries
−Removed: Homesale transaction volume can be impacted by natural disasters and other climate-related interruptions.
−Removed: Natural disasters are occurring more frequently and/or with more intense effects and may impact general population trends.
−Removed: Areas afflicted by natural disasters may experience a decline in home sale transaction volume due to home destruction , and/or general population movement out of the afflicted area , and the risk of non-insurability against such disasters .
−Removed: Such events can make it difficult or impossible for homeowners and builders to sell their homes and result in slowdowns in home sale transaction volume.
−Removed: Additionally, the risk of non-insurability may disqualify certain prospective homebuyers whether due to heightened mortgage underwriting requirements or the perceived risk of loss to the homebuyer.
−Removed: Because the real estate industry relies on home sale transactions, climate crises can exacerbate negative financial results for real estate companies operating in particularly affected areas.
−Removed: Risks Related to Our General Business and Operations
−Removed: Our business could be adversely affected if we are unable to expand, maintain and improve the systems and technologies which we rely on to operate or fail to adopt and integrate new technologies .
−Removed: As the number of agents and brokers in our company grows, our success will depend on our ability to expand, maintain and improve the technology that supports our business operations, including, but not limited to, our cloud office platform , as well as our ability to adopt and integrate new technologies, including, but not limited to machine learning and artificial intelligence solutions .
−Removed: Loss of key personnel or the lack of adequate staffing with the requisite expertise and training could impede our efforts in this regard.
−Removed: If we do not adopt and offer new in-demand technologies and/or if our systems and technologies lack capacity or quality sufficient to service agents and their clients, then the number of agents who wish to use our products could decrease, the level of client service and transaction volume afforded by our systems could suffer and our costs could increase.
−Removed: In addition, if our systems, procedures or controls are not adequate to provide reliable, accurate and timely financial and other reporting, we may not be able to satisfy regulatory scrutiny or contractual obligations with third parties and may suffer a loss of reputation.
−Removed: Any of these events could negatively affect our financial position.
−Removed: Cybersecurity incidents could disrupt our business operations, result in the loss of critical and confidential information, adversely impact our reputation and harm our business.
−Removed: Cybersecurity threats and incidents directed at us could range from uncoordinated individual attempts to gain unauthorized access to information technology systems to sophisticated and targeted measures aimed at disrupting business or gathering personal data of customers.
−Removed: Additionally, bad actors are increasingly using AI technology to launch more automated, targeted and coordinated attacks generally.
−Removed: In the ordinary course of our business, we and our agents and brokers collect and store sensitive data, including proprietary business information and personal information about our clients and customers.
−Removed: Our business and particularly our cloud-based platform, is reliant on the uninterrupted functioning of our information technology systems.
−Removed: The secure processing, maintenance and transmission of information are critical to our operations, especially the processing and closing of real estate transactions.
−Removed: Although we employ measures designed to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption, or unavailability of critical data and confidential or proprietary information (our own or that of third parties, including potentially sensitive personal information of our clients and customers) and the disruption of business operations.
−Removed: Any such compromises to our security could cause harm to our reputation, which could cause customers to lose trust and confidence in us or could cause agents and brokers to stop working for us.
−Removed: In addition, we may incur significant costs for remediation that may include liability for stolen assets or information, repair of system damage and compensation to clients, customers and business partners.
−Removed: We may also be subject to legal claims, government investigation and additional state and federal statutory requirements.
−Removed: The potential consequences of a material cybersecurity incident include regulatory violations of applicable U.S.
−Removed: and foreign privacy and other laws, reputational damage, loss of market value, litigation with third parties (which could result in our exposure to material civil or criminal liability), diminution in the value of the services we provide to our customers and increased cybersecurity protection and remediation costs (that may include liability for stolen assets or information), which in turn could have a material adverse effect on our competitiveness and results of operations.
+Added: Except for the risk factors disclosed in Part I, Item 1A of 2022 Annual Report, which are hereby incorporated by reference into this Part II, Item 1A of this Form 10-Q, and the additional risk factor set forth below, there have been no material changes to the Company’s risk factors as disclosed in the 2022 Annual Report.
Risks Related to Legal and Regulatory Matters
−Removed: If we fail to protect the privacy and personal information of our customers, agents or employees, we may be subject to legal claims, government action and damage to our reputation.
−Removed: Hundreds of thousands of consumers, independent contractors and employees have shared personal information with us during the normal course of our business processing real estate transactions.
−Removed: This includes, but is not limited to, Social Security numbers, annual income amounts and sources, consumer names, addresses, telephone and cell phone numbers and email addresses.
−Removed: To run our business, it is essential for us to store and transmit this sensitive information in our systems and networks.
−Removed: At the same time, we are subject to numerous laws, regulations and other requirements that require businesses like ours to protect the security of personal information, notify customers and other individuals about our privacy practices and limit the use, disclosure, or transfer of personal data across country borders.
−Removed: Regulators in the U.S.
−Removed: and abroad continue to enact comprehensive new laws or legislative reforms imposing significant privacy and cybersecurity restrictions.
−Removed: The result is that we are subject to increased regulatory scrutiny, additional contractual requirements from corporate customers and heightened compliance costs.
−Removed: These ongoing changes to privacy and cybersecurity laws also may make it more difficult for us to operate our business and may have a material adverse effect on our operations.
−Removed: For example, the European Union’s GDPR conferred new and significant privacy rights on individuals (including employees and independent agents) and materially increased penalties for violations.
−Removed: In the U.S., California enacted the California Consumer Privacy Act — which went into full effect in 2021 — imposing new and comprehensive requirements on organizations that collect and disclose personal information about California residents.
−Removed: In March 2017, the New York Department of Financial Services’ cybersecurity regulation went into effect, requiring regulated financial institutions to establish a detailed cybersecurity program.
−Removed: Program requirements include corporate governance, incident planning, data management, system testing, vendor oversight and regulator notification rules.
−Removed: Now, other state regulatory agencies are expected to enact similar requirements following the adoption of the Insurance Data Security Model Law by the National Association of Insurance Commissioners that is consistent with the New York regulation.
−Removed: Any significant violations of privacy and cybersecurity could result in the loss of new or existing business, litigation, regulatory investigations, the payment of fines, damages and penalties and damage to our reputation, which could have a material adverse effect on our business, financial condition and results of operations.
−Removed: We could also be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, results of operations or financial condition.
−Removed: For example, we have and may continue to incorporate new technologies such as machine learning and artificial intelligence into our processes and systems, which are under increased regulatory scrutiny.
−Removed: We may be required to change our platforms and services due to new laws and/or decisions related to emerging technologies which may decrease our operational efficiency and/or hinder our ability to improve our services.
−Removed: In addition, while we disclose our information collection and dissemination practices in a published privacy statement on our websites, which we may modify from time to time, we may be subject to legal claims, government action and damage to our reputation if we act or are perceived to be acting inconsistently with the terms of our privacy statement, customer expectations or state, national and international regulations.
−Removed: Our policy and safeguards could be deemed insufficient if third parties with whom we have shared personal information fail to protect the privacy of that information.
−Removed: The occurrence of a significant claim in excess of our insurance coverage or which is not covered by our insurance in any given period could have a material adverse effect on our financial condition and results of operations during the period.
−Removed: In the event we or the vendors with which we contract to provide services on behalf of our customers were to suffer a breach of personal information, our customers and independent agents could terminate their business with us.
−Removed: Further, we may be subject to claims to the extent individual employees or independent contractors breach or fail to adhere to Company policies and practices and such actions jeopardize any personal information.
−Removed: Our legal liability could include significant defense costs, settlement costs, damages and penalties, plus, damage our reputation with consumers, which could significantly damage our ability to attract customers.
−Removed: Any or all of these consequences would result in a meaningful unfavorable impact on our brand, business model, revenue, expenses, income and margins.
−Removed: In addition, concern among potential home-buyers or sellers about our privacy practices could result in regulatory investigations, especially in the European Union as related to the GDPR.
−Removed: Additionally, concern among potential home-
−Removed: buyers or sellers could keep them from using our services or require us to incur significant expense to alter our business practices or educate them about how we use personal information.
−Removed: Risks Related to Our Stock
−Removed: Glenn Sanford, our Chairman and Chief Executive Officer, together with Penny Sanford, a significant shareholder, and Jason Gesing, a director and our Chief Industry Relations Officer and Gene Frederick, a director and agent , own a significant percentage of our stock and have agreed to act as a group on any matter submitted to a vote of our stockholders.
−Removed: As a result, the trading price for our shares may be depressed and they can significantly influence take actions that may be adverse to the interests of our other stockholders .
−Removed: On July 31, 2023 November 2, 2022 , Glenn Sanford, Penny Sanford, and Jason Gesing and Gene Frederick filed an amended Schedule 13D with the Securities and Exchange Commission, which disclosed that they beneficially owned approximately 51.73% of our outstanding common stock as of September 30, 2022 and that they had agreed to vote their shares as a group with respect to the election of directors and any other matter on which our shares of common stock are entitled to vote and that they beneficially owned approximately 4 7.69% of our outstanding common stock as of June 19, 2023 .
−Removed: This significant concentration of share ownership may adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in a company with a controlling stockholder group holding a significant number of our shares .
−Removed: The group can significantly influence all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets.
−Removed: In addition, due to his significant ownership stake and his service as our Principal Executive Officer and Chairman of the Board of Directors, Mr.
−Removed: Sanford significantly influences controls the management of our business and affairs.
−Removed: Together, Messrs.
−Removed: Sanford , and Gesing and Frederick hold two three of our seven board seats.
−Removed: This concentration of ownership and i nfluence control could have the effect of delaying, deferring, or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination that could be favorable to our other stockholders.
−Removed: We are a Until July 31, 2023, we were a “controlled company” within the meaning of Nasdaq rules and, as a result, we qualif ied y for and intend to rel ied y on, exemptions from certain corporate governance requirements .
−Removed: Under applicable Nasdaq rules, we qualify for and intend to rely on certain phase-in periods to comply with the previously exempt governance requirements .
−Removed: As of September 30, 2022, Glenn Sanford, Penny Sanford, Jason Gesing and Gene Frederick beneficially owned approximately 51.73% of the total combined voting power of our outstanding common stock.
−Removed: Accordingly On July 31, 2023, Penny Sanford, Glenn Sanford, and Jason Gesing filed a Schedule 13D/A disclosing that Eugene Frederick was no longer a member of the voting group pursuant to which Ms.
−Removed: Sanford and Messrs.
−Removed: Sanford, Gesing and Frederick had previously agreed to vote their shares as a group.
−Removed: Until July 31, 2023, we qualif ied y as a “controlled company” within the meaning of Nasdaq corporate governance standards and, accordingly, we qualified for and from time-to-time relied on exemptions to certain governance requirements .
−Removed: Under Nasdaq rules, a company may phase-in to compliance with those governance requirements after ceasing to be a “controlled company” a company of which more than 50% of the voting power Nasdaq is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain Nasdaq corporate governance standards , including:
−Removed: ● the requirement that a majority of the members of our board of directors be independent directors;
−Removed: ● the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
−Removed: ● the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter for addressing the committee’s purpose and responsibilities .
−Removed: ● the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
−Removed: We intend to use certain of these phase-in exemptions.
−Removed: As a result, we will not have a majority of independent directors, our compensation and our nominating and corporate governance and compensation committees will not consist entirely of independent directors in the immediate future and such committees may not be subject to annual performance evaluations .
−Removed: Consequently, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance rules and requirements.
−Removed: Our reliance on these
−Removed: exemptions status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.
+Added: Adverse outcomes in litigation and regulatory actions against other companies and agents in our industry could adversely impact our financial results.
+Added: Adverse outcomes in legal and regulatory actions against other companies, brokers, and agents in the residential and commercial real estate industry may adversely impact the financial condition of the Company and our real estate brokers and agents when those matters relate to business practices shared by the Company, our real estate brokers and agents, or our industry at large.
+Added: Such matters may include, without limitation, RESPA, Telephone Consumer Protection Act of 1991 and state consumer protection law, antitrust and anticompetition, and worker classification claims.
+Added: Additionally, if plaintiffs or regulatory bodies are successful in such actions, this may increase the likelihood that similar claims are made against the Company and/or our real estate brokers and agents which claims could result
+Added: in significant liability and be adverse to our financial results if we or our brokers and agents are unable to distinguish or defend our business practices.
+Added: As an example, in the matter of Burnett v.
+Added: National Association of Realtors (U.S.
+Added: District Court for the Western District of Missouri), a federal jury found NAR and certain other remaining brokerage defendants liable for $1.8 billion in damages, which verdict was appealed on October 31, 2023.
+Added: Additionally, certain other brokerage defendants settled with the plaintiffs, including both monetary and non-monetary settlement terms.
+Added: That same day, NAR, the Company, Compass, Inc., Redfin Corporation, Weichert Realtors, United Real Estate, Howard Hann Real Estate Services, and Douglas Elliman, Inc.
+Added: were named as defendants in Gibson v.
+Added: National Association of Realtors , alleging a similar fact pattern and antitrust violations.
+Added: The Company is continuing to review the allegations and intends to vigorously defend the action.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.